The Tallest Tree in the Land

A young ruler wanted a majestic garden with towering trees. He met with his gardener to share his vision. His gardener recommended planting 100 giant Sequoia trees to surround his land. The Sequoia is the most massive tree in the world, fitting for a young ruler. The ruler was pleased with the suggestion, and he authorized the project.

The young ruler checked his garden often. He was not satisfied with his freshly planted trees, especially compared to his friends. He became more frustrated when he saw the beautiful trees they posted on social media. He was jealous and angry.

He approached his gardener, demanding he remove the Sequoias and plant a faster-growing tree. His gardener pleaded with the young ruler to leave the trees alone. Majestic trees take years to mature. If he let them grow, his patience would be rewarded. The young ruler did not care. He wanted faster results.  The gardener reluctantly succumbed to his ruler’s request and planted Weeping Willows.

The gardener removed the Sequoias, except for one. He let it stand because the young ruler could not see it from his estate, it would be hidden for years.

After several years, the young ruler left his estate to attend college. When he left, the Weeping Willows matured and looked beautiful. Standing about 35 feet tall, they sprinkled his garden, and he was pleased. He finally had a garden worthy of respect.

The gardener tended the property while the ruler was away, trimming trees, watering plants, and planting seasonal flowers. And, he paid particular attention to the lone Sequoia.

When the ruler finished his studies, he pursued a career as a doctor in another country. While away from his estate, his garden flourished.

While working his rounds, he met a young lady, also a doctor. They married and had several children. He missed his estate and his Weeping Willows, but he loved his life, growing family, and new country.

The children continued to grow and eventually left home to attend college, find jobs, and start their own families.

The ruler was now old and wise. It was time for him to return to his homeland and his beloved estate with his extended family – children, in-laws, grandchildren, and great-grandchildren. He was excited to showcase his lush garden and majestic Weeping Willows.

As the ruler and his family arrived at the estate, they were in awe of the massive tree looming in the distance. Standing more than 200 feet tall, it towered over his estate and his tiny Weeping Willows. It was visible for miles and commanded admiration and reverence. It was the tallest tree in the land.

The wise ruler approached his gardener, wanting to know when he planted the beautiful tree. The gardener said he planted it when the ruler told him to do so many years ago. He informed the ruler that he let it stand, reminding the ruler it would take years and patience for majestic trees to grow.

The ruler was disappointed in his Weeping Willows. If he had listened to his gardener, he would have hundreds of giant Sequoias and the most fantastic garden in all the land.

Diversified investment portfolios, like majestic Sequoias and beautiful gardens, take time to mature. Be patient.

Someone is sitting in the shade today because someone planted a tree a long time ago. ~ Warren Buffett

October 24, 2020

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

The Pendulum

The passing of Justice Ruth Bader Ginsburg is a tragic loss. I learned about her life from the movie On The Basis of Sex, and I’ve enjoyed reading the recent articles about her accomplishments. She opined on many issues, and one quote from a 2017 interview with the BBC particularly stood out to me.  Justice Ginsburg said, “I am optimistic in the long run. A great man once said that the true symbol of the United States is not the bald eagle. It is the pendulum. And when the pendulum swings too far in one direction, it will go back.”

As an investor, the pendulum analogy resonated with me because markets, all markets, have wide gyrating swings and rarely remain stagnant. Since 1926, the S&P 500 has generated an average annual return of 10%, but it has never closed a calendar year with a 10% gain. The range of returns has been far and wide. In 1931 the S&P 500 fell by 43%; in 1933, it rose 54%. Extreme market moves are not limited to stocks. US long-term interest rates rose from 6% to 15% from 1972 to 1982. They fell back to 6% in 1992. The spot price for West Texas Intermediate Crude climbed to $133 from $47 in three years. It would collapse back to $47 one year after reaching its peak price. Gold hit a high of $637 per ounce in 1980, and it did not breach this price again until 2007. Recently, gold climbed above $2,000 per ounce, passing the previous high set in 2011. It dropped 42% from 2011 to 2015. Markets are continuously moving, which is emotionally challenging for investors.

When a trend is in place, investors assume it will last forever, and forever is a long time. From January 1995 to March 2000, the NASDAQ rose 542%. Convinced it would continue, individuals were buyers of stocks. It peaked in March 2000 and then fell 75%. It would not eclipse its previous high for another fifteen years.

Growth stocks have outperformed value stocks for the past two decades, and investors are confident value is dead. A Google search for “Is value dead?” will produce thousands of articles. At some point, value will beat growth, but no one knows when this will occur.

A shifting market can be beneficial to investors. When the pendulum swings too far to the left and stocks become cheap, use it as an opportunity to buy great companies at lower prices. When it swings too far to the right and stocks become overvalued, sell some shares to lock in your profits. A market in motion is favorable to the enterprising investor.

What if you don’t want to own fluctuating investments? Can you altogether avoid risk? Yes, in the short term. The one-month US T-Bill has never lost money if held to maturity. It’s considered the safest investment in the world. Of course, you won’t make money either after taxes and inflation. The 94-year average annual return for the one-month T-Bill has been 3.3%, and inflation averaged 2.9%, so your net return, before taxes, was .4%. A $1 investment in 1926 was worth $22 in 2019. The same $1 invested in the S&P 500 increased to $9,237, or 41,886% more than the safe investment.[1]

Of course, no trend lasts forever. The Boston Red Sox and Chicago Cubs were cursed never to win another World Series until they did in 2004 and 2007, respectively. In 2016, the Cleveland Cavaliers won the NBA championship, the cities first major sports title since 1964.

If trends don’t last forever, how can you take advantage of an ever-changing market?

  • Plan. Set goals. A financial plan can help you prioritize and quantify your goals. It can also keep your emotions in check as you oscillate between greed and fear.
  • Diversify your assets. Diversification allows you to own several asset classes like stocks, bonds, and cash.  A diversified portfolio exposes you to a wide variety of investments, some of which should perform well.
  • Cash. Allocating a portion of your portfolio to cash gives you a chance to purchase stocks when they fall.
  • Take Profits. When stocks or bonds rise above your price target, sell some shares, and lock in your profits.
  • Rebalance. Rebalancing your portfolio once or twice per year will help you maintain your risk level and asset allocation. Automating this process will help you to buy low and sell high without emotion.

Markets fluctuate, it’s what they do, so don’t worry when the pendulum swings too far to the left or right. Rather than worrying about extreme cycles, focus on your plan and goals – and the facts of the case.

“So often in life, things that you regard as an impediment turn out to be great, good fortune.” ~ Justice Ruth Bader Ginsburg

September 23, 2020

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.


[1] Dimensional Matrix Book 2020

Do You Need To Beat The Market?

Investors want to crush the stock market, and rightfully so, but is it necessary? Must you beat the stock market to reach your goals? Since 1926, the S&P 500 has generated an average annual return of 10.1%. If you earn 10% per year, your money will double every seven years. Allocating all your assets to stocks may allow you to better the market’s returns, but it isn’t likely, especially over time. And, once you start to diversify your portfolio by adding bonds or real estate or international stocks or cash, you probably will only better the market in down years, and who wants to be the best loser? As Ricky Bobby said, “If you’re not first, your last.”

According to a recent Wall Street Journal article: “Members of the American Association of Individual Investors found that they overestimated their own investment returns by an average of 3.4 percentage points a year relative to their actual returns, and they overestimated their own returns relative to those of an appropriate benchmark by 5.1 percentage points.”[1]

However, all is not lost if you don’t outperform the S&P 500. In fact, you can do quite well by not posting above-average returns. What matters most to your financial future is saving and longevity. The more money you can save, and the longer you can do it,  the better your financial foundation will be. For example, my daughter opened a Roth IRA a few years ago. If she invests $6,000 per year for fifty years in a generic balanced fund, her account balance could be worth more than $6.5 million.

To dig into balanced funds deeper, let’s look at a few managed by Putnam, American Funds, Fidelity, Schwab, and Vanguard. The average allocation for these funds is 61% stocks, 34% bonds, and 5% cash – an allocation some financial experts consider a relic.

George Putnam Balanced Fund (PGEOX). Launched in 1937, this balanced fund has generated an average annual return of 8.91%. Investing $10,000 per year from inception is now worth $144 million! However, if you invested all your money in the S&P 500, it would be worth about $310 million today. You trailed the market by $166 million. By not investing in the market, you “lost” more than you made. If this fund was in your account today, would you be disappointed with a balance of $144 million? I doubt it.

American Funds American Balanced Fund (ABALX). Since 1975, this balanced fund produced an average annual return of 9.99%. Investing $10,000 per year from July 1975 to August 2020 is now worth $8.03 million. If you invested in the S&P 500 instead, you’d be worth $10.5 million. Would you be upset with $8 million in your bank account? Unlikely.

Fidelity Balanced Fund (FBALX). Since 1986, the Fidelity Balanced Fund has averaged 9.26%. A $10,000 annual investment, for 34 years, is now worth $2.25 million. It also underperformed the S&P 500. If you allocated 100% of your assets to the S&P 500, your balance would be $2.7 million. Are you offended with an investment account balance of “only” $2.25 million? Probably not.

Schwab Balanced Fund (SWOBX). Schwab’s balanced fund started in 1996, and it has generated an average annual return of 7.15%. Investing $10,000 per year for 24 years produced a gain of $629,000. A similar investment in the S&P 500 would be worth about $850,000. You underperformed the market by more than $200,000, but you still have $629,000.

Vanguard Balanced Fund (VBAIX). Vanguard’s fund is twenty years old. It opened for investing in 2000 at the top of the Tech Wreck and the start of the lost decade. Despite starting a fund at one of the worst times in history, the Vanguard Balance fund still produced an average annual gain of 8.29%. Investing $10,000 per year, for twenty years, is now worth $502,000. Like the other funds, it underperformed the market, but you still have a half-million dollars in your account, not too shabby.

Despite these five stellar funds underperforming the market, they produced phenomenal gains for shareholders. The average annual return for these funds has been 8.72%. Year-to-date, they’re up 7%, and for the past year, they’ve increased 13%.

If the S&P 500 offers such stellar returns, why not allocate 100% of your assets to stocks? You can, of course, if you have the temperament, but I’ve found most investors don’t have the fortitude to invest all their money in the market, especially when stocks fall by 30%, 40%, or 50% as they did in 2000, 2008, and 2020. Investors prefer a balanced portfolio of stocks, bonds, and cash based on their long-term goals. Rather than focusing on the market, pay attention to your goals, save your money, follow your plan, and pursue a balanced life.

“Be moderate in order to taste the joys of life in abundance.” Epicurus

September 10, 2020

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

Fund data provided by YCharts and Morningstar.

Picture Credit: Orla, IStock Photos


[1] https://www.wsj.com/articles/investors-still-believe-they-can-beat-the-stock-market-11599491572?mod=searchresults&page=1&pos=1, By Meir Statman, September 7, 2020

Forever?

Exxon Mobil is leaving the Dow Jones Industrial Average after 92 years. They joined the Dow in 1928, and it’s considered one of the bluest of blue chips – a stock to own forever. Salesforce will take its spot. It’s not the first perennial holding to be substituted by a newer, swankier company. Walgreen’s replaced General Electric in 2018 after a 112-year run and Apple supplanted AT&T in 2015 after 99 years. The three former Dow Jones members spent a combined 303 years in the popular index. Procter & Gamble is now the longest-tenured company in the Dow at 88 years.

For decades, shareholders of Exxon, GE, and AT&T considered themselves set for life. A portfolio consisting of these three companies turned $30,000 into $1.2 million from 1983 to 2016, generating an average annual return of 11.8% – far outpacing the S&P 500. Yet, from 2016 through 2020, this three-stock portfolio has fallen 45% while the S&P 500 is up 68%, a difference of 113%![1]

XOM_GE_T_chart (1)

From 1930 to 1960, Exxon, GE, and AT&T were a few of the largest companies in the world, and AT&T held the top spot for four decades. Exxon was the largest company in the world in 2011.[2] It’s now the 34th largest company in the US.

Big Board

In addition to the long-term investment success of this blue-chip triad, they generated significant dividend income over the past three decades. Exxon’s dividend yield averaged 3.15%, GE’s average payout was 2.95%, and AT&T paid 4.54%. These former juggernauts raised their dividends by an average of 495% during this stretch.

However, time’s change and Exxon’s revenue has declined 31% over the past decade, and its dividend payout ratio is 207% – an extremely high metric. Exxon’s stock price has risen 68 cents over the past twenty years, and GE’s stock hasn’t budged a dime in twenty-eight years. AT&T has followed a similar path. Its share price is down more than 40% from its 1999 peak.[3]

Cisco Systems is an excellent example of not getting married to a stock. Its share price soared 3,500% from 1995 to 2000. By 2002, it had fallen 85%. Over the past twenty years, it’s down 42%, and it has never returned to its all-time high of $72.19 set in April 2000.[4]

CSCO_chart

Today, Facebook, Amazon, Apple, Netflix, Google, Microsoft, and Tesla are the largest companies, and investors plan to own them forever. And rightfully so. If you owned a basket of these high-flyers, you’d be up 97% this year! It’s hard to imagine that one of these companies could follow the fate of Exxon, GE, or AT&T, but it’s possible.

What should you do if you own a stock that you want to hold forever? Here are a few suggestions.

  • If your company is performing well, and it’s meeting your needs, do nothing. Let it run.
  • If the stock becomes a significant percentage of your wealth, consider reducing it, and redeploying your capital into another company or two. What is a large percentage? When your stock approaches 10% or more of your portfolio, start paying extra attention to it. When it breaches 25%, sell some shares to drop your weighing to 10% of your account balance or lower.
  • Trust, but verify. Review earnings reports and company announcements. Is the trend intact? Are they generating positive revenue, earnings, and cash flow? Is the company innovating and producing products and services people will use? If so, hold on to the stock.
  • Keep an eye on management. Steve Jobs, Bill Gates, Jeff Bezos, and Elon Musk are legendary leaders and visionaries. A strong management team is a crucial component to the success of a company, so keep an eye on their lieutenants as well. You can track critical employees on Morningstar or Yahoo! Finance.
  • Take profits. It’s okay to take profits after a strong run. Apple and Tesla announced stock splits a few weeks ago, and their stock prices have risen 31% and 47%, respectively. After a substantial gain, it’s okay to trim your holdings to lock in a profit.
  • Average up. Most people are comfortable averaging down, but few like to average up. What is averaging up? Let’s say you purchased 100 shares of Apple at $150 in 2019, and you bought more at $250 and $350 and $450. Your average cost is $300. Apple is currently trading for $500 per share, so your gain is $200, or 67%, despite buying the stock at higher prices.
  • Sell it. If your company’s fortunes change, sell it, and move on to a new company. There are thousands of companies and investment opportunities, so don’t get wedded to a stock.

Owning great companies is one of the best ways to create wealth and concentrating your holdings into a few stocks can magnify your returns. But, it’s essential to review your investments regularly to make sure they’re meeting your goals and objectives. Do not ignore fundamentals and pay attention to popular trends. Times change and being flexible to pivot to new ideas will allow your account to grow over time.

The bigger they are, the harder they fall. ~ Anonymous

August 26, 2020

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

 

[1] Morningstar Office Hypotheticals – April 1983 to July 2020

[2] Dimensiional Funds

[3] YCharts

[4] Ibid

The Indianapolis 500

Drivers start your engines!

Today marks the 104th running of the Indianapolis 500 – “The Greatest Spectacle in Racing.” Drivers will travel at speeds of 225 miles per hour or more in pursuit of auto racing’s most iconic trophy. The 1911 winner, Ray Harroun, averaged 75 miles per hour, slower than some currently posted highway speed signs.

Race day is exciting, and the spectacle is legendary. Crowds of people usually pour into the brickyard to be part of the scene, and millions more will watch it on TV.  The singing of our National Anthem, the singing of “Back Home Again in Indiana,” and the stealth bomber flyover add to the enthusiasm of the day.

Most of the attention will be on the 33 drivers, and rightly so, as they’ll be the ones responsible for executing the plan. However, behind them is an army of support staff like strategists, spotters, spouses, and owners. Teams work as one to make sure the driver can win the race by strategizing and planning for a successful outcome. The plan is their road map for the race.  As the race continues, they must adjust their strategy based on new data like car performance, track conditions, and weather.

In addition to a fast car and the driver’s skill, they’ll need a little luck to win. In 2011 Dan Wheldon was trailing the winner until the last lap when J.R. Hildebrand’s car hit the wall on the final turn. Hildebrand’s accident allowed Wheldon to win.  Wheldon would’ve finished second, at best, had Hildebrand not crashed.

Regardless of how fast these cars travel, drivers will pass each other often and spend a majority of the 500 miles jockeying for a position to win. Drivers need to focus on their team goals, trust the process, and not worry about the competition.

Unfortunately, drivers may experience a crash. When this happens, the yellow caution flag will fly, and drivers must slow down for the cleanup crew to clear the track before racing can resume. Accidents and crashes are unexpected, of course, so it’s best to try and minimize the damage. Drivers do not live in fear of a crash, and nor should you.

What can an investor learn from the Indianapolis 500? Here are a few thoughts.

  • Drive your race. People travel at different speeds to reach their goals. If you’re on the right track, don’t worry about others. Your plan only applies to you and your current situation.
  • Create a financial plan. Your plan will help guide you through the race of your life. It will be your roadmap to success.
  • Adjust and review your plan. Drivers adjust their plans based on new data. As you review your plan and goals, you should adapt to new data as well. Flexibility is paramount.
  • Work with your team. A driver relies on their team to win, and your trusted advisors can help you reach your goals. A CPA, attorney, real estate agent, mortgage broker, insurance agent, financial planner, and an investment manager should be in your pit crew.
  • Diversify your investments. In the market, like racing, crashes happen. It’s not possible to predict when they will occur, so your best defense is a diversified portfolio of stocks, bonds, and cash.
  • Celebrate your wins. It’s essential to enjoy the fruits of your labor. If you’ve reached a goal, celebrate it with gusto – and milk!

After 500 miles, the winner will capture the checkered flag, drink their milk, and kiss the bricks at the finish line. The team will celebrate the victory for a few days and then start planning for the next race. You might not pass under a checkered flag when you’ve achieved your goals, but you’ll know when you’ve won your race.

Nothing compares to the Indianapolis 500.  ~ Mario Andretti

August 21, 2020

 

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is T.D. Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

What Is a Stock Split?

Tesla and Apple are splitting their shares, sending their stock prices higher. Wall Street, Twitter, and CNBC spent the last week or so commenting on the benefits of a split. What does it mean when a company decides to split its stock? Nothing.

What is a stock split? Let’s say you own 100 shares of a $100 stock valued at $10,000. If the company issues a two for one stock split (2:1), you will own 200 shares at $50 with a value of $10,000 once the split is complete. In this case, your shares doubled, and the price cut in half.

Tesla is issuing a five for one split, so for every share you own, you’ll own five afterwords. Tesla closed at $1,650 per share on Friday. If the split occurred today, the price would be $330. Since the announcement on August 11, the shares have soared more than 19% – in four days!

TSLA_chart (1)

Apple announced a four for one  (4:1) split, so for every share you own, you will hold four when completed. It is up more than 8% since the announcement. Apple last split its stock seven for one in 2014. If you purchased 100 shares on June 1, 2014, you would own 2,800 shares once they complete the recently announced split. Apple has split its shares five times.

AAPL_chart

Stocks splits used to be the norm. When a company reached a specific price, it would split its shares. For most companies, the magic price was $100. McDonald’s has split their shares eight times since the 1970s, while Coca-Cola has issued six, and Pepsi has done it five times.

What if a company doesn’t split its shares? Berkshire Hathaway trades for $316,251 because they have never issued a split. If Berkshire split its stock as often as Apple, the share price would be $1,411 – less than the price of Tesla and Amazon. If Apple never split its stock, it would trade for approximately $103,000 per share.

BRK.A_chart

When I lived in Connecticut, I chopped wood in the summer for our winter fires. After I cut a large piece of wood in two, I still had the same amount but in two smaller chunks.  I worked at a deli while in college. If someone ordered a sandwich, I cut it in two – same sandwich, two halves. When my family orders a dessert, we cut it into thirds – the same amount, three pieces.

Stock splits are exciting, but they do not add or subtract from the value of the company. One of the best ways to benefit from a stock split is to buy a great company and hold it forever.

You better cut the pizza in four pieces because I’m not hungry enough to eat six. ~ Yogi Berra

August 15, 2020

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

Concerned About the Presidential Election?

The presidential election is coming, and investors are shifting their tired, worrisome gaze towards the fall. We’re still battling the virus and dealing with racial tensions. Now we must add the election to the mix. Each political party, and legions of supporters, are convinced that the “other” party will tank the economy and the stock market once the election is over. Is this true? Will stocks fall if Trump wins? What about Biden?

On the heels of the 2016 election, the Brookings Institute projected that stocks would fall 10% to 15% if Trump won. In a CNN article, they wrote, “almost everyone on Wall Street currently predicts Hillary Clinton will win the White House.” They added: “A Trump triumph would likely cause investors to flee stocks to the safety of gold and bonds.”[1] Trump did win, and stocks have risen 44% from election day while bonds rose 26%, and gold has increased by 41%.

^DJI_IGPUSD_^SPXBA_chart

Since 1928, there have been twenty-three elections. The average annual return during these election years has been 11.28%, and 87% of the time, stocks finished the year in positive territory.

Fidelity has done extensive research on elections and market returns. It’s fascinating data. From 1789, the stock market has generated an average annual return of 9.1% during election years. The data below shows how the stock market performed under various election scenarios according to their report.[2]

  • Republican President: Average annual return = 8.6%
  • Democratic President: Average annual return = 8.8%
  • Republican Sweep: Average annual return = 8.6%
  • Democratic Sweep: Average annual return = 8.2%
  • Republican President and Divided Congress: Average annual return = 8.7%
  • Democratic President and Divided Congress: Average annual return = 10.9%

Fidelity’s study spans 231 years, so let’s review the stock market performance, as measured by the S&P 500, for our most recent Presidents.[3]

  • William J. Clinton = 210%
  • Barack H. Obama = 182%
  • Ronald W. Reagan = 117%
  • George H.W. Bush = 51%
  • Donald J. Trump = 44%
  • Jimmy E. Carter = 28%
  • George W. Bush = -40%

The presidential election will stir up plenty of emotions and cause the stock market to gyrate considerably. However, the election will have little impact on your investment portfolio. Rather than worrying about the election, focus on your financial goals. A more significant impact on your wealth will be how much money you save and invest. If you save more than you spend, your wealth will increase. Allocating a large percentage of your assets to stocks may allow you to create generational wealth because stocks historically outperform bonds.

If you’re concerned the “other party” will destroy the market, you probably own too many stocks, or you have never completed a financial plan. A financial plan will help you determine the appropriate asset allocation so you can handle multiple market conditions. During the stock market correction this past March, we regularly checked our client’s plans to make sure their goals were still intact – and they were.

I recently talked with a client who was concerned about his rising expenses because of a home purchase. I informed him we factored in an increase in his living expenses for the next two years, so he was going to be okay. He said he was going to sleep well that night. A financial plan, your plan, will remove confusion, complexity, and worry so you can pursue things you enjoy.

Elections come and go, so don’t let political anxiety weigh you down every four years. Follow your plan, focus on your goals, save your money, invest often, diversify your assets, think long-term, and good things will happen.

Be sure to put your feet in the right place, then stand firm. ~ Abraham Lincoln

July 24, 2020

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

 

[1] https://money.cnn.com/2016/10/24/investing/stocks-donald-trump-hillary-clinton/ Heather Long, October 24, 2016

[2] https://www.fidelity.com/learning-center/trading-investing/markets-sectors/stock-returns-and-elections Jurrien Timmer, Director of Global Macro, Fidelity Management & Research Company

[3] https://www.forbes.com/sites/sergeiklebnikov/2020/07/23/historical-stock-market-returns-under-every-us-president/#4a589312faaf Sergie Klebnikov and Halah Touralai, Forbes Staff Writers, July 23, 2020

Did You Miss the Rebound?

The first few minutes of a flight are exhilarating as the pilot throttles the plane down the runway and points its nose heavenward. A stock market recovery is fast and furious, particularly after a steep drop. If you miss the start of a recovery, you will forego substantial gains. From the March 23 low, the Dow Jones, S&P 500, and NASDAQ have climbed substantially. The NASDAQ is up 57% while the S&P 500 and Dow Jones have risen more than 45%.

^IXIC_^SPX_^DJI_chart (1)

Did you miss the rebound? Is it too late to get back in the market? If you liquidated your portfolio in March, should you now repurchase your stock holdings? If you’re still standing on the tarmac looking up at a soaring stock market, you can take comfort in knowing that the Dow Jones and S&P 500 are down to flat on the year.

^SPX_^DJI_chart

Outside of large-cap technology stocks, most sectors are performing poorly this year. Small-cap stocks, international companies, and real estate holdings are trading in negative territory. Small-cap and real estate stocks are down more than 14% for the year.

^MSEM_^SML_^MSEAFE_^SPCSERES_chart

Despite the recent rally, it’s not too late to invest in the markets, especially if you purchase a diversified portfolio of funds. It doesn’t make sense to time the market if you own a basket of funds because you will always have some sectors trading up and others trading down. It’s better to stay fully invested so you can take advantage of the long-term trend of the markets. You will miss opportunities if you regularly buy and sell your investments.

Also, markets move. Today’s winner could be tomorrow’s loser. As I mentioned, large-cap technology stocks are outperforming most sectors this year, but it hasn’t always been the case. From 2000 to 2010 the NASDAQ lost 44% while emerging markets rose 102% and small-caps were up 68%.

^IXIC_^SML_^MSEM_chart

According to Dimensional Fund Advisors, a 60% stock and 40% bond portfolio has generated an average annual return of 8.97% since 1926. A moderately balanced portfolio of stocks and bonds has weathered 94 years of booms, busts, wars, pandemics, corrections, depressions, and recessions. And, for the brave who refuse to sell, it has produced generational wealth. A one-dollar investment in 1926 is now worth $3,350. Of course, 94 years is a long time, so what has it done lately?[1]

A Dimensional 60/40 model is up 6.36% for the year and more than 16% for the past twelve months. For the past three, five, and ten years, it has returned more than 10% per year.  On a rolling ten-year calendar, the model has never lost money. The best ten-year performance for this model started in 1982, averaging more than 17.5% per year. The worst decade started in 1929, generating a gain of .21% per year.[2]

Rather than trying to time the market, focus on your financial plan and your personal goals. A portfolio that you own for decades based on your goals will yield better results than attempting to buy at the bottom or sell at the top.

Let time in the markets work for you and your family.

“Time is free, but it’s priceless. You can’t own it, but you can use it. You can’t keep it, but you can spend it. Once you’ve lost it, you can never get it back.” Harvey Mackay

July 21, 2020

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

[1] https://returnsweb.dimensional.com/, data ending 6/30/2020. The 60/40 index consists of the S&P 500 and long-term government bonds

[2] Ibid

Which Market?

The NASDAQ is soaring this year despite the political turmoil, racial tensions, and a global pandemic. It has risen 18% so far, and it’s not showing any signs of slowing down as it climbs a wall of worry. A few media outlets and financial experts are referring to the rise as a bubble. Market Watch had this to say about the stock market, “If you still do old-fashioned, cold analytical analysis based on numbers, you’ll see that the stock market is significantly above the mother of support zones. It is now a bubble.”[1]

When individual investors refer to the market, it is the Dow Jones Industrial Average. Is it up? Is it down? Will it keep rising, or will it crash? If the Dow falls more than 250 points, it’s considered breaking news even though it’s less than a 1 percent decline. The Dow Jones gets all the attention, but what about other markets? Is it fair to lump all markets together? What about the other indices?

Morningstar tracks more than 84,000 indices or markets, so when someone asks what I think about the market, I wonder which one they’re referencing. If you own a diversified portfolio of funds, you probably have exposure to dozens of markets.

To find out if the market is overvalued, let’s dissect a traditional 60/40 portfolio – 60% stocks, 40% bonds.

Large-Cap Growth Stocks. This sector has been red hot for more than a decade. The primary fund for this asset class is the Invesco QQQ Trust – The Qs! Stocks in this index include Apple, Microsoft, Amazon, Facebook, Alphabet, Tesla, NVIDIA, and Netflix. This star-studded index is up more than 490% for the past ten years, and it is up 24% on the year. If stocks are in a bubble, it’s this sector.

Large-Cap Value Stocks. Value stocks have trailed growth stocks by a wide margin for the past few decades, and this year is no different. The Vanguard Value ETF is down 16% for the year and up 115% for the past ten. Companies in this index include Johnson & Johnson, Berkshire Hathaway, Exxon Mobil, Pepsi, and Amgen.

International Developed Markets. International stocks have barely budged for the past ten years, rising a paltry 24%. The MSCI EAFE Index (EFA) is down 10.2% for the year, hardly a bubble. Companies in this sector include Nestle, Novartis, Toyota, and Unilever.

International Emerging Markets. This sector is one of the worst-performing asset classes over the past decade. It has risen 6.4% – total, not per year. A $10,000 investment a decade ago is now worth $10,640. Popular stocks in this category include Alibaba, Tencent, JD.com, and Baidu.

Small-Cap Growth. This sector is showing some life this year because it invests in growth stocks. It is up 2.25% for the year, and it has risen 233% for the past decade. Stocks in this index include DocuSign, Moderna, Teledoc, The Trade Desk, and Pool Corp.

Small-Cap Value. As far as US stocks go, few have fared worse than this sector, falling more than 23%. In the past ten years, it has generated an 87% total return. Small-cap and value have been a disastrous combination this year. Companies in this index include PerkinElmer, Allegion, Gaming and Leisure Properties, and ON Semiconductor.

Mid-Cap Index. Mid-Cap stocks are down 6.6% for the year. Over the past ten years, they’re up 171%. This sector includes companies like Lululemon, Splunk, Chipotle, and Clorox.

International Small-Cap. This international sector is down 12.4% for the year, but up 57% over the past ten years. Companies in this index include Rightmove, Bechtle, and Avast.

Real Estate. Working from home (WFH) is taking a toll on real estate stocks. Malls, shopping centers, office buildings, and senior living centers are not doing well in the COVID-19 environment. Does it make sense to allocate money to this sector with all the negative headwinds? I believe it does because real estate stocks will also give you exposure to data centers, cell towers, storage units, and timber. Real estate stocks are down 16% for the year and up 63% for the past decade.

Short-Term Bonds. Short-term US government bonds are the safest investment in the world. They have risen .42% for the past decade, and they’re up .32% on the year. Treasury bills are shelter investments, providing you with liquidity and safety.

High-Yield (Junk) Bonds. Lower rated bonds, known as high-yield or junk bonds, trade more like stocks than bonds, especially when stocks fall. Junk bonds have lost money for the past ten years, falling 12%, and they’re down 6.75% in 2020. A few names in this sector include Ford, American Airlines, and Netflix.

Corporate Bonds. Corporate bonds are having a good year, rising 6.2%. They have risen 26% for the past decade. Companies in this category typically have strong balance sheets. A few quality names in this sector include Anheuser-Busch, Microsoft, Apple, and Oracle.

Gold. Gold typically does well when investors or scared or there is a hint of inflation. This year gold has risen 18%, and over the past decade, it has risen 42%.

Commodities. A commodity index includes gold, oil, sugar, soybeans, corn, copper, zinc, silver, etc. It has been a challenging decade for commodities, losing 14%. This year it is up 7% rising on the strength of gold, silver, and copper.

Your portfolio may include some of these components. At the start of this year, it would have made sense to allocate 100% of your assets to large-cap growth companies, but it’s not possible to know, in advance, which sector will outperform the others. For example, from 2000 to 2010, the large-cap growth index lost 49%, while emerging markets rose 102%.

So, is the market in a bubble? It depends on the market, of course. One of the best ways to protect your assets is to own a diversified portfolio of low-cost funds and rebalance them as needed. Rebalancing your accounts will keep your asset allocation and risk level intact.

Rather than worrying if we’re in a bubble and trying to time your buys and sells, focus on your goals, think long-term, and let the stock market help you create generational wealth.

History shows us, over and over, that bull markets can go well beyond rational valuation levels as long the outlook for the future earnings is positive.” ~ Peter Bernstein

July 11, 2020

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

The data source for the investment categories, names, and returns come from YCharts.

[1] https://www.marketwatch.com/story/the-latest-sign-of-a-stock-market-bubble-small-companies-claiming-to-disrupt-large-industries-2020-07-06, by Nigam Arora, July 7, 2020

What if?

If you have children, you probably answered a million what-if questions. What if the sky falls? What if dogs talked? What if I wear my clothes backward? What if I eat my soup with a fork? What if I become a horse?

What if?

Investors are asking quite a few what-if questions because of the current economic environment and the healthcare crisis — questions with few answers.

Let’s explore some what-if questions.

What if stocks crash? Stocks crash often. According to J.P. Morgan Asset Management, there have been several significant market declines. Stocks fell 86% during the Great Depression. They fell 49% during the tech-wreck in 2000. The S&P 500 fell 53% from 2007 to 2009, and most recently, it fell 34% because of COVID-19. J.P. Morgan highlighted 13 bear markets in their Guide to the Markets® third-quarter outlook. The average drop was 42%, and the downturns lasted for 22 months.[1] From March 2009 to July 2020, the S&P 500 Index has risen 366%, but it closed in negative territory 42% of the time. During this bull-market run, the index dropped more than 10% on several occasions. It fell 16% in 2011, 11% in 2016, 17.5% in 2018, and 34% in March 2020.[2]

What if there is a recession? Since 1900 the U.S. has weathered twenty-four recessions or about once every five years.[3]

What if interest rates rise? The Federal Funds rate jumped from 4.24% in 1970 to more than 20% in 1981. Interest rates climbed to 6.5% in 2000, and from 2000 to 2007, they soared from 1% to 5.25%.[4]

What if there is inflation? The inflation rate in 1920 peaked at 23.5%. After WWII, it touched 19%. In 1980 it spiked to 14%. The 106-year inflation rate has averaged 3.23%.[5]

What if stocks don’t rise? Stocks go nowhere often. During the Great Depression, stocks eked out an average annual return of 1.7% for fifteen years from 1929 to 1944. Stocks produced an average yearly return of .9% from 1973 to 1978. From 2000 to 2012, the market generated an average annual return of 1.7% during the Great Recession.[6]

What if there is a war? The United States has been involved in several wars or conflicts: WWI, WWII, Korea, Vietnam, Iraq, and Afghanistan, to name a few.

What if there is another pandemic? In addition to COVID-19, there have been several global epidemics – the bubonic plague, typhoid, yellow fever, Spanish flu, pneumonic plague, cholera, smallpox, HIV/AIDS, Ebola, MERS, SARS, measles, H1N1, mumps, the flu, and so on.[7]

What if a Republican wins the election? The average annual return with a Republican president in the White House has been 8.6%.[8]

What if a Democrat wins the election? The average annual return with a Democrat president in the White House has been 8.8%.[9]

Despite crashes, recessions, depressions, wars, pandemics, rising interest rates, inflation, and elections, the stock market marches higher. In June 1920, the Dow Jones Industrial Average closed at 90.76. Today, it is 25,832 – a gain of 28,361 percent! The 100-year average annual return for stocks is 10%.

It’s possible to ask more what-if questions about investing, but what’s the point? It’s impossible to know what’s going to happen tomorrow, so don’t try to outsmart the market. It’s a waste of time, energy, and resources. Instead, focus on what you can control, like your spending and your savings.  A financial plan can help you focus and prioritize your goals. It will help you determine your investment allocation and other important decisions. Once your plan is completed, invest in a diversified portfolio of low-cost index funds, and hold them forever.

“Life can only be understood backwards; but it must be lived forwards.” ~ Søren Kierkegaard

July 3, 2020

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

[1] J.P.Morgan Asset Management Guide to the Markets® U.S.|3Q 2020|As of June 30, 2020.

[2] YCharts

[3] J.P.Morgan Asset Management Guide to the Markets® U.S.|3Q 2020|As of June 30, 2020.

[4] https://www.macrotrends.net/2015/fed-funds-rate-historical-chart, website accessed July 2, 2020

[5] YCharts

[6] Dimensional Fund Advisors 2019 Matrix Book

[7] https://en.wikipedia.org/wiki/List_of_epidemics

[8] https://www.fidelity.com/learning-center/trading-investing/markets-sectors/stock-returns-and-elections

[9] Ibid