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

My Fitbit

My wife and daughter own Fitbits. I didn’t want to be left out, so I bought one too. The main reason for getting our Fitbits is our healthcare plan will give us points we can use to purchase gift cards. Of course, we want to get fit, but our real motivation is to rack up the points.

My Fitbit tracks my sleep, steps, heart rate, weight, water intake, calories, and so on. My goals are to walk 10,000 steps per day and exercise at least five days per week. So far, it’s going well. My Fitbit buzzes when I reach my goal, and if I have been sitting for extended periods, it will remind me to get up and walk around. My daily record, so far, has been 26,000 steps, which included walking, mowing my lawn, and cycling around my neighborhood. For my efforts, I earned the following badges: skydiver, skyscraper, penguin march, and classics. I guess these are good badges.

My Fitbit is like an electronic coach I wear on my wrist, a constant reminder to keep moving, keep pursuing my goals despite the obstacles.

A financial plan is like a Fitbit. A plan records and tracks your essential financial data to make sure you’re on pace to achieve your goals. Unlike your Fitbit, your plan comes with a financial planner. Your planner will be your coach and confidant, encouraging you to keep moving despite the headwinds.

As the stock market falls and the economy crumbles, a financial plan may bring you peace. Despite the destruction in the market this year, our client’s financial plans and goals remain intact. We monitor our client’s data regularly and adjust as needed. When a client inquires about their investments, I can review their financial plan to let them know they’re still on pace to achieve their goals.

A financial plan is mostly data-driven, a combination of assets, ages, goals, time-horizons, risk tolerance levels, etc. It’s a numbers game, and the data gives clients the confidence they need to keep moving forward.

Here are five reasons why it’s essential to complete a financial plan.

  • Individuals who complete a financial plan have three times the assets of those individuals who do little or no planning.[1]
  • A plan will quantify and visualize your goals. Do you want to retire early? Buy a second home? Travel the world? Your plan can answer these questions and several more.
  • A plan can improve your budgeting and spending goals. A spending plan can give you control over your cash flow, allowing you to buy what you want – if it’s in the budget!
  • Your plan will be your financial guide, whether your saving money for college or retirement. It will be your GPS. It will keep you on the right path.
  • It will keep your emotions in check, especially when global markets are falling apart.

For our part, as a planner, we will do the following:

  • Understand your personal and financial circumstances.
  • Help you identify and select goals.
  • Analyze your current and potential course of action.
  • Develop financial planning recommendations.
  • Present your recommendations.
  • Implement your recommendations.
  • Monitor your progress.

Once your plan is in place, I recommend meeting with your planner quarterly. After you’re satisfied with the results, an annual review is all that is needed.

A Fitbit can’t make me work out, nor can a plan make me develop healthy financial habits. I must do the work and put in the time, but if I do, I know good things will happen.

Success is walking from failure to failure with no loss of enthusiasm.” ~ Sir Winston Churchill

May 13, 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 are not suitable for every investor.

 

 

 

 

 

[1] http://www.nber.org/papers/w17078

The Beauty of Cash

Cash is wonderful. Simple. Humble. It never boasts when times are good, nor complains when times are tough. Cash is an asset like stocks or bonds or real estate, but it doesn’t get any respect – like Rodney Dangerfield, but it should, particularly when the stock market and economy are struggling.

CEOs who hold large amounts of cash get ridiculed for not deploying it to acquire other companies, buy back their stock, or pay a dividend to shareholders as if holding cash was a sign of weakness.

Warren Buffett, CEO of Berkshire Hathaway, holds $128 billion in cash, and it has been suggested he “buy blue-chip stocks, invest in Boeing, or provide rescue financing to companies in the travel industry.”[1] Instead, Mr. Buffett recently sold all his airline stocks to raise more cash. Mr. Buffett has made his billions by investing for the long haul, being patient, and utilizing cash.

Tim Cook, CEO of Apple, has also been criticized for carrying too much cash on the balance sheet. Apple currently has more than $100 billion in cash and short-term investments, and he has been urged to buy other technology companies. Fortune thought Mr. Cook should have purchased Netflix last year, calling it “his biggest blunder so far.”[2] A money management firm posted an open letter on its website to Apple and Tesla, suggesting they merge, saying, “Apple lost its innovative soul when Steve Jobs passed away in 2011.”[3]

Berkshire Hathaway and Apple have pristine balance sheets that must be praised, not mocked. Companies and CEOs who pay attention to the bottom line can survive recessions and depressions.  If two iconic investors are holding billions of dollars in cash, shouldn’t we pay attention? Is it time to give cash some respect?

What is cash? Cash can be dollars you carry in your wallet or keep in your bank. It can also include short-term certificates of deposit or US Treasury Bills.  Any liquid, guaranteed investment maturing in one year or less is considered cash, at least for investment purposes. A money market will invest in short-term obligations, so you can park your money in a money market fund as well.

As interest rates approach zero, does allocating a portion of your assets to cash still make sense? It does. Despite low rates, cash is liquid and safe like few other investments.

Cash does have a downside. As a long-term investment, it does not hold up, and it will barely keep pace with inflation. Investing in stocks is still the best way to create generational wealth, but if you need to preserve your wealth in the near term, invest in cash. If your time horizon is five years or more, allocate most of your assets to stocks.

What can you do with your cash? Here are a few ideas.

  • Emergency Fund. Your emergency fund should have enough money to cover three to six months of expenses. If your household expenses are $10,000 per month, your emergency fund balance should be $30,000 to $60,000. During challenging economic times, you might want to increase your fund balance to cover nine to twelve months of expenses.
  • Opportunity Fund. Setting aside money for opportunities is also recommended. How much money is appropriate for this fund? It depends on what you want to buy or where you want to go.
  • If you are within five years of retirement, my recommendation is to keep three to five years of expenses in cash. If your annual household expenses are $100,000, your cash balance should be $300,000 to $500,000. A large cash balance allows your stocks to recover if you were to retire during a down market like we are experiencing today.
  • Purchases. If you need to buy a car or pay for college tuition, keep your money in cash regardless of the time frame. Also, allocate your money to cash if you need it in one year or less.
  • Borrowing. It’s common for people to rely on debt to finance cars, homes, education, etc. But what do you do if your bank freezes your credit? Wells Fargo has stopped issuing home equity loans, and they will only refinance jumbo mortgages for clients who hold at least $250,000 in liquid assets with their bank.[4] A cash balance gives you access to your capital regardless of your bank’s internal policies.
  • Risk Reduction. Allocating a portion of your assets to cash will reduce your risk. Your risk will fall by 23% when you allocate 30% of your portfolio to cash or short-term investments. Stocks outperform cash significantly over time; however, for the past two years, this has not been the case as stocks have fallen 4.5% from January 1, 2018.[5]

Calvin Coolidge said, “Use it up, wear it out, make it do, or do without.” Mr. Coolidge was a fan of cash, and we ought to follow his advice today. If you have the money to buy something, go for it. If not, save your money until you do.

Cash has always been king, and it should be given the respect it is due. Treat it as a valued asset, and it will bring you peace, and it may even enhance your portfolios overall performance.

I don’t get no respect – Rodney Dangerfield

May 4, 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 are not suitable for every investor.

[1] https://www.nasdaq.com/articles/its-time-for-warren-buffett-to-get-greedy-2020-03-13, Barrons, Andcrew Bary, March 13, 2020

[2] https://fortune.com/2019/02/15/apple-tim-cook-netflix/, Fortune, Don Reisinger, February 15, 2019

[3] https://gerberkawasaki.com/article/open-letter-to-tim-cook-and-elon-musk-on-why-apple-and-tesla-need-to-merge, Danilo Kawasaki, website and article accessed May 3, 2020

[4] https://www.wsj.com/articles/wells-fargo-curtails-jumbo-loans-amid-market-turmoil-11586037701, WSJ, Ben Eisen, April 4,2020

[5] YCharts

PWM Weekly Market Update

Happy Saturday,

The Great Wall of China is open to visitors, the NFL draft is in high gear, and Georgia is letting some businesses reopen. If you need a hair cut and you like to bowl, a visit to the Peach State may be in order.

Our rebalancing software runs weekly, looking to sell expensive assets and buy cheap ones. It’s an automated process. We did not rebalance any portfolios this week as volatility continues to tumble. For the first time in a while, it felt like a typical week, as far as investments are concerned.

The US Index of Consumer Sentiment is an indicator I follow. The 68-year average for the index is 86.7, and the recent reading is 71.8. When consumers are optimistic, sentiment is high. When consumers are pessimistic, sentiment is low. The all-time high was 112 in March 2000, before the Dow Jones Industrial Average fell 33% from March 2000 to March 2003. The historical low was 51.7 in May 1980 before stocks rose 228% from 1980 to 1987. In March 2009, consumer confidence touched 57.3, before the market climbed 236% from March 2009 through yesterday. The moral of the story: When consumer confidence is low, it’s an excellent time to buy stocks.

The current asset allocation for public pension funds is 49% stocks, 23% bonds, 7% real estate, 19% alternative investments, and 2% cash. The 30-year average annual median return for pension funds was 8.3%.[1] The S&P 500 returned 8.2% over the same time frame.

Here’s how stocks, bonds, and other asset classes performed this past week.

  • The S&P 500 fell 1.3%
  • The NASDAQ fell .67%
  • International Stocks fell .95%
  • Emerging Markets fell 1.5%
  • Long-Term Bonds rose 1.8%
  • Gold rose 2.5%
  • Oil fell 34%
  • Chinese Stocks fell .85%

If you’re looking for some good news, I recommend watching Some Good News on YouTube hosted by John Krasinski (The Office, Tom Clancy’s Jack Ryan, A Quiet Place, & 13 Hours). He hosts the show form his home and highlights good news from around the world – and space. Here’s the link to his channel: https://www.youtube.com/channel/UCOe_y6KKvS3PdIfb9q9pGug

Like a drink of cool water to a weary, thirsty soul, so hearing good news revives the spirit. ~ Proverbs 25:25 (TPT)

Bill Parrott, CFP®

President and CEO

Parrott Wealth Management

http://www.parrottwealth.com

[1] https://www.nasra.org/investment

PWM Weekly Stock Market Update

Happy Saturday,

Another good week for stocks. The Dow Jones Industrial Average jumped 3% on Friday and finished up 2.2% for the week. The NASDAQ 100 is positive for the year, and it is up more than 15% for the past twelve months. Small-cap stocks continue to rebound, and international stocks are looking better. The S&P 500 has risen 29% from the March lows.

Why are stocks rebounding? We’re starting to see optimistic signs from around the world. Gilead Sciences is using its drug remdesivir to treat COVID-19 patients, and the results are encouraging. Boeing is resuming production in Seattle, Germany is going to let small businesses open on Monday, and the PGA Tour is teeing off June 11 at the Colonial Golf Course in Fort Worth, Texas. Speaking of Texas, Governor Greg Abbot plans to open some businesses on April 27.

Our investment models were quiet this week as volatility continues to drop. We only rebalanced ten accounts on Tuesday, a year low – which is a good sign.

It has been near impossible to buy U.S. Government securities because large institutions are gobbling them up for their money market funds. As a result, we are purchasing Certificates of Deposits from around the country for our cash and bond holdings. CD’s are federally insured to $250,000 per person, per account.

The CBOE put/call ratio is an indicator I watch closely. It relies on options to determine if investors are greedy or fearful. An option is a contract that allows you to control 100 shares of stock for every contract you own. A put option will rise in value when the price of a stock falls. A call option will increase in value when the price of a stock rises. If investors purchase several puts, fear is high. When confidence is high, they will buy calls. If the ratio is over one (more put buyers than call buyers), investors are nervous; below one, they’re confident. In March, the indicator peaked at 1.83. The ten-year average is .94; the current reading is .91. The ratio has dropped 50% from the peak, an encouraging sign for investors.

Corporate insider buying has been bullish for the past few weeks. Executives and insiders are buying shares of their company stock because of the compelling valuations.

Here’s how stocks, bonds, and other asset classes performed this past week.

  • The S&P 500 rose 3%
  • The NASDAQ rose 7%
  • International Stocks rose .34%
  • Emerging Markets rose 2.2%
  • Long-Term Bonds rose 1.4%
  • Gold fell .17%
  • Oil fell 17.2%
  • Chinese Stocks rose 3%

I decided to run the Boston Marathon in 2009; however, I needed to qualify for the race first. Due to the marathon calendar and my schedule, I missed the window for 2009 and 2010, so I set my sites on 2011. To qualify, I signed up to run the 2010 Austin Marathon, and as a backup, I registered for the Los Angeles Marathon, scheduled for three weeks later. To run Boston, I needed a plan, and it included a two-year training schedule, weight training, and better eating habits.

Training for a marathon is tedious and lonely, especially on runs of 15 to 20 miles or more, and running in Texas is challenging because temperatures will climb north of 100 degrees in the summer and drop into the teens during the winter.

I qualified for the Boston Marathon based on my time in Austin. On race day, my goal was to run each mile under 8 minutes and not fixate on the finish line, 26.2 miles from the start. If I kept my pace, I would finish the race in 3 hours and 30 minutes or better. I followed my plan and ran the race one step at a time, one mile at a time, and finished in 3 hours and 22 minutes – a personal best!

Runners who struggle to finish a marathon become overwhelmed by the magnitude of the race, especially when they obsess over the entire 26.2 miles. To get to the finish line, follow your plan, focus on your goal, keep to your pace, and enjoy the journey.

A journey of a thousand miles begins with a single step. ~ Chinese Proverb

Have a great weekend, and keep the faith!

 

Weekly Stock Market Update

Happy Saturday,

Finally, some good news for investors as the Dow Jones rose 12.84% for the week. On Tuesday, the index rose 11.37%, the best day in 91 years, and the fourth-best percentage move of all-time. The Dow Jones posted its first consecutive up days since February 5 and 6.

Our models continue to rebalance weekly, looking to sell expensive assets and buy inexpensive ones. This week we sold bonds and purchased real estate investment funds —the model’s trade without emotion, which is good because I would not have made this trade. The real estate sector soared 17.38% this week.

We are selling individual corporate bonds, especially companies whose balance sheets are suspect. In 2008, companies with weak financials saw the price of their bonds drop significantly, some trading to zero. Boeing and Gap are two bonds we sold this past week.

We’re taking advantage of the drop in stocks to harvest losses in taxable accounts. Tax-loss selling will allow you to realize losses today to offset gains tomorrow.

Citigroup tracks market sentiment through their Panic/Euphoria Model, and it’s reasonably accurate. It is now in panic mode, a positive sign for stocks because stocks like to climb a wall of worry, and the best time to buy stocks is when fear is high. If you wait for the “all-clear” signal, it’s too late.

Here’s how stocks, bonds, and other asset classes performed this past week.

  • The S&P 500 rose 10.50%
  • The NASDAQ rose 8.55%
  • International rose 12.35%
  • Emerging Markets rose 5.75%
  • Long-Term Bonds rose 5.19%
  • Gold rose 8.66%
  • Oil fell 9.05%
  • Chinese Stocks rose 6.20%

Our Government leaders passed the Cares Act this week, and it’s powerful. Here are the highlights.

  • The IRS will issue $1,200 checks to individuals. Families with children under age 17 will receive $500 per child. The income threshold is $150,000 for married couples, $75,000 for individuals. Your payout will be reduced by $50 for every $1,000 you’re over the income limit. (Kitces & Levine)
  • You can withdraw up to $100,000 from your IRA for Coronavirus-Related issues. The 10% penalty will be waived, and you can repay your IRA over three years. Your income can also be spread out over three years. (Kitces & Levine)
  • The loan limit amount in 401(k) plans is now $100,000 up from $50,000. (Kitces & Levine)
  • All 2019 and 2020 Required Minimum Distributions (RMD’s) from IRA’s are waived. You do not need to take a distribution from your IRA in 2020. (Kitces & Levine)
  • Student loan payments are deferred until September 30, 2020 (Kitces & Levine)
  • Individual small businesses may qualify for loans up to $10 million, or 2.5 times average payroll costs, to cover payroll, rent, mortgage interest, insurance, etc. (Kitces & Levine)
  • The 2020 AGI limit is waived for charitable contributions. You may be able to eliminate all your 2020 tax liability through charitable donations. If you’ve never used your resources to help others, this is a great year to start. (Kitces & Levine)

Here is what Warren Buffett said about the 2008 stock market correction in the Berkshire Hathaway Annual Report: “Amid this bad news, however, never forget that our country has faced far worse travails in the past. In the 20th Century alone, we dealt with two great wars (one of which we initially appeared to be losing); a dozen or so panics and recessions; virulent inflation that led to a 21 1⁄2% prime rate in 1980; and the Great Depression of the 1930s, when unemployment ranged between 15% and 25% for many years.

America has had no shortage of challenges. Without fail, however, we’ve overcome them. In the face of those obstacles – and many others – the real standard of living for Americans improved nearly seven-fold during the 1900s, while the Dow Jones Industrials rose from 66 to 11,497. Compare the record of this period with the dozens of centuries during which humans secured only tiny gains, if any, in how they lived. Though the path has not been smooth, our economic system has worked extraordinarily well over time. It has unleashed human potential as no other system has, and it will continue to do so. America’s best days lie ahead.”

The shelter-in-place is challenging, but also encouraging. In my neighborhood, people are enjoying the outdoors by walking dogs, riding bikes, and hiking trails. A group of kids is painting rocks and leaving them on the sidewalks. Families have been coloring their driveways with heart-warming messages, and kids have put teddy bears in windows for a neighborhood-wide “bear hunt.” Since we might be homebound for some time, I started reading War and Peace! What books are you reading?

“Wealth isn’t primarily determined by investment performance, but by investor behavior.” ~ Nick Murray, Simple Wealth Inevitable Wealth

Have a great weekend, and keep the faith!

If you want more information, please call me at 512-922-4429.

Sincerely,

Bill Parrott, CFP®

President and CEO

Parrott Wealth Management

www.parrottwealth.com

 

A Day in the Life of a Market Correction

Global stocks continue to fall, and each morning I wake up to check to see what the markets have in store for the day. I look at my phone (AAPL, T) to view the latest news. I turn on my TV (SNE, TWX) to watch CNBC (CMCSA).  While watching CNBC (CMCSA), I scan my email accounts (GOOG, MSFT, WORK).  Once I read the news, I click through Facebook (FB), LinkedIn (MSFT), and Twitter (TWTR) to get caught up on social media.

After I finish my channel checks, I grab breakfast and eat some Honey Nut Cheerios (GIS) with a glass of Tropicana Orange Juice (PEP). While eating breakfast, I listen to ESPN Radio (DIS) on satellite radio (SIRI).

After breakfast, I go for a run (NKE, UA) to get in a little exercise. After I work out, it’s now time to get ready for work, so I take a shower, shave (PG, UL,) and get dressed (JWN, DDS). On the way to work, I stop at the gas station to fill up my truck (XOM, AXP, TM).  With a full tank of gas, I drive to Starbuck’s (SBUX, AXP) to get a cup of coffee.

After my trip to Starbuck’s (SBUX, AXP), I visit my bank (WFC) to get an extra $20.00 for the day. I take a detour to Target (TGT, AXP) to get a few office supplies.

At the office, I turn on my computer (DELL, HPQ, MSFT) to start my workday.  I use The Wall Street Journal, Barrons, Fox News, The New York Times, (NWS, FOXA, NYT), Morningstar (MORN), Value Line (VALU), and T.D. Ameritrade (AMTD) to keep abreast of the market.

At lunch, I eat at McDonald’s (MCD, AXP, SQ) to get a burger, fries, and a Coke (KO).

Back at the office, I order a new book from Amazon (AMZN, AXP, UPS) and schedule a video conference call (ZM) with a client. After the call is over, I mailed her some information (STMP).

The market had another rough day, so I went home and took my dog (PETS, CHWY) for a walk.

After my walk, my wife and I went to dinner at Eddie V’s (DRI) to get something to eat and have a glass of wine (STZ, BUD).  We used Uber (UBER).

I’m now back at home to catch up on the day (CMCSA, DIS, TWX) and check the latest social media feeds (FB, MSFT, TWTR, GOOG, MSFT).  We’re now watching movies and playing games (NFLX, DIS, MAT, HAS, ATVI).

The weekend is coming, and I’m going to work on a backyard project (HD, LOW, YETI).

Until tomorrow…

The best thing that happens to us is when a great company gets into temporary trouble…We want to buy them when they’re on the operating table. ~ Warren Buffett

March 18, 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.