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.

 

 

 

 

 

 

 

 

Can You Do Nothing?

It’s hard to do nothing. It’s hard to disconnect from a connected world. If you have children, you’ve probably heard them say: “I’m bored; there’s nothing to do!” If you want to see how hard it is to do nothing, turn off everything around you, and close your eyes for ten minutes. Welcome back. How’d you do?

The most challenging investment strategy is the buy and hold model, a strategy that relies on making a few changes to your portfolio over time. You do nothing but sit and wait for your investments to perform. It’s easy to do nothing when stocks rise as they did in 2019, but how about now? It takes courage and conviction to hold your shares during a market rout like we’re currently experiencing.

A buy and hold strategy is boring, and it’s not sexy. Tell people you own a diversified portfolio of index funds that you plan to keep forever, and they’ll roll their eyes. Warren Buffett said that people don’t like to grow rich slowly. If you read the tortoise and the hare, you know slow and steady wins the race.

Several years ago, I worked with a broker who told me he periodically bought and sold stocks to give the appearance he was monitoring his client’s accounts. His activity “strategy” benefited him more than his clients because he generated a commission with each trade.  Activity for activity’s sake is not a strategy.

Pursuing get quick rich trading schemes often end poorly. However, people are attracted to the possibility of day trading their way to riches, especially when market volatility is high like it is now. It appears easy to buy when the market falls 10% and sell when it rebounds 10%, but this is only in hindsight.

Investors get antsy when their portfolio isn’t rising. When turbulence hits, they run for the exits. During the fourth quarter of 2018, investors pulled $133 billion out of the stock market just before it started rising again.[1]

During the previous bull market (2009 to 2020), the S&P 500 rose more than 160%, including yesterday’s 12% drop. The one-month U.S. Treasury Bill considered the safest investment in the world, lost money every year since 2009 when adjusted for inflation.

Of course, there are times when you need to sell your investments or make portfolio changes. Using your funds to generate monthly income or pay off a mortgage is undoubtedly warranted. Rebalancing your account to keep your asset allocation intact is recommended.

A financial plan can help you improve your investment results and give you the necessary tools to stay invested during falling markets. It will provide you with a roadmap on how best to spend your hard-earned dollars by aligning your goals and risk tolerance to your portfolio. Your plan will be your antidote against making poor investment decisions.

Give it a try – do nothing!

The trick is, when there is nothing to do, do nothing. ~ Warren Buffett

March 17, 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://www.yardeni.com/pub/ecoindiciwk.pdf, Dr. Edward Yardeni, May 9, 2018

Too Late to Sell?

The Dow Jones is down 18.8% for the year, so is it too late to sell? Investors have sold $34 billion in equity mutual funds and $17 billion in bond funds as they seek safety from the rout in global assets.[1] The news is ominous, and the headlines are bleak. Investors are voting with their dollars, and it’s clear they don’t want to own stocks.

In December of 2018, investors sold $133 billion in funds before stocks rose significantly in 2019. In October of 2008, investors liquidated $128 billion in mutual funds, a few months before one of the great bull markets in history.

It’s never too late to sell because stocks can always fall further. William O’Neil, the founder of Investor’s Business Daily, recommends selling your shares if they fall 7% to 8% because a small loss can turn into a big one if you don’t cut your losses. He said, “You don’t want to take a loss, so you wait, and you hope, until your loss gets so large it costs you dearly. This is by far the number one mistake most investors make.” Enron shareholders had the opportunity to sell their shares at $90, or $80, or $70, or $60, or $50, or $40, and so on before it traded to zero. I’m sure investors in Enron would have loved to sell at any price above zero, regardless of their cost basis.

An investor who sold their holdings in August of 1987, avoided the stock market crash on October 19, 1987. If you knew the Oil Embargo of 1973 was coming, you could have sold your stocks in 1972 and avoided a 41% drop in the S&P 500 from 1973 to 1974. If you sold your shares in 2007 before the Great Recession, you missed a 50% drop in the market. Of course, selling before a correction when stocks are at an all-time high is difficult, and predicting the future is impossible.

When stocks are falling, emotions transcend facts. Not many people care that stocks produce superior long-term results when their accounts have lost 20% in a few weeks.

It’s easy to look in the review mirror and say what you would have done, but what should you do today? Should you sell? Here are a few suggestions to help you decide.

  1. If your stocks are keeping you up at night, then sell your shares. If you’re losing sleep, you own too many stocks.
  2. If you need your money in one year or less, do not invest in stocks. My nieces and daughter must use their money to pay for tuition, room, board, and books, so they invested in a money market fund. I don’t need my retirement money for 10 to 15 years, so I’m 75% invested in stocks.
  3. If you’re retiring in the next two or three years, invest in U.S. Treasury Bills to cover three years’ worth of household expenses.
  4. If you don’t have a safety net, sell stocks. A recommended safety net is three to six months of expenses. If your monthly expenses are $10,000, keep $30,000 to $60,000 in cash.
  5. If you have high levels of debt, sell your stock to reduce your obligations – returns are fleeting, expenses are forever.
  6. If you need money to purchase a home, car, boat, plane, or any expensive item, sell your stocks and move the proceeds to cash.
  7. If you’re 100% allocated to stocks, reduce your equity exposure, and sell some of your holdings.
  8. If you know stocks are going to drop 20% tomorrow, sell today.

With the drop in stock prices and interest rates, bonds may be a riskier investment than stocks. The current yield on the 30-Year U.S. Treasury is 1.5%. The ten-year average Is 3.1%, and if rates rise back to the average, bonds will fall by 20%. In 1980, the 30-Year U.S Treasury yield peaked at 15.08%. If rates returned to their all-time highs, bonds would fall 75%![2] The iShares 20+ Year Treasury Bond ETF (TLT) is up 26.3% for the past year, but it fell 10.5% this week as interest rates rebounded from their remarkable lows.

Money market funds and savings accounts offer low rates. The one-month U.S. T-Bill is yielding .33%.  The current inflation rate is 2.33%, so you’re losing 2%, before taxes, to park your money in a safe account. Cash accounts and short-term bonds are not sustainable solutions for creating wealth over time.

The Dow is down 18.7% year-to-date and off 9.8% for the past year. It’s up 30.6% over the past five years, 118% for the past ten years, and 9,390% since 1930.[3] It’s impossible to know what stocks will do tomorrow, but over time they will rise.

My first full year in the investment business was in 1990, and the Dow Jones Industrial Average fell 4.25% that year; from June to December, it dropped 21%. I was devastated because every stock I bought plunged in price. However, 30 years later, the Dow is up more than 740%.

Is it too late to sell? If selling your stocks will bring you peace, then sell. However, stocks have always recovered, so make sure you’re selling for the right reasons and not from a position of fear.

Be strong, keep the faith, follow your plan, think long-term and good things will happen.

We have nothing to fear but fear itself. ~ Franklin Delano Roosevelt

March 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.

 

 

 

 

 

 

 

 

 

 

[1] https://ici.org/research/stats/flows/combined/combined_flows_03_11_20, Website accessed 3/14/2020.

[2] https://www.macrotrends.net/2521/30-year-treasury-bond-rate-yield-chart

[3] YCharts

Do you remember July 7, 1986?

Do you remember July 7, 1986? I don’t. I was probably concerned with three things. Was I going to the beach? Were the Dodger’s winning? Where was I going to eat lunch?

On July 7, 1986, the Dow Jones dropped 3.3%. I’m sure the newspaper headlines were full of doom and gloom. The “experts” were probably pontificating that this was the beginning of the end and that the buy and hold strategy was over forever.

If you were fortunate enough to buy the S&P 500 Index on that horrible day and hold it until the end of February 2020, you made a lot of money. Let’s say you purchased $100,000 worth of the Vanguard S&P 500 Index Fund on July 7, 1986. Your investment is now worth $2.4 million, generating an average annual return was 10.3%, including this week’s stock market thrashing.

I still believe in the buy and hold strategy. When the market comes down, it allows you to invest in great companies at lower prices. It’s like flying. The only way to get on an airplane is when it’s on the ground. If you’re not on that plane when the pilot leaves the gate and roars down the runway, you lose.

However, I realize that not everybody has the confidence or courage to buy during a market meltdown, so here are a few suggestions to help strengthen your portfolio.

  • If you need your money in one year or less, do not invest in the stock market, keep your money in cash or short term investments like U.S. Treasury Bills or CD’s.
  • If you’re going to retire in five years or less, then I would recommend keeping three years’ worth of expenses in cash, short term CD’s or U.S. Treasuries. For example, if your annual expenses are $100,000, then your cash holdings should be $300,000.
  • If you’re in your 20’s or 30’s, I would back up your pick-up truck and buy as much stock as you can to buy great companies at discounted prices.
  • If you are concerned about international turmoil, invest in small and mid-cap companies headquartered in the United States. Small companies typically do not have much international exposure.
  • Invest in dividend-paying companies. According to YCharts, over 1,588 companies are yielding more than 3%.
  • Asset allocation and diversification still work. A balanced portfolio of stocks, bonds, and cash will treat you well over the long term.
  • If your timeframe is 3 to 5 years or more, I would recommend holding on to your investments.

The current markets are not fun, but this can be an opportunity for you to reexamine your investment holdings and financial goals to make sure they’re in line with your long-term financial plan.

Be on your guard, stand firm in the faith; be courageous; be strong. ~ 1 Corinthians 16:13.

February 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.

 

 

How to Survive a Stock Market Correction

The Dow Jones Industrial Average was less than 500 points away from touching 30,000 before the Coronaviraus arrived and spooked investors. In less than two weeks, the Dow Jones has fallen almost 13%, and it appears the selling will continue until a vaccine arrives, hopefully soon. As the market climbed higher, bears were calling for a correction and they finally got their wish. Stock market corrections are common, and they occur about every three to five years. A bear market lasts approximately 18 months, while a bull market will run for about eight years.[1]

How can you protect yourself against a bear market attack? Here are a few suggestions.

  1. Don’t panic! A market drop is normal, painful, but normal.
  2. Don’t make any changes to your portfolio during the initial phase of a market correction. Let the market find its footing before you make any significant changes to your investments.
  3. Cash is king. If you have a cash cushion, you’re less likely to make rash decisions regarding your stock holdings. How much cash is enough?  My recommendation is for you to hold three to six months of expenses in cash. If your monthly expenses are $10,000, then your cash account should be $30,000 to $60,000.
  4. Invest in U.S. T-Bills if you’re nearing retirement. A suggested amount is three years’ worth of expenses. If your annual expenses are $100,000, invest $300,000. The safety of T-Bills will allow you to survive a typical correction. If you invested in October 2007, you could have lived off your T-Bills for three years while waiting for the Great Recession to end. The Great Recession lasted from 2007 to 2009, where stocks fell 53%, so your bonds allowed your stocks to recover.
  5. Diversify your assets. A balanced portfolio of stocks, bonds, and cash will help cushion the blow from a market drop. During a market drop, your bonds will perform well.  During the 2008 market selloff, long-term U.S. government bonds rose 25.9%.[2]
  6. Rebalance your portfolio. You will sell appreciated investments to buy depressed ones, or buy low and sell high. If you rebalance your portfolio, you can take advantage of lower stock prices. Rebalancing allows you to keep your risk level and asset allocation in check.
  7. Eliminate your margin balance. A sure way to lose more money than you intended is to use leverage.  If you use margin to buy securities, I would encourage you to eliminate it. The best way to make a bad situation worse is to employ excessive margin in a down market.
  8. Stay invested. The two days following the stock market crash of October 19, 1987, the Dow Jones Industrial Average rose 16%. Despite the dramatic drop on Black Monday, the Dow ended 1987 in positive territory, and it has since risen 1,380%, including the recent selloff.[3]
  9. Look for bargains. Is your favorite stock now 25% cheaper? If you’re not sure what to purchase, buy a broad-based index fund.
  10. Think long term. A bear market lasts about 18 months. You may own your investments for years, maybe decades, before you need the money, so think generationally to help you get through the dark days of a market downturn.
  11. Markets recover. The stock market has always recovered! It may take time, but they eventually rebound.
  12. Have fun. The market will go up, down, and sideways long after we’re gone. Instead of worrying about the daily moves in the stock market, get outside, and enjoy your friends, family, and hobbies while you wait for stocks to bounce back.

Stock market corrections come and go. The market is a long-term wealth creation machine occasionally disrupted with short-term pullbacks. If you apply these ideas, you may have an opportunity to benefit from the long-term performance of the stock market.

Even though I walk through the darkest valley, I will fear no evil, for you are with me; your rod and your staff, they comfort me.  ~ Psalm 23:4.

February 27, 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://www.forbes.com/sites/robertlenzner/2015/01/02/bull-markets-last-five-times-longer-than-bear-markets/#12745f772dd5, Robert Lenzer, January 2, 2015, site accessed 3/10/17.

[2] Dimensional Fund Advisors 2016 Matrix Book.

[3] YCharts. DJIA – October 19, 1987 to February 27, 2020.

A Billion Dollars A Year

How would you spend a billion dollars? Would you create a foundation? Would you run for President? Would you try to send a rocket to Mars? Would you purchase priceless art?

The top five hedge fund managers last year earned more than a billion dollars in salary, with an average pay of $1.48 billion. A group of fifteen hedge fund managers made more than $12 billion.[1] Hedge fund managers typically charge a 2% fee on your investment and take 20% of your profits as compensation. The S&P 500 rose 29% last year, without fees. If you invested $10,000,000 in a hedge fund and your account appreciated 29%, your manager’s compensation would have been approximately $780,000, or 7.8% of your original investment.

Last year was a phenomenal year for major asset classes, so your hedge fund manager should be compensated well for his (the top five hedge fund managers are all men) efforts. How did they perform? The five hedge fund managers, as a group, generated an average return of 24.6%, before fees.  The best of this elite group returned 41%, the worst returned 14%.[2]

On a gross basis, the top five underperformed the S&P 500 by 4.4%. Two of the five outperformed the index, and only one bettered it on a net basis. If the average return was 24.6% and their fee was 7.8%, then the net gain was 16.8%. Last year, several low-cost ETFs performed well: Real Estate returned 24.4%, Utilities 21.3%, Small Caps 21%, International Stocks 18.1%, Gold 17.9%, and Emerging Markets 16.7%.[3] An equal weighting of these ETF’s returned 19.9%.

Fees matter when it comes to investing because you can only spend net returns. How do you know what fees you’re paying? Here are a few suggestions.

  • Every publicly traded investment has a ticker symbol, and if you plug it into Yahoo! Finance, Morningstar, or any other financial site, you’ll be able to see the fees associated with your investment. Every Mutual Fund and Exchange Traded Fund has an operating expense ratio (OER). For example, the OER for Vanguard’s S&P 500 Index Fund (VOO) is .03% or $3 per $10,000 invested.
  • Registered Investment Advisors must file their Form ADV each year. The ADV outlines an advisor’s fee schedule, assets under management, and other vital information. If you work with an advisor, they’ll provide you with their form.
  • Broker sold insurance items, and other packaged products are delivered with a prospectus. The prospectus summarizes the fee schedule, including sales charges, surrender fees, 12b-1 fees, and additional fees.
  • Brokerage firms post their commission rates and schedule online.
  • Conduct a fee audit with your advisor. Your advisor should be able to review your investment holdings, account fees, and other charges to help you get a better handle on your costs.

Registered Investment Advisors must disclose their fees to you before you invest, brokers should do the same. If you’re not sure what fees you’re paying, ask. It’s your money. I’ve noticed firms that charge high fees say they’re adding value to their clients. If you’re working with one of these firms, ask them how they’re adding value. If they can’t explain it to you, maybe it’s time to hire a new advisor.

One of the best ways to add value to your bottom line is to work with a Certified Financial Planner™ who invests your money in a globally diversified portfolio of low-cost funds and offers financial planning.

Give to everyone what you owe them: If you owe taxes, pay taxes; if revenue, then revenue; if respect, then respect; if honor, then honor. ~ Romans 13:7

February 17, 2020.

Bill Parrott, CFP®, CKA®, 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://markets.businessinsider.com/news/stocks/hedge-fund-managers-earned-more-than-billion-last-year-highest-2020-2-1028894639, by Ben Wick, February 11, 2020

[2] Ibid

[3] YCharts: VNQ, VPU, IJR, EFA, GLD, & VWO 2019.

China and Emerging Markets

China is closed. The world’s second-largest economy is shut down due to the Coronavirus, and life is at a standstill. According to several news reports, the number of deaths from the virus has now surpassed the number of deaths from SARS – a frightening thought, and the uncertainty is making the situation worse.

China’s idleness will have, at some point, an impact on global economies and stock markets. The Chinese stock market is down .5% for the year, but this can change quickly.

Emerging markets and China are linked. Chinese stocks are 33% of the MSCI Emerging Market Index, so when China moves, so does the index. The index invests across five regions, 26 countries, and 1,100 securities.[1] Dimensional Funds, Fidelity, and Oppenheimer manage sizeable emerging market mutual funds, while Vanguard, Blackrock, and Schwab have substantial assets in their exchange-traded funds. The top holdings for most of these funds include Alibaba, Tencent, Taiwan Semiconductor, and PingAn Insurance Group.

The Matthews China Investor Fund (MCHFX) has produced an average annual return of 11.51% for the past twenty years, and it has a current asset allocation of 95% stocks, 5% cash. Most of their assets, 89%, are invested in Asian emerging markets.

Chinese stocks account for 3% of the global equity market capitalization, the same level as France and Canada.[2]  We recommend an allocation of 5% to emerging markets, so if Chinese stocks account for 33% of the index, our exposure to China is 1.65%. If Chinese stocks fall, the index will too. However, I’m willing to commit 1.65% of capital to the world’s second-largest economy.

During the AIDS epidemic from 1987 to 1995, the emerging markets index fell 6.7%, Chinese stocks dropped 40%, and the S&P 500 rose 34.9%.

Emerging markets rose 13.8% during the Bird Flu outbreak from 1997 to 2004. Chinese stocks plunged 65.6%, the S&P 500 rose 63.6%.

The emerging markets index rose 122% during the SARS epidemic from 2002 to 2005, while Chinese stocks climbed 74%, and the S&P 500 index grew 8.7%.

During the Swine Flu outbreak from 2009 to 2010, emerging markets soared 103.1%, Chinese stocks increased by 62.5%, and the S&P 500 was up 39.2%.

The Ebola outbreak occurred from 2013 to 2016. During this outbreak, emerging markets fell by 18.2%, Chinese stocks dropped 6.8%, and the S&P 500 rose 57%.

The United States stock market is massive, efficient, and developed, but it’s not immune to extended periods of poor performance. During the ‘70s, a 10,000 investment grew to $11,570, generating an average annual return of 1.47%. If you invested $10,000 in the S&P 500 on January 1, 2000, you had to wait thirteen years before you were profitable. But, if you held on to your original $10,000 investment from 1970, it’s now worth $357,820, producing an average annual return of 7.35%.[3]  For the past two decades, the S&P 500 and MSCI Emerging Markets Index produced similar returns.

Emerging markets have always been volatile – a feast or famine mentality. In 2006, Chinese stocks rose 82.9%. in 2008, they fell by 50.8%. Turkey rose 253% in 1999, and fell 45.8% in 2000, 32.8% in 2001, and 35.8% in 2002.[4] Volatility is the central theme for investors in emerging markets.

Does it make sense to sell all your emerging market holdings? My recommendation is to stay committed to this sector. Another reason to remain long emerging markets is demographics. China, India, Indonesia, Pakistan, Brazil, Russia, and Mexico account for 49% of the world’s population – and growing![5]

Rather than selling your emerging market stocks, invest in a globally diversified portfolio of low-cost funds, investing in an assortment of stocks and bonds based on your financial goals and time horizon.

What should you do if emerging markets fall? Buy more!

Nevertheless, I will bring health and healing to it; I will heal my people and will let them enjoy abundant peace and security. ~ Jeremiah 33:6 

February 10, 2020.

Bill Parrott, CFP®, CKA®, 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://www.msci.com/emerging-markets

[2] Dimensional Fund Advisors 2019 Matrix Book

[3] YCharts.

[4] Dimensional Fund Advisors 2019 Matrix Book

[5] https://www.internetworldstats.com/stats8.htm

I Missed Tesla

Tesla’s stock performance has been electrifying, rising 20% yesterday, 15% today, and 86% for the year. Since June, it’s soared 415%. On August 7, 2018, Elon Musk tweeted, “Am considering taking Tesla private at $420. Funding secured.”[1] Tesla’s stock is up 142% from this now infamous tweet.

Initially, I missed several “obvious” winners over the past three decades, like Apple, Google, Microsoft, Amazon, and so on. I did, however, eventually buy these stocks. In 1993 I purchased DELL Computer in my IRA and quickly doubled my money. After it doubled, I sold it so I wouldn’t lose my profit. DELL would rise another 20,000% or so over the next several years, a valuable lesson to let your winners run.

I’m not worried I missed Tesla, because I own it indirectly through several funds. Who knows what’s ahead for Tesla, but if it follows the path of previous highfliers, I may get another opportunity to buy it at a lower price. When I started in the business as a stockbroker, I recommended Coca Cola stock to clients, despite the fact it went public in 1919, 71 years before I started. Coke stock has risen over 1,000% since January of 1990[2], so investors still made money despite its strong performance during the previous seven decades.

Missing a winning stock doesn’t cause me any regret because I’ve also passed on losers like Enron, Worldcom, Global Crossing, Gamestop, and several others. In a diversified portfolio of individual stocks, you’ll probably own a few winners, a few losers, and numerous also-rans. A winning stock like Amazon or Tesla can have a significant impact on your portfolio. A losing stock, likewise, will be an anchor, dragging your performance down.

Tesla is a popular stock, getting most of the headlines and screen time on CNBC, but other stocks are performing better this year. Nanoviricides is up 331%, LMP Automotive Holdings Inc is up 114%, and Interups is up 110%.[3] Owning mutual funds will give you exposure to companies not on your radar screen.

What should you do if you’ve missed a highflying stock that everybody else appears to own? Here are a few suggestions.

  • Be patient. What goes up will come down. Amazon stock fell 92% in 2001 and 60% in 2008. Apple fell 85% in 1985, 82% in 1997, 79% in 2003, and 56% in 2008. Facebook fell 54% in 2012 and 38% in 2018.[4] Stocks fluctuate and oscillate between over and undervalued.
  • Buy fewer shares. If your goal is to buy 100 shares, start with 50 or 25.
  • Buy a fixed dollar amount. Rather than focusing on shares, start with dollars. A prudent allocation is 3% to 5% of your account balance.
  • Set a limit. Enter a buy-limit to purchase the stock at a specific price. You can set any price you want, but you must buy the stock if it trades at or below your limit price; however, you’re not guaranteed to get the stock at the price you set.
  • Sell a put option. Selling a put option obligates you to buy shares at a specific price. Because you’re a seller, you’ll collect a premium. The premium is yours to keep, regardless of what happens to the price of the stock. For example, Tesla’s April 2020 $500 put option is currently selling for $6.75, meaning, for every contract you sell, you’ll collect $675, before fees. One option contract equals 100 shares of stock, so if you sold one contract at $500, you’re obligated to buy it at that price if the stock trades at or below the strike price when the contract expires in April – 100 shares of Tesla at $500 is a $50,000 purchase. If you’re going to pursue this strategy, please work with an advisor who understands option trading, because options involve risk, and they’re not suitable for every investor.
  • Buy a mutual fund. The following mutual funds own shares of Tesla: Baron Partners (BPTUX), Harbor Capital Appreciation (HRCAX), Vanguard Extended Market (VEXMX) and Invesco QQQ Trust (QQQ)

Chasing a high-flying stock is a risky proposition, so develop a trading plan and tread lightly. Don’t over commit capital and avoid leverage. Be patient, and work your plan.

“The trick is not to learn to trust your gut feelings, but rather to discipline yourself to ignore them. Stand by your stocks as long as the fundamental story of the company hasn’t changed.” ~ Peter Lynch

February 4, 2020.

Bill Parrott, CFP®, CKA®, 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://www.cnbc.com/2019/08/08/teslas-chaotic-year-after-musks-funding-secured-tweet.html, By Michael Wayland, August 8, 2019.

[2] YCharts: January 1, 1990 – February 3, 2020.

[3] YCharts

[4] Ibid

If, Then

In college, I learned the if, then command while studying the BASIC computer language. BASIC is a conditional language that relied on the if command. If X is true, then Y is false, and so.

Financial planners rely on if, then statements regularly. It’s common for planners to include a statement like, “If you invested X amount in stock Y, then you’d have Z dollars today.” The examples show investors the advantage of long-term investing, despite the stock market’s gyrations. Some of the examples are outrageous, but we still use them anyway. For example, if you invested $100,000 in the stock market in 1926, you’d be worth more than $700 million today. This example is ridiculous on many levels. First, $100,000 in 1926 is equivalent to $1.5 million today. Second, would you have held on to your investment through the Great Depression? Doubtful. Third, it assumes you didn’t pay any taxes on your investment or spend any money for 93 years.

Despite the crazy claims, advisors use these examples religiously, including me.

Here are a few if, then statements.

If you invested $100,000 in Amazon in 1997, you’d have $92 million today.[1]

If you invested $92 million in Enron, you’d have zero dollars today.

If you sold stocks last December because the market was down 15%, you missed a 36% return in the S&P 500 this year.

If you sold bonds last year because you expected the Federal Reserve to raise interest rates this year, you missed a 13.7% return in long-term bonds through the iShares 20+ Year Treasury Bond ETF (TLT).

If you create a budget, it will help you with your spending.

If you spend less than you earn, you’ll save money.

If you save money, your assets will grow.

If you try to keep up with the Joneses, you’ll end up in the poor house.

If you make a Will or a Trust, you’ll protect your family.

If you own life insurance, you’ll also protect your family.

If you own long-term care insurance, you’ll protect your assets if you move into an assisted living facility.

If you participate in a high deductible health insurance program, consider opening a Health Savings Account to offset the cost of healthcare.

If you’re going to live in your city for five years or more, buy a home.

If you have a mortgage, add a few dollars to your monthly payment so you can pay it off early.

If you move often, rent a home.

If you have children, invest early and often so you can pay for some, if not all, of their college education.

If you work for a company that offers a retirement plan, contribute as much as possible so you can eventually enjoy your retirement.

If you have financial assets to meet your spending needs, defer your Social Security benefits until age 70 so you can qualify for the maximum benefit allowed.

If you have any assets, consider donating to a charity or causes you and your family support.

If you own an IRA or workplace retirement plan, check your beneficiaries to make sure they’re current.

If you complete a financial plan, you’ll have three times more assets than those people who do little or no planning.[2]

If you work with a Certified Financial Planner®, they will put your interest first.

If you finished reading this blog, thank you and Merry Christmas!

“First, solve the problem. Then, write the code.” – John Johnson

December 17, 2019

Bill Parrott, CFP®, CKA®, 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 Hypothetical

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