Investments – Parrott Wealth Management, LLC.

Timing

September 22, 2023September 22, 2023Posted in InvestmentsTagged Investment Management, Stock Market, Stock Market Crash, Stock TradingLeave a comment

Timing is everything.

Arcangelo won the 155^th running of the Belmont Stakes with a winning time of two minutes and 29 seconds. If he raced Secretariat in the 1973 Belmont, he would’ve lost by 5 seconds, a wide margin.

Carl Lewis set the world record for the 100-meter dash in 1991 with a time of 9.86 seconds. In 2009, Usain Bolt lowered it to 9.58 seconds, .28 seconds faster than Lewis.

Jules Verne wrote Around the World in Eighty Days in 1873. An 80-day trip in 1873 was a record. Today, the Space Shuttle can orbit the Earth in 90 minutes.

If you purchased the Vanguard 500 Index fund on March 9, 2009, the market low, you generated an average annual return of 15.86%, turning $10,000 into $85,150. If you bought the same fund on October 1, 2007, the market top, your return fell to 8.81% per year, and $10,000 is now worth $38,570. You more than tripled your money by investing at the top, but it’s not as impressive as if you caught the low.

You won’t invest at the top or bottom of a market cycle. A more realistic scenario is that you’ll invest between the two. For example, if you invested $10,000 in January 1990, you made 9.96% annually, now worth $246,260.[1] Since 1990, four recessions and five major stock market corrections have occurred, including the Tech Wreck, the Great Recession, the 2018 pullback, the COVID correction, and last year’s decline. In addition, the Federal Reserve raised interest rates to the highest level in more than two decades.

Time is more important than timing.

Time is on my side; yes, it is. ~ The Rolling Stones

September 22, 2023

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level.

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. Prices and yields are for today only and are subject to change without notice. Past performance is not a guarantee of future performance.

[1] Source: YCHARTS January 1, 1990 to September 22, 2023.

The Race To Zero

September 19, 2023Posted in InvestmentsTagged Financial Planning, Investment Management, Wealth ManagementLeave a comment

Zero sugar. Zero emissions. Zero fees. The number zero is popular these days as people pursue more with less, and investment giants like Vanguard, Fidelity, and Schwab continually shave basis points from their expense ratios to remain uber-competitive.

The Wall Street Journal recently published an article about index funds and fees, mentioning that several companies offer expense ratios of 0.05% or lower, compared to the standard expense ratio twenty years ago, which was nearly 1%. Eric Balchunas, senior ETF analyst at Bloomberg Intelligence, said, “It is hell for issuers, but heaven for investors.”[1] The average ETF fee is 0.55%.

There are more than 15,000 registered investment advisor (RIA) firms in the United States, and most provide similar services, like financial planning, investment management, and portfolio rebalancing. It’s challenging to differentiate one firm from the other because they’re grafted from the same tree of Modern Portfolio Theory (MPT) and observe the teachings of Harry Markowitz, Burton Malkiel, John Bogle, Eugene Fama, Ken French, and others who preach asset allocation, diversification, and low fees. They often quote Warren Buffett, Peter Lynch, and Daniel Kahneman, and their websites show pictures of giant compasses, sailboats, happy couples, giant buildings, or exotic animals, further blurring the distinction.

During my career, I’ve reviewed thousands of financial plans and investment accounts, and the portfolios are comparable unless managed by enormous brokerage firms or insurance companies. RIAs typically invest client assets in a globally diversified portfolio of low-cost funds, which include large, small, and international equity funds sprinkled with a few bond or alternative holdings.

I follow several firms on social media and realized our firm is a low-cost provider. We charge a half percent (0.50%) to manage client assets, about half the industry average of 1% to 1.50%. High fees and higher asset minimums hinder people seeking financial assistance and planning, so we removed these barriers. Firms charge a fee of 1% or more because they can; it’s the industry standard, so they can get away with it – if everyone else is doing it, so can we, a line of thinking with which we disagree.

In addition to our asset management fee, our financial planning fee costs $800, which we waive for our asset management clients. Many firms charge thousands of dollars or require a monthly subscription for financial planning. Still, you don’t need to pay exorbitant fees for this service, especially if your situation is not complicated.

Michael Kitces states the median asset management fee for a $1 million account is $10,000. In this same study, he references many ways to pay your advisor, including a retainer at $4,000, a standalone financial plan at $2,500, or an hourly rate of $250.[2]

Our low fee does not mean no service, and we frequently say, “We’re half the price but twice the service of our industry peers.” We respond quickly to emails and phone calls. We don’t walk dogs, offer dry cleaning, or own an airplane, but we pride ourselves on excellent service and pass on our savings to our clients.

We have low fees because we manage our bottom line well and rely heavily on technology, allowing us to provide multiple services. For example, we can rebalance hundreds of accounts in minutes, assess a client’s risk tolerance, and review tax returns with the click of a mouse. We are data-driven and, when needed, outsource functions to other firms, like insurance and estate planning. We also say no to private placements, private equity, real estate syndicates, or expensive insurance products that charge high commission rates. Our competitive model and lean structure are suited for cost-conscious investors who want to invest wisely and save money. It’s not rocket science.

We don’t have a niche because when I started my investment career at age 24, I wasn’t connected to an affinity group or had access to money, so I worked with anybody willing to give me a chance. It’s in my DNA, and as a result, our firm helps anyone needing financial guidance, regardless of age, assets, or income, because it’s the right thing to do.

Others have criticized our business model, but it’s working. Since 2015, we’ve grown at an average annual clip of 32% and have been profitable yearly. And we work with clients in fifteen different states. We can scale and continue to grow because of our streamlined process.

We have already reduced our asset management and financial planning costs once and expect to lower them further as our firm grows. I believe the investment management process is becoming a commodity if it’s not already. Also, AI and computer-driven trading may also eliminate the need for money managers or active fund management, forcing lower fees.

Moral: If your advisor charges you 1% or more to buy a basket of index funds, it’s time to find a new firm.

When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients. Both large and small investors should stick with low-cost index funds.” ~ Warren Buffett

September 19, 2023

[1] https://www.wsj.com/finance/investing/you-might-be-paying-too-much-for-that-index-fund-a2458f24, Jack Pitcher, September 18, 2023

[2] https://www.kitces.com/blog/financial-advisor-average-fee-2020-aum-hourly-comprehensive-financial-plan-cost/, Michael Kitces and Derek Tharp, February 8, 2021

Chaos Theory

September 9, 2023Posted in InvestmentsTagged Investment Management, Stock Market, Wealth ManagementLeave a comment

I don’t like chaos. My anxiety, stress, and blood pressure all rise as it increases. Yet, I work in an industry that thrives on it as thousands of experts analyze millions of data points to try and answer a single question, like, will stocks rise today? Finding one answer is impossible because any input can alter the equation.

According to Google AI, Chaos Theory studies math and physics, examining complex patterns to understand and predict behavior. It states that there are underlying patterns within the randomness of chaotic systems. Wall Street analysts constantly search for patterns in the randomness, but they’re hard to find.

Stocks are chaotic, chock-full of turmoil, continuously rising and falling, whereas US Treasury Bills are peaceful and tranquil. My personality trait and risk profile lean toward safety, and I should own T-Bills, but I own stocks. I allocate more than 75% of my assets to stocks, though it’s outside my comfort zone because I must own stocks to achieve my financial goals.

NVIDIA is the stock to own this year, rising more than 210%, but last year it fell 50%. In 2020, it plunged by 35%; in 2018, it dropped by 56%. It’s a volatile stock, full of turmoil, but over the last decade, it has risen by more than 12,000%, averaging 61% annually – a staggering return.

Apple is the world’s largest company, with a market cap of $2.78 trillion; if you own a mutual fund or participate in a 401(k) plan, you probably own it. The stock is up 37% this year but dropped by 26.8% last year. During the Tech Wreck in 2000, it crashed by more than 80%, falling by 58% in the Great Financial Crisis. Apple is up 900% this decade.

Microsoft software is everywhere, and its stock is a perennial favorite. It’s up 39% this year after falling 28% last year. During the Great Recession, it sank 74%; from 2000 to 2016, it lost 4.9%, but over the past ten years, it’s up 973%.

To generate outside returns and create long-term wealth, you must own stocks despite the chaos, turmoil, volatility, and uncertainty. If you invest too conservatively in safe and predictable investments, you risk not having enough money in retirement.

Embrace the chaos!

Anything worth doing good takes a little chaos. ~ Flea

September 9, 2023

Only You

September 4, 2023Posted in InvestmentsTagged Financial Planning, Investment Management, Stock Market, Wealth ManagementLeave a comment

Smokey the Bear is a firefighting hero. The US Forest Service and Ad Council created the campaign in 1944, and 96% of adults recognize Smokey Bear and his catchphrase, “Only YOU can prevent wildfires!”[1] According to the National Park Service, humans cause nearly 85% of wildfires in the United States.[2] Smokey Bear was right: Only you can prevent wildfires.

What does Smokey the Bear have to do with investing? Well, only you can provide for your financial future. It’s your responsibility and no one else’s, and it’s up to you to save money and invest wisely. Of course, you can obtain help from financial planners, but you must implement your plan because you are the spark for creating financial abundance. A financial planner provides suggestions and recommendations, but you must act on them to succeed financially. If you ignore them, you risk missing out on achieving your financial goals.

Several years ago, my family and I went camping in rural Texas, and we brought all the necessary items – a tent, firewood, marshmallows, etc. We built a raging fire that lasted well into the evening, and before we called it a night, we doused it with several gallons of water to ensure it was out. We did not want any embers landing on the parched Texas prairie.

How can you control your financial future? Here are a few suggestions.

Spending. Spending is in your control. The more money you spend, the more assets you need to retire. It’s simple math.
Savings. The more money you can save today, the more you can spend tomorrow.
Growth. To grow your wealth and maintain your lifestyle, you must own stocks. If you invest too conservatively during your working years, you risk not having enough resources in retirement.
Start. The sooner you start investing, the better. For example, a twenty-five-year-old can save $158 monthly to become a millionaire at age 65. If you’re fifty, you must save $2,412 monthly, or fifteen times someone half your age.
Emotions. Self-control is paramount for successful investors. Peter Lynch said, “The key organ in your body is your stomach; it’s not your brain.” Warren Buffett added, “Emotional stability will always beat intelligence in investing.” Investing during a stock market correction is devastating and painful, like a forest fire, but you must not panic and sell your stocks. Stocks, like forests, eventually recover. If you panicked in 2008, 2018, 2020, and 2022, you’ve missed significant gains as the market rebounded.

You’re it. It’s up to you to succeed financially, and you must take control of your financial future to prosper. You need to strike the match and start the fire, but make sure you have a plan before you do.

What matters is hard work and emotional intelligence. ~ Mickey Drexler

September 4, 2023

[1] https://www.stateforesters.org/2022/08/03/smokey-bears-birthday-is-fast-approaching-whos-up-for-a-history-lesson/#:~:text=America’s%20favorite%20black%20bear%20turns,old%20on%20Tuesday%2C%20August%209th.&text=Smokey%20Bear%20and%20his%20signature,impressive%2096%25%20of%20adults%20nationwide., Grant Peterson, August 3, 2022

[2] https://www.nps.gov/articles/wildfire-causes-and-evaluation.htm#:~:text=Nearly%2085%20percent*%20of%20wildland,and%20intentional%20acts%20of%20arson.&text=Lightning%20is%20one%20of%20the%20two%20natural%20causes%20of%20fires.

Are Bonds Safe?

August 29, 2023Posted in InvestmentsTagged Bonds, Fixed Income, Stock Market, Stock Market Crash, Stock TradingLeave a comment

I like bonds, but I’m struggling with their long-term performance. Bonds are inversely related to the direction of interest rates; when rates rise, prices fall like a see-saw in a park, and since the Federal Reserve started raising interest rates in 2022, the one-month US Treasury Bill rate has soared by more than 2,600%. As a result, the prices of bonds have fallen since 2022, wiping out decades of gains.

The one-month US Treasury Bill is considered the safest investment in the world and has never lost money if held to maturity, and since 1926, it has produced an average annual return of 3.25%. A $1 investment is now worth $22.63. If you want a safe investment, look no further than the T-Bill. However, inflation averaged 2.95% during the same period, so your net gain was 0.30% before taxes.

Over the past decade, stocks have been on a wild ride, dealing with four significant corrections, including the COVID crash in 2020 and last year’s down draft, where the S&P 500 fell by more than 18%. Despite the headwinds of COVID, war, inflation, rising interest rates, and multiple corrections, the index soared 171%, averaging 10.50% per year and outperforming bonds by 182%.

The outperformance of stocks this past decade is not an anomaly. As I mentioned, a $1 investment in T-Bills in 1926 grew to $22. Investing that same dollar in the S&P 500 would be worth $13,474, or 612 times more than the safe investment. Stocks appear risky, but I believe they are safer than bonds over time.

Our clients with significant stock exposure have outperformed our conservative clients by a wide margin and recovered losses quickly. It has not been easy for our stock-oriented clients to remain invested, especially after last year’s market performance, but they have stayed the course and are reaping the benefits of a rising stock market.

To maintain your lifestyle and protect your wealth, you must own stocks. There is no alternative.

What would life be if we had no courage to attempt anything? ~ Vincent Van Gogh

August 29, 2023

One Bad Mistake

August 17, 2023Posted in InvestmentsTagged Investment Management, Stock Market, Stock Market CrashLeave a comment

Bill Buckner committed one of the worst errors in baseball history. During game six of the 1986 World Series, the Boston Red Sox led the New York Mets three games to two. In extra innings, a ground ball went through his legs, allowing the winning run to score. The Mets would go on to win the game and the World Series. People don’t remember that Mr. Buckner had 2,715 career hits, was the National League batting champion in 1980, and played for twenty-one seasons. He was a good player, but people only remember his one bad mistake.

The stock market has risen 75% of the time, averaging 10% annually since 1926. Yet, investors primarily focus on corrections like the Great Financial Crisis (GFC) from 2007 to 2009 or the Tech Wreck from 2000 to 2003. When I started my career, investors worried about another October 19, 1987, when the Dow Jones fell 22%. Few people want to talk about the strength of the market, like the period from 2009 to 2017, where the S&P 500 averaged 15.3% per year, or 1990 to 1999, which returned 20.9% annually – another winning streak occurred from 1982 to 1989, where it gained 18.9% yearly. People remember corrections and crashes but ignore the market’s long-term trend.

Investors can create generational wealth if they own stocks, invest regularly, and avoid big mistakes. What’s a big mistake? It occurs when investors panic during corrections and scary times like 1987, 2000, 2008, 2018, 2020, or 2022. The October 19, 1987 crash was the worst since the Great Depression, yet the Dow Jones finished the year in positive territory. After the Tech Wreck, the S&P 500 climbed 66% from 2003 to 2007. It soared 141% after the Great Financial Crisis (GFC). The stock market crashed 31% in thirty days during the initial days of COVID, but from March 2020 to December 2021, it jumped 113%. If you stayed in the game, your assets recovered quickly.

After the GFC, I talked with investors who said they sold their investments in 2007, before the correction. I congratulated them on their market timing skills and asked, “When did you get back in the market?” Several years later, most did not because they feared stocks would fall further or crash again. Though they allegedly timed the market correctly, they failed to return to the market to ride the rebound.

Since 1972, the S&P 500 has risen 78% of the time. The index finished in negative territory eleven times, falling on average 14.4%, while the average gain during the positive forty years has been 19%. Rebounds and recoveries last a long time, and the index has averaged 10.27% annually for the past fifty-one years.

How can you avoid big mistakes? Here are a few recommendations.

Diversify. Diversify your assets across size, sector, and country. Own a basket of small, medium, and large companies across the globe in different industries.
Plan. A well-constructed financial plan can keep you informed and invested during the dark days, allowing you to benefit from the long-term trend of stocks after they recover.
Patience. Buy stocks if your time horizon is three to five years or more. If you need money in the short term, buy US T-Bills. Time in the market is your friend.

I played Senior Babe Ruth baseball in high school, and in one game, I was playing left field. It was the last inning, and we were winning when I missed a fly ball. The runner on second base started running, and I took my eye off the ball; it rolled to the fence, and we lost the game. We would have won the game if I caught it. I occasionally think about that game and ignore the ones where I played well. It’s human nature.

Play ball.

“If one picture is worth a thousand words, you have seen about a million words, but more than that, you have seen an absolutely bizarre finish to Game 6 of the 1986 World Series. The Mets are not only alive, they are well; and they will play the Red Sox in Game 7 tomorrow!” ~ Vin Scully

August 17, 2023

It’s Complicated

August 3, 2023Posted in InvestmentsTagged Investing, Investment ManagementLeave a comment

Complicated investment strategies attract attention because investors want to get rich quickly or impress their friends. Complexity is another word for job security on Wall Street. Options and hedge fund strategies are intricate and convoluted products requiring multiple disclosures and hours of explanation to innocent investors.

My two mentors wrote covered calls and sold options for their clients, so that’s what I did as well. Why not? They were successful. We sold options because option buyers lose all their money 90% to 95% of the time. When you sell option contracts, you take the other side of the trade from the buyer or speculator. If buyers lose money, then sellers make it. An option contract is complicated to understand because you must be correct on the security, direction, timing, price, and maturity all at once, and if you’re not, you’ll lose money. In addition, you must understand the Greeks: Delta, Gamma, Theta, Vega, and Rho. Implied volatility is another vital component of option pricing. Regardless, investors will continue to buy options, especially in a bull market.

In 2008, Warren Buffett bet Protégé Partners that a simple S&P 500 index fund would outperform five separately managed hedge funds over ten years, and the winner would receive $1 million. How did it turn out? Protégé threw in the towel before the end of the contest date because the hedge funds were getting trounced. At the time, the index fund was up 85.4%, while the average return for the hedge funds was 22%.[1] Simple wins.

Several Nobel prize winners and Wall Street Legends founded Long Term Capital Management in 1994, and in 1998, they brought the global financial markets to their knees with their complex trading strategies. The firm relied on complicated bond arbitrage strategies, and when Russia defaulted on its debt in 1998, it destroyed the fund and required a $3.6 billion bailout from several banks.[2] Roger Lowenstein wrote an excellent book about this ordeal, When Genious Failed. In this case, the long-term time horizon was about four years. Long-term US Government bonds averaged 9.52% annually during this same period.[3] Safe and simple.

Complicated investment strategies look good on paper because they promise huge profits and outsized gains, but it’s probably too good to be true. Most investors would benefit from a simple strategy of owning low-cost index funds in a diversified portfolio rather than focusing on byzantine investment strategies.

Vanguard’s Balanced Index fund is simple and has performed well over time. The fund’s allocation is 60% stocks and 40% bonds and has returned more than 900% for the past three decades, or about 8% annually. A $100,000 investment is now worth $1 million – not too shabby.

To succeed as an investor, focus on simple solutions and avoid complex strategies.

Everything should be made as simple as possible, but not simpler. ~ Albert Einstein

August 3, 2023

[1] https://www.investopedia.com/articles/investing/030916/buffetts-bet-hedge-funds-year-eight-brka-brkb.asp, David Floyd, June 25, 2019.

[2] https://en.wikipedia.org/wiki/Long-Term_Capital_Management

[3] Source: Dimensional Fund Advisors Returns Web, 1/1/1994 to 12/31/1998.

Financial Storms

July 24, 2023Posted in InvestmentsTagged Investment Management, Stock Market, Stock Market Crash, Stock TradingLeave a comment

Mountain storms are extraordinary, powerful, and frightening. Last week, my wife and I experienced an incredible lightning show in Vail, Colorado. The lightning lit up the sky, and the thunder reverberated through the valley. It was quite the display of nature. However, the sun shone the next day, and the sky was blue, a bluebird day.

The stock market experienced a financial storm last year as the S&P 500 dropped by 19.8%, the steepest decline since 2008. It was a challenging year for large, medium, and small stocks, and there was no place to hide. And investors fled the markets, withdrawing more than $126 billion from mutual funds and ETFs. Investors were searching for shelters to protect themselves from the financial storm. Storms are temporary and eventually pass.

The markets are recovering from last year’s correction, as the three major stock indices are trading in positive territory. Stocks are trading higher this year, but you must endure the storm to benefit from the gains because it’s impossible to time the market. Markets started rebounding last June during the height of the storm, and that’s when investors began withdrawing money from their mutual funds and ETFs. Investors panicked during the darkest hour. By the end of May, investors removed more than $100 billion from funds, and since then, the Nasdaq is up 13.9%, the S&P is up 10.2%, and the Dow Jones is up 7.4%. The market is forward-looking and knew the storm was passing long before investors did. It pays to be patient. Do not panic.

Preparation and planning are the best ways to prepare for a storm. Climbers and hikers carry backpacks with water bottles, headlamps, compasses, jackets, GPS, first aid kits, etc., because they know mountain storms can arrive anytime. The same applies to financial storms; they can come anytime, without warning. Diversify your assets and follow your financial plan. A well-diversified investment portfolio based on your financial plan should survive financial storms and stock market corrections. Storms pass. Markets recover. Time moves on.

Follow your plan, think long-term, invest often, and good things will happen.

After every storm, the sun will smile; for every problem, there is a solution, and the soul’s indefeasible duty is to be of good cheer. ~ William R. Alger

July 24, 2023

Vail’s Legendary Back Bowls

July 24, 2023Posted in InvestmentsTagged Investment Management, Stock Market, Stock Market Crash, Stock TradingLeave a comment

Vail is massive. The skiable terrain is 5,317 acres, 195 runs, 32 ski lifts, and a vertical rise of 3,450 feet! From Vail Village, the mountain looks immense, and it is, but it only tells part of the story because more than fifty percent of the ski resort is in the back bowls, which you can only see after riding a gondola to mid-Vail and then riding a ski lift to its peak. The back bowls of Vail are stunning, with fabulous ski runs and hiking trails like Seldom, Never, Cow’s Face, Dragon’s Teeth, Red Zinger, Chicken Yard, and the Ptarmigan Loop. It’s paradise.

First-time visitors are awed by the front side of Vail, but if they’re willing to explore the mountain, they will realize there is more to it than meets the eye – much more.

Investors spend too much time focusing on the here and now, looking at the recent headlines to try and make long-term investment decisions. If you only focus on current headlines, you’re missing out on long-term investment opportunities because when a story reaches the front page of the Wall Street Journal or the lead story on CNBC, the market has already moved on; it’s yesterday’s news.

During the market correction, financial experts and economic gurus were predicting a stock market crash with runaway inflation. One world-renowned financial author encouraged investors to buy tuna and baked beans because you can’t eat gold, silver, or bitcoin.[1] The founder of Twitter warned of hyperinflation, saying, “It’s happening.”[2] What happened? The S&P 500 jumped 14.51% and inflation fell 65%. If you only focused on what you can see, you missed a double-digit return in the stock market. Sorry Charlie!

Fear sells, and news headlines are scary. A popular money manager predicting a stock market correction generates more publicity than one who says everything is fine and nothing to worry about. A vociferous investor with a megaphone can move markets in the near term, but the long-term fundamentals of stocks win in the end. Since 1926, the S&P 500 has risen three-quarters of the time and generated an average annual return of 10% despite endless predictions for vicious corrections and economic disasters.

Do not let today’s headlines interrupt your long-term financial goals. It’s already old news. Instead, focus on your goals, invest often, and enjoy life.

My family and I hiked Vail’s legendary back bowls last week, which was incredible. The views were endless, and the wildflowers were spectacular. If we only stayed in Vail Village, we would have missed the most significant part of Vail. Investing, like hiking, is best when you take the road less traveled and don’t follow the crowd.

There’s a big, wonderful world out there for you. It belongs to you. It’s exciting and stimulating and rewarding. Don’t cheat yourselves out of this promise. ~ Nancy Reagan

July 24, 2023

[1] https://markets.businessinsider.com/news/stocks/robert-kiyosaki-rich-poor-dad-tuna-gold-silver-bitcoin-inflation-2022-6 June 13, 2022

[2] https://www.cnbc.com/2021/10/23/twitter-and-square-ceo-jack-dorsey-says-hyperinflation-will-happen-soon-in-the-us-and-the-world.html, Jeff Cox, October 22, 2021

Do You Like Paying Taxes?

July 23, 2023Posted in InvestmentsTagged Stock Market, Stock Trading, TaxesLeave a comment

Do you like to pay taxes? I doubt it, but taxes are a function of successful investing. Paying a capital gain tax on a profitable trade is part of the game, yet some investors hold on to a stock too long because they don’t want to pay any taxes. In some cases, a stock will drop, eliminating all the profit and capital gains, which is worse than paying taxes. Let’s look at a few examples.

Cisco Systems

Cisco was the poster child for internet stocks in the late 1990s and early 2000s. From 1995 to March 2000, it soared more than 4,015%, rising from $1.95 to $80.25 – a nice little profit. However, some investors did not sell because they thought it would trade higher, but by October 2002, it dropped by 88%, wiping out capital gains for many investors. At its peak, Cisco traded at a price-to-earnings ratio of 205, or more than 13 times its historical average, and hasn’t eclipsed its all-time high set twenty-three years ago. Cisco Systems initiated a dividend in 2011, long after it corrected.

Disney

Disney has fallen on hard times, and the stock is struggling, trading near a nine-year low of $87.18 as issues mount at its theme parks, movie studios, and other outlets like ESPN. At its peak, it sold for more than $200 per share. Over the past decade, Disney traded from $64 per share to $200, gaining 214%. Since March 2021, Disney has fallen 56%. Its PE ratio touched 300 as it started to correct, fifteen times the historical average for Disney. Disney also eliminated its dividend in 2021, another sign it may be time to lock in your profit.

3M Co

3M has been a financial powerhouse, but the stock has dropped because of pending litigation related to forever chemicals and earplugs. From January 2000 to January 2018, it soared 428% but has since dropped 60%, trading near a ten-year low. At its peak, the PE ratio was 32, which was not significantly overvalued but more than two times its average. The dividend yield dropped to 1.5%, more than half its historical average of 3.9%.

NVIDIA Corp

NVIDIA is the current “it” stock because of artificial intelligence and has risen more than 200% this year and more than 12,000% since 2013. It has not given up its gains, and investors are holding on for more. Will it correct like the other stocks? Who knows, time will tell. It trades at a price-to-earnings ratio of 230, or six times its historical average, so it may be wise to lock in some profits. NVIDIA’s dividend yield is .04%, or 60% below its average of .1%.

Of course, selling a stock at its peak is more luck than skill and easier said than done. Hindsight is twenty-twenty. However, do not let your capital gain tax drive your investment decision. It never hurts to realize a profit if the stock valuation is overvalued or extended. I have seen too many investors give up gains to avoid paying taxes.

Once you acquire your stock, calculate your target price so you have a general idea of where to sell it. The PE ratio and dividend yield are two financial metrics you can use to calculate a ballpark range for selling your shares.

Price-to-earnings ratio. The PE ratio is a common metric for stock valuation. It’s not foolproof; some analysts don’t like it, but it will give you a general idea of the future valuation of your shares. For example, if the historical PE ratio is 20 and the projected earnings per share are $5, the stock valuation is $100 (20 x $5). If your stock is selling for $80, it’s undervalued; if it is selling for $140, it’s overvalued. As the price rises, so does the PE ratio. Do not automatically sell your stock if it hits your price target. Reevaluate it based on new data or information. If nothing changes, consider selling a few shares.
Dividend Yield. The dividend yield is another financial metric you can use to determine the price target for your stock. For example, if the company pays a $2 dividend and the average dividend yield is 5%, the stock valuation is $40 ($2 divided by .05). It’s undervalued at $30 and overvalued at $50. The dividend yield drops as the price of the stock rises.

Finding historical financial data is relatively easy on Yahoo! Finance, Morningstar, or Value Line. A quick calculation can identify which stocks to sell or buy for your portfolio.

Happy Trading.

Then Jesus said to them, “Give back to Caesar what is Caesar’s and to God what is God’s.” And they were amazed at him. ~ Mark 12:17

July 23, 2023

Data sources: YCHARTS and Value Line

Category: Investments

Timing

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The Race To Zero

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Chaos Theory

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Only You

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Are Bonds Safe?

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One Bad Mistake

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It’s Complicated

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Financial Storms

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Vail’s Legendary Back Bowls

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Do You Like Paying Taxes?

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