I Don’t Want to Invest In Stocks

Investors are nervous; despite the recent rally in stocks, and they are looking to sell shares because of the virus or the economic environment. It’s forcing some individuals to reconsider their exposure to risk assets. As the market climbs higher and interest rates fall to zero, what else can you do with your money?

If you want to sell your stock holdings, and you’re not excited about investing in bonds, consider a few other alternatives for your assets. Here are a few suggestions.

  1. Reduce your debt. Though interest rates are low, reducing or eliminating your debt is a smart choice, especially debt you can’t deduct like credit cards or auto loans. It doesn’t make sense to store your cash in a bank account with a zero percent interest rate if you’re mortgage rate is 3%, 4%, or higher. Let’s assume your current mortgage balance is $250,000, with twenty years remaining, and it carries a 4% interest rate. If you pay it off today, you will save $113,588 in interest payments.
  2. Buy a second home. Buying a second home in the mountains, at the beach, on a lake, or in the country sounds inviting. In a COVID-19 world, a little elbow room would be nice. Several years ago, I helped a friend run numbers before he purchased a lake house. He made the plunge, and his family has enjoyed the property for many years. Recently, a client purchased a small ranch in central Texas after we completed his financial plan. The plan validated his decision. My grandparents owned an immaculate second home in Laguna Beach – family and friends used it often. A second home can create experiences and memories that last a lifetime.
  3. Remodel your home. The shutdown is creating a remodeling boom. Individuals are upgrading kitchens, bathrooms, and backyards. If you plan to stay in your home for another five to seven years, then give it an upgrade. If you don’t want to spend big bucks, consider a paint job or a few small landscaping projects. According to HGTV, bathrooms, landscaping, and kitchen upgrades have the best ROI.[1]
  4. Donate to a charity. Nonprofits and charitable organizations are struggling, so any money you donate will go along way to help those in need. Consider contributing to groups or organizations you support. A Google search for nonprofit organizations in your neighborhood will yield many results.
  5. Love your neighbor. Are you aware of any friends or relatives who are struggling financially? Do they need a new car? Can you help them pay their medical bills? According to the BBC, “The US is expecting an avalanche of evictions.”[2] If you know someone who is on the brink of being evicted, pay their rent.

Money should be spent; it’s meant to change hands, and hoarding cash is not a wise investment. If you’re not sure how much to spend on a home project or donate to your favorite charity, consider a financial plan. Your plan will help you quantify and prioritize your goals. When a client asks me if they can buy a car or a home or donate money, we will review their financial plan together. And, more often than not, they can proceed. A financial plan gives them the confidence to act on their wishes.

So, if you’re not ready to invest in the stock market, look for alternatives.

“Each time you muster up what it takes and go for it, the next go-round becomes that much easier. Real and important changes begin with small, courageous acts.” ~ Chip Gaines

July 14, 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.hgtv.com/lifestyle/real-estate/top-home-updates-that-pay-off-pictures

[2] https://www.bbc.com/news/world-us-canada-53088352, Jessica Lussenop, June 19, 2020

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

I’m the Captain Now

A high-profile internet celebrity is leading a legion of day-traders with his antics. He recently said, “I’m the captain now,” and referred to Warren Buffett as an idiot.[1] Yesterday on CNBC, he said he had generated returns of 400% after “catching on” to trading.[2] Day traders have moved from gambling on sports to trading in bankrupt companies like Hertz and Chesapeake Energy.  Should you follow this Pied Piper?

Day trading is complicated. If it were easy, everybody would be doing it. It’s my understanding that “the captain” is worth more than $115 million, and he is trading with about $3 million, or 2.6% of his net worth, so he can afford to lose 100% of his capital. He can afford to swim in the deep end of the pool without fear. Several years ago, a client was investing in trust deeds by lending money to people who couldn’t borrow from traditional resources like banks or credit unions. He was a multi-millionaire, and he could afford to lose a few thousand dollars if his borrowers defaulted on their loans. A relative of his wanted to follow his investment strategy, but she couldn’t afford to lose any money. Her net worth was in the low thousands, so if she lost a portion of her assets, it would be catastrophic.

Despite the worst economic data since the Great Depression, day traders are partying like it’s 1999. They appear to be making a killing by trading stocks and ETFs like Hertz, American Airlines, Luckin Coffee, and the JETS ETF. Their portal of choice is Robinhood, where traders can execute their orders sans commissions.

Here are a few tips if you want to start day trading.

  • Have a plan. Work on your entry and exit points. Know what you’re going to do before you start trading. Identify a few stocks and get to know their trading patterns – as best you can.
  • Only invest with money you can afford to lose. If you can lose 100% of your trading capital, and still support yourself and your family, then give it a shot. Limit your speculative trading to 3% to 5% of your investment capital.
  • Only trade in your taxable investment account so you can write off your losses. Do not day trade in your retirement accounts.
  • Do not borrow money to trade. Avoid margin. Leverage is your friend when stocks rise; it is the enemy when they fall. Your account can go negative if you employ too much margin – meaning if you borrow money and you lose it all, you may owe your brokerage account money because of your deficit.
  • Take your gains. If you’re successful, ring the register to lock in your profits. Yes, you should let your winners run, but if you’re trading in bankrupt securities and you make 20%, 50%, 100%, or more, take your profits off the table.
  • Cut your losses. If you’re losing money, cut your losses and sell your stocks so you can live to see another day. Try to limit your downside to 7% to 10% per trade.
  • Inform your spouse, loved one, or significant other that you’re about to embark on a trading journey. Let them know you will be speculating with a portion of their treasure. It’s better to inform them from the beginning that you may lose significant amounts of money. In this case, it is better to ask for permission than it is to beg for forgiveness.

In 1999, the NASDAQ soared 85%; by October 2002, it fell 77%, and it would take seventeen years for the index to reclaim its previous high. The severity of the drop and the prolonged drifting in the market wiped out a generation of day traders. As one speculator said, “I never did make any money out of that,” he admits. “I’m just not able to make it work. It’s harder than it looks.”[3]

Captain Phillips is a movie about a small group of Somali pirates who hijack the Maersk Alabama. When the lead pirate makes his way to the bridge, he looks Captain Phillips in the eye and says, “I’m the captain now.” As the movie ends, “the captain” was arrested by the US Navy, and the Seal snipers eliminated his associates. It didn’t work out for the pirates because they bit off more than they could chew, and they didn’t have a plan.

I’m sure there are successful day traders, but they almost certainly do it for a living, it’s their 9 to 5 job. And, if they have figured out day trading, they’re probably living on a private island somewhere in the pacific.

Happy Trading

“In the short run, the market is a voting machine, but in the long run, it is a weighing machine.” ~ Benjamin Graham

June 16, 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.thewealthadvisor.com/article/warren-buffett-idiot-says-investor-who-claims-daytrading-easiest-game-ive-ever-played, The Wealth Advisor, June 10, 2020

[2] https://www.youtube.com/watch?v=Q0t_7R2sv4w, website accessed

[3] https://money.cnn.com/2000/08/09/investing/q_daytradewhere/, August 9, 2000

Bearing Fruit

Growing up in Southern California, fruit trees were everywhere. It seemed like orange, lemon, and avocado trees were on every corner. My backyard had two huge trees – one orange and one lemon that repeatedly produced fruit. My grandfather owned a citrus ranch with thousands of trees.

Fruit trees can live for 30 years or more. Apple and apricot trees can live for 40 years; persimmons can thrive for more than 50 years.[1]  A fruit tree takes about four to six years to grow before it starts to bear fruit.[2] Once trees begin bearing fruit, they can deliver bushels for decades. An Apple tree can produce about six to ten bushels with each harvest, approximately 750 to 1,250 apples.[3] How about them apples?

To diversify your orchard, plant several types of trees like apple, avocado, pear, cherry, pomegranate, orange, or grapefruit, to name a few. Your farm will produce fruit at various times and in contrasting quantities, giving you an abundance of choices at harvest time.

Moving from a small seed to a thriving orchard requires time, patience, and effort. Planting an apple tree today will not produce results tomorrow. It will need several years before the roots take hold and grow. If you continually rip the tree out of the ground to see how the roots are growing, it will never grow. Once your trees start producing fruit, you must tend to their upkeep by watering and pruning them regularly. If a tree dies, remove it and plant a new one, and manage your healthy trees so that they can grow and flourish.

Your trees will grow at different intervals, some fast, others slow. At times it will appear as if your trees aren’t growing, but they are.

Dividend-paying stocks are like fruit trees; they can produce results for years in the form of dividends.  Standard & Poor’s has a list of dividend aristocrats – companies that have paid dividends for more than twenty-five years. Currently, there are 64 companies on the list.[4] Here are a few names from this outstanding list: Coca-Cola, Pepsi, Procter & Gamble, Walmart, Walgreens, 3M, Abbot Laboratories, Medtronic, McDonald’s, Chevron, and At&T.[5]

The yield on the S&P 500 Index is 1.8%,  and more than 1,000 companies yield 2% or higher. Beware of companies with extremely high dividend yields. If a company has a dividend yield of 10%, 15%, or more, it can be a trap, and they probably have a weak balance sheet. More important than a high yield, is a company that regularly raises its dividend. Intel’s dividend in 2000 was .003 cents per share (per quarter). It is now .33 cents per share, an increase of 10,900%.

At times, a stock experiences stunted growth. Microsoft traded flat from January 2000 to July 2016, the price of Microsoft did not budge for sixteen years. It dropped to a low of $16.25 in March 2009 after peaking at $55.75 nine years prior. In 2003 they initiated a dividend of 8 cents per share, and today it is 51 cents, an increase of 537%. In addition to their regular payout, Microsoft paid a special dividend of $3.00 per share in 2004. A patient shareholder enjoyed a steady stream of rising income while waiting for Microsoft to recover. Microsoft is trading for $195 per share today.[6]

In a low-interest-rate world, a portfolio of dividend-paying companies is attractive. The yield on the U.S. Thirty-Year Treasury has been falling for decades. In 1980 the bond paid more than 15%. Today it’s yielding 1.5%, a drop of 90%.[7] If you are relying on government bonds for retirement income, you’re in trouble. McDonald’s dividend in 1980, as a comparison, was .004 cents per share (per quarter) or .4%. It’s now $1.25 per share, and it’s yielding 2.51%. McDonald’s dividend increased by 31,150% since 1980!

Get started today by investing in several dividend-paying companies that will bear fruit for generations. If you’re not sure which dividend stock to buy, you can purchase an exchange-traded fund like ProShares S&P 500 Dividend Aristocrats (NOBL) or Vanguard’s Dividend Appreciation ETF (VIG). These two ETFs will own high-quality, dividend-paying companies.

Happy planting!

He replied, “Because you have so little faith. Truly I tell you, if you have faith as small as a mustard seed, you can say to this mountain, ‘Move from here to there,’ and it will move. Nothing will be impossible for you.” ~ Matthew 17:20

June 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 are not suitable for every investor.

 

 

 

 

[1] https://www.davewilson.com/question/how-long-do-fruit-trees-live, Website accessed June 8, 2020

[2] https://homeguides.sfgate.com/long-apple-trees-mature-produce-fruit-56479.html#:~:text=Standard%20Rootstock,years%20after%20you%20plant%20it. Ruth de Jauregui, November 28, 2018

[3] https://extension2.missouri.edu/g6021#:~:text=A%20semidwarf%20tree%20will%20produce,fruit%20in%20a%20home%20refrigerator., Michele Warmund, website accessed June 10, 2020

[4] https://www.investopedia.com/terms/d/dividend-aristocrat.asp, James Chen, May 17, 2020.

[5] https://www.suredividend.com/dividend-aristocrats-list/?gclid=Cj0KCQjwiYL3BRDVARIsAF9E4Ge-N32o40_3DQ2Q28gaRUNsKD57lI78dfYLoa0EQwYMyL-z4PA1asUaAhD8EALw_wcB, website accessed June 10, 2020

[6] YCharts

[7] https://www.macrotrends.net/2521/30-year-treasury-bond-rate-yield-chart, Website accessed June 10, 2020

What I Miss?

The NASDAQ, Dow Jones, and S&P 500 are posting positive returns over the past year, and the NASDAQ is up more than 9% for the year. These leading indices were down more than 30% less than three months ago as investors reacted to the COVID-19 virus. Since the virus outbreak, our country has experienced depression-era economic data and witnessed civil unrest. Investors have been scratching their heads to try and reconcile the performance in the stock market with the reality on the streets.

The stock market is up more than 40% from the March 23 low, and it has turned in the best 50-day performance in history. It’s hard to fathom a stock market trading at all-time highs while our economy and cities struggle. We have experienced the worst pandemic in more than 100 years, the bleakest economy since the depression, and, according to some, racial tensions not seen since 1968. However, the market is forward-looking and data-driven, and it’s anticipating our country will realize better days ahead.

In March, investors, and a few financial professionals, panicked. One prominent investment firm in Texas sold their client’s entire stock holdings in early March to ride out the storm. I believe his clients are still in cash.  A renowned hedge fund manager said, “Hell is coming.”[1] Another stated, “I would say it’s one of the most overvalued, maybe the second-most overvalued I’ve seen.”[2] Sometimes the safest investment strategy is to do nothing. And trying to time the market is a fool’s errand

With hindsight, market timing appears easy, but it’s not. It’s impossible. Boeing is now trading above $200, so buying it in March at $95 seemed like a no brainer. But, at the time, airline capacity had fallen by 95%, and Boeing was battling the government to obtain certification for its 737 Max. There are twenty-two analysts that follow Boeing, and their average price target is $157, or 26% below its current price.[3] Despite Boeing’s recent performance, it is still down 47% from its high.

After more than thirty years in the investment business, I’m still looking for a better strategy than buy and hold. Owning a globally diversified portfolio of low-cost funds is still hard to beat. During the first few weeks of the market rout, bonds performed well. They provided safety and support.  As the market recovered, the baton was passed to different asset classes like growth stocks, value stocks, international companies, emerging markets, real estate, and small-cap stocks. Each sector performed well at one time or another. Each category contributed to the performance of the portfolio.

Our investment models were active during the market correction. They are designed to keep our client’s asset allocation and risk tolerance in check. Initially, we were selling bonds to buy stocks, and then as the market rebounded significantly, we sold stocks to buy bonds. At one point, our models were allocating money to real estate funds, despite being down more than 40%. I was hyperventilating as our software allocated funds to this asset class. The real-estate allocation has been a stellar performing asset class over the past couple of months, outperforming most of our other asset classes. Our models are now in positive territory for the past year.

A globally diversified portfolio of mutual funds is not sexy. While some funds are rising, others are falling. It seems I’m forever apologizing for an underperforming asset class. Investors, apparently, only want to own funds that grow in value, but the funds are always changing leadership positions, which is the root of diversification.

What is the best way to find a portfolio that is the right fit for you? A financial plan is a powerful tool to help you define and refine your goals. Your advisor will use the data to align your investments with your objectives. If your finances are in sync with your aspirations, you’re more likely to stay invested through thick and thin. As the markets fell, we were regularly stress-testing our client’s financial plans, and the drop impacted not one. Despite the rout, our client’s financial plans remained intact. If your strategy is working and you’re on track to reach your goals, do not make any changes, and dare to stay invested.

Most experts do not know what’s going to happen tomorrow, and the stock market has been tormenting professionals for centuries. Do not let the opinions of others derail your dreams. Instead, focus on your goals, think long-term, pay attention to your plan, and hold onto your investments.

“Sometimes, the most important thing to do is to do nothing.” ~  Debasish Mridha

June 5, 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.theguardian.com/business/2020/mar/27/hell-is-coming-how-bill-ackmans-tv-interview-tanked-the-markets-and-made-him-26bn, Rubert Neate, March 27, 2020.

[2] https://www.marketwatch.com/story/this-is-second-most-overvalued-stock-market-that-billionaire-investor-david-tepper-has-ever-seen-2020-05-13, William Watts, May 14, 2020.

[3] https://money.cnn.com/quote/forecast/forecast.html?symb=ba#:~:text=Boeing%20Co%20(NYSE%3ABA)&text=The%2022%20analysts%20offering%2012,the%20last%20price%20of%20184.30., website accessed June 5, 2020

All That Jazz

Jerry Sloan, the legendary coach of the Utah Jazz, recently passed away. Mr. Sloan had a stellar career as a player and a coach. As a player, he was twice an all-star, and his number was retired by the Chicago Bulls.  In 2009, he was enshrined in the NBA hall of fame for his coaching ability. He coached the Utah Jazz for more than 20 years, “the longest coaching tenure with the same team in professional sports,” and retired as the 4th winningest coach in NBA history.[1] Mr. Sloan was consistent and respected.

Coach Sloan led the Utah Jazz to their first NBA finals in 1997 with players Karl Malone and John Stockton. The Utah Jazz teams under Sloan weren’t flashy like the Lakers, nor did they have the pedigree of the Celtics, and they weren’t as coarse as the Pistons, but they were fundamentally sound, and nice – like most people in Utah.

If Coach Sloan were an investment professional, he probably would have been a fan of dollar-cost averaging, a consistent strategy that relies on fundamentals and patience. The dollar-cost averaging strategy lacks the flair of private equity, liquid alts, futures trading, IPOs, or option collars. Still, it is stable and reliable, and for most investors, it delivers results.

How does dollar-cost averaging work? This strategy requires you to invest a fixed dollar amount each month into a mutual fund or several funds. Let’s look at an example. You decide to invest $500 per month in Vanguard’s 500 Index Fund (VFINX) over several years.

  • One Year: After one year, your investment is worth $5,950, and it generated a loss of 1.83%.
  • Five Years: After five years, your investment is worth $37,298. It generated an average annual return of 8.92% and produced a gain of $7,298.
  • Ten Years: After ten years, your investment is worth $105,927. It generated an average annual return of 11.11% and produced a gain of $45,927.
  • Twenty Years: After twenty years, your account is worth $310,255. The 20-year average annual return was 8.74%, and it produced a gain of $190,255.
  • Thirty Years: After thirty years, your account is worth $818,929. The 30-year average annual return was 8.79%, and it produced a gain of $638,929.
  • Forty Years: After forty years, your account is worth $2.97 million. The 40-year average annual return was 10.24%, and it produced a gain of $2.73 million.

For the dollar-cost averaging strategy to reward shareholders over time a down market is needed, and the lower, the better. If you’re investing for the long haul, a down market will allow you to accumulate shares at lower prices. Your share accumulation will pay dividends when the stock market recovers because you will own more shares at higher prices. If you participate in a 401(k) plan, you likely witnessed this happening in your account.

If you’re looking for an easy way to accumulate wealth, look no further than the dollar-cost averaging strategy. A calculated, consistent investment strategy over time is a winning formula. This strategy is easy to institute, and you can do it with an IRA, 401(k), 403(b), 529 Plan, or taxable brokerage account, and you can start it with any dollar amount.

Courage is the most important of all the virtues because, without courage, you can’t practice any other virtue consistently.” ~ Maya Angelou

May 30, 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.hoophall.com/hall-of-famers/jerry-sloan, website accessed May 29, 2020.

 

Planning with Uncertainty

Zero Dark Thirty is a thriller about the global pursuit of Osama Bin Laden. A CIA operative determines he is living in a compound in Pakistan, but few believe her analysis, until the meeting scene. During this scene, the power players assess the likelihood that Bin Laden is living at the compound. One associate tells the group, “We don’t deal in certainty, we deal in probability.”[1] The members are approximately 60% positive that he is living at the site until they ask Maya what she thinks. She says, “A 100% he’s there. Okay, fine, 95% because I know certainty freaks you guys out, but it’s a hundred.”[2]

Financial planning is clothed in uncertainty – a combination of math, assumptions, predictions, and guesses. Most financial planning models rely on intuitions about the future, and financial planners are aiming at moving targets. A change to one metric will reverberate through the plan. If I modify the rate of return by 1%, it can have life-altering consequences for a client. Despite the uncertainty, a written plan is still recommended for all investors, because as John Maynard Keynes said, “It is better to be roughly right than precisely wrong.”

Regardless of the environment, uncertainty is ever-present even in the best of times. Last year the stock market and economy were humming. The future was bright, investors were confident, but then the Coronavirus arrived, and uncertainty escalated quickly.

To learn more about planning with uncertainty, I contacted Captain Lawrence G. Getz III, Commander of the University of Michigan’s Navy ROTC program. Captain Getz is a Navy helicopter pilot who has flown more than 2,500 hours, including 500 combat hours in the SH-60 Seahawk helicopter. He was also the Executive and Commanding Officer of the USS Kearsarge. For his service, Captain Getz has earned the Defense Superior Service Medal, Legion of Merit, and two Meritorious Service Medals, to name a few. Captain Getz knows plenty about planning with uncertainty, and he has learned a thing or two during his twenty-nine years in the Navy.

Before each mission, he and his team would script out their pre-planned responses (PPR). Captain Getz said, “It‘s like Tom Brady throwing to different receivers. If one is covered, he looks for the next receiver, and so on until he finds an open one.” He added, “Tom Brady and his teammates practice the routes, they are pre-planned.” Part of his planning is to make smart decisions every day and take precautions. “The smart decisions you make today will make you better years, and decades from now,” he added.

“No plan survives the first contact, but the training and trust will get you through the bad days,” said Captain Getz. I asked him how he dealt with his emotions while flying. He said, “Compartmentalize your emotions, put them in a box, and execute your plan. Being afraid is normal, but do not make emotional decisions in highly volatile times. Do not make decisions in fear.” He added, “We are always dealing with VUCA – volatile, uncertain, complex, and ambiguous situations.”

Emotions play a significant role for investors. If you let them manipulate you, it can have negative consequences on your financial future. I asked Captain Getz how individuals should deal with fear, and he said, “Look to historical spikes. Individuals had the same concerns and fears ten or twenty years ago as people do today, but we (Americans) made it through. We are resilient. We put our head down and make it out.” He talked about people’s reaction to New Orleans after Katrina ripped through The Big Easy. He said, “People did not want to rebuild the city; they wanted to tear it down. But that’s not what we do; we make it better.”

In a recent report from Morningstar: A Behavioral Guide to Market Volatility, they note that “volatile times can also make us more prone to behavioral mistakes.” They added, “When we predict what’s going to happen in the future, our minds naturally reach for what happened most recently.”[3] We believe current events will last forever.

Captain Getz relies on his team through pre-planned responses and constant communication. How does he know when it is time to waive off a mission? When is it time to get out of a bad situation? He said, “His team talks before each mission.” For example, he tells them, “If he is on final approach, and he is taking enemy fire they should remind him to waive off.” Communication and planning are paramount.

Reviewing each mission is critical to his team’s success, and they will evaluate each one when they return to base. He said, “You have to check your ego at the door and have the conversation about the mission. Was it clear? What did you think? We must communicate to work better.”

Captain Getz flew with a Smart Pack strapped to his knee – a 5×7 card, a checklist for each mission. The card included details about the mission, navigation, code words, etc. He said, “If I forgot my name, I could look down at the card and follow the plan.”

Building and developing a team to deal with uncertainty is also important to Captain Getz. He relied on his team frequently, and he spent considerable time hanging out with his crew. His team would work out, walk, eat, read, and drink together. The camaraderie “made them better teammates.”

I asked Captain Getz how he celebrated his victories. He said, “Celebrate humbly, take pride in your work, take pride in working well together.” He added, “I look to provide meaning, and I know we are serving something bigger than ourselves.”

As an investor, how can you incorporate Captain Getz’s wisdom? Here are a few suggestions.

  • Develop a written plan for your pre-planned responses (PPR). Your written plan will help you navigate your financial future. Decide beforehand how you will react to a falling market, a shifting economic environment, or a change to your employment status.
  • Build a team. In addition to your financial planner, incorporate your CPA, attorney, insurance agent, mortgage banker, and other professionals to assist you with your planning needs. Your team can guide you through challenging times; they are your financial support group.
  • Communicate with your team and loved ones. Let those most important to you know about your financial intentions. Inform them of your plans and show them where you keep your relevant documents like wills and trusts. If your situation changes, let them know as soon as possible.
  • Make smart, short-term decisions every day. Your daily decisions will have generational consequences.
  • Control your emotions. Avoid all financial decisions if you’re afraid or fearful. Talk to your team or reference your plan before you proceed. If you’re emotionally paralyzed, wait 24 hours before making any adjustments. As an investor, you can only control how much you save and how much you spend; everything else is beyond your grasp, so let it go.
  • Do not wait for perfection. If you’re waiting for 100% certainty before proceeding, you’ll never execute your plan. By the time the all-clear signal is given, it’s too late to act. Make the best decision you can with the information you have and advance accordingly.
  • Review your plan. Review your plan regularly to ensure your goals are still intact. Do not revise it if you are on target to achieve your goals. If your plan has been dislocated due to the recent market turmoil or some other factor, adjust it as needed. I recommend reviewing your plan quarterly.
  • Celebrate your victories. It’s okay to enjoy the fruits of your labor and celebrate your wins. If you have reached your goals, rejoice in your success.
  • Serve others. Serving others with your time, talent or treasure is humbling, especially if you’re helping those who can’t pay you back. It’s hard to worry about yourself or feel discouraged when you’re lending a hand to someone in need. During this economic downturn, look for opportunities to do some good.

We are in uncertain times, but we will prevail. Our country has faced many challenges, but we’re still standing. We are still fighting.

Fair winds and following seas.

“A good Navy is not a provocation to war. It is the surest guaranty of peace.” ~ Theodore Roosevelt

May 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 are not suitable for every investor.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

[1] https://www.youtube.com/watch?v=irG0wGzw7Ok, Website accessed May 17, 2020

[2] Ibid

[3] A Behavioral Guide to Market Volatility: How Behavioral Science Can Help Advisors During Market Turmoil. Morningstar Research by Samantha Lamas, Behavioral Researcher and Steve Wendel, Head of Behavioral Science

PWM Weekly Stock Market Update

The stock market and the economy are sending mixed messages. The Dow Jones Industrial Average is up 31% from the March lows while the economy is posting depression era numbers. 20.5 million people lost their job in April, and the unemployment rate spiked to 14.7%. Despite the terrible economic news, investors are optimistic about a potential vaccine and the possibility of returning to work. The market is a leading indicator, and it is looking past the recent data – hopefully, there is good news on the horizon.

Our investment models were quiet this week as volatility continues to drop. The volatility index (VIX) is down 66% from its peak, and the lower it goes, the better it is for investors.

The American Association of Individual Investors (AAII) tracks several indicators. The percentage of individual investors who are bullish, or expect stocks to rise, fell to 23.67% – a low rating. This AAII indicator is a contrarian indicator. When individual investors are pessimistic about the future direction of the stock market, the market usually rises and vice versa. For example, the index reading on January 23, 2020, was 45.6%, before the Dow Jones fell 36%. The thirty-three-year average AAII indicator is 38.23%.[1]

The NASDAQ is now positive, and it’s up 14.5% for the past year as Microsoft, Amazon, and Apple lead the way. The S&P 500 is also trading in positive territory for the past year.

Shanghai Disneyland is reopening on Monday, and tickets sold out within minutes. Starbuck’s is planning to open 85% of its stores here in the U.S., and Walgreen’s is returning to regular operating hours.

Retailers continue to struggle as Neiman Marcus and J.Crew file for bankruptcy protection. Nordstrom’s is permanently closing 16 stores (sorry Mom).

Several pharmaceutical companies, including Gilead, Pfizer, Amgen, Johnson & Johnson, and Regeneron, are racing to produce a vaccine for the Coronavirus.

The Thunderbirds will fly in formation above San Antonio and Austin on Wednesday to show their support for healthcare workers, first responders, and essential personnel.

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

  • The S&P 500 rose 3.74%
  • The NASDAQ rose 5.77%
  • International Stocks rose 2.82%
  • Emerging Markets rose 4.46%
  • Long-Term Bonds fell 2.36%
  • Gold fell .18%
  • Energy Stocks rose 7.85%
  • Chinese Stocks rose 5.79%

Despite the recent performance of the market, we do remain cautious on stocks in the near term, so diversify your portfolio, follow your plan, think long-term, and be patient.

Here is the story of The Tortoise and The Hare, a great reminder about being patient and following your plan – enjoy: http://read.gov/aesop/025.html

Patience and perseverance have a magical effect before which difficulties disappear, and obstacles vanish. ~ John Quincy Adams

Have a great weekend, and keep the faith!

May 9, 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. http://www.parrottwealth.com

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] YCharts

It Still Works

After the Great Recession, a friend asked me if diversification still made sense. He followed up with another question before I could answer. He asked, “If my assets are diversified, how come I’m losing money?” I said diversification still works, but it doesn’t protect you against a loss. Diversification helps reduce your risk allowing you to create generational wealth.

During the Great Recession, bonds outperformed stocks, but stocks have topped bonds for the past ten years as the market rebounded from the recession lows. This year, so far, bonds are winning. Investing is not a binary event. Few investors allocate 100% of their assets to bonds or stocks and flip between the two depending on their temperament

Stocks can decline, especially after a 10-year bull market. Stocks enter correction territory about every three to five years. Over the past two decades, the market has realized drops of 30%, 40%, and 50%. The average decline for the past twenty years has been 9.3%.[1] The market is always correcting, always adjusting, so it should not surprise you when it falls.

Microsoft, Apple, Amazon, Facebook, Alphabet, and Netflix account for 21% of the S&P 500 Index and 48% of the NASDAQ 100. These super six companies generated an average total return of 280% for the past five years compared to a 39% return for the S&P 500. However, they have experienced periods of underperformance relative to diversified portfolios. Microsoft fell 71% from January 2000 to March 2009, and it took 17 years for it to reclaim its previous high. Apple fell 75% in 1985, 74% in 1998, and 80% in 2003. Amazon fell 93% during the Tech Wreck. And risk arrives quickly – like lightning. Last year Hilton, Hertz, and Southwest Airlines were up, on average, 33%. This year, as a group, they’re down 56%, and Hertz is contemplating bankruptcy.[2]

Stocks, bonds, and cash are components we use to build diversified portfolios. Stocks for growth, bonds for income, and cash for safety. Stocks are subdivided into large, small, and international companies. Bond maturities vary between a few months to several years.

A diversified portfolio has many moving parts, and depending on the market cycle; some are up while others are down. One goal of a balanced account is to keep people invested for the long-term, despite the roller coaster ride of the market. Dimensional Fund’s 60% stock and 40% bond portfolio is down 10.5% for the year. It has averaged 7.5% for the past twenty years, and it has risen 75% of the time. Since 1926 it has been profitable 78% of the time and generated an average annual return of 8.9%.[3]

How do you develop a diversified portfolio? It starts with your financial plan. Your plan will incorporate your hopes, dreams, and fears. It will integrate essential financial components to determine your risk tolerance and asset allocation. If your investments are aligned to your goals, you’re more likely to remain invested so you can capture the long-term trends from the market. A balanced account is designed to withstand several market conditions and endure for generations. Diversification still works because we don’t know in advance which investments will perform well. Therefore, a globally diversified portfolio of mutual funds is the best way for most people to invest. If you want to invest in individual stocks or concentrate your investments, do so in a taxable account so you can take advantage of the tax code.

As we continue to deal with uncertainty from the virus and rumble through a volatile market, focus on your goals, create a plan, think long-term, and good things will happen.

But divide your investments among many places, for you do not know what risks might lie ahead. ~ Ecclesiastes 11:2

May 7, 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] YCharts

[2] Ibid

[3] Dimensional Fund Advisors – January 1, 1926 to April 30,2020

What is Rebalancing?

We try to maintain a balanced life, eat a balanced diet, and, of course, we need balance to ride a bike. Balance is harmony. Investors should pursue balance; unfortunately, they rarely rebalance their portfolios, and they get too aggressive or too conservative at the wrong time.

Rebalancing is an excellent way to maintain your asset allocation and keep your risk tolerance in check, but what does it mean, and how does it work? When you rebalance your portfolio, you’re selling assets that have risen and buying ones that have declined – buy low and sell high. Rebalancing is done on a calendar basis – monthly, quarterly, or annually. Another option is to rebalance on a percentage basis. If an asset class rises or falls by 5% or more, you can adjust your portfolio by rebalancing. You can decide which model works best for your situation. Our firm rebalances based on the percentage moves of the asset classes in our models.

Let us look at a few moments in history to highlight this point.

1929

If your portfolio consisted of 50% stocks and 50% bonds in 1929, your equity allocation dropped to 23%, and your bond allocation increased to 77% at the end of 1932, a mix too conservative based on your original allocation. If you rebalanced every year, you would have sold bonds to buy stocks. However, this would not have been so easy during the Great Depression. The Dow Jones Industrial Average fell 65% in four years, so it would have taken a bold investor with a firm conviction to buy stocks. Without rebalancing, you had to wait until 1955 before your allocation returned to 50% stocks and 50% bonds.

2000

Stocks fell 43% during The Tech Wreck. If you started the decade with a 50% stock and 50% bond portfolio, it fell to 30% stocks and 70% bonds by the end of 2002. Twenty years later, your portfolio allocation is 40% stocks and 60% bonds. It has not yet returned to your original allocation because bonds have outperformed stocks for the past two decades. Bonds have generated an average annual return of 7.2%, while stocks have returned 5%.

2009

If you were fortunate to start investing in 2009, your stock returns have done exceptionally well, averaging almost 11% per year. If you started with an allocation of 50% stocks and 50% bonds in 2009, your asset allocation entering 2020 was 73.5% stocks, and 26.5% bonds – too aggressive based on your initial target.

2020

Stocks are off to a horrible start this year, and your original portfolio of 50% stocks and 50% bonds is now 45% stocks and 55% bonds after four months.

As you can see, balance is rarely maintained, and you must continuously monitor your accounts to make sure your portfolio stays balanced. If you do nothing, your portfolio can oscillate between too conservative or too aggressive – at the wrong time. For example, if you did not rebalance your accounts for the past ten years, your equity risk was too high at its peak in February, before the S&P 500 fell 34% in March. If you did not rebalance your accounts in 2008, your portfolio was too conservative to benefit from the rebound in stocks starting in 2009.

Here are a few tips to help you rebalance your portfolio.

  1. Rebalancing your accounts annually is recommended, but you can also do it monthly or quarterly. Due to the increased volatility in stocks recently, we are running our rebalancing models weekly.
  2. January is an excellent month to rebalance your accounts because most mutual funds pay dividends and capital gains in December.
  3. Your 401(k) plan may have an automatic rebalancing tab allowing you to set it and forget it. Your plan should give you the option to rebalance monthly, quarterly, or annually.
  4. It’s easier to rebalance a portfolio of mutual funds or ETFs than it is a basket of individual stocks or bonds. It’s not possible to sell a half share of a stock or a third of a bond. If you plan to rebalance your accounts, stick with funds.
  5. If possible, automate the process of rebalancing. It’s emotionally challenging to sell stocks when they’re rising, harder to buy them when they’re falling. Automating this process will remove your emotions from the buy and sell decisions.

Rebalancing may or may not increase your returns, but it will allow you to preserve your asset allocation and risk tolerance. If you invested $20,000 in 1992 in Vanguard’s Total Stock Fund (VTSMX) and Vanguard’s Total Bond Fund (VBTIX) – 50% allocation to each, your ending balance as of March 31, 2020, was $152,903. Your investment produced an average annual return of 7.5% without rebalancing. Your allocation, 28 years later, is 70% stocks, 30% bonds. If you rebalanced your account annually to an allocation of 50% stocks and 50% bonds, your return improved to 7.7% and your balance is now $160,156.[1] In this case, your allocation and risk level stayed constant, and your performance improved, which is the goal of rebalancing.

The key to long term financial success is to match your financial goals to your investment portfolio. A financial plan will help you identify your hopes, dreams, and fears. Once you complete this process, put your plan to work and rebalance your accounts often!

Life is like riding a bicycle. To keep your balance, you must keep moving. ~ Albert Einstein

April 16, 2020

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

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

 

[1] Morningstar Office Hypothetical