A Watched Pot

A watched pot never boils, or so I’m told. When I was much younger, I put this theory to test and, to my surprise, the water did boil as I kept my eyes glued to the pot.

Watching water boiling, grass growing, or paint drying is boring and a waste of time. Similarly, watching your investment accounts daily is not productive. Your investments will rise or fall whether you watch them or not. In fact, they may perform better if you don’t watch them at all.

In a study by Greg B. Davies and Arnaud de Servigny the authors discuss how often people check their investment accounts and their corresponding performance. They found that people who check their account balances daily experienced a loss 41% of the time. Individuals who checked their balances every five years experienced a loss about 12% of the time and those who checked it every 12 years never lost money.[1]

Last December stocks gyrated dramatically. If you looked at the stock market on Christmas Eve, it was down 3%. Had you waited until the day after Christmas to check in on the stock market, it climbed 5%. The Dow Jones averaged a 9.4% average annual return for the past five years. A $10,000 investment in the Dow Jones Industrial ETF (DIA) five years ago is now worth $17,798. However, during this impressive run, the market experienced several down days. The Dow had 107 down days of 200 points or more and two days where it fell over 1,000 points. And, 45% of the time, the index closed in negative territory. If you were micro-managing your portfolio, your urge to sell may have been high during these down days.

Trying to time the market is near to impossible. Rather than focusing on the daily moves in the market, pay attention to those things you can control. Here’s a list of items you should be watching.

  • Focus on your long-term goals and review them annually. Your goals will help guide your financial decisions.
  • Review your accounts quarterly or semi-annually. If they are allocated properly, you won’t need to make daily adjustments.
  • Review your fees often. Read the small print to make sure your fees are inline, and you’re not being over charged for services you didn’t agree to.
  • Check your credit reports annually. Credit Karma also recommends checking them before a major purchase or applying for a new job.[2]
  • Credit card and bank statements should be viewed monthly. A scan of your statements is wise to make sure your debits and credits are being applied correctly.
  • Utility bills and other household statements should be checked semi-annually. Your statements may be delivered electronically, and your payments deducted automatically from your bank account, so checking these accounts for additional fees and balances is recommended.
  • Your asset allocation should be reviewed annually. Over the course of a year, your accounts may move substantially. If your account balances are not in line with your risk profile, rebalance them to your original asset allocation.
  • Your financial plan should be reviewed every two to three years.
  • If you have a family will or trust (and you should), it should be reviewed every five years unless you have a major lifestyle change.
  • Your insurance policies – home, life, auto, should be reviewed annually.

Keeping a watchful eye on your household metrics is paramount. It’s important to be on guard and vigilant when watching your finances and other items that are important to your family, so you don’t get boiled accidentally.

Be alert and of sober mind. Your enemy the devil prowls around like a roaring lion looking for someone to devour. ~ 1 Peter 5:8

March 5, 2019

Bill Parrott 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.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.

 

 

 

[1] Greg B. Davies, Behavioral Investment Management: An Efficient Alternative to Modern Portfolio Theory (McGraw-Hill, 2012), p. 53. The Behavioral Investor by Daniel Crosby, Ph.D. – Kindle Edition, location 1423, accessed 2/10/19.

[2] https://www.creditkarma.com/credit-cards/i/how-often-check-credit-reports/, by Christy Rakoczy Bieber, 12/4/2018.

Frozen TV Dinners

Americans dined on TV dinners from Swanson’s during the ‘60s and ‘70s. Parked in front of a TV while eating a balanced meal on a wobbly TV tray was quick, convenient and efficient. These pre-packaged meals freed up time in the kitchen, so families could spend some “quality” time together while watching Mary Tyler Moore, Happy Days, or Bonanza. The days of making dinner from scratch were declining with the arrival of frozen dinners and the microwave.

The internet age has allowed companies like Grubhub and Blue Apron to thrive by delivering food to our doorstep. Grubhub will bring you a meal from your favorite restaurant whether you’re buying a sandwich or several entrees. Blue Apron will deliver fresh ingredients, so you can prepare and cook your items when it’s fitting for your schedule.

Of course, you can still make home-made meals by shopping for your favorite items and cooking them to your liking. You can choose from thousands of ingredients as you roam the aisles of your local supermarket. Cooking your own meals is rewarding especially if you have the time and desire.

Mutual funds are packaged products allowing you to own thousands of individual securities with the purchase of a few funds. The fund manager will do the “cooking” for you so you don’t have to worry about the ingredients, the only thing you must do is decide which funds are best suited for your situation. A Certified Financial Planner® can help you find the right mix of assets to help you reach your goals.

Over the past twelve months there have been 755 companies that generated a return of 25% or more. A few of the companies in this group include AeroVironment, Hexcel, Match Group, and Zoetis. If you bought 100 shares of each of the 755 companies, it would’ve cost $6.7 million. Jim Cramer recommends allocating an hour per week of research for each company you own, which, in this case, isn’t mathematically possible.

Finding the right investment ingredients to generate positive returns can be tough.  In 2017, about 9% of the companies on this list had a negative return; in 2016, 26% of the companies were in the red. In 2008, 327 of the companies were down 25% or more.  Several of these 2008 losers turned into winners a few years later but I doubt investors stayed the course to enjoy the good times. For example, Crocs was down 96% in 2008 while year-to-date it’s up 47%; over the past 10 years it has generated an average annual return of 7.21%.[1]

A better alternative for most investors is to purchase low-cost mutual funds diversified throughout the world.  By holding a basket of five mutual funds you’d own more than 13,500 companies. The following five mutual funds managed by Dimensional Funds generated a one-year return of 16.51%. The five-year average was 11.57%.[2] More importantly, this portfolio will allow you to live your life without trying to find the right stock at the right time. Here are the funds:

DFSCX: DFA US Micro Cap Portfolio.

DUSLX: DFA US Large Cap Growth Portfolio

DFSTX: DFA US Small Cap Portfolio

DISMX: DFA International Small Cap Portfolio

DFIEX: DFA International Core

As you create your investment portfolio, look to mutual funds to achieve your goals. A financial plan is your recipe and the funds are the ingredients. Your plan and portfolio will be based on your financial goals and dreams. Furthermore, it will allow you to focus on more important things you enjoy doing like cooking.

Bon Appetite!

Life itself is the proper binge. ~ Julia Child

June 18, 2018

Bill Parrott is the President and CEO of Parrott Wealth Management firm 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.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.

 

 

[1] Morningstar Office Hypothetical Tool

[2] Ibid