Tag: Dow Jones

Dow 36,000

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The Dow Jones Industrial Average will top 36,000 at some point. It’s not much of a forecast because the Dow is currently trading at 35,645, and it surpassed 36,000 only a few weeks ago. However, in 1999, authors James K. Glassman and Kevin A. Hassett projected the Dow would soar above 36,000, which they outlined in their book Dow 36,000: The New Strategy for Profiting From the Coming Rise in the Stock Market. It was a bold prediction because the Dow was trading at 10,700 at that time. They argued that stocks were undervalued, and the index would triple in value over the next few years. When they made their prediction, the Dow had soared 168% from 1995 to 1999, averaging 24% per year. How did their prediction turn out?

The Dow peaked about a month after their book was published, and by 2003, the index dropped 23%. It did rebound before crashing again in 2008 to a low of 6,875. Twenty-two years later, their prophecy rang true as the Dow breached 36,000.

Dow 36,000 doesn’t have any shock value today, but how about Dow 250,000? What is your reaction to the index soaring 600%? If the market were to jump seven-fold, how would you allocate your portfolio today? Would you buy stocks or bonds? Would you worry about market corrections?

Why Dow 250,000? Dow 250,000 is a twenty-year goal if the index rises 10% per year. Since 1915, stocks averaged 6.3% per year without dividends.[1] If we included dividends, the average annual return would have been 10%, so my target is not far-fetched. Will the Dow best 250,000? Who knows? It might. If I’m half right, the index will triple from today’s value.

The Dow has tripled since Messrs. Glassman and Hassett published their book despite several recessions, numerous market corrections, rising interest rates, falling interest rates, high inflation, low inflation, and four different presidents – two Democrats, two Republicans.

The stock market rises about three-quarters of the time, so don’t worry about short-term moves. Instead, follow your plan, invest often, and let the long-term trend of stocks grow your wealth.

Prediction is difficult – particularly when it involves the future. ~ Mark Twain

November 24, 2021

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. 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.macrotrends.net/1319/dow-jones-100-year-historical-chart

Forever?

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Exxon Mobil is leaving the Dow Jones Industrial Average after 92 years. They joined the Dow in 1928, and it’s considered one of the bluest of blue chips – a stock to own forever. Salesforce will take its spot. It’s not the first perennial holding to be substituted by a newer, swankier company. Walgreen’s replaced General Electric in 2018 after a 112-year run and Apple supplanted AT&T in 2015 after 99 years. The three former Dow Jones members spent a combined 303 years in the popular index. Procter & Gamble is now the longest-tenured company in the Dow at 88 years.

For decades, shareholders of Exxon, GE, and AT&T considered themselves set for life. A portfolio consisting of these three companies turned $30,000 into $1.2 million from 1983 to 2016, generating an average annual return of 11.8% – far outpacing the S&P 500. Yet, from 2016 through 2020, this three-stock portfolio has fallen 45% while the S&P 500 is up 68%, a difference of 113%![1]

XOM_GE_T_chart (1)

From 1930 to 1960, Exxon, GE, and AT&T were a few of the largest companies in the world, and AT&T held the top spot for four decades. Exxon was the largest company in the world in 2011.[2] It’s now the 34th largest company in the US.

Big Board

In addition to the long-term investment success of this blue-chip triad, they generated significant dividend income over the past three decades. Exxon’s dividend yield averaged 3.15%, GE’s average payout was 2.95%, and AT&T paid 4.54%. These former juggernauts raised their dividends by an average of 495% during this stretch.

However, time’s change and Exxon’s revenue has declined 31% over the past decade, and its dividend payout ratio is 207% – an extremely high metric. Exxon’s stock price has risen 68 cents over the past twenty years, and GE’s stock hasn’t budged a dime in twenty-eight years. AT&T has followed a similar path. Its share price is down more than 40% from its 1999 peak.[3]

Cisco Systems is an excellent example of not getting married to a stock. Its share price soared 3,500% from 1995 to 2000. By 2002, it had fallen 85%. Over the past twenty years, it’s down 42%, and it has never returned to its all-time high of $72.19 set in April 2000.[4]

CSCO_chart

Today, Facebook, Amazon, Apple, Netflix, Google, Microsoft, and Tesla are the largest companies, and investors plan to own them forever. And rightfully so. If you owned a basket of these high-flyers, you’d be up 97% this year! It’s hard to imagine that one of these companies could follow the fate of Exxon, GE, or AT&T, but it’s possible.

What should you do if you own a stock that you want to hold forever? Here are a few suggestions.

  • If your company is performing well, and it’s meeting your needs, do nothing. Let it run.
  • If the stock becomes a significant percentage of your wealth, consider reducing it, and redeploying your capital into another company or two. What is a large percentage? When your stock approaches 10% or more of your portfolio, start paying extra attention to it. When it breaches 25%, sell some shares to drop your weighing to 10% of your account balance or lower.
  • Trust, but verify. Review earnings reports and company announcements. Is the trend intact? Are they generating positive revenue, earnings, and cash flow? Is the company innovating and producing products and services people will use? If so, hold on to the stock.
  • Keep an eye on management. Steve Jobs, Bill Gates, Jeff Bezos, and Elon Musk are legendary leaders and visionaries. A strong management team is a crucial component to the success of a company, so keep an eye on their lieutenants as well. You can track critical employees on Morningstar or Yahoo! Finance.
  • Take profits. It’s okay to take profits after a strong run. Apple and Tesla announced stock splits a few weeks ago, and their stock prices have risen 31% and 47%, respectively. After a substantial gain, it’s okay to trim your holdings to lock in a profit.
  • Average up. Most people are comfortable averaging down, but few like to average up. What is averaging up? Let’s say you purchased 100 shares of Apple at $150 in 2019, and you bought more at $250 and $350 and $450. Your average cost is $300. Apple is currently trading for $500 per share, so your gain is $200, or 67%, despite buying the stock at higher prices.
  • Sell it. If your company’s fortunes change, sell it, and move on to a new company. There are thousands of companies and investment opportunities, so don’t get wedded to a stock.

Owning great companies is one of the best ways to create wealth and concentrating your holdings into a few stocks can magnify your returns. But, it’s essential to review your investments regularly to make sure they’re meeting your goals and objectives. Do not ignore fundamentals and pay attention to popular trends. Times change and being flexible to pivot to new ideas will allow your account to grow over time.

The bigger they are, the harder they fall. ~ Anonymous

August 26, 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 Hypotheticals – April 1983 to July 2020

[2] Dimensiional Funds

[3] YCharts

[4] Ibid

October 19, 1987.

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Today marks the 30-year anniversary of Black Monday when the Dow Jones Industrial Average fell over 22%!  It was a dark day as stocks fell to historic lows.  Despite the drop, the Dow finished the year with a gain of 2.26% and it climbed 11.85% in 1988 and 26.96% in 1989.

In 1937, during the Great Depression, Sir John Templeton purchased $100 worth of every stock trading below $1 per share.  A few years later he sold most of them for a substantial profit.[1]  The Standard & Poor 500 fell 35% in 1937.  It’s not easy, but when investors are in a panic selling mode it allows the patient investor to buy great companies at bargain prices.

Here are a few stocks you could’ve purchased on Black Monday.[2]

  • Coca-Cola: A $10,000 investment in KO is now worth $453,514.
  • Boeing: A $10,000 investment in BA is now worth $556,532
  • McDonald’s: A $10,000 investment in MCD is now worth $590,529.
  • Johnson & Johnson: A $10,000 investment in JNJ is now worth $634,413.
  • Apple: A $10,000 investment in AAPL is now worth $1.44 million.

Will we ever experience another Black Monday?  Forever is a long time so it’s likely we’ll witness another dramatic drop.  When the market does fall again, here are a few survival tips to help you navigate the correction.

  • Buy. Stocks sell for bargain prices when individuals sell out of fear.  I’d recommend creating a list of companies you want to purchase before the correction arrives so you’ll be ready to pounce on your ideas during the market turmoil.
  • Wait. If you’re not sure what to do during a market meltdown, don’t do anything.  Your best strategy may be to wait until the storm passes and then you can make changes to your portfolio.
  • Diversify. A diversified portfolio will help reduce the losses in your portfolio.  In 1987 the international index (MSCI-EAFE Index) was up 24.6% and the one-month T-Bill was up 5.5%.[3]
  • Rebalance. During a steep stock market drop your asset allocation will change significantly.  Rebalancing your portfolio will return your account to its original allocation.
  • Review. Reviewing your investment plan and financial goals is always recommended, especially when the stock market is falling.  Are your goals still intact or do you need to make changes?
  • Think. What’s the root cause of the correction?  Flash crash?  Political event? Failed merger?  Knowing the reason behind the crash may give you some time to think about selling your holdings.

From October 2007 to March 2009, the Great Recession, the Dow Jones Industrial Average fell 53.5%.  It bottomed on March 9, 2009 and since then it has climbed 257%.

Corrections are petrifying but markets have always recovered.  In fact, today, the Dow Jones closed at an all-time high of 23,157!

“Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market.” ~ Warren Buffett

Bill Parrott is the President and CEO of Parrott Wealth Management.  For more information on financial planning and investment management, please visit www.parrottwealth.com.

October 19, 2017

Note:  Your returns may differ than those posted.  Past performance isn’t a guarantee of future performance.

[1] http://www.investopedia.com/university/greatest/johntempleton.asp, By Nathan Reiff, website accessed 10/16/17.

[2] Morningstar Office Hypothetical Tool – 10/19/1987 to 9/30/2017.

[3] Dimensional Funds 2017 Matrix Book.

Who Knows?

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This week marks the 30-year anniversary of Black Monday when the Dow Jones Industrial Average fell 508 points or 22.5% and experts are still searching for answers as to why the market crashed.  The culprit has been pinned on portfolio insurance which is ironic because portfolio insurance is designed to protect portfolios when stocks fall.  Professional investors needed a villain because they couldn’t tell their clients they didn’t have a reason for the stock market correction so portfolio insurance has been accused of the crime.  However, no one really knows why the market fell on that dark day in October.

Last week Richard Thaler was awarded the Nobel prize in economics for his study of behavioral economics and finance.   He studies the psychological side of economics and tries to understand why investors behave in certain ways.  In his book Misbehaving he said, “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”

Confidence runs high on Wall Street because investors want answers, they want the truth.  CNBC commentators, money managers, traders, and pontificators give surefire forecasts.  These experts claim to know the direction of stock prices, interest rates and oil.   They’re not only certain in the direction of their trade but they also know when it will happen.   These individuals have big microphones and a wide audience so their word is accepted as Gospel like Adam Sandler in the Wedding Singer, “Funny, I have the microphone and you don’t so you will listen to every damn word I have to say!”

When their predictions don’t work or fall short, their explanation is usually blamed on some unforeseen event, an event no one could have foretold.   The unseen event is why no one will ever be able to predict market moves.  After all, if we knew an event was going to happen, we’d take steps to protect ourselves against the event.   For example, Warren Buffett sold 90% of his Walmart holdings during the fourth quarter of 2016.[1]  Walmart is up 15.25% for 2017.  Do you think the greatest investor of all time would have sold Walmart if he knew it would rise 15%?

Wall Street is not alone in their definite predictions.   College pre-season football analyst, political pundits and weatherman join the list of experts who must be right early and often.  The listening audience wants to know the experts are in control and all knowing.

I’m an advisor and financial planner so I’m supposed to know the unknown.  I’m supposed to be certain in a sea of uncertainty.   Predicting the direction of the stock market should be easy like trying to forecast the flight pattern of a butterfly on a windy day or the spending habits of teenagers.   I want to have all the answers but I don’t.  I don’t know what will happen tomorrow let alone ten years from now.

Despite the ambiguity of forecasts and predictions, I do know a few things that can give you a long-term advantage.

  1. Save more and spend less. You control how much money you spend and how much money you save.   If you save more than you spend, your assets will grow.
  2. Plan for success. A financial plan can give you a framework to help strengthen your financial foundation.   Your plan can help with things like retirement or education.
  3. Stocks outperform bonds. For the past 90 years stocks have outperformed bonds by a ratio of 45:1.   If bonds are worth $10,000, then stocks are worth $450,000.   If your time horizon is longer than 10 years, you’d be wise to own a large basket of stocks.[2]
  4. Diversification will reduce risk. A portfolio allocated across large, small and international stocks mixed in with bonds and cash will reduce the risk for your investments.  For example, a portfolio with 60% stocks and 40% bonds and cash will reduce your risk 35% when compared to an all stock portfolio.[3]
  5. Time wins. A long-term view will improve your investment results.  Trying to time the market or actively trade your account is a loser’s game.  Over 20-year rolling periods (1980 – 2000, 1981 – 2001, and so on) the stock market has made money 100% of the time.  Since 1926 there have been 72 rolling periods.[4]
  6. Rebalance your account.  Rebalancing your account will help reduce risk and keep your original asset allocation in check.   For example, if you start the year with a portfolio of 60% stocks and 40% bonds and by the end of the year it moved to 80% stocks and 20% bonds, it should be rebalanced back to your original 60%/40% split.

For the record, if you invested $100,000 in the Vanguard S&P 500 index fund on October 19, 1987, your investment is now worth $2,100,000 and generated an average annual return of 10.71%.[5]

Will the stock market crash soon? Who knows?

“The market can stay irrational longer than you can stay solvent.” ~ John Maynard Keynes.

“Therefore, keep watch, because you do not know on what day your Lord will come. ~ Matthew 24:42

Bill Parrott is the President and CEO of Parrott Wealth Management.  For more information on financial planning and investment management please visit www.parrottwealth.com.

October 14, 2017

Note: Your returns may differ than those posted in this blog and past performance is not a guarantee of future performance.  Securities involve risk and are not insured or guaranteed.

 

[1] http://www.businessinsider.com/why-warren-buffett-sold-walmart-2017-3, John Szarmiak, March 13, 2017.

[2] Dimensional Fund 2017 Matrix Book.

[3] Riskalyze

[4] Ibbotson®SBBI® 2015 Classic Yearbook.

[5] Morningstar Office Hypothetical Tool, 10/19/1987 – 9/30/2017.