Fish On!

I recently returned from a fly-fishing trip with a few mighty men. It was a quick trip – one day, to be exact. We fished on private water in Colorado, and it was an epic day. We caught several fish in a pristine river under bright blue skies.

As the day progressed, we adjusted our flies under the watchful eyes of our guides. As we made the changes and the water warmed up, we caught more fish. As the flies got smaller, the fish got bigger. The tiniest flies produced the best results.

Most investors allocate a hefty portion of their portfolio to large-cap stocks like Apple, Amazon, or Microsoft. These behemoths have produced stellar returns for years, but, at one time, they were small-cap stocks started by a couple of guys with big ideas.

Why should you invest in small-cap stocks? Well, for one, they outperform large companies. For the past year, small companies and micro-caps trounced large-cap stocks. Micro-caps and small-caps are up 59% and 56%, respectively; large-cap stocks have risen 34%.[1]

Since 1995, micro-cap stocks generated an average annual return of 11.7%, small-caps returned 11.3% per year, and large-cap stocks averaged 10.8% per year.[2] A $10,000 investment in micro-caps grew to $189,000 compared to $151,000 for large-caps.[3]

Large companies are household names, and investors are comfortable owning them in their portfolios. The old saying on Wall Street is that you would never get fired for recommending IBM. But what about buying Atkore, Fabrinet, Exponent, or Itron? These names are not well known.

Identifying a diamond in the rough is challenging because we don’t know which company will become the next Apple or Microsoft. So, the best way to participate in this category is to buy a mutual fund or ETF. For example, Dimensional Funds small and midcap funds own more than 3,700 companies.

If you want to generate big returns, think small!

He put another parable before them, saying, “The kingdom of heaven is like a grain of mustard seed that a man took and sowed in his field. It is the smallest of all seeds, but when it has grown it is larger than all the garden plants and becomes a tree, so that the birds of the air come and make nests in its branches.” ~ Matthew 13:31-32

June 7, 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] YCharts

[2] Ibid

[3] Ycharts: 1/1/1995 to 6/4/2021 – DFSCX, DFSTX, VFAIX

Match the Hatch.

Astute fly fishermen and women match their fly to the insect to catch more fish and this is referred to as “match the hatch.”  For example, if you’re fishing in area with grasshoppers, you want a fly that looks like a grasshopper.  Entomology is the study of insects so a basic understanding of it will help fly fishermen and women have a better experience when they’re on the water.

Investors should try to match their hatch as well.  An investor who wants to improve their odds for investment success should match their hopes, dreams and fears to their investment portfolio.

Completing a financial plan is one way to increase your odds of financial success.  Your plan will assist you in identifying and quantifying your financial goals.  The discovery period for your financial plan is just as important as the finished product.  The more detailed and specific your goals and financial information, the better your financial plan will be.  Of course, your plan will only be as good as the data you put into it so spend some time in complying your information.

Knowing your risk tolerance is another important factor for your investment success.  However, trying to understand how much risk you’re willing to take is challenging.  During a rising market investors are willing to take on a high degree of risk.   When markets fall, investors are risk averse and aren’t comfortable owning risk assets.   How much risk can you handle?  One benchmark is to review your trading habits during the Great Recession of 2008.  During the 2008 market meltdown, did you hold on to your investments or did you sell your holdings?  If you didn’t sell your investments, you’re probably a growth oriented investor willing to withstand a high level of risk.  If you sold your investments, you’re probably a conservative investor.   In addition to your actions, you can also complete a risk tolerance questionnaire or two.  Riskalyze and FinaMetrica are two services that can help you identify your risk tolerance level.

Once you’ve identified your financial goals and risk tolerance, the next step is to make sure your investments are aligned with these metrics.   If your investments are united with your financial goals and risk level, then you’re more likely to stay invested through multiple market cycles.

What should you do if your financial plan, risk tolerance and investments are out of whack?  If your plan isn’t in sync, then changes must be made.  Your investment portfolio will need to be rebalanced and aligned to your financial plan and investment goals.  The portfolio adjustment might be a minor tweak or a major overhaul.   If your plan calls for a major overhaul, pay attention to taxes, fees or penalties before you make any changes.

Catching a fish with the right fly is a thrilling experience.  However, if you’re fishing with the wrong fly, you need to change it as soon as possible to the correct fly so you can catch more fish.

There is no greater fan of fly fishing than the worm. ~ Patrick F. McManus

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

October 13, 2017



A Market Runs Through It.

Fly fishing is addicting.  It’s more religion than a sport for many.   The attraction to fly fishing, in addition to catching the fish, is all the gear – rod, real, line, leaders, waders, snips and flies.

A River Runs Through It isn’t a fly fishing movie, per se, but it does show amazing scenes on the Blackfoot River.  If the fly fishing scenes in the movie don’t get you excited, nothing will.

The river I fish is nothing like the Blackfoot.  It’s a slow, meandering river. The water is dark and murky and I have no idea where the fish are hanging out.  I cast a lot and I’m forced to be patient.  I cast. I wait.  I cast. I wait.  On occasion I will pull a nice little fish out of the water.

What does fly fishing have to do with investing?   A lot.

My time on the water begins the evening before when I build my plan. Where to fish?  What rod to use?  What’s the best fly?  Planning is important.  It doesn’t matter if you’re fishing or investing a thoughtful plan will increase your chance of success.  Your plan will make both activities more enjoyable.

Investing, like fishing, requires persistence.  Persistence brings patience.  Patience gives you discipline.  Discipline will make you a better investor.  It would be nice to catch a 20-pound bass with every cast but I know it’s not likely to happen.  On most casts I come up with air and water.  It’s important to keep casting because the only way to catch a fish is if the fly is in the water.

The fly is half the fun in fly fishing.  Choosing the right fly is part of the challenge.  What fly to use –   popper, dragon fly, minnow, crawfish?  I’ve used them all at one point or another.  A diversified box of flies is a must because conditions change quickly.   The markets change quickly as well.  A diversified portfolio of stocks, bonds and cash will keep you ready for most market conditions.

A wind knot is not fun.  A tangled line is downtime.  When I’m confronted with a wind knot I have two choices.  I can untangle the knot or cut the line.  I’ve done both.   During my downtime I review my goals.  Should I keep fishing?  Am I in the right spot?  Do I need to add a heavier line?  When the market corrects and your portfolio is in a knot what do you do?  You can’t ignore a wind knot when fishing.  It has to be dealt with.  A market correction is the same.  It must not be ignored.  Use a correction to review your holdings and goals.

Hiking to the lake or river can be just as fun as fishing.   Investors seem to be in a hurry to arrive at their final destination.   Take time on your journey to enjoy the view.  Investing is a lifetime event.  It doesn’t start with your first job nor does it end with your last.  Investing is generational.

Planning, persistence and long term thinking are needed for fly fishing and investing.   If you practice these things, you’ll be hooked for life.

If fishing is a religion, fly fishing is the high church – Tom Brokaw

Bill Parrott is the President and CEO of Parrott Wealth Management, LLC.