Time Frames

Warren Buffet recently published his much-anticipated annual letter to shareholders. Per usual, it was chock-full of wisdom.

Mr. Buffett started investing 77 years ago with an investment of $114.75 in Cities Service Preferred Stock. Had he invested this amount in an unmanaged S&P 500 Index fund it would have grown to $606,811 at the end of January 2019 – a gain of 5,288%![1]

He discusses deficits and gold: “Those who regularly preach doom because of government budget deficits (as I regularly did myself for many years) might note that our country’s national debt has increased roughly 400-fold during the last of my 77-year periods. That’s 40,000%! Suppose you had foreseen this increase and panicked at the prospect of runaway deficits and a worthless currency. To “protect” yourself, you might have eschewed stocks and opted instead to buy 3 1/4 ounces of gold with your $114.75. And what would that supposed protection have delivered? You would now have an asset worth about $4,200, less than 1% of what would have been realized from a simple unmanaged investment in American business. The magical metal was no match for the American mettle.”[2]

He’s no fan of gold. To be fair to the price of gold, it was fixed at $35 per ounce from 1944 to 1976 before President Nixon abandoned the gold standard.[3] Since Nixon set it free, gold has averaged an annual return of 8.8% per year. The S&P 500 averaged 8.3% per year, before dividends, during this same time frame.

Time frames matter. From January 2005 through January 2019 Gold (GLD) outperformed the S&P 500 (SPY) by 56%.  If the start date is changed to January 2009, stocks outperformed gold by 164%. Gold has posted a negative return for the past 5 years while stocks have risen 51%.[4]

Had you purchased Amazon in 2000, you would’ve lost 86% of your investment by the end of 2001. A $10,000 investment dropped to $1,421. If you told anybody you owned Amazon, they would’ve called you an idiot. However, from January 1, 2000 to January 31, 2019 it returned 2,157% to investors. The S&P 500 rose 181% during this stretch.[5]

Last year, cash outperformed stocks – a first since 1994. Since 1926 cash has generated a negative return after deducting taxes and accounting for inflation.

It’s important to watch time frames when comparing investments because it’s easy to make any investment look good for a while.  Rather than focusing on investments that appear attractive in the near term, concentrate on the ones that can help you reach your financial goals. Here are a few guidelines to help you make better portfolio decisions.

  • If you want to own gold, or some other alternative investment, limit it to 3% to 5% of your account balance.
  • Stocks outperform bonds and cash over time. If your horizon is three years or more, allocate a healthy portion of your assets to stocks.
  • International stocks make up half of the world’s equity market capitalization, so allocate a portion of your assets to companies outside of the United States.
  • If you need money in one year or less, invest in short term cash investments like T-Bills, CDs or money market funds.
  • Adding tax-free municipal bonds to your account can improve returns, especially if you’re a high-income earner living in California or New York.
  • To reduce risk, add bonds and cash to your account.
  • Rebalancing your accounts once or twice per year will keep your risk level and asset allocation in check.
  • Keep your fees low. You can check the fees of your holdings at Yahoo! Finance, Morningstar, or several more financial websites.

Mr. Buffett made a fortune by buying and holding great companies that can raise their earnings over time. His time frame has been forever. He bought investments that fit his model and shunned things that didn’t, like gold. Following the investing habits of Mr. Buffett will pay dividends.  A great place to learn about his philosophy is by reading his annual letter. Here’s the link:

http://www.berkshirehathaway.com/letters/2018ltr.pdf

“Facts are stubborn things, but statistics are pliable.” ~ Mark Twain

February 27, 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] Berkshire Hathaway Letter to shareholders, accessed 2/27/2019, http://www.berkshirehathaway.com/letters/2018ltr.pdf

[2] Ibid

[3] https://www.thebalance.com/gold-price-history-3305646, Kimberly Amadeo, 1/7/2019

[4] YCharts, GLD & SPY, accessed 2/26/2019

[5] Morningstar Office Hypothetical Report

There’s Gold in Them Thar Hills!

The California gold rush of 1849 brought millions of speculators to the Golden State in search of wealth and riches.   A few of these individuals made money but most lost everything.  It appears there is another gold rush occurring today with the returns on gold turning in a stellar 2016.  In addition, silver is also having an epic performance this year.

According to a recent Morningstar report $4.1 billion was invested into precious metal funds last week – the most ever![1]  Investors continue to chase the precious returns for gold and silver.   With gold and silver trades shining this year does it make sense to make these investments a major holding in your portfolio?  The short answer is no.   If you need proof of mutual fund flows, please review the mutual fund flows into technology funds in March of 2000 just before the Nasdaq fell 65%.

Gold is soaring with the yellow metal up over 28% so far in 2016.  The 30-year average annual return for gold has been 1.98%.   A $10,000 investment in gold in 1986 is now worth $18,007.   The five-year average annual return has been a negative 4.27%.[2]

Silver usually plays second fiddle to gold but not this year.   Silver is up 42%.  The five-year average annual return for silver has been a negative 13.5% per year.  A $10,000 investment in silver five years ago is now worth $4,842.  The thirty-year return for silver has been similar to gold with a 2% average annual return.[3]   As a point of reference inflation has averaged 2.6% since 1986.[4]

Why are these investments doing so well?  A big factor is fear.  The world appears to be a little unsettled so when fear and uncertainty are high gold and silver perform well.   As investors focus on the headlines of Brexit, Dallas and the election money continues to pour into these investment categories.   Headline risk is a main driver for the performance of gold and silver this year.

If you still have the gold bug and want to add precious metals to your account, limit your exposure to 3% or 5% of your account balance.   If your investable assets are $1 million, then your allocation to gold or silver can fall in the range of $30,000 to $50,000.

Choose my instruction instead of silver, knowledge rather than choice gold ~ Proverbs 8:10.

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

July 9, 2016

 

 

 

[1] http://news.morningstar.com/all/market-watch/TDJNMW20160708205/going-for-gold-money-floods-into-precious-metals-like-never-before.aspx, Sara Sjolin, Marketwatch, 7/8/2016.

[2] http://www.macrotrends.net/1333/historical-gold-prices-100-year-chart, accessed July 7, 2016.

[3] http://www.macrotrends.net/1470/historical-silver-prices-100-year-chart, accessed July 8, 2016.

[4] US Inflation: Changes in US CPI Index 1926 – 2015, Dimensional Fund Advisors Matrix Book 2016.