Tag: Investing

It’s Complicated

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Complicated investment strategies attract attention because investors want to get rich quickly or impress their friends. Complexity is another word for job security on Wall Street. Options and hedge fund strategies are intricate and convoluted products requiring multiple disclosures and hours of explanation to innocent investors.

My two mentors wrote covered calls and sold options for their clients, so that’s what I did as well. Why not? They were successful. We sold options because option buyers lose all their money 90% to 95% of the time. When you sell option contracts, you take the other side of the trade from the buyer or speculator. If buyers lose money, then sellers make it. An option contract is complicated to understand because you must be correct on the security, direction, timing, price, and maturity all at once, and if you’re not, you’ll lose money. In addition, you must understand the Greeks: Delta, Gamma, Theta,  Vega, and Rho. Implied volatility is another vital component of option pricing. Regardless, investors will continue to buy options, especially in a bull market.

In 2008, Warren Buffett bet Protégé Partners that a simple S&P 500 index fund would outperform five separately managed hedge funds over ten years, and the winner would receive $1 million. How did it turn out? Protégé threw in the towel before the end of the contest date because the hedge funds were getting trounced. At the time, the index fund was up 85.4%, while the average return for the hedge funds was 22%.[1] Simple wins.

Several Nobel prize winners and Wall Street Legends founded Long Term Capital Management in 1994, and in 1998, they brought the global financial markets to their knees with their complex trading strategies. The firm relied on complicated bond arbitrage strategies, and when Russia defaulted on its debt in 1998, it destroyed the fund and required a $3.6 billion bailout from several banks.[2] Roger Lowenstein wrote an excellent book about this ordeal, When Genious Failed. In this case, the long-term time horizon was about four years. Long-term US Government bonds averaged 9.52% annually during this same period.[3] Safe and simple.

Complicated investment strategies look good on paper because they promise huge profits and outsized gains, but it’s probably too good to be true. Most investors would benefit from a simple strategy of owning low-cost index funds in a diversified portfolio rather than focusing on byzantine investment strategies.

Vanguard’s Balanced Index fund is simple and has performed well over time. The fund’s allocation is 60% stocks and 40% bonds and has returned more than 900% for the past three decades, or about 8% annually. A $100,000 investment is now worth $1 million – not too shabby.

To succeed as an investor, focus on simple solutions and avoid complex strategies.

Everything should be made as simple as possible, but not simpler. ~ Albert Einstein

August 3, 2023

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 your asset level.

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. Prices and yields are for today only and are subject to change without notice.

[1] https://www.investopedia.com/articles/investing/030916/buffetts-bet-hedge-funds-year-eight-brka-brkb.asp, David Floyd, June 25, 2019.

[2] https://en.wikipedia.org/wiki/Long-Term_Capital_Management

[3] Source: Dimensional Fund Advisors Returns Web, 1/1/1994 to 12/31/1998.

The Magnificent Seven

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Seven stocks are generating most of the returns this year, named the Magnificent Seven. Meta, Apple, Amazon, Alphabet, Microsoft, Nvidia, and Tesla are the seven companies, and they’re delivering an Oscar-worthy performance.

These seven stocks are up 90% year-to-date as a group, led by Nvidia, up 191%. The group’s laggard is Alphabet because it’s “only” up 35%. The drive to artificial intelligence (AI) and the Fed’s projected slowdown in raising interest rates is fueling the move in these stocks.

It seems obvious that these stocks are rallying because AI is everywhere, and everyone knows the Federal Reserve will stop raising interest rates eventually. However, these seven stocks were down 45% in 2022, with Meta and Tesla falling 65%. If these companies were poised to soar this year, why did they crash last year?

Ycharts tracks 9,820 US stocks. The Magnificent Seven represents 0.07% of the companies in its database. Is it possible to identify the seven best-performing stocks before they move higher? I doubt it. And if it were, how come no one mentions Propel Media, Sky Petroleum, Freedom Holdings, Arno Therapeutics, Ai Technology Group, Diamond Holdings, or Pineapple Express? These stunning seven stocks are up 41,000% this year!

Owning the best-performing stocks before they move higher is mostly luck. Finding the needle in the haystack consistently is impossible, but investors keep trying. Why not. If you find a few companies before they take off, you can make a lot of money.

Here are a few ideas to help you find hidden gems.

  • Diversify your assets across multiple stocks and sectors. Widen your net.
  • Invest in moonshots. Moonshots are risky and speculative, but you can generate significant returns if they pay off. Limit your allocation to 3% to 5% of your investment portfolio.
  • Look for stocks with solid moats and little competition.
  • Read as much as possible to find innovative companies. In addition to reading popular periodicals like the Wall Street Journal or Barron’s, look to trade magazines and industry journals.
  • Practice patience and courage. It takes strength to own the best-performing companies because they’re volatile. For example, Amazon fell 95% in 2001. Last year, Tesla slid more than 70% from its previous high. If you own stocks at the peak, you must hold them in the valleys.
  • High-flying stocks are expensive. The average PE ratio for the Magnificent Seven is 106. You will pay up in valuation to buy solid-performing stocks. Coca-Cola is a company that delivers consistent performance, and the market rewards it with a high multiple. The 10-year average PE ratio for Coke is 27.29. A company with a low PE ratio could be a value trap. For example, the average PE ratio for Intel is 10.6, and the stock is down 47% from January 2000, 23 years!
  • Review and rebalance. Stocks and trees don’t grow to the sky, so reevaluate your holdings often. Do you remember Sears, Roebuck & Company? It was once the most dominant company in America, now it’s a former shell of itself, and the stock is worthless.
  • Ride your winner for as long as possible. One Secretariat is worth more than a thousand average racehorses. If you own a great company, let it run.

They fought for the ones who couldn’t fight for themselves, and they died for them, too. All to win something that didn’t belong to them. It was – magnificent. ~ Emma Cullen, Magnificent Seven

July 8, 2023

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 your asset level.

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. Prices and yields are for today only and are subject to change without notice.

Four Bond Strategies

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Bonds don’t get much love, especially after last year’s rout, but they are vital to your investment success. Here are four investment strategies.

Retirement

Bill Bernstein, author and investment professional, has said, “If you’ve won the game, stop playing.” Mr. Bernstein allocates twenty years’ worth of expenses to bonds to remove equity risk from his portfolio. Reducing risk in retirement is paramount, and bonds can help you achieve this goal. Suppose you spend $100,000 annually, then twenty years’ worth of expenses is $2 million before inflation and $2.7 million after. If twenty years is too long, consider fifteen, ten, or five years for your bond exposure. Also, this strategy determines your asset allocation. For example, if you own a $5 million portfolio and allocate $2 million to bonds, you can invest the remainder in equities.

Pre-Retirement

Allocate a portion of your assets to bonds if you are three to five years from retirement. If your annual expenses are $100,000, transfer $300,000 to $500,000 to bonds. Your bond portfolio can provide safety and income if you retire during a bear market. If you retire in a down market like 2000 or 2008, your fixed-income portfolio allows you to cover your expenses without selling your stocks at significant losses. It also gives your equities time to recover.

Major Purchase

Are you buying a new home, car, boat, or plane? Do you need to make a tuition payment? If so, buy bonds to match the liability. For example, if you need $200,000 for a down payment on a new home next year, buy $200,000 worth of bonds that mature simultaneously. The bonds remove uncertainty and equity risk ensuring that your funds will be available when you need them most.

Peace of Mind

Equities are volatile, especially last year. The stock market regularly corrects 10% or more and crashes 30% or 40% every few years, and they are not for the faint of heart. If you don’t want extreme volatility, allocate a larger portion of your assets to bonds. Buying bonds can reduce your long-term returns, but knowing your assets can give you peace and security.

Bonds are a valuable tool if used correctly, and they can enhance your portfolio in certain situations.

Bye, bye, and buy bonds!

An investment in knowledge pays the best interest. ~ Benjamin Franklin

May 2, 2023

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 your asset level.

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. Prices and yields are for today only and are subject to change without notice.

Should You Buy US Treasuries?

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The one-year US T-Bill currently yields 5.1%. It’s an attractive rate compared to the 1.15% the S&P 500 has returned over the past two years, and it’s guaranteed. Stocks are volatile, interest rates are rising, the Ukraine War rages on, and China is a constant threat, so buying T-Bills sounds like an excellent investment choice. It seems like a no-brainer.

The current rate is the highest since 2007 and well above its 30-year average of 2.57%. If you invest $1 million in a one-year US T-Bill, you’ll earn $51,000 annually at today’s rate – not too shabby.

Let’s explore reasons to buy a one-year US Treasury Bill.

  • Buying a T-Bill makes sense if you need your money in one year or less, and it is a wise investment.
  • You can earn more interest in a T-Bill than you can from your checking account, savings account, CD, or money market fund. If you are sitting on a large cash balance, buy a T-Bill.
  • If you’re worried about a stock market crash or a financial disaster, buy a T-Bill. The US Government guarantees a T-Bill and offers tax benefits if you live in a state with an income tax, and it’s an excellent hedge for a stock portfolio.

Let’s explore reasons not to buy a one-year US Treasury Bill.

  • The current inflation rate is 6.41%, so you lose 1.31% annually.
  • The T-Bill produced an average annual return of 1.12% over the past thirty years, while inflation averaged 2.67%, so your net yearly loss was 1.55%.
  • Over the past thirty years, the S&P 500 has increased 811%, inflation 121%, and T-Bills 39%. The S&P 500 has outperformed the one-year T-Bill by 772% since 1990.
  • Buy stocks if your time horizon is three to five years or more.

Consider buying a T-Bill if you need the money in one year or less, as a stock market hedge, or if you hold a significant cash position. A T-Bill can be part of a diversified portfolio, but it’s a poor choice for creating generational wealth.

Despite the headline news and recent market turbulence, stocks are still the best investment for the long run.

Inflation is taxation without legislation. ~ Milton Friedman

February 25, 2023

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 your asset level.

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. Prices and yields are for today only and are subject to change without notice.

Inflation or Recission?

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Inflation is climbing, while some market indicators are predicting a recession. The market gauges are in flux, leaving investors confused and concerned about their financial future. Which battle should you fight – inflation or recession?

The current inflation rate is 6.41%. The rate is down sharply from its peak but up significantly from the low. The recent readings indicate a flattening, or, in other words, the inflation rate may hover around the current level for a while. The 6.41% inflation rate is crushing, and at that rate, the value of your dollar will drop by 46% over ten years as the value of goods and services will continue to rise. Have you purchased eggs lately?

On the other hand, a few market indicators forecast a recession. The 10-2 Year Treasury Yield Curve is inverted, where the yield on the US 10-Year Treasury is lower than the yield on the US 2-Year: the 10-year yields 3.86%, the rate on the 2-year is 4.62%, a difference of negative 0.76%. What does this mean for investors? Historically, when the yield curve inverts, a recession follows, but it’s not instantaneous, and it could be several months if one arrives, if at all.

What should you do to protect your portfolio from inflation or a recession? Let’s look at a few ideas.

  • Stocks are an excellent hedge against inflation. If a company raises its prices to combat inflation, it will eventually earn more money, and when they make money, you could also. For example, Microsoft earned $1.21 per share in 2006 and $9.21 per share in 2022, an increase of 661%. The price of Microsoft increased by 817% during that period.
  • Bonds are an excellent hedge against a recession. If a downturn arrives, then interest rates will fall. The Federal Reserve is raising interest rates now but will lower them if our economy falters, and when rates drop, bond prices rise.
  • Cash is a short-term haven. A robust cash allocation can protect your portfolio against a stock market correction, but it will hinder the growth of your portfolio. US Treasuries now offer an attractive rate of nearly 5%, allowing you to earn some interest if you decide to sell your stocks or long-term bonds.
  • Alternative investments may protect your portfolio against inflation or a market correction. A real estate investment trust can perform well when inflation rises; everybody loves real estate primarily because their homes have appreciated over time. Gold is a decent hedge against a stock market crash, but you must time it correctly. Despite popular opinion, I’m not fond of gold as an inflation hedge. The inflation rate has jumped 175% over the past three years, and gold has increased by 12%.

Owning a globally diversified portfolio will help you fight inflation and a recession. What is a globally diversified portfolio? It is one where you own US stocks, large companies, small companies, international holdings, bonds, cash, and alternative investments. Some industry experts refer to this as an all-weather portfolio. The portfolio works well because the individual components react to changing market conditions at different times, and it’s impossible to time the market or accurately predict inflation or a recession.

To fortify your portfolio, diversify your investments and follow your plan.

The is no such thing as bad weather, only different kinds of good weather. ~ John Ruskin

February 21, 2023

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 your asset level.

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. Prices and yields are for today only and are subject to change without notice.

How To Survive A Stock Market Crash

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The first rule for surviving a stock market crash is not to panic, and the second is not to sell on the day of the correction. Markets typically rebound after a sharp sell-off as investors hunt for bargains, so wait before liquidating your portfolio. For example, two days after the 1987 crash, the S&P 500 jumped 15%, and the Dow Jones climbed nearly 20% from December 1929 to March 1930, following Black Tuesday, October 29, 1929. You probably won’t recover all your losses, especially if you bought stocks the day before the correction, but it will help.

The S&P 500 has fallen 23% this year, and the NASDAQ is down 31%. Will markets fall another 25% or 30% from here? It could, I guess, but no one knows for sure, especially the experts. It would be one of the worst corrections in history if it did.

One popular money manager said, “We’re being forced to choose between two overpriced assets. That is not always a terrific choice to make because there is a third choice, and that is, don’t play the game and hold money in cash.” He also recommended investors buy commodities for the next ten or twenty years and encouraged investors to sit in cash until stocks fell. His comments occurred in 2010. How did his prediction turn out? Since 2010, the S&P 500 soared 204%, while commodities dropped 9%.[1]

A famous economist said, “US stocks will fall, and the government will nationalize more banks.” He predicted a correction in 2009 after The Great Recession, where stocks dropped 53%. The S&P 500 has climbed 343%, and the government has not nationalized more banks since his comments.[2]

A prominent author wrote books about a depression starting in 2009 and a stock market crash in 2011, and neither happened. The market climbed more than 300% since 2009 and rose 2.1% in 2011.[3]

The S&P 500 is up 151% this century despite numerous corrections. The index dropped 46% from 2000 to 2003, 53% from 2007 to 2009, 30% during COVID, and it’s currently down 23%. Most investors consider a correction or crash a one-day event like October 19, 1987, or October 29, 1929. However, stocks routinely fall 10% or 20%, and the market usually finishes in negative territory about once every four years. The last down year occurred in 2018 when the S&P 500 fell by 4.4%.[4]

In the twelve months preceding Black Tuesday, October 29, 1929, the S&P 500 soared 58%, and from September 1926 to August 1929, it generated an average annual return of 40.3%. The S&P 500 rose 167% during the preceding five years and was up 35% through August before Black Monday, October 19, 1987. After the correction, the S&P started to recover, and by January 1990, it erased all its losses by rising by 57%.[5] Before this correction, the market was up 81%. Despite a crash, you may still have significant capital gains if you have been a long-term investor. 

Corrections are scary, violent, and short-lived, so here are a few suggestions to help you survive a stock market crash.  

  • Buy US T-Bills. The one-year US T-Bill currently yields 4.2%, and it’s guaranteed if you hold until maturity.
  • Fortify your emergency fund. We recommend an emergency fund covering your household expenses for three to six months. If you’re concerned about a further drop in the market, extend the duration to twelve to eighteen months.
  • Diversify your assets. A balanced portfolio of stocks, bonds, and cash will soften the blow of a market drop. During market drops, bonds perform well. In 2008, long-term US government bonds rose 25.9%, while stocks dropped 45%.
  • Buy stocks. Buy stocks if your time horizon is three to five years or more. According to Dimensional Funds, the 5-year average cumulative return after a 20% decline is a 72% gain.
  • Rebalance your portfolio. If you rebalance your portfolio, you can buy investments at lower prices. Rebalancing your accounts keeps your risk level and asset allocation in check.
  • Eliminate margin. One way to lose more money than you intended is to use leverage. If you margin your securities, eliminate it. Margin will make a bad situation worse.
  • Think long-term. You may own your investments for years, maybe decades, before you need the money, so think generationally.
  • Markets recover. The stock market has always recovered! It may take time, but they eventually rebound as they did in 2020, 2018, 2008, 2002, 2001, 2000, 1990, 1981, 1977, 1974, 1973, 1969, 1966, 1962, 1957, 1953, 1946, 1941, and 1929.

Stock market corrections come and go, and the market is a long-term wealth creation machine occasionally interrupted by short-term pullbacks. Do not fear a downdraft. Instead, use it as an opportunity to buy excellent companies or funds at enhanced prices.

I’ve done a lot of thinking about fear. For me the crucial question is not how to climb without fear-that’s impossible- but how to deal with it when it creeps into your nerve endings. ~ Alex Honnold

September 26, 2022

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 you 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. We have waived our financial planning fee for the remainder of the year, so your cost is $0.00.

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.cnbc.com/2010/11/11/have-cash-wait-for-stocks-to-fall-jeremy-grantham.html, Michelle Lodge, November 11, 2010

[2] https://www.cbsnews.com/news/nouriel-roubini-misses-another-prediction/, Larry Swedroe, May 20, 2011

[3] The Great Depression ahead, 2009 and the The Great Crash Ahead, 2011, both written by Harry Dent

[4] YCHARTS

[5] Dimensional Fund Advosrs Returns Web

Take A Flyer?

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Mark Cuban invested $20 million into 85 companies on Shark Tank. Mr. Cuban recently tweeted, “On a cash basis, I’m down on my Shark Tank Investments.”[1] He joined the show in 2011, and if he had invested in the Vanguard S&P 500 Index Fund instead, he could have made 214%! However, that’s not the point. Mr. Cuban’s net worth is $4.7 billion. The Shark Tank investments represent about a half percent of his total net worth or $5 per $1,000. Big whoop. If one of the companies turned into the next Amazon, Microsoft, etc., his investment would have increased significantly.

Global markets continue to trade down, looking for a bottom. In the carnage, there are several companies worth buying today, but you won’t know if you got a bargain until many years from now. You will miss excellent opportunities if you wait until the market recovers or the economy improves. So, the ideal time to buy great companies is when everyone else runs for the hills.

Are you ready to take a flyer? Can you invest a half percent of your net worth to buy a few beaten-down companies? Can you spare $5 from your $1,000 nest egg?

Here are a few suggestions to help you find a few diamonds in the rough.

  • Identify companies that are trading well below their 52-week high. The market has decimated many great companies, including Amazon, Disney, Medtronic, MMM, Nike, eBay, Starbucks, and  FedEx. It’s possible to find stocks trading down 20%, 30%, or more from their all-time highs.
  • Look for companies with solid balance sheets, consistent earnings, revenue, free cash flow, and low debt. In addition, locate companies with robust profit margins and return on invested capital. A few stocks in this category are Apple, Microsoft, Coca-Cola, Lululemon, Fastenal, and Tractor Supply.
  • Screen for companies with robust dividends and a history of increasing their payouts. Abbvie, Amgen, Home Depot, Lockheed Martin, and T.Rowe Price are a few stocks to make this list.
  • Try to find new companies destroyed in the downturn. Zoom, Docusign, Pinterest, Doordash, Snowflake, and Yeti are down significantly this past year but could rebound in the future.
  • Do you have any hobbies – hiking, cars, travel? Several stocks like Garmin, Ferrari, Etsy, or Booking Holdings can fuel your pursuits.

A well-balanced portfolio diversified across asset classes and countries is an excellent way to create generational wealth. Saving money regularly while reducing spending is a blueprint for a profitable future. Investing in low-cost mutual funds or ETFs has proven successful. But taking a flyer now and then or speculating with a few dollars could produce significant gains if you choose wisely. If you strike out or miss the mark, your venture won’t destroy your financial foundation.

Are you ready?

Life all comes down to a few moments. This is one of them. ~ Bud Fox

July 26, 2022

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 you 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. We have waived our financial planning fee for the remainder of the year, so your cost is $0.00.

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. I like watching Shark Tank, and Wall Street was one of my favorite movies.

[1] https://www.cnbc.com/2022/07/26/mark-cuban-shark-tank-investing-strategy-isnt-always-making-money.html, Tom Huddleston, Jr. July 26, 2022

Invest Overseas?

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A few years ago, my family spent three weeks traveling around Europe. We trekked from Edinburgh to Rome, with several stops in between. We saw amazing, and sobering sites, including Edinburgh Castle, the Tower of London, Dachau, the Eifel Tower, The Louvre, the Sistine Chapel, the Last Supper painting, and the Colosseum. It was a trip to remember

It’s an excellent time to visit Europe because the Euro and the Dollar are trading at parity, meaning there is no premium to travel overseas. When I went to Europe, the Euro was trading at a 30% premium to the dollar, so it wasn’t cheap.

Visiting foreign soil is a great way to expand the body, mind, and soul. Mark Twain said, “Travel is fatal to prejudice, bigotry, and narrow-mindedness.” There are numerous benefits to leaving our homeland, but what about investing in international companies?

I recently talked with a fellow financial planner, and we were discussing how the S&P 500 crushed international investments for the past eight years by more than 100%. In fact, the MSCI EAFE (Europe, Australia, Far East Asia) index has lost money since 2014. If you own a diversified portfolio of stocks, bonds, and funds, you probably have international exposure and are likely not happy with the performance. International markets account for 40% of the global market capitalization, so don’t ignore a good chunk of global companies.

However, the S&P 500 has not always dominated international stocks. From 1970 to 2012, the MSCI EAFE  index beat our popular index. Before the Great Recession in 2007, the EAFE outperformed the S&P 500 by more than 710% since 1970. From 2002 to 2021, the S&P 500 was the best performing market once when it jumped 12.7% in 2012. Last year our market was up 26.5%, but Austria soared by 41.5%.[1]

International small-caps also bettered the S&P 500. From 1997 to 2012, Dimensional Funds International Small Company Fund (DFISX) beat the S&P 500. Historically, international small-cap stocks outperform large caps, and from 1970 to 2021, they averaged 14.2% per year, compared to 10.2% for the S&P 500.[2]

And, don’t forget, the S&P 500 lost 9% from 2000 to 2010. The index produced a negative return for ten years!

Like most markets, Europe is trading in negative territory, and they’ll continue to feel the impact of the war in Ukraine. The Eurozone economic statistics are similar to ours. Their GDP grew by 5.4%, and ours jumped 3.5%. Their inflation rate is 8.6%, and ours is 9.06%.[3] On a valuation basis, international markets are cheap relative to our indices.[4]

Diversified portfolios need large, small, domestic, and international holdings to be successful over time, so don’t try to time the market or chase returns because no one knows which market will be better than the next from year to year. A suggested allocation to international investments is 10% to 25%, depending on your risk tolerance and willingness to mind the gap.

What goes down usually goes back up if you’re willing to be patient and don’t hit the panic button. ~ Mark Mobius

July 23, 2022

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 you 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. We have waived our financial planning fee for the remainder of the year, so your cost is $0.00.

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. I enjoyed the train ride from Germany to Rome as we traveled through the Swiss Alps – stunning scenery.

[1] Dimensional Funds Matrix 2022 Matrix Book

[2] Ibid

[3] YCHARTS

[4] https://www.putnam.com/newsroom/post/perspectives/6842-just-how-cheap-are-european-equities/

What’s Under The Hood?

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The gear heads at my high school loved to pop the hoods of their muscle cars and gawk over the engines. Most were pristine on the outside but lousy on the inside; it was impossible to tell until the hood was agape. Likewise, it’s similar to investment models – on the outside, they all look the same, but when you look under the hood, they’re radically different.

The standard asset allocation model is 60 percent stocks and 40 percent bonds, but what does it mean? What constitutes the sixty percent, and how is the remaining 40 percent invested? Investment models vary from firm to firm and are not equal.

Our sixty – forty models hold funds managed by Dimensional, Vanguard, and Blackrock, and sixty percent of the portfolio invests in stocks diversified by size, type, sector, category, and country. The funds own thousands of companies, including Exxon, Pfizer, Amazon, Apple, Amgen, Dollar Tree, and Matador Resources. Technology is our largest allocation, followed by financial services and industrials. The United States accounts for most of the assets, followed by Europe, then Asia.

Our forty percent bond allocation is split evenly between corporate and government bonds with an average maturity of eleven years. We recently extended the bond maturities because of rising interest rates, which is counterintuitive. The last time we adjusted our bond holdings was March 2020, during COVID, when we sold most of our long-term bonds and bought short-term bonds with an average maturity of two to three years. It was a profitable trade because interest rates were falling, and we preserved capital with our short-term bonds as rates started climbing. Hopefully, we’re correct again – time will tell.

We use TD Ameritrade’s iRebal platform and screen our portfolios weekly, looking for changes to our allocations because we don’t want to get too aggressive or too conservative at the wrong time. We aim to maintain a close relationship with our benchmarks to keep our client’s risk tolerance in check. If we find portfolios that deviated from our pre-set tolerance bands, we rebalance them back to their original allocation.

As you invest and build your portfolio, check your fund holdings, allocation, and fees to ensure they align with your financial plan and goals.

The cars we drive say a lot about us. ~ Alexandra Paul

June 3, 2022

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.

What If I’m Wrong?

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During my final semester of college, I discovered the stock market through an investment class. The professor opened my eyes to the possibility of creating wealth by owning great American companies. In the Fall of 1987, I experienced Black Monday in my college classroom; I didn’t lose money because I didn’t own stocks. Despite the crash, or because of it, I became enthralled with equities.

Since 1987, I’ve been a student of the stock market reading thousands of books and articles, studying legendary investors like Graham, Buffett, Lynch, Templeton, Miller, Bogle, Marks, etc. – each one a raging capitalist who believed in America’s economic engine. These notable investors bought stocks during troubled times, which is why they’re worth multi-millions and billions. Warren Buffett, at 91, continues to purchase companies and could care less about market drops or corrections. In fact, he has been on a buying spree this year, despite the decline in the market.

Since 1926, stocks have averaged 10% per year despite wars, recessions, corrections, and inflation spikes. The market has always rebounded from previous pullbacks, but what if this time is different? What if stocks don’t recover? Is this the beginning of the end for equities? What if the sun does not rise tomorrow? Is it time to bury your money in the backyard or under your mattress? Maybe it is. Perhaps now is the time to abandon equities and embrace cash.

It feels like the end of times because stocks are off to their third-worst start ever while bonds posted their worst returns. The S&P 500 is down 19%, and Bloomberg’s US Aggregate Bond index is off nearly 10%! It’s unusual for stocks and bonds to perform poorly simultaneously. Historically, when stocks fall, bonds rise. During the previous five S&P 500 Index corrections, where stocks fell 20%, bonds rose 2.2%.[1] According to the Capital Group, the average annual return for the ten years ending December 2021 was 16.5%, and the average annual return for 10-year rolling periods dating back to 1974 was 15.74%. From 2012 to 2021, a $10,000 investment grew to $37,900, but if you missed the 40 best days, your valuation dropped to $10,050.[2] According to Bloomberg, bonds have made money 100% of the time during every rolling 5-year period dating back to 1926.[3] Time in the market is more important than timing the market.

Inflation spikes have occurred about fifteen times over the past 108 years or every seven years. We last experienced a severe increase more than forty years ago, from 1977 to 1980. Once inflation started to wane, the stock market soared to all-time highs from 1982 to 1999, rising by 1,211%. The market declined slightly in 1990, closing down 6%, but the bull run did not end until 2000, when stocks crashed during the Tech Wreck.[4] What about 1987? On October 19, 1987, stocks fell more than 22% or 508 points. Despite the drop, the market finished the year in positive territory.

Is it possible that McDonald’s stops selling hamburgers or Apple no longer offers earbuds? Will people stop shopping at Amazon, Target, or Walmart? Will Budweiser halt selling beer at baseball games? Will Norfolk Southern and Union Pacific quit shipping materials across the country? Will Tesla stop building electric cars? Will Southwest Airlines leave the airline industry, or gasp, Starbucks exits the coffee business? It’s possible but not probable.

I spent considerable time a McDonald’s while attending college, and when I ordered food, I didn’t care if its stock was up or down. I started my investment career in 1990, and my first recommendation was McDonald’s because people must eat. It fell 15% in 1990, and clients were worried it would fall further. I told them to visit any McDonald’s in the world at noon, and if it was empty, we would sell the stock. I never received a call. Since 1990, McDonald’s stock has risen 5,210%. A $100,000 investment is now worth $5.35 million.

The Dow Jones has weathered many storms and achieved several milestones, but investors were nervous when the index was 30, 300, 3,000, and 30,000. When it reaches 300,000, investors will be anxious —human nature. Do not let your short-term fears derail your long-term goals, and don’t bet against great American companies.

Rather than worry about the market, invite a friend to McDonald’s and enjoy the day.

It’s the end of the world as we know it, and I feel fine. ~ REM

May 19, 2022

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.capitalgroup.com/ria/insights/articles/how-to-handle-market-declines.html

[2] IBID

[3] chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://www.blackrock.com/us/financial-professionals/literature/investor-education/student-of-the-market.pdf

[4] DFA 2022 Matrix Book