Six Reasons to Sell Stocks

Markets are reeling, and there are few places to hide. Investors are scared of inflation, rising interest rates, and the Ukraine war. This year, the S&P 500 is down 16%, and the NASDAQ is fairing much worse. Long-term bonds are down 22%, while real estate holdings have dropped 17%. Investors are selling stocks to buy safe investments like short-term U.S. Treasuries. In uncertain times investors seek a port in the storm.

Does it make sense to sell stocks? Maybe. Here are six reasons to sell.

  1. You’re 100% invested in stocks. If you’re allocated 100% to equities, sell shares to add bonds or cash to your portfolio. Bonds and cash can lower your volatility and allow you to buy stocks at lower prices through portfolio rebalancing.
  2. You need the money in one year or less. Stocks are unpredictable in the short term. On an annual basis, stocks finish in positive territory 73% of the time. Over twenty years, they have never lost money.[1] However, on occasion, they do fall.
  3. You need money to buy a new home, pay for college, or acquire a new car. Invest in short-term bonds or money-market funds because liquidity is paramount if you need to meet financial obligations.
  4. Your risk exposure is too high. Last year, stocks soared and elevated your stock exposure. For example, if your target equity exposure is 70%, and it jumped to 80% last year, sell 10% of your holdings to reduce your risk. 
  5. Your goals have changed. If your financial goals change, adjust your asset allocation and investment portfolio to meet your needs. Regularly reviewing your financial goals is recommended.
  6. Are you retiring? If you’re retiring this year – congratulations! If so, buy bonds to cover three years of expenses to avoid worrying about the stock market volatility. For example, if your annual expenses are $100,000, purchase $300,000 in bonds.

Selling from a position of fear has historically been a poor decision because stocks recover. When you react to volatility or a drop in prices, you’re most likely selling near a bottom. If you sell your shares, when do you repurchase them? Uncertainty is a central theme for investors, and we never know what will happen tomorrow. What is the price of safety? Currently, a one-year Treasury Bill yields 2%, and the inflation rate is 8.54%, so you’re losing 6.54% before taxes. Does it make sense to lose 6.5% per year while waiting for stocks to recover?

A financial plan can help you focus on your goals and investment allocation. Through Monte Carlo simulations, most financial planning models allow for significant stock market corrections. Money Guide Pro, for example, runs a thousand scenarios to determine the soundness of your plan, and it’s better to be partially right than entirely wrong when it comes to planning.

If your time horizon is longer than two years, use down days to buy great companies at lower prices. It’s hard to buy low and sell high, but you’ll be happy when prices rebound. Will people stop purchasing cell phones, hamburgers, or electric vehicles? I don’t think so, so take advantage of people’s fears to add to your stock holdings.

Stocks, like the tide, fluctuate daily, and they have been doing so for centuries. Rather than worrying about the volatility, create a plan, focus on your goals, think long-term and good things will happen.

Therefore do not worry about tomorrow, for tomorrow will worry about itself. Each day has enough trouble of its own. ~ Matthews 6:34

May 9, 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] Morningstar Classic Year Book – 2015

Invest Like a Stoic

Stoics would have made great investors because they focused on issues they could control. Marcus Aurelius, Epictetus, and Seneca would probably have much to say about today’s markets or, more importantly, investor’s reactions to the performance of stocks and bonds.

Stocks and bonds face strong headwinds from inflation, rising interest rates, COVID, the supply chain, and the war in Ukraine. These areas are causing heartache among investors as global markets crumble. Yet, we can’t control the outcome of these worldly events.

What can you control? As an investor, you can control your spending and savings; that’s about it. If you reduce your spending, you can increase your savings, and the more you save, the better. Of course, if your spending rises, you may have to reduce your savings.

Here are a few tips to help you manage your assets and emotions.

  1. Automate your expenses by depositing your paycheck and paying your bills. Automation simplifies your life and helps you avoid late fees and penalties.
  2. Automate your savings. Automate your investment accounts after setting up your 401(k) plan. Link your checking and savings account to build up your emergency fund. Transferring dollars monthly from checking to savings gives you access to the funds while increasing your emergency reserves.
  3. Buy the dip. If you automate your savings, you can buy the dip without emotion. It’s hard to buy stocks when they fall, but you can eliminate this fear through automation.
  4. Do not check your accounts. If you review your accounts daily, try doing it weekly. If you review them weekly, try doing it monthly. If you review them monthly, try doing it annually. The less you look at your investments, the better, especially if you own a diversified portfolio of low-cost funds.
  5. Manage your time horizon. If you need access to your funds in one year or less, deposit your money in money market funds, CDs, or T-Bills! If your horizon is three to five years or more, buy stocks.
  6. Build a financial plan. A financial plan guides your financial future and quantifies your hopes, dreams, and fears.

You can control your savings, spending, and outlook, but you can’t control inflation, interest rates, or world war. Despite these recurring issues, stocks rise more than they fall.

From 1926 to 2021, the stock market has risen 75% of the time.[1]

Best five years:

  • 1933 = up 56.7%
  • 1954 = up 50%
  • 1958 = up 45%
  • 1935 = up 44.4%
  • 1975 = up 38.8%

Worst five years:

  • 1931 = down 43.5%
  • 2008 = down 36.7%
  • 1937 = down 34.7%
  • 1930 = down 28.8%
  • 1974 = down 27%

A key takeaway is that the best years follow the worst years; sharp down days precede strong up days, and risk and return are linked.

I don’t know when stocks will recover, so follow your plan and focus on what you can control.

We control our reasoned choice and all acts that depend on that moral will. ~ Epictetus

April 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 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                                     


[1] The Rewarding Distribution of US Stock Market Returns – Dimensional, 1926 to 2021

My Investment Shopping Cart

Peter Lynch, the legendary portfolio manager of the Fidelity Magellan Fund,  said, “Buy what you know.” As a result, I created my shopping cart investment portfolio consisting of twenty companies my family and I use often. And, like a regular shopping experience, I substituted some products because others weren’t available. My local grocery store is privately held HEB, so I added Kroger as a replacement.

Here are the companies in my shopping cart:

  • Alphabet
  • Amazon
  • Anheuser-Busch
  • Apple
  • AT&T
  • Clorox
  • Coca-Cola
  • Costco
  • General Mills
  • Home Depot
  • Honda Motor
  • Johnson & Johnson
  • Kroger
  • Netflix
  • P&G
  • Starbuck’s
  • Target
  • Twitter
  • UPS
  • Walgreen’s

The portfolio is down 4.62% year-to-date, while the S&P 500 has lost 6.04%. Last year, it was up 19.79%, and the S&P climbed 28.71%. Over the past 3-, 5-, and 10-year periods, the shopping cart portfolio has averaged 17%, slightly ahead of the S&P 500, which returned 16%. The current yield for the portfolio is 2.18%.

The shopping cart portfolio has captured 96% of the upside and 74% of the downside for the past decade, relative to the S&P 500. The capture ratio is 1.29, outperforming the market.

Shopping cart full of food isolated on white. Grocery and food store concept. 3d illustration

If you’re looking to cook up a sizzling portfolio, throw some household names in your shopping cart.

April 21, 2022

www.parrottwealth.com

Note: Past performance is no guarantee of future performance.

The Middle Child

Being the middle child is tough; ask Jan Brady, Lisa from the Simpsons, or Malcolm in the Middle. Most of the attention falls on the firstborn child or the family’s baby. Mid-cap stocks suffer the same fate because investors want to own large-cap or small-cap stocks.  

Since 1980, mid-cap stocks have outperformed the S&P 500, generating an average annual return of 12.72%. The returns have been higher than large caps, but the downside has been similar. From July 1982 to June 1983, the mid-cap index soared 82%, whereas the S&P 500 rose 61%. During the Great Recession, both fell by 43%.[1]

Mid-cap stocks make an excellent portfolio choice because they survived the startup and small-cap phase, but they still have room to grow. Some popular mid-cap companies include Kroger’s, Dollar Tree, RH, Dick’s Sporting Goods, and Skechers.

The Dow Jones US Mid Cap Index has been up 215% over the past ten years, producing an average annual gain of 12.14%, similar to its 40-year average annual return.

Consider mid-cap stocks if you want to give your portfolio a boost.

April 20, 2022

www.parrottwealth.com

Note: past performance is not a guarantee of future performance.


[1] Dimensional Funds Returns Web – January 1, 1980 to March 31, 2022

Small Things      

Good things come in small packages, which is true for small company stocks. Since 1972 Dimensional Fund’s small-cap index has more than doubled the return of its large-cap index, generating an annualized return of 12.7%, compared to 10.9% for large caps. The index returns date to 1927, and the best one-year return was 259% during the Great Depression. During the first phase of COVID, the small-cap index produced a 107% return from April 2020 to March 2021.[1] Though returns for small stocks have been better than larger ones, so has the risk level.

However, large-company stocks have outperformed small caps over the past 1-, 3-, 5-, and 10-year periods.

Will large companies continue to best small ones? Will the trend continue? Time will tell, but I believe small-cap stocks will again post better returns than large-caps as they have done for the past 95 years.

April 19, 2022

www.parrottwealth.com

Note: past performance is not a guarantee of future performance.


[1] DFA Returns Web – 1927 to 2022

Emerging Markets          

Emerging markets account for about 14% of the world’s stock market cap, or $10 trillion in assets.[1] Companies listed in Brazil, Mexico, Taiwan, Korea, China, and India account for most of the assets in this sector.

Over the past decade, the S&P 500 has trounced the MSCI Emerging Markets Index by 207%. The S&P 500 is up 216%, while the emerging market index has barely budged, up a paltry 9%.

What’s the point of allocating assets to this sector if the returns are so poor? It’s a fair question. The main reason to add international investments to your portfolio is for diversification. During the lost decade from 2000 to 2010, the S&P 500 lost 24%, while emerging markets soared 102% – a difference of 126%. And until last June, the two indices were neck in neck for performance this century.

An allocation of 5% to 10% of your portfolio makes sense for emerging markets.

April 18, 2022

www.parrottwealth.com

Note: Past performance is not an indication of future performance.


[1] DFA 2020 Matrix  Book

What A Brutal Year!

Stocks and bonds are falling while commodity prices are soaring. The Federal Reserve is raising interest rates, investors are not happy, and they are losing patience! However, I’m referring to 1994, not 2022.

In 1994, the S&P 500 fell 1.54% and, at one point, was down 9%, and long-term government bonds plunged by 7.8%. While traditional investments dropped, commodity investments rocketed, generating a return of 16.6%.[1] Sound familiar?

The previous year made 1994 so frustrating because stocks and bonds produced stellar returns. The S&P 500 jumped 10.1% in 1993, and long-term government bonds climbed 13.2%. Investors expected the good times to continue; they didn’t. Last year, the S&P 500 soared 27%, so this year’s negative returns are upsetting.  

What happened in 1994? Alan Greenspan and the Federal Reserve surprised markets by raising interest rates, and Fortune Magazine called it the “Bond Market Massacre.”[2] The Fed Funds rate started the year at 3% and finished at 6% – a 100% increase. The Federal Reserve raised interest rates seven times from February 1994 to February 1995.

In 1994 the Federal Reserve was aggressively hiking interest rates, and a rising rate environment is not good for stocks or bonds. How did the markets fare since 1994? Investors poured money into the commodity sector because of its strong performance. With a strong economy and rising rates, investors chased this hot sector. However, those who bought commodity funds made 1.55% yearly from 1994 to 2022, barely outpacing inflation. A $10,000 investment grew to $15,450.[3] As a comparison, the S&P 500 returned 1,510% or 10.7% per year from 1995. A $10,000 investment grew to $160,540.[4]

Today, investors are frustrated by the lack of performance from stocks and bonds. The stock market is falling, bonds are dropping, and interest rates and inflation are rising. It feels like 1994 again, and investors are ready to jump ship and sell stocks and bonds.

Here are a few thoughts to protect yourself from doing something that may harm your long-term performance.

  • First, do nothing. Don’t chase returns, and don’t make dramatic portfolio changes. The best course of action, at times, is to let your portfolio find its footing. The S&P jumped 37.6% in 1995, 23% in 1996, 33.4% in 1997, 23.6% in 1998, and 21% in 1999. If you sold your stocks in 1994, you missed an incredible run in stocks where they climbed 138%!
  • Diversify your accounts. In 1994, international stocks – large and small, performed well, and real Estate Investment Trusts (REITs) generated positive returns.
  • Buy bonds for your account despite rising rates. Bonds are a vital part of a portfolio, and they provide safety and income. Adding bonds to your account while interest rates rise is an opportunity to lock in higher rates. If you purchased long-term government bonds in 1994, you made 31% in 1995.[5]
  • Rebalance your portfolio to keep your asset allocation and risk level intact. It’s also a great way to buy low and sell high. We screen our model portfolios weekly to look for accounts where the asset allocation has shifted from the original target, and when we find them, we rebalance the portfolio.
  • A financial plan is paramount if you want to be a successful investor. It will help you stay focused on your goals, despite volatile markets.

I don’t know when stocks and bonds will recover, but there will be better days ahead if history is my guide.

But if we hope for what we do not see, we wait for it with patience. ~ Romans 8:25

April 15, 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] Dimensional Fund Advisors 202 Matrix Book.

[2] http://www.businessinsider.com/1994-federal-reserve-tightening-story-2013-1, Matthew Boesler, January 25, 2013

[3] YCHARTS

[4] YCHARTS

[5] DFA 2021 Matrix Boox

What Can Happen?

We recently stress-tested our client’s financial plans to determine how they would withstand a 50% stock market correction and a perpetual inflation rate of 5.25%. Thankfully, most plans withstood the test. Since 1971, there have been several corrections of 40% or more – 1974, 2002, and 2008; the S&P 500 fell 32% during the COVID correction. Inflation has averaged 3.24% since 1914, so we are confident that our plans can perform well in various market conditions.

What about the plans that failed our test? After screening all our plans, we focused on those that did not pass, and, after tweaking a few inputs like asset allocations, spending limits, or retirement dates, they improved noticeably.

We are in tumultuous times and face astronomical headwinds from inflation, rising interest rates, and war. Markets react fiercely to news headlines, and volatility is the new normal, and it’s challenging to hold stocks when they gyrate wildly. Despite all the recessions, corrections, drops, and pullbacks, the S&P 500 has risen 4,750% since 1971. The market rewards the patient buy-and-hold investor.

How would your life change if your investments fell 50 percent? Could you still provide for your family? Will your basic needs be met? If so, stay the course. If not, consider reducing your equity exposure by adding bonds and cash.

Who knows what will happen tomorrow – no one knows. I’m not aware of any analyst or expert who accurately predicted COVID or the Ukraine War – two significant events impacting everyone. We can die a thousand deaths worrying about every possible outcome, but it’s not worth it. Instead, follow your financial plan, diversify your assets, and think long-term.

The road to success is dotted with many tempting parking spaces. ~ Will Rogers

March 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 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.

A Financial Whirlpool

Markets are in a financial whirlpool as they try to navigate the treacherous waters of Ukraine, inflation, rising interest rates, and China’s recent lockdown. Stocks and bonds react violently to the headlines, and volatility is off the charts. There are few places to hide.

The Federal Reserve will raise interest rates by a quarter of a point this week to try and tame inflation, which is currently averaging 7.8%. This year, interest rates are up significantly despite the Fed’s inaction, so investors already understand the impact of rising rates through lower bond prices or increased mortgage payments.

Gas prices are soaring at the pump, and the national average is $4.4 per gallon, an all-time high. In some parts of California, the cost of gas is north of $7! The higher prices are arriving just in time for the driving season.

The Federal Reserve is fighting inflation, but the recent data could send our country into a recession. At some point, individuals will decide between paying for essential items and non-essential ones. Escalating food and gas prices are taking a toll on the consumer, and rising interest rates make purchasing a home less affordable. People will stop spending money on travel and entertainment to put gas in their cars and food on the table, and when spending slows, recessions tend to follow.

If you believe inflation prevails, then stocks, real estate, and commodity investments should perform well, but bonds will not. As inflation climbs, the Fed will continue to raise interest rates. The last serious battle with inflation occurred more than forty years ago when it rocketed above 14%. It peaked in 1980, and then both inflation and interest rates dropped substantially. In 1982, stocks started one of the great bull runs in history, rising 160% before it was inconveniently interrupted by the crash on October 19, 1987.

If you are in the recession camp, bonds will perform well, while stocks, real estate, and commodity investments will not. The last prolonged recession occurred from 2007 to 2009, when the S&P 500 fell 53%, and bonds soared 26% at the trough of the Great Recession.

Will we experience inflation or a recession? That’s the $64,000 question. It’s impossible to know because we can make a case for both, and that’s why we’re in a financial whirlpool. If you rafted down a river, you know it’s hard to get out of a whirlpool – near impossible because two opposing currents cause a vortex that sucks everything down a drain. The opposite economic currents are inflation and recession, and only time will tell who wins. However, it’s smooth sailing once you get out of the whirlpool.

How can you protect yourself from a financial whirlpool?

  • Diversify your assets to include stocks, bonds, cash, and alternative investments. A balanced portfolio exposes you to asset classes that perform well in different economic conditions. And don’t forget to add international holdings because not all countries experience recessions simultaneously.
  • Eliminate your debt to ride out the storm: pay off car loans, student loans, credit cards, and mortgages. Being debt-free can bring you peace of mind, especially in uncertain times. Also, reducing your debt payments allows you to save and invest more money.
  • Increase your cash position. Extending your emergency fund to cover nine to twelve months of expenses allows your stocks and bonds time to recover.
  • Buy stocks. Stocks have always recovered. If your time horizon is three to five years or more, consider adding great companies to your portfolio.
  • Follow your financial plan. A financial plan can help you stay invested during difficult times. We recently tested our client’s plans against a 50% stock market correction and a sustained inflation rate of 5.25%. Thankfully, the results were mostly positive.

It’s a difficult time with much uncertainty, so invest wisely, proceed with caution, and follow your plan.

Happy paddling!

Rivers know this: there is no hurry. We shall get there someday. ~ A.A. Milne, Winnie-The-Pooh

March 15, 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.

Stock Market Correction Checklist

Stocks are sinking under the weight of the Russian invasion. The S&P 500 is down 12%, while the NASDAQ is off 18%. It’s a tough time to own stocks. Should you sell? Here is a quick checklist to help you make a better investment decision.

  • Do you need the money?
  • Do you have an emergency fund to cover three months of expenses or more?
  • Is your time horizon five years or more?
  • Are your assets diversified across stocks, bonds, and cash?
  • Do you own a balanced portfolio of low-cost mutual funds or ETFs?
  • Did you sell stocks in March 2020?
  • Did you sell stocks during the fourth quarter of 2018?
  • Did you sell stocks during the Great Recession – 2007 to 2009?
  • Did you sell stocks during the Tech Wreck – 2000 to 2002?
  • Did you sell stocks on October 19, 1987?
  • Did you sell stocks when Russia invaded Syria?
  • Did you sell stocks when Russia invaded Crimea?
  • Did you sell stocks when Russia invaded Chechnya?
  • Did you sell stocks when Russia invaded Afghanistan?
  • Do you have a financial plan?
  • Do you have a family will or trust?
  • Do you have adequate life insurance to protect your family?
  • Do you have disability insurance?
  • Do you own long-term care insurance?
  • Do you study balance sheets, income statements, and cash flow statements if you own stocks?
  • Do you own any stock that accounts for more than 25% of your assets?
  • If you have children, are you funding their 529 education account?
  • Are your monthly debt payments less than 38% of your gross income? For example, if you earn $10,000, your total debt payments should be less than $3,800.
  • Are you contributing to your company’s retirement plan?
  • Do you invest 10% of your income?
  • Do you donate 10% of your income to charities, non-profits, or organizations you support?

If your financial and estate plan are current and you don’t need money, consider staying the course. If you have an emergency fund, your assets are diversified, and you’re investing regularly, consider staying the course. If your life and disability insurance will protect your family, consider staying the course. If you did not sell stocks in March 2020 or during Russia’s previous invasions, consider staying the course.

If you need money, you don’t have a financial or estate plan, your time horizon is less than one year, or you sold stocks during previous corrections, consider selling your stocks.

I don’t know where the market is going in the short-term – too much uncertainty. However, stocks will recover. It might take a few months or a few years, but stocks have rebounded from previous corrections. It takes patience, courage, and a plan to create wealth, and it’s challenging to amass wealth if you panic and sell when times are tough.

Courage is being scared to death and saddling up anyway.” ~ John Wayne

March 8, 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.