I’m Afraid to Invest

It is a tough time to be an investor. The political, social, and racial environment is troubling.  Despite the stellar long-term performance of the stock market, investors are nervous about committing capital to stocks. If you’re frightened to invest, consider a monthly dollar-cost averaging program.

Let’s assume you can invest $120,000 today, but you’re not ready to push all your chips to the center of the table. In this case, invest $1,000 per month for ten years in Vanguard’s 500 Index Fund. Did this strategy work? After ten years, your $120,000 is now worth $219,537 – generating an average annual return of 11.8%.

If you expand your time horizon to twenty years, your $1,000 monthly investment is now worth $651,021, earning 9.1% per year.

How about thirty years? After thirty years, your automated monthly investment program of $1,000 is now worth $1.72 million, averaging 9% per year.

What about a forty-year timeline? After forty years, your investment is now worth $6.16 million, producing an average annual return of 10.4%.

Let’s look at a fifty-year time horizon. We now will invest $1,000 per month into the Investment Company of America mutual fund because the Vanguard 500 Index fund is not available. Your investment is now worth $57.76 million. The average annual return was 10.9%.

After sixty years, your dollar-cost averaging program has turned your $1,000 monthly investment into $195 million! The average annual return was 11.2%.

After fifty or sixty years, the numbers are ridiculous and probably not obtainable for most investors. I doubt many, if any, people can commit to investing monthly for sixty years. However, if you’re skittish, starting a monthly investment program could be your ticket to better returns.

Times are hard, but probably no worse than they have been over the past sixty years. Despite challenging times, the stock market has always marched higher. The key to long-term investment success is to follow your plan, save your money, and invest often. Do not let short-term market moves, or the media, derail your financial plans.

Be not afraid of growing slowly; be afraid only of standing still. ~ Chinese Proverb

June 29, 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.

Investment source: Morningstar Hypothetical, returns are pre-tax, net of fees.

All That Jazz

Jerry Sloan, the legendary coach of the Utah Jazz, recently passed away. Mr. Sloan had a stellar career as a player and a coach. As a player, he was twice an all-star, and his number was retired by the Chicago Bulls.  In 2009, he was enshrined in the NBA hall of fame for his coaching ability. He coached the Utah Jazz for more than 20 years, “the longest coaching tenure with the same team in professional sports,” and retired as the 4th winningest coach in NBA history.[1] Mr. Sloan was consistent and respected.

Coach Sloan led the Utah Jazz to their first NBA finals in 1997 with players Karl Malone and John Stockton. The Utah Jazz teams under Sloan weren’t flashy like the Lakers, nor did they have the pedigree of the Celtics, and they weren’t as coarse as the Pistons, but they were fundamentally sound, and nice – like most people in Utah.

If Coach Sloan were an investment professional, he probably would have been a fan of dollar-cost averaging, a consistent strategy that relies on fundamentals and patience. The dollar-cost averaging strategy lacks the flair of private equity, liquid alts, futures trading, IPOs, or option collars. Still, it is stable and reliable, and for most investors, it delivers results.

How does dollar-cost averaging work? This strategy requires you to invest a fixed dollar amount each month into a mutual fund or several funds. Let’s look at an example. You decide to invest $500 per month in Vanguard’s 500 Index Fund (VFINX) over several years.

  • One Year: After one year, your investment is worth $5,950, and it generated a loss of 1.83%.
  • Five Years: After five years, your investment is worth $37,298. It generated an average annual return of 8.92% and produced a gain of $7,298.
  • Ten Years: After ten years, your investment is worth $105,927. It generated an average annual return of 11.11% and produced a gain of $45,927.
  • Twenty Years: After twenty years, your account is worth $310,255. The 20-year average annual return was 8.74%, and it produced a gain of $190,255.
  • Thirty Years: After thirty years, your account is worth $818,929. The 30-year average annual return was 8.79%, and it produced a gain of $638,929.
  • Forty Years: After forty years, your account is worth $2.97 million. The 40-year average annual return was 10.24%, and it produced a gain of $2.73 million.

For the dollar-cost averaging strategy to reward shareholders over time a down market is needed, and the lower, the better. If you’re investing for the long haul, a down market will allow you to accumulate shares at lower prices. Your share accumulation will pay dividends when the stock market recovers because you will own more shares at higher prices. If you participate in a 401(k) plan, you likely witnessed this happening in your account.

If you’re looking for an easy way to accumulate wealth, look no further than the dollar-cost averaging strategy. A calculated, consistent investment strategy over time is a winning formula. This strategy is easy to institute, and you can do it with an IRA, 401(k), 403(b), 529 Plan, or taxable brokerage account, and you can start it with any dollar amount.

Courage is the most important of all the virtues because, without courage, you can’t practice any other virtue consistently.” ~ Maya Angelou

May 30, 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 are not suitable for every investor.

 

[1] https://www.hoophall.com/hall-of-famers/jerry-sloan, website accessed May 29, 2020.

 

What is Rebalancing?

We try to maintain a balanced life, eat a balanced diet, and, of course, we need balance to ride a bike. Balance is harmony. Investors should pursue balance; unfortunately, they rarely rebalance their portfolios, and they get too aggressive or too conservative at the wrong time.

Rebalancing is an excellent way to maintain your asset allocation and keep your risk tolerance in check, but what does it mean, and how does it work? When you rebalance your portfolio, you’re selling assets that have risen and buying ones that have declined – buy low and sell high. Rebalancing is done on a calendar basis – monthly, quarterly, or annually. Another option is to rebalance on a percentage basis. If an asset class rises or falls by 5% or more, you can adjust your portfolio by rebalancing. You can decide which model works best for your situation. Our firm rebalances based on the percentage moves of the asset classes in our models.

Let us look at a few moments in history to highlight this point.

1929

If your portfolio consisted of 50% stocks and 50% bonds in 1929, your equity allocation dropped to 23%, and your bond allocation increased to 77% at the end of 1932, a mix too conservative based on your original allocation. If you rebalanced every year, you would have sold bonds to buy stocks. However, this would not have been so easy during the Great Depression. The Dow Jones Industrial Average fell 65% in four years, so it would have taken a bold investor with a firm conviction to buy stocks. Without rebalancing, you had to wait until 1955 before your allocation returned to 50% stocks and 50% bonds.

2000

Stocks fell 43% during The Tech Wreck. If you started the decade with a 50% stock and 50% bond portfolio, it fell to 30% stocks and 70% bonds by the end of 2002. Twenty years later, your portfolio allocation is 40% stocks and 60% bonds. It has not yet returned to your original allocation because bonds have outperformed stocks for the past two decades. Bonds have generated an average annual return of 7.2%, while stocks have returned 5%.

2009

If you were fortunate to start investing in 2009, your stock returns have done exceptionally well, averaging almost 11% per year. If you started with an allocation of 50% stocks and 50% bonds in 2009, your asset allocation entering 2020 was 73.5% stocks, and 26.5% bonds – too aggressive based on your initial target.

2020

Stocks are off to a horrible start this year, and your original portfolio of 50% stocks and 50% bonds is now 45% stocks and 55% bonds after four months.

As you can see, balance is rarely maintained, and you must continuously monitor your accounts to make sure your portfolio stays balanced. If you do nothing, your portfolio can oscillate between too conservative or too aggressive – at the wrong time. For example, if you did not rebalance your accounts for the past ten years, your equity risk was too high at its peak in February, before the S&P 500 fell 34% in March. If you did not rebalance your accounts in 2008, your portfolio was too conservative to benefit from the rebound in stocks starting in 2009.

Here are a few tips to help you rebalance your portfolio.

  1. Rebalancing your accounts annually is recommended, but you can also do it monthly or quarterly. Due to the increased volatility in stocks recently, we are running our rebalancing models weekly.
  2. January is an excellent month to rebalance your accounts because most mutual funds pay dividends and capital gains in December.
  3. Your 401(k) plan may have an automatic rebalancing tab allowing you to set it and forget it. Your plan should give you the option to rebalance monthly, quarterly, or annually.
  4. It’s easier to rebalance a portfolio of mutual funds or ETFs than it is a basket of individual stocks or bonds. It’s not possible to sell a half share of a stock or a third of a bond. If you plan to rebalance your accounts, stick with funds.
  5. If possible, automate the process of rebalancing. It’s emotionally challenging to sell stocks when they’re rising, harder to buy them when they’re falling. Automating this process will remove your emotions from the buy and sell decisions.

Rebalancing may or may not increase your returns, but it will allow you to preserve your asset allocation and risk tolerance. If you invested $20,000 in 1992 in Vanguard’s Total Stock Fund (VTSMX) and Vanguard’s Total Bond Fund (VBTIX) – 50% allocation to each, your ending balance as of March 31, 2020, was $152,903. Your investment produced an average annual return of 7.5% without rebalancing. Your allocation, 28 years later, is 70% stocks, 30% bonds. If you rebalanced your account annually to an allocation of 50% stocks and 50% bonds, your return improved to 7.7% and your balance is now $160,156.[1] In this case, your allocation and risk level stayed constant, and your performance improved, which is the goal of rebalancing.

The key to long term financial success is to match your financial goals to your investment portfolio. A financial plan will help you identify your hopes, dreams, and fears. Once you complete this process, put your plan to work and rebalance your accounts often!

Life is like riding a bicycle. To keep your balance, you must keep moving. ~ Albert Einstein

April 16, 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 Hypothetical

Grandma B

My Grandma B was born in 1900. In Iowa. She dressed to the nines and did not appear to have a care in the world. She loved playing the piano, singing songs, and visiting with her family. Her sources of income were modest, relying on Social Security and rental income from a building that housed a florist. Despite her small income, she never appeared to want for anything.

With the world shut down and global stock markets going haywire, I wondered what it would have been like for Grandma B to be an investor at the start of the 20th century.

On January 2, 1900, the Dow Jones Industrial Average opened at 68.13.[1]

A few months after she was born, more than 6,000 people died in the Galveston, Texas hurricane. In 1901 President McKinley was assassinated.

Seven years after she was born, the stock market crashed during the Panic of 1907. J.P. Morgan (the individual) acted as the Federal Reserve to provide liquidity to the markets.  The Dow fell 37% from 1906 to 1908.[2]

At age 14, World War I started, and it would last until her 18th birthday. After WWI, the world was rocked by the Spanish Flu, killing 20 million people globally and 500,000 in the U.S. The Spanish Flu ended when Grandma B turned 20. The Dow fell 38% at the beginning of the war and would fall 25% during the pandemic.[3]

At age 20, she roared into the next decade as our country finally celebrated some good news. It lasted nine years before the stock market and economy crashed on October 29, 1929. The Dow rose 326% during the Roaring Twenties and fell 86.5% during the Great Depression.[4]

During the Great Depression, Gross Domestic Product fell 27%, and unemployment peaked at 25% – dark times. There was a brief uptick in economic activity after the depression ended, but it only lasted a few years as the recession of 1937 and 1938 shut down the economy. The market fell by 35% in 1937.[5]

What could pull the economy out of a slump? Another World War. Grandma B, not yet forty, was to witness her second world war. World War II lasted from 1939 to 1945. It ended when the U.S. dropped two nuclear bombs on Japan.

Grandma B had to wait 34 years before her investment account made any money as the Dow Jones climbed through 100 in 1934!

Polio attacked about 35,000 people per year in the 1940s and 1950s, peaking at 56,000 deaths in the late fifties before Dr. Jonas Salk developed a vaccine. [6]

A few years after WWII ended, the U.S. entered the Korean War from 1950 to 1953. In 1955 we would go to war with Vietnam. It lasted 20 years.

After surviving the Spanish Flu, the Asian Flu arrived in 1957, where 1.1 million people died, including 116,000 U.S. Citizens.

The Cuban Missile Crisis in 1962 was a battle between two superpowers – the USA and USSR. The following year, November 22, 1963, John F. Kennedy was assassinated.

Ten years later, the Arab Oil Embargo would usher in another recession, and the stock market fell 41% in 1973 and 1974.

When Grandma B was 79, the Iran Hostage Crisis and the Three Mile Island incident stunned our country.

The economy would recover in the early eighties, and stocks would climb 220% before crashing 22% on October 19, 1987.

In 1989, President George Bush signed legislation to bailout 800 insolvent savings and loans. The market would fall 8% in October due to the failed buyout of United Airlines.[7]

Grandma B passed away in February 1990, two months shy of her ninetieth birthday. She lived a great life, surrounded by friends and family. Despite two world wars, a depression, several recessions, pandemics, two presidential assassinations, and no internet, the Dow Jones averaged 4.2% per year during her lifetime before dividends. If she received a 2% dividend yield, her investments grew at a rate of 6.2% per year.

If Grandma B were alive today, she would have earned an average annual return of 5% before dividends, including this year’s drop in stocks.

It’s a difficult time for all, but I can’t imagine it being worse than what Grandma B experienced as an investor. And, I wonder, if 120 years from now, my grandchildren would be worried that the Dow Jones Industrial Average fell from 10.4 million to 8.3 million?

Is this heaven? No, it’s Iowa. ~ Field of Dreams

April 11, 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] http://www.fedprimerate.com/dow-jones-industrial-average-history-djia.htm

[2] Ibid

[3] Ibid

[4] Ibid

[5] Dimensional Fund Advisors 2019 Matrix Book

[6] https://www.cdc.gov/polio/what-is-polio/polio-us.html

[7] https://www.baylorschool.org/uploaded/Library_Resources_PDFs/US_History_US_Historical_Events_from_1900_to_Present.pdf

A Day in the Life of a Market Correction

Global stocks continue to fall, and each morning I wake up to check to see what the markets have in store for the day. I look at my phone (AAPL, T) to view the latest news. I turn on my TV (SNE, TWX) to watch CNBC (CMCSA).  While watching CNBC (CMCSA), I scan my email accounts (GOOG, MSFT, WORK).  Once I read the news, I click through Facebook (FB), LinkedIn (MSFT), and Twitter (TWTR) to get caught up on social media.

After I finish my channel checks, I grab breakfast and eat some Honey Nut Cheerios (GIS) with a glass of Tropicana Orange Juice (PEP). While eating breakfast, I listen to ESPN Radio (DIS) on satellite radio (SIRI).

After breakfast, I go for a run (NKE, UA) to get in a little exercise. After I work out, it’s now time to get ready for work, so I take a shower, shave (PG, UL,) and get dressed (JWN, DDS). On the way to work, I stop at the gas station to fill up my truck (XOM, AXP, TM).  With a full tank of gas, I drive to Starbuck’s (SBUX, AXP) to get a cup of coffee.

After my trip to Starbuck’s (SBUX, AXP), I visit my bank (WFC) to get an extra $20.00 for the day. I take a detour to Target (TGT, AXP) to get a few office supplies.

At the office, I turn on my computer (DELL, HPQ, MSFT) to start my workday.  I use The Wall Street Journal, Barrons, Fox News, The New York Times, (NWS, FOXA, NYT), Morningstar (MORN), Value Line (VALU), and T.D. Ameritrade (AMTD) to keep abreast of the market.

At lunch, I eat at McDonald’s (MCD, AXP, SQ) to get a burger, fries, and a Coke (KO).

Back at the office, I order a new book from Amazon (AMZN, AXP, UPS) and schedule a video conference call (ZM) with a client. After the call is over, I mailed her some information (STMP).

The market had another rough day, so I went home and took my dog (PETS, CHWY) for a walk.

After my walk, my wife and I went to dinner at Eddie V’s (DRI) to get something to eat and have a glass of wine (STZ, BUD).  We used Uber (UBER).

I’m now back at home to catch up on the day (CMCSA, DIS, TWX) and check the latest social media feeds (FB, MSFT, TWTR, GOOG, MSFT).  We’re now watching movies and playing games (NFLX, DIS, MAT, HAS, ATVI).

The weekend is coming, and I’m going to work on a backyard project (HD, LOW, YETI).

Until tomorrow…

The best thing that happens to us is when a great company gets into temporary trouble…We want to buy them when they’re on the operating table. ~ Warren Buffett

March 18, 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.

 

 

 

 

 

 

 

 

A Billion Dollars A Year

How would you spend a billion dollars? Would you create a foundation? Would you run for President? Would you try to send a rocket to Mars? Would you purchase priceless art?

The top five hedge fund managers last year earned more than a billion dollars in salary, with an average pay of $1.48 billion. A group of fifteen hedge fund managers made more than $12 billion.[1] Hedge fund managers typically charge a 2% fee on your investment and take 20% of your profits as compensation. The S&P 500 rose 29% last year, without fees. If you invested $10,000,000 in a hedge fund and your account appreciated 29%, your manager’s compensation would have been approximately $780,000, or 7.8% of your original investment.

Last year was a phenomenal year for major asset classes, so your hedge fund manager should be compensated well for his (the top five hedge fund managers are all men) efforts. How did they perform? The five hedge fund managers, as a group, generated an average return of 24.6%, before fees.  The best of this elite group returned 41%, the worst returned 14%.[2]

On a gross basis, the top five underperformed the S&P 500 by 4.4%. Two of the five outperformed the index, and only one bettered it on a net basis. If the average return was 24.6% and their fee was 7.8%, then the net gain was 16.8%. Last year, several low-cost ETFs performed well: Real Estate returned 24.4%, Utilities 21.3%, Small Caps 21%, International Stocks 18.1%, Gold 17.9%, and Emerging Markets 16.7%.[3] An equal weighting of these ETF’s returned 19.9%.

Fees matter when it comes to investing because you can only spend net returns. How do you know what fees you’re paying? Here are a few suggestions.

  • Every publicly traded investment has a ticker symbol, and if you plug it into Yahoo! Finance, Morningstar, or any other financial site, you’ll be able to see the fees associated with your investment. Every Mutual Fund and Exchange Traded Fund has an operating expense ratio (OER). For example, the OER for Vanguard’s S&P 500 Index Fund (VOO) is .03% or $3 per $10,000 invested.
  • Registered Investment Advisors must file their Form ADV each year. The ADV outlines an advisor’s fee schedule, assets under management, and other vital information. If you work with an advisor, they’ll provide you with their form.
  • Broker sold insurance items, and other packaged products are delivered with a prospectus. The prospectus summarizes the fee schedule, including sales charges, surrender fees, 12b-1 fees, and additional fees.
  • Brokerage firms post their commission rates and schedule online.
  • Conduct a fee audit with your advisor. Your advisor should be able to review your investment holdings, account fees, and other charges to help you get a better handle on your costs.

Registered Investment Advisors must disclose their fees to you before you invest, brokers should do the same. If you’re not sure what fees you’re paying, ask. It’s your money. I’ve noticed firms that charge high fees say they’re adding value to their clients. If you’re working with one of these firms, ask them how they’re adding value. If they can’t explain it to you, maybe it’s time to hire a new advisor.

One of the best ways to add value to your bottom line is to work with a Certified Financial Planner™ who invests your money in a globally diversified portfolio of low-cost funds and offers financial planning.

Give to everyone what you owe them: If you owe taxes, pay taxes; if revenue, then revenue; if respect, then respect; if honor, then honor. ~ Romans 13:7

February 17, 2020.

Bill Parrott, CFP®, CKA®, 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://markets.businessinsider.com/news/stocks/hedge-fund-managers-earned-more-than-billion-last-year-highest-2020-2-1028894639, by Ben Wick, February 11, 2020

[2] Ibid

[3] YCharts: VNQ, VPU, IJR, EFA, GLD, & VWO 2019.

China and Emerging Markets

China is closed. The world’s second-largest economy is shut down due to the Coronavirus, and life is at a standstill. According to several news reports, the number of deaths from the virus has now surpassed the number of deaths from SARS – a frightening thought, and the uncertainty is making the situation worse.

China’s idleness will have, at some point, an impact on global economies and stock markets. The Chinese stock market is down .5% for the year, but this can change quickly.

Emerging markets and China are linked. Chinese stocks are 33% of the MSCI Emerging Market Index, so when China moves, so does the index. The index invests across five regions, 26 countries, and 1,100 securities.[1] Dimensional Funds, Fidelity, and Oppenheimer manage sizeable emerging market mutual funds, while Vanguard, Blackrock, and Schwab have substantial assets in their exchange-traded funds. The top holdings for most of these funds include Alibaba, Tencent, Taiwan Semiconductor, and PingAn Insurance Group.

The Matthews China Investor Fund (MCHFX) has produced an average annual return of 11.51% for the past twenty years, and it has a current asset allocation of 95% stocks, 5% cash. Most of their assets, 89%, are invested in Asian emerging markets.

Chinese stocks account for 3% of the global equity market capitalization, the same level as France and Canada.[2]  We recommend an allocation of 5% to emerging markets, so if Chinese stocks account for 33% of the index, our exposure to China is 1.65%. If Chinese stocks fall, the index will too. However, I’m willing to commit 1.65% of capital to the world’s second-largest economy.

During the AIDS epidemic from 1987 to 1995, the emerging markets index fell 6.7%, Chinese stocks dropped 40%, and the S&P 500 rose 34.9%.

Emerging markets rose 13.8% during the Bird Flu outbreak from 1997 to 2004. Chinese stocks plunged 65.6%, the S&P 500 rose 63.6%.

The emerging markets index rose 122% during the SARS epidemic from 2002 to 2005, while Chinese stocks climbed 74%, and the S&P 500 index grew 8.7%.

During the Swine Flu outbreak from 2009 to 2010, emerging markets soared 103.1%, Chinese stocks increased by 62.5%, and the S&P 500 was up 39.2%.

The Ebola outbreak occurred from 2013 to 2016. During this outbreak, emerging markets fell by 18.2%, Chinese stocks dropped 6.8%, and the S&P 500 rose 57%.

The United States stock market is massive, efficient, and developed, but it’s not immune to extended periods of poor performance. During the ‘70s, a 10,000 investment grew to $11,570, generating an average annual return of 1.47%. If you invested $10,000 in the S&P 500 on January 1, 2000, you had to wait thirteen years before you were profitable. But, if you held on to your original $10,000 investment from 1970, it’s now worth $357,820, producing an average annual return of 7.35%.[3]  For the past two decades, the S&P 500 and MSCI Emerging Markets Index produced similar returns.

Emerging markets have always been volatile – a feast or famine mentality. In 2006, Chinese stocks rose 82.9%. in 2008, they fell by 50.8%. Turkey rose 253% in 1999, and fell 45.8% in 2000, 32.8% in 2001, and 35.8% in 2002.[4] Volatility is the central theme for investors in emerging markets.

Does it make sense to sell all your emerging market holdings? My recommendation is to stay committed to this sector. Another reason to remain long emerging markets is demographics. China, India, Indonesia, Pakistan, Brazil, Russia, and Mexico account for 49% of the world’s population – and growing![5]

Rather than selling your emerging market stocks, invest in a globally diversified portfolio of low-cost funds, investing in an assortment of stocks and bonds based on your financial goals and time horizon.

What should you do if emerging markets fall? Buy more!

Nevertheless, I will bring health and healing to it; I will heal my people and will let them enjoy abundant peace and security. ~ Jeremiah 33:6 

February 10, 2020.

Bill Parrott, CFP®, CKA®, 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.msci.com/emerging-markets

[2] Dimensional Fund Advisors 2019 Matrix Book

[3] YCharts.

[4] Dimensional Fund Advisors 2019 Matrix Book

[5] https://www.internetworldstats.com/stats8.htm

I Missed Tesla

Tesla’s stock performance has been electrifying, rising 20% yesterday, 15% today, and 86% for the year. Since June, it’s soared 415%. On August 7, 2018, Elon Musk tweeted, “Am considering taking Tesla private at $420. Funding secured.”[1] Tesla’s stock is up 142% from this now infamous tweet.

Initially, I missed several “obvious” winners over the past three decades, like Apple, Google, Microsoft, Amazon, and so on. I did, however, eventually buy these stocks. In 1993 I purchased DELL Computer in my IRA and quickly doubled my money. After it doubled, I sold it so I wouldn’t lose my profit. DELL would rise another 20,000% or so over the next several years, a valuable lesson to let your winners run.

I’m not worried I missed Tesla, because I own it indirectly through several funds. Who knows what’s ahead for Tesla, but if it follows the path of previous highfliers, I may get another opportunity to buy it at a lower price. When I started in the business as a stockbroker, I recommended Coca Cola stock to clients, despite the fact it went public in 1919, 71 years before I started. Coke stock has risen over 1,000% since January of 1990[2], so investors still made money despite its strong performance during the previous seven decades.

Missing a winning stock doesn’t cause me any regret because I’ve also passed on losers like Enron, Worldcom, Global Crossing, Gamestop, and several others. In a diversified portfolio of individual stocks, you’ll probably own a few winners, a few losers, and numerous also-rans. A winning stock like Amazon or Tesla can have a significant impact on your portfolio. A losing stock, likewise, will be an anchor, dragging your performance down.

Tesla is a popular stock, getting most of the headlines and screen time on CNBC, but other stocks are performing better this year. Nanoviricides is up 331%, LMP Automotive Holdings Inc is up 114%, and Interups is up 110%.[3] Owning mutual funds will give you exposure to companies not on your radar screen.

What should you do if you’ve missed a highflying stock that everybody else appears to own? Here are a few suggestions.

  • Be patient. What goes up will come down. Amazon stock fell 92% in 2001 and 60% in 2008. Apple fell 85% in 1985, 82% in 1997, 79% in 2003, and 56% in 2008. Facebook fell 54% in 2012 and 38% in 2018.[4] Stocks fluctuate and oscillate between over and undervalued.
  • Buy fewer shares. If your goal is to buy 100 shares, start with 50 or 25.
  • Buy a fixed dollar amount. Rather than focusing on shares, start with dollars. A prudent allocation is 3% to 5% of your account balance.
  • Set a limit. Enter a buy-limit to purchase the stock at a specific price. You can set any price you want, but you must buy the stock if it trades at or below your limit price; however, you’re not guaranteed to get the stock at the price you set.
  • Sell a put option. Selling a put option obligates you to buy shares at a specific price. Because you’re a seller, you’ll collect a premium. The premium is yours to keep, regardless of what happens to the price of the stock. For example, Tesla’s April 2020 $500 put option is currently selling for $6.75, meaning, for every contract you sell, you’ll collect $675, before fees. One option contract equals 100 shares of stock, so if you sold one contract at $500, you’re obligated to buy it at that price if the stock trades at or below the strike price when the contract expires in April – 100 shares of Tesla at $500 is a $50,000 purchase. If you’re going to pursue this strategy, please work with an advisor who understands option trading, because options involve risk, and they’re not suitable for every investor.
  • Buy a mutual fund. The following mutual funds own shares of Tesla: Baron Partners (BPTUX), Harbor Capital Appreciation (HRCAX), Vanguard Extended Market (VEXMX) and Invesco QQQ Trust (QQQ)

Chasing a high-flying stock is a risky proposition, so develop a trading plan and tread lightly. Don’t over commit capital and avoid leverage. Be patient, and work your plan.

“The trick is not to learn to trust your gut feelings, but rather to discipline yourself to ignore them. Stand by your stocks as long as the fundamental story of the company hasn’t changed.” ~ Peter Lynch

February 4, 2020.

Bill Parrott, CFP®, CKA®, 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.cnbc.com/2019/08/08/teslas-chaotic-year-after-musks-funding-secured-tweet.html, By Michael Wayland, August 8, 2019.

[2] YCharts: January 1, 1990 – February 3, 2020.

[3] YCharts

[4] Ibid

A Flight to Safety

This decade is off to a tough start. The Coronavirus is disrupting global trade, travel, markets, and economies. The 2020 U.S. Presidential election will also add to the uncertainty and confusion. With increasing risk, should you buy, sell, or hold your existing investments?

When forecasts are dire, and projections are bleak, selling your stock positions and moving to cash makes sense. It seems prudent to sell your investments and park the money in a bank until the storm passes, and, when it does, you can repurchase your stocks.

Let’s say, for fun, you invested $1 million in the S&P 500 in 2005 – 100% of your assets. After three years, your strategy paid off. Your account at the end of 2007 is worth $1.172 million, a gain of 17.2%![1]

Here’s where it gets interesting because, we now know, 2008 was a horrible year for the S&P 500. If you decided to hold, you lost 38.3%. Your original investment of $1 million is now worth $747,392, a loss of 25.2%.

With hindsight, you would have sold your investment on December 31, 2007, to lock in your gains. If you sold, you would’ve been a hero, admired for having the foresight and courage to sell after three years of substantial profits. However, it’s unlikely you would’ve moved from cash to stocks in January of 2009 because we were in the midst of the Great Recession. You probably would have waited two or three more years to get back in the market, missing a 40.5% return. If you reinvested in January 2009, you made 23.6% for the year. If you had the conviction to buy the dip in 2008 and 2009, you made even more when stocks recovered.

If you ignored the bear market and held your stocks during the correction of 2008, you made $2.76 million from 2005 to the year-end of 2019, an increase of 227%. Now that your account balance is $2.76 million, what should you do -sell or hold? If you sell, you’ll pay a capital gains tax of 20%, or $455,243 – a significant number. If you hold, you may encounter another stock market correction. A repeat of 2008 would mean a loss of $1.25 million, but still above your original investment of $1 million.

It’s impossible to time the market, but they’re a few strategies you can employ to protect your assets. The first is to diversify your holdings to include different asset classes like small companies, international stocks, and bonds. A globally diversified portfolio of mutual funds would have lost 20.3% in 2008, not great, but better than a loss of 38%. True, you give up some upside, but you protect your assets to the downside. A balanced portfolio of 60% stocks, 40% bonds generated an average annual return of 6.5% since 2005. Your $1 million investment grew to $2.48 million.[2]

More stock means more risk, but it also means more reward. Buy and hold investors have been rewarded for their patience, and, hopefully, this time will not be different.  If you want to find out the risk exposure in your portfolio, give us a call.

“Go out on a limb. That’s where the fruit is.” — Jimmy Carter

February 3, 2020.

Bill Parrott, CFP®, CKA®, 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] YCharts – IVV, 1/1/2005 to 12/31/2019.

[2] Morningstar Office Hypothetical

Rivers and Tributaries

The Mighty Mississippi, The Nile, The Amazon, and The Yangtze are some of the longest rivers in the world, traveling thousands of miles, moving millions of gallons of water every day; critical components to commerce as millions of people, and billions of dollars of freight go up and down the rivers.

The names of significant rivers are known to most people, but what about tributaries? Tributaries are smaller rivers flowing into larger ones, and vital to the support of the more extensive river system. The Big Muddy, Chippewa, and Watab are a few rivers flowing into the Mississippi. Without smaller rivers, bigger ones can’t survive.

Open an atlas, and you’ll discover hundreds of little blue lines crisscrossing the map. These blue lines represent rivers and streams. The Rio Grande borders Texas to the south; the Red River is to the north. In between, thousands of tributaries pour into more significant rivers and the Gulf of Mexico. Some of these dry creek beds will lay dormant until the rain arrives, turning them into raging rivers.

In the investment world, the two leading indices are the Standard & Poor’s 500 and MSCI EFA. The S&P 500 includes the 500 largest companies in the United States. The MSCI EFA is the international index encompassing Europe, Australia, and Far East Asia and includes companies from 21 different countries.[1] These two indices cover the world, and most professional investors rely on them for their primary benchmarks. However, building a portfolio consisting of two broad-based indices isn’t prudent, especially ones so similar.

As small streams are essential to mighty rivers, small stocks are important to bigger ones. A globally diversified portfolio of different sized stocks and bonds will allow you to benefit from thousands of securities scattered around the world.

The past few years, small and international stocks have trailed large U.S. companies, but it won’t last forever. At some point, these sideshows will turn into the main attraction, just like small creeks turning into raging rivers. For the past three years, the S&P 500 has returned 47%, the S&P 600 Small-Cap Index 26.2%, and the MSCI EAFE International Index 19.2%. However, from 2000 to 2010, the Small-Cap Index returned 48%, and the MSCE EAFE International Index rose 30% while the S&P 500 lost 6.5%.[2]

Morningstar tracks over 83,000 global indices[3], so it’s possible to get carried away when building your portfolio. A narrow focus may limit your investment choices, too many, and your account will be overly diversified.

How many different asset classes should you include in your account? At a minimum, your portfolio should consist of large, small, and international stocks, bonds, cash, and an alternative class – so six. Of course, this number can vary dramatically depending on several factors, like your risk tolerance, assets, and time horizon. The broad categories can also include growth, value, developed, emerging, short-term, long-term, high yield, and so on.

Regardless of the number of funds, focus on owning a globally diversified portfolio of low-cost funds based on your financial goals.

If you’re not sure where to start, contact a Certified Financial Planner® who can help you navigate the treacherous waters of the financial markets.

A river is more than an amenity; it is a treasure. ~ Oliver Wendell Holmes

January 21, 2020

Bill Parrott, CFP®, CKA®, 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.msci.com/documents/10199/822e3d18-16fb-4d23-9295-11bc9e07b8ba

[2] YCharts

[3] Morningstar Office Hypothetical