Fake News!

Fake News is everywhere, I think. Who knows?

Fake news is on the rise, undermining credible news stories and causing angst. It attacks people, places and things by reporting stories that aren’t true. People shoot first and ask questions later by reacting to false headlines. Online posts, media outlets, and Heads of State rant against the proliferation of fake news stories. If someone doesn’t like a post or news story, they shout: Fake News! With all the data circulating the internet it’s imperative that you spend time separating the wheat from the chaff.

Fake news is alive and well in the investing world. Here are a few examples:

  • I don’t need to save money to accumulate wealth. False. One of the largest components to your wealth creation is how much money you save and invest monthly. How much should you save? A suggested amount is 10% to 15% of your income. If you’re waiting for a lottery ticket, corporate buyout, IPO, or inheritance from a rich uncle, you may be waiting for a long time – possibly forever. Saving $1,000 per month for 30 years will grow to $1.2 million if you can earn 7% on your investment.
  • I can borrow my way to wealth. Debt is an anchor and it will hinder your opportunities to create wealth. The more debt payments you’re making, the less money you can invest. Debt is also a fixed cost and will last the life of your loan. For example, if you borrow $300,000 for 30-years at 4.5%, it will cost you $247,000 in interest.
  • I’m young, I don’t need life insurance. If you’re married with young kids, have a mortgage, a few car loans, and a student loan or two, you need life insurance. How much? At a minimum you’ll need enough to pay off all your debts. If you include the cost for college and survivor income for your spouse, it will add to the amount of life insurance you’ll need. A stay-at-home spouse needs life insurance as well.
  • I’m young so I don’t need to save money until I’m older. Dave Ramsey tells a story about Jack and Blake. Jack is 21 years old and saved $2,400 per year for nine years and then stopped investing. He invested a total of $21,600 and it grew to $2.54 million. Blake, on the other hand, started investing at age 30. He invested $2,400 for 38 years. His total investment of $91,200 grew to $1.48 million. Jack’s nest egg is more than a million dollars greater than Blake’s all because he started when he was young.[1]
  • I’m old, I don’t need to invest for growth. You may live to age 100, or beyond. A person who retires at 65 might spend 35 years in retirement. If you retire your money to a bank or money market fund when you stop working, it will lose value after you factor in inflation and taxes. At a 3% inflation rate, your dollar will lose 35% of it’s value after 35 years – a loss of 1% per year. Contrast this to an investment in Vanguard’s S&P 500 Index Fund on May 29, 1984. A $10,000 investment is now worth $398,000!
  • I can trade my way to prosperity. Day traders, market timers and speculators generate high commissions, short-term tax liabilities, but not wealth. Asset allocation accounts for 93.6% of your investment return. The remaining 6.4% is attributed to market timing and investment selection.[2]
  • I can keep up with the Joneses. Do your friends drive Ferraris and drink Screaming Eagle Cabernet Sauvignon, but you drive a Prius and drink La Croix? If so, hanging out with your friends could be damaging to your wealth. Trying to keep up with your neighbors financially is a fool’s errand. Focus on your finances, not theirs. Who cares if your neighbor has a bigger boat?
  • I don’t need a financial plan. Have you tried taking a road trip without a GPS? Have you ever been lost on a mountain trail without a map? If you’ve ever planned a family vacation, you know the benefit of a solid plan. A financial plan will help you quantify and prioritize your goals. It will be your guide and travel companion.

Facts matter, especially when it comes to investing. Investment truth for success: Invest early, invest often, think long-term, keep you your fees low and create a financial plan.

The problem with quotes on the Internet is that it is hard to verify their authenticity.” ~  Abraham Lincoln (source: the Internet)

May 30, 2019

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.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than 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.

[1] Financial Peace University

[2] Determinants of Portfolio Performance, Financial Analyst Journal, July/August 1986, Vol 42, No. 4, 6 pages; Gary P. Brinson, L. Randolph Hood, Gilbert L. Beebower.

Do Investment Returns Matter?

The S&P 500 rose 13% in the first quarter.  Are you satisfied or frustrated if your investment portfolio “only” made 12%?

During the quarterly review season investors want to know how well their accounts performed. Did they make money? Did they outperform the market? Will the trend continue? These are common, and logical, questions investors ask their advisors – but are they the right ones to ask?

Of course, returns matter. However, rather than focusing solely on your investment returns, you should review your financial goals and savings target. Are you saving money? Are you investing for a purpose? Do you have written financial goals? If you aren’t saving any money, your returns won’t matter. Nor will they matter if you’re not investing for a purpose like buying a new home, saving for retirement, or funding an education.

Identifying your investment goals is paramount to determining if you’re on the right track. For example, if your goal is to retire with $1 million and your current account balance is $1.2 million, you don’t need to take aggressive risks with your money. A conservative mix of investments will help you grow and preserve your wealth. On the other hand, if your balance is $250,000, you’ll need to own a growth-oriented portfolio loaded with quality stocks.

Time is also a factor. A 25-year old who saves $500 per month needs to earn 6% per year to reach $1 million in assets by age 65. A 50-year old needs to earn 25% – an unrealistic rate of return.

Investment goals and time frames are linked. Will you need your money in one year or less? If so, invest in short-term investments like U.S. T-Bills, money market funds, or CDs. These low-yielding investments will underperform stocks over time, but your goal is not to generate the highest return because you’ll need the money in the near term.

Saving for college is also time dependent – 18 years or less. If you recently had a baby, then an all-stock portfolio makes sense. As your child approaches age 18, move the assets to safer investments. When my daughter was born her account was filled with individual stocks. When she entered college, I moved half her assets to U.S. T-Bills so I could pay for her tuition, rent and food. She’s graduating from college in December and this strategy worked well.

Retirement is a primary goal for most. Saving as much as possible for your retirement is recommended. You’re allowed to contribute $19,000 per year to your 401(k). If you’re 50 or older, you can add another $6,000. You can also contribute $6,000 to an IRA. You can contribute another $1,000 if you’re 50 or older

During your next quarterly review, focus on your goals rather than your returns. Here are a few suggestions to help you transition from returns to goals.

  • Establish goals. If you don’t have a target, you can’t measure your progress. Once you document your financial goals, you’ll know if you’re on track – or not. Set up a system to monitor your progress. You can create a savings thermometer like you see at fund raising events! If you’re on track, stay the course. If not, make the necessary adjustments.
  • Increase your savings. You can’t control the stock market and returns are fleeting, but you can control how much money you save. In 2017 the S&P 500 rose 21.8%. It fell 4.4% last year. Let’s return to our 25-year old investor. She needs to earn 6% per year to reach $1 million at age 65 if she saves $500 per month. If she increases her monthly savings to $1,000, she only needs to earn 3.32%.
  • Control your spending. To retire, you need to cover your expenses. The lower your expenses, the less money you’ll need to save for retirement. For example, if your annual expenses are $100,000, you’ll need at least $2.5 million to pay for your expenses. If you can lower them to $75,000, then the amount you’ll need to save is $1.875 million. Do you track your expenses? Creating a spending goal or budget plan will help you establish your asset target. Multiply your expenses by 25 to figure out how much money you’ll need for retirement. Are you on track?
  • Adjust your asset allocation. An allocation to 100% stocks will give you the best opportunity to create long-term wealth, but it will be a bumpy ride. In 2008 the S&P 500 fell 37%. A portfolio consisting of 50% stocks and 50% bonds fell 20%. Adding bonds to an all equity portfolio will reduce your risk. What is your appropriate asset allocation? It depends on your tolerance for risk, financial goals, and time horizon. You can click on this link to identify your risk tolerance: https://clients.riskalyze.com/risk-questionnaire/questionnaire-intro
  • Big wins. The largest investment in your account will have the biggest impact on your returns. My parents best performing stock has been Starbuck’s, it’s also their smallest position. It has little impact on their account. Denmark’s stock market has outperformed the U.S. market by 4% per year for the past 20 years. Denmark accounts for 1% of the global market capitalization while the U.S. accounts for 54%.[1] When U.S. stocks move it makes an impact, not so much with Denmark.

It’s important to generate positive long-term returns, but it’s more important to have financial goals. Take some time to identify your goals so at your next quarterly review meeting you can focus on your progress.

Risk comes from not knowing what you’re doing. ~ Warren Buffett

May 9, 2019

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.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than 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.

[1] Dimensional 2019 Matrix Book

The Masters

Tiger Woods roared to life by winning the 2019 Masters – his fifth green jacket.  He last won at Augusta in 2005 and it’s his first major win in 11 years. Athletically, his win marks one of the greatest comebacks in all of sports.

His trials and tribulations are well documented, and few people gave him much of a chance of returning to glory. After his fall from grace, experts weighed in on his golfing future:

Stephen A. Smith, “His short game is gone. His health is gone.”[1] Mr smith is now suggesting “Tiger will catch Jack Nicklaus for the most major wins.”[2]

Jamele Hill said his next press release should be, “I’m retiring.”[3]

Colin Cowherd considered him a “former golfer.”[4]

Shannon Sharpe added, “He will never, ever be that guy again.”[5]

It takes perseverance and courage to pursue your goals after an 11-year dry spell. It’s even harder when people are telling you to quit and you’re a has been, but he kept swinging. Several sponsors dropped him after his fall including AT&T, Accenture, PepsiCo, Proctor & Gamble and Tag Heuer. Nike, Bridgestone Golf Balls and Taylor Made, however, stayed the course with Mr. Woods and they were rewarded when he conquered Augusta on Sunday.[6]

Investors would be wise to follow his lead, especially when it comes to perseverance. A few investment sectors have been out of favor for a long time, even decades. The urge to move your money from underperforming sectors may be high, but history tells us this may be a mistake. Ask Tiger.

Let’s look at a few investment categories in need of a win.

International Investments. Foreign markets have trailed U.S. stocks for the past 1-, 3-, 5- 10-year periods – by a lot. A $10,000 investment ten years ago in the Vanguard S&P 500 index fund (VOO) is now worth $26,280. By comparison, the same investment in the iShares MSCI EAFE ETF (EFA) is only worth $12,830 – a difference of $13,450. International stocks account for about 48% of the world’s market capitalization, so an allocation to this sector still makes sense.

Value Stocks. Growth stocks have outperformed value stocks over the past 1-, 3-, 5-, 10-, and 25-year periods.  Value stocks did outperform during the lost decade of the 2000s. What is a value stock? Some popular names include Johnson & Johnson, Exxon Mobile, Pfizer, AT&T, Walmart, and IBM. Growth names include Apple, Amazon, Microsoft, Facebook, Disney, Netflix and Mastercard.

Fixed Income. Stocks have trounced bonds for the past 92 years by a ratio of 49 to 1. A dollar invested in stocks in 1926 is now worth $7,025. The same dollar invested in bonds grew to a paltry $142. Bonds have shown brief moments of brilliance by rising 25.9% in 2008, 27.1% in 2011, and 24.7% in 2014. Despite their lackluster returns and low yields, bonds are needed for safety and liquidity, especially during times of stock market turmoil.

In hindsight, allocating 100% of your portfolio to U.S. large-cap growth stocks makes sense. But this is not a prudent strategy for most investors. Dating back to 1992, the Vanguard Growth Index fund (VIGIX) generated an average annual return of 9.7%, but it fell 58.5% during the Tech Wreck (2000 – 2002) and 49.6% during the Great Recession (2007 – 2009). During the fourth quarter of last year it fell 19.8%. Not many investors would have had the courage, or foresight, to stay invested during those tumultuous days.

At times we must walk through the valley to reach the mountain top. During the dark days it takes faith and fortitude to hold on for better days. To be a successful investor, focus on the long term, ignore the noise, diversify your holdings, invest often, rebalance annually, and keep your fees low.

So, tee it up and invest for the win.

Not only so, but we also glory in our sufferings, because we know that suffering produces perseverance; perseverance, character; and character, hope.  And hope does not put us to shame, because God’s love has been poured out into our hearts through the Holy Spirit, who has been given to us. ~ Romans 5:3-5

April 16, 2019

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.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.

 

 

 

[1] Skratch TV, https://www.youtube.com/watch?v=Fue0sQs5jtI, website accessed 4/15/19.

[2] http://www.espn.com/golf/, accessed 4/15/2019

[3] Skratch TV, https://www.youtube.com/watch?v=Fue0sQs5jtI, website accessed 4/15/19.

[4] Ibid

[5] Ibid

[6] https://www.wsj.com/articles/tiger-woods-rewards-nikes-loyalty-with-masters-win-11555351215?mod=searchresults&page=1&pos=1, April 15, 2019, Suzanne Vranica and Khadeeja Safdar

Beware Ten Year Track Records

Mutual fund companies and asset managers will start touting their 10-year performance record with dazzling numbers. The marketers will try to lure you in based on their outsized performance. But, before you invest, dig deeper. Ask to see their 15-year track record. If they don’t have one, review their performance from 2008. How did the fund perform during the Great Recession?

These companies are rejoicing, as they should, because it’s March 2019 and they’re now able to report their 10-year track record without including the disastrous year of 2008. The bear market is finally in the rearview mirror for reporting purposes.

How significant is this change? Well, the 10-year average annual total return for the S&P 500 from March 2009 to 2019 has been 16.5%. By comparison, the 10-year return ending 2018 was 7.13% – a difference of 9.37%! Since 1926 the S&P 500 Index has averaged 10%, so the recent returns are well above the historical average.

Of course, the returns are what they are, but they’re exaggerated due to the sharp sell-off during the Great Recession when the S&P 500 Index fell 53%. The index bottomed on March 9, 2009 and then it went on an extraordinary run for the next 10 years, rising 317%! If, and it’s a big if, you invested $10,000 at this juncture it would be worth $41,750 today.[1]

Despite these outsized gains a majority of U.S. Large Cap Funds still underperformed their index. In fact, only 10.9% of actively managed mutual funds beat their index over the past 10 years. The funds with the lowest cost did slightly better as 17.3% of this group beat the index. However, funds with high fees were destroyed as only 2.1% managed to do better than the market.[2]

Here are a few suggestions to help you build a mutual fund portfolio.

  • Invest in low-cost mutual funds managed by Dimensional Fund Advisors or Vanguard. Adding Exchange Traded Funds (ETFs) from Blackrock or Vanguard will help keep your costs low.
  • Diversify your assets across large, small and international funds. Adding bonds and real estate holdings will further diversify your portfolio.
  • Build your portfolio around your financial goals and risk tolerance. These two ingredients will help determine your asset allocation.
  • Time is your friend when investing in the stock market. A time horizon longer than five years should include a heavy dose of equity funds.
  • Rebalance your investments once or twice per year. This will keep your asset allocation and risk tolerance in check.
  • Review past returns for as long as the data is available on your fund. You can research this data on several sites including Yahoo! Finance, Morningstar, YCharts, or the Wall Street Journal.
  • Analyze the fee structure. Avoid funds with a front-end sales charge, a deferred sales charge, or a 12b-1 fee.
  • Incorporate a buy and hold philosophy. Don’t fret the daily fluctuations in the market or listen to the “experts” about the pending correction.

This past decade has treated investors well. What will the next decade bring? Who knows, but if history is a guide, it will be a good one.  Stay invested my friends.

I can only control my own performance. If I do my best, then I can feel good at the end of the day. ~ Michael Phelps

March 20, 2019

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.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog. Past performance does not guarantee future results.

 

 

 

 

 

 

 

[1] YCharts – March 9, 2000 – March 20, 2019

[2] https://office.morningstar.com/research/doc/Feb%2007%202019_US_ActivePassive_Barometer_-_7_Takeaways_from_the_2018_911724, Ben Johnson, 2/7/2019

A Watched Pot

A watched pot never boils, or so I’m told. When I was much younger, I put this theory to test and, to my surprise, the water did boil as I kept my eyes glued to the pot.

Watching water boiling, grass growing, or paint drying is boring and a waste of time. Similarly, watching your investment accounts daily is not productive. Your investments will rise or fall whether you watch them or not. In fact, they may perform better if you don’t watch them at all.

In a study by Greg B. Davies and Arnaud de Servigny the authors discuss how often people check their investment accounts and their corresponding performance. They found that people who check their account balances daily experienced a loss 41% of the time. Individuals who checked their balances every five years experienced a loss about 12% of the time and those who checked it every 12 years never lost money.[1]

Last December stocks gyrated dramatically. If you looked at the stock market on Christmas Eve, it was down 3%. Had you waited until the day after Christmas to check in on the stock market, it climbed 5%. The Dow Jones averaged a 9.4% average annual return for the past five years. A $10,000 investment in the Dow Jones Industrial ETF (DIA) five years ago is now worth $17,798. However, during this impressive run, the market experienced several down days. The Dow had 107 down days of 200 points or more and two days where it fell over 1,000 points. And, 45% of the time, the index closed in negative territory. If you were micro-managing your portfolio, your urge to sell may have been high during these down days.

Trying to time the market is near to impossible. Rather than focusing on the daily moves in the market, pay attention to those things you can control. Here’s a list of items you should be watching.

  • Focus on your long-term goals and review them annually. Your goals will help guide your financial decisions.
  • Review your accounts quarterly or semi-annually. If they are allocated properly, you won’t need to make daily adjustments.
  • Review your fees often. Read the small print to make sure your fees are inline, and you’re not being over charged for services you didn’t agree to.
  • Check your credit reports annually. Credit Karma also recommends checking them before a major purchase or applying for a new job.[2]
  • Credit card and bank statements should be viewed monthly. A scan of your statements is wise to make sure your debits and credits are being applied correctly.
  • Utility bills and other household statements should be checked semi-annually. Your statements may be delivered electronically, and your payments deducted automatically from your bank account, so checking these accounts for additional fees and balances is recommended.
  • Your asset allocation should be reviewed annually. Over the course of a year, your accounts may move substantially. If your account balances are not in line with your risk profile, rebalance them to your original asset allocation.
  • Your financial plan should be reviewed every two to three years.
  • If you have a family will or trust (and you should), it should be reviewed every five years unless you have a major lifestyle change.
  • Your insurance policies – home, life, auto, should be reviewed annually.

Keeping a watchful eye on your household metrics is paramount. It’s important to be on guard and vigilant when watching your finances and other items that are important to your family, so you don’t get boiled accidentally.

Be alert and of sober mind. Your enemy the devil prowls around like a roaring lion looking for someone to devour. ~ 1 Peter 5:8

March 5, 2019

Bill Parrott is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.

 

 

 

[1] Greg B. Davies, Behavioral Investment Management: An Efficient Alternative to Modern Portfolio Theory (McGraw-Hill, 2012), p. 53. The Behavioral Investor by Daniel Crosby, Ph.D. – Kindle Edition, location 1423, accessed 2/10/19.

[2] https://www.creditkarma.com/credit-cards/i/how-often-check-credit-reports/, by Christy Rakoczy Bieber, 12/4/2018.

Time Frames

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

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

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

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

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

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

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

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

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

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

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

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

February 27, 2019

Bill Parrott is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.

 

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

[2] Ibid

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

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

[5] Morningstar Office Hypothetical Report

What if I’m Wrong?

Being wrong is no fun just ask the referees from the recent NFC playoff game between the Los Angeles Rams and New Orleans Saints.

Timing is everything and sometimes the difference between right and wrong is a split-second decision. Of course, no one wants to be wrong, but it’s a part of life.

I believe stocks will generate wealth for years to come, but what if I’m wrong? What if you invest at the wrong time and lose money? Can you recover from a sharp sell off? Since 1926 stocks have risen about three quarters of the time and generated an average annual return of 10%. They’ve created wealth for legions of investors but what if it’s different this time?

Let’s look back at four difficult times for investors: 1929, 1973, 2000 and 2008.

1929

On January 1, 1929 an investor who started with $1,000,000 and allocated their holdings to 60% stocks, 40% bonds lost money for six straight years before recovering in 1935 with a value of $1,018,082. The stock component of $600,000 fell 65% to $207,961 by the end of 1932. The bond portfolio never dipped below $400,000. The returns weren’t great, but over 20 years the portfolio generated an average annual return of 3.8%.  From 1929 to 1949 stocks rose 50% of the time, bonds 85%.  At the end of 1949 the portfolio was worth $2,188,086, a gain of $1,188,086.

1973

An investor with a $1,000,000 portfolio and an allocation of 60% stocks, 40% bonds in 1973 had to wait until 1976 before their account was profitable. The combined portfolio generated an average annual return of 7.05% from 1973 to 1983. Stocks fell 37% in the first two years, but they made money 63% of the time, bonds made money 54%. The $1,000,000 portfolio was worth $2,114,774 at the end of 1983, a gain of $1,114,774.

2000

An investor with $1,000,000 and an allocation of 60% stocks, 40% bonds had to wait until 2003 before their portfolio recovered. Stocks fell 37% from 2000 to 2002 and their bonds never lost money. In fact, from 2000 to 2018 bonds outperformed stocks by a wide margin. Stocks averaged 4.65% annually while bonds returned 6.87%. The combined portfolio turned $1,000,000 into $2,834,987 at the end of 2018, a gain of $1,834,987. Stocks rose 74% of the time, bonds 79%.  The combined portfolio generated an average annual return of 5.64%.

2008

An investor with $1,000,000 and an allocation of 60% stocks, 40% bonds had to wait two years before their portfolio recovered. In 2008 stocks fell 37% and bonds rose 26%. Stocks rose 81% of the time, bonds 63%. The combined portfolio returned 6.44% per year and the portfolio grew to $1,987,575 at the end of 2018, a gain of $987,575.

Despite investing during some of the worst times in history, these portfolios still generated positive returns over time. A courageous investor made money by staying the course. Trying to time the market and panicking during downturns will do more harm than good. If you’re a long-term investor, ignore the short-term ripples in the market.

Now faith is confidence in what we hope for and assurance about what we do not see. ~ Hebrews 11:1

January 23, 2019

Bill Parrott is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.  The returns were calculated based on the data from the 2015 Ibbotson® SBBI® Classic Year Book.

 

A New Year

2018 was less than kind to investors as all major asset classes finished in negative territory. Cash was the best performing asset for the first time since 1994 and only the 10th time since 1926.

Diversification is still vital for investors to obtain and maintain wealth. A mix of stocks, bonds and cash based on your goals and risk tolerance is recommended. In a “normal” market stocks outperform bonds and cash. Stocks have risen about 75% of the time over the past 100 years, but, on occasion, they drop in value like they did last year.

Investors question the wisdom of owning bonds and cash during a rising market. From March 9, 2009 to October 1, 2018, the market rose 307% or 15.7% per year! It was a great bull run. When stocks are rising 15% per year who wants to own bonds paying 2%? But when stocks fall, bonds don’t look so bad. During the 4th quarter the Dow Jones fell 12.4% while long-term bonds rose 4.6%.

Rather than trying to time the market and move in and out of stocks with precision, focus on your goals and asset allocation. Here are a few suggestions to get you started.

  • Write down your goals. What do you want to achieve in 2019 – financially, personally, professionally? If you write down your dreams, they become goals.
  • Do you have any immediate financial needs? If so, attack these items first. Don’t let them fester. It’s not possible to pursue your financial dreams if something is holding you back. A boat can’t leave the harbor if it’s tied to a dock.
  • Create a financial plan. Your plan will help you quantify and prioritize your goals. It will also determine your asset allocation and risk tolerance.
  • Develop a spending plan. Do you know where your money is going? A budget will help you create wealth over time by redirecting your spending to savings.
  • Diversify your assets. As I mentioned, stocks, bonds and cash are essential to your long-term investment success. Adding international and alternative investments to your portfolio will also help your results.
  • Rebalance your accounts. January is a great time to rebalance your accounts and return them to your original asset allocation. If you didn’t make any changes to your accounts last year, it’s possible your equity exposure is below your target allocation because of the market drop.
  • Payoff debt. Do you have car loans, credit card debt, student loans or a mortgage? If you have assets to pay off these debts, do it today! Reducing your debt level is freeing financially and emotionally. In addition, you’ll save thousands of dollars in interest payments over the life of your loan. Let’s say you owe $30,000 on a car loan with a 4% interest rate. If you paid it off, you’d eliminate your $552 monthly payment and save over $3,100 in interest payments. Can you find a better way to spend $552 per month?
  • Establish an emergency fund. The goal is to reach three to six months of expenses in short-term savings like CD’s or T-Bills. For example, if your monthly expenses are $10,000, then try to save $30,000 to $60,000. I’ve run several marathons and the hardest part has always been the first day of training. Once I started, however, the training became easier.
  • Give money to groups or organizations you support. Giving will loosen your grip on your money, help others, and make you happier.
  • Health is wealth. January is a great time to start working out. Invest some time in walking, hiking, biking, running, climbing, skiing, swimming, lifting, or anything that gets you moving.

Focus on the future. Don’t let last year’s lousy market hold you back. The Baylor Bears won 1 football game in 2017 finishing with a dismal record of 1-11. However, they didn’t let the disappointment of their horrible season ruin their plans for 2018. Rather, they trained with a process and a purpose, concentrating on those items they could control. How did they do in 2018? They won 7 games and beat Vanderbilt in the Texas Bowl – quite a turnaround.

A new year gives you 365 new opportunities – so get going!

Let your eyes look straight ahead; fix your gaze directly before you. ~ Proverbs 4:25

January 2, 2019

Bill Parrott is the President and CEO of Parrott Wealth Management firm 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 to help our clients pursue a life of purpose.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.

Who Cares?

Who cares that the current bull market has risen more than 260% when stocks have dropped 7% in the past month? Does it matter that stocks have generated an average annual return of 10% for the past 100 years or markets rise 75% of the time when this year will be negative? Stocks have outpaced bonds and cash for decades, but so what? This year bonds and cash have the upper hand.

The current bull market started on March 9, 2009 after a grueling 17-month bear market. The current recovery is (was) over nine years old – one of the longest recoveries on record.  Did the market go straight up during this historic run? Of course not. It was littered with several corrections.

During this bull market, the Dow Jones experienced 68 days when it fell 2% or more and 45% of the time it produced a return of 0% or worse. The average daily gain has been .06% – yawn.

Here is a year by year look at this bull market.

2009 – After the bull market started, it dropped 7.42%. It finished the year up 18.82%.

2010 – During this year the market fell 7.6%, 13.5% and 5.12%. It finished the year up 11.02%.

2011 – During this year the market fell 6.28%, 7.12%, 16.26%, and 8.17%. It finished the year up 5.53%.

2012 – During this year the market fell 8.87% and 7.75%. It finished the year up 7.26%.

2013 – During this year the market fell 4.86%, 5.6%, and 5.75%. It finished the year up 26.50%.

2014 – During this year the market fell 13.75%, 4.5%, 6.64%, and 4.95%. It finished the year up 7.52%.

2015 – During this year the market fell 14.44%. It finished the year down 2.23%.

2016 – During this year the market fell 10.12%. It finished the year up 13.42%.

2017 – During this year the market fell 1.9% – a mild year. It finished the year up 25.08%.

2018 – This year the market has fallen 11.58%, 4.75%, and 12%. The year isn’t over yet!

As you can see, this bull market experienced significant drops, but it always recovered. Will this time be different? Who knows? Time will tell.

Here are a few suggestions if you’re concerned about the recent market volatility.

  1. If you need money in the next one, two or three years, do not invest it in the stock market. Rather, invest in a money market fund, CD or U.S. Treasury Bill.
  2. If the market is keeping you up at night, your allocation to stocks is too high. Sell your stocks to your comfort level.
  3. Work on your financial plan. Your plan will determine your asset allocation based on your goals. If your plan, goals, and asset allocation are aligned, you’re more likely to stay invested through good times and bad.
  4. Time the market. Sell at the top; buy at the bottom. Just kidding. No one has been able to consistently time the market, but who knows, you may be the one to do it.

These past three months have been brutal. The market downturn has turned a decent year into a poor one. This happens occasionally. During the next two weeks spend some time reviewing your goals. If they’re still intact, stay the course.

People who succeed in the stock market also accept periodic losses, setbacks, and unexpected occurrences. Calamitous drops do not scare them out of the game. ~ Peter Lynch

December 18, 2018

Bill Parrott is the President and CEO of Parrott Wealth Management firm 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 to help our clients pursue a life of purpose.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.

 

Source: YCharts. Year by year data does not include dividends.

 

Photo Credit: Victor Brave

 

 

 

 

Is Bad Good?

Global markets have dropped considerably the past three months. The Dow Jones has fallen about 8% as investors react to negative headlines about trade wars, Brexit, interest rates, and several other issues. They have been selling stocks to buy bonds or park money in a cash account. These remedies may feel good in the short-term, especially as markets fall, but over time it’s not a wise strategy.

Quantifying investor behavior is challenging. Calculating emotions in a spreadsheet is impossible. However, sentiment indicators try to capture this information.

Sentiment indicators are contrarian, by nature, and they tend to follow the market’s direction. If stocks rise, so do the indicators.

The CBOE Volatility Index (VIX), CBOE Equity Put/Call Ratio, the American Association of Individual Investors Bull-Bear Spread, and mutual fund flows are a few of the more popular sentiment surveys.

The CBOE Volatility Index, the VIX, is the fear gauge. When fear is high, it rises. On November 20, 2008, it peaked at 80.86, indicating an extreme level of fear in the markets. Stocks would fall for a few more months before rising 267%. The average VIX reading is 18.39. It currently stands at 21.63.

The CBOE Equity Put/Call ratio is an indicator utilizing options. When it’s above .7 investors are buying more puts than calls. Put buyers expect the market to fall so they’ll profit if it does. When investors buy calls, they expect the market to rise. If the reading is above .7, it’s bullish. Below .45 is bearish. The current reading is .79. On August 21, 2008, the put/call ratio was .39. Investors were buying calls because they were optimistic the market would continue to rise. They were very confident – too confident. The market fell 37% by the end of 2008.

Measuring mutual fund flows is another solid indicator for investors. When they feel secure, investors buy mutual funds. When they’re scared, they sell. From April 2016 to December 2016 investors withdrew $199 billion from equity mutual funds fearing a market drop. In 2017, the Dow Jones rose 24.33% – a great year for the index. In the past three months investors have sold $62 billion worth of mutual funds.

My favorite sentiment indicator is from the American Association of Individual Investors. When this indicator is high, investors are confident. On August 21, 1987, the indicator reached 66. Two months later the Dow Jones fell 22% – the worst one-day drop in its history. On January 6, 2000, it hit an all-time high of 75. Three months later the Tech Wreck would arrive. The NASDAQ index would fall more than 50% over the next two years.  One of the most pessimist readings ever recorded was March 5, 2009 when it touched 18.92. Four days later stocks hit bottom and started a nine-year bull run. Today the indicator is flashing a pessimistic warning of 20.90%. The historical average is 38.24.

These indicators are currently in negative territory, a positive for stocks. When pessimism and fear rise, stocks look more attractive. The market likes to climb a wall of worry.

Not to be left out of the indicator game, the New York Times ran an article about the 2019 financial crisis that hasn’t happened yet. The article appeared in their style section.[1] Business Week’s famous headline, “The Death of Equities” appeared in August 1979. Had you purchased stocks on the day it ran, you would have enjoyed a gain of 2,641%!

Ron Paul is also getting into the prediction business. He’s predicting a 50% correction that will “spark depression-like conditions that may be ‘worse than 1929.’”[2]

Of course, no indicator is perfect. A negative one isn’t always positive. It’s imperative to focus on your goals. If they haven’t changed, stay the course. It takes courage and fortitude to hold stocks when everybody is selling but owning great companies for the long haul is how wealth is created.

The big money is not in the buying and the selling, but in the waiting. ~ Charlie Munger

December 17, 2018

Bill Parrott is the President and CEO of Parrott Wealth Management firm 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 to help our clients pursue a life of purpose.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.

 

[1] https://www.nytimes.com/2018/12/10/style/2019-financial-crisis.html, by Alex Williams, 12/10/2018

[2] https://www.cnbc.com/2018/12/14/ron-paul-market-meltdown-could-spark-depression-like-conditions.html, by Stephanie Landsom