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

Riptides

Growing up in Southern California I spent a considerable amount of time at the beach – Huntington, Newport, Laguna and Mission – boogie boarding, body surfing, snorkeling, or scuba diving. On occasion I’d get stuck in a riptide.

Riptides are dangerous and can be life threatening. The most important thing to do if you’re caught in one is to relax. Don’t try to swim directly back to shore because the riptide is pulling you out to sea. It’s exhausting to swim against the tide and this is when you’ll get in trouble. To escape, swim horizontally to the riptide, parallel to the shore. Once you start swimming across the tide, identify a lifeguard tower to help you keep your bearings. After a while, you’ll be out of the riptide and you can swim safely back to shore.

Investors probably feel like they’re stuck in a financial riptide because the markets, all markets, are struggling this year.

Mutual funds are having a lackluster year. In fact, 82.5% of all mutual funds are in negative territory.  There are a few funds up more than 10% for the year, very few. The percentage of funds in double digit territory is .74%. Ned Davis Research recently reported that no asset class has generated a return of more than 5% – a first since 1972.[1]

Individual stocks aren’t faring much better as 70% of U.S. stocks are trading in negative territory.

What should you do if your portfolio is stuck in a financial riptide?

  • Don’t panic or make rash decisions.
  • Review your plan and your investments. Are you still on track to reach your goals? If you are, do not make any changes.
  • Look for bargains. In a down year, locate good investments that are oversold to add to your portfolio for future growth.
  • Rebalance your portfolio. As markets fluctuate, it’s possible your asset allocation is out of sync. For example, if your original allocation was 50% stocks, 50% bonds, it may now be 40% stocks, 60% bonds. When you rebalance, it will return your portfolio’s asset allocation to your original stance of 50%/50%.

Sometimes you must go sideways to reach your goals. It would be nice to generate a 10% return every year, with no downside, but this isn’t possible. Like tides, markets rise and fall. They fluctuate. The market will eventually recover. In the meantime, keep your eyes fixed on the horizon and focus on your long-term goals.

Life is a little like a message in a bottle, to be carried by the winds and the tides. ~ Gene Tierney

December 11, 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] MSCI Bloomberg Barclays Indices, Ned Davis Research, Inc. Russell, Source: S&P GSCI, Ed Clissold, Chief U.S. Strategist for Ned Davis Research Group, 11/26/2018,

Cash is King!

Cash is King! The King is Dead! Long live the King! An unusual thing is happening this year – cash is outperforming stocks and bonds. Allocating your investments to T-Bills has been a winning trade this year.

According to Deutsche Bank, 90% of the 70 asset classes they track are in negative territory for the year. As a comparison, last year only 1% of assets generated negative returns.[1]

U.S. T-Bills, or cash, rarely outperform stocks and bonds. In fact, it has only happened 8 times in the last 92 years. The last year was 1994.[2]

Treasury Bills are a safe investment, probably the safest.  Since 1926 they have never lost money – a rare feat for an investment. If they’re so safe and have never lost money, why not allocate 100% of your assets to this category? Great question. A major reason is inflation. Inflation has all but wiped out your realized return. T-Bills have historically averaged 3.4% and inflation has averaged 2.9%. Your net return, before taxes, has been .5%. If you subtract taxes, your return is negative.[3]

In 1974, T-Bills generated a return of 8%, but the inflation rate was 12.2% – a real loss of 4.2%.[4]

Cash is part of the asset allocation pie of stocks, bonds and cash. All three components are needed for you to achieve long-term investment success.

Cash may provide temporary comfort during a stock market downdraft, but it’s not a long-term solution to creating wealth. Of course, if you need money in the next year or two, then an allocation to cash make sense. For example, if you’re going to buy a new home next year, then a high cash reserve is needed.

A recent client transferred money from their CD to their investment account, a diversified portfolio with several asset classes. Her diversified portfolio is in negative territory so far. She asked me a few weeks ago if she would’ve been better off keeping her money in the CD, and I told her yes, it would have been the better strategy. Hindsight is 20/20.

Stocks aren’t performing well this year looking to break a nine-year winning streak. Stocks never appreciate in a straight line, unfortunately. A jagged chart of stocks is the norm. High points and low ones dot the landscape.

How should you allocate your assets between stocks, bonds and cash? The best way to determine your allocation is to complete a financial plan. Your plan will give you guidance on how to best invest your resources.

When should you allocate more resources to cash? If you need money, then keep it in cash – money market funds, CDs or T-Bills. If you’re approaching retirement, then my recommendation is for you to allocate three-years’ worth of expenses to cash. For example, if your annual expenses are $100,000, then a cash allocation of $300,000 is suggested. Last, if you can’t sleep at night because you’re worried about stocks falling further, then raise enough cash so that you can make it through the night.

If your time horizon is more than five years, invest in stocks and bonds.  Despite their sporadic returns, they historically generate higher returns than cash.

For we walk by faith, not by sight. ~ 2 Corinthians 5:7

November 26, 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.

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

 

 

 

 

[1] https://www.wsj.com/articles/no-refuge-for-investors-as-2018-rout-sends-stocks-bonds-oil-lower-1543155033, Akane Otani and Michael Wursthorn, 11/25/2018

[2] Ibbotson® SBBI® 2015 Classic Yearbook

[3] Dimensional Fund Advisors 2018 Matrix Book

[4] Ibbotson® SBBI® 2015 Classic Yearbook

My Two Best Days

Tommy Lasorda once said, “The best possible thing in baseball is winning the World Series. The second-best thing is losing in the World Series.” He added, “When we win, I’m so happy I eat a lot. When we lose, I’m so depressed, I eat a lot. When we’re rained out, I’m so disappointed I eat a lot.” Mr. Lasorda didn’t let his circumstance alter his mood. He recognized the beauty of playing baseball regardless if his teams won, lost or were rained out. His two favorite days were managing when the team won and managing when they lost.

When I’m asked about how the market is performing, I’m not sure how to respond because up days and down days both provide excellent opportunities to investors. Of course, everybody likes to make money from a rising market. When stocks are rising consumer confidence is high and people feel good about their wealth and they spend money.

When the market is falling, people feel depressed and frightened because they see their assets dropping in value. When stocks fall, investors lose confidence and spend less money.

Should it matter if stocks are rising or falling? Over time, the answer is no. Stocks have risen about 73% of the time since 1926 and 54% of the time they’ve been the best performing asset class.[1] Since 2009 the S&P 500 Index has risen 267%, averaging 14.15% per year. It has not had a losing year since 2008, including this year.

A winning percentage of 73% is pretty good, but what about the remaining 27%? The market has finished in negative territory 27% of the time since 1926 and we have experienced some doozies. The market fell 43% in 1931, 35% in 1937, 26% in 1974, 22% in 2002, and 37% in 2008. Despite these disruptions, the market has averaged 10% per year for almost 100 years.

When markets drop, fear rises. However, when stocks fall you have an opportunity to buy great companies at better prices. Investors loved Amazon at $2,050.50 but hated it after falling 26% to $1,520. Why? Amazon was the same company on October 17 at its high as it was on October 30 near the low. If the market rises most of the time, why not use down days to add stocks to your portfolio? Instead of fearing a drop, get excited that you can now add great companies to your account.

As I mentioned, the S&P 500 has been the top performing asset class 54% of the time, meaning 46% of the time another investment is doing better. In 2008, long-term bonds soared 26%. Last year emerging markets climbed 35%. No trend lasts forever, so a diversified portfolio is recommended so you can take advantage of all global markets.

A globally diversified portfolio of mutual funds with a mix of 60% stocks, 40% bonds has generated an average annual return of 7.5% for the past 20 years despite the lost decade from 2000 to 2010.[2] A $100,000 investment in 1998 is now worth more than $424,000.

To stay invested for the long haul and to benefit from the rise in global markets, you need a plan. Your plan will align your goals, risk tolerance, asset allocation and investment selection. With this alignment you can enjoy the up days and tolerate the down ones. Your plan will keep you focused on those things that matter to you and your family most.

I like up days and down days, so, to me, the market is always doing well regardless of the daily moves. Markets have been rising and falling for centuries, so take advantage of up and down days to generate wealth for you and your family.

Man, I did love this game. I’d have played for food money. It was the game… The sounds, the smells. Did you ever hold a ball or a glove to your face? ~ Shoeless Joe Jackson (Ray Liotta – Field of Dreams)

11/12/2018

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.

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

[1] Ibbotson® SBBI® 2015 Classic Year Book

[2] Dimensional Fund Advisors 2018 Matrix Book

Models

A few months after the Great Recession a writer for a national magazine asked a simple question: “Did asset allocation models let down the individual investor?” I don’t think they did because conservative models lost less money than aggressive ones during the meltdown. In other words, the models performed as expected.

Asset allocation models are designed to perform based on their underlying investments. They won’t guarantee your assets against market losses, but they will perform in line with their benchmarks. In a rising market aggressive models will outperform conservative ones. The opposite occurs when markets are falling.

During a market rout you may find solace by selling your investments and moving your money to cash. In the short term, it will provide safety and comfort. However, over time, holding cash is a losing proposition because your returns will be negative after you factor in taxes and inflation.

A better idea is to align a model to your risk tolerance and financial goals. If your time horizon is longer than five years, a growth-oriented model may be more fitting than an all cash strategy. You’re likely to stay invested through a market cycle if your portfolio is aligned to your beliefs giving you an opportunity to capture the returns from the long-term trend of the stock market.

How do you know which model is suitable for your situation? There are companies that provide risk tolerance software to help determine the right model for you and your family. Riskalyze and Finametrica are two firms that work with advisors to help clients determine which model is appropriate. In addition to their algorithms, a financial plan and client conversations will complete the overall asset allocation and model process.

Why should you use a model for your investment portfolio? It will give you exposure to sectors you might not have considered if you only buy individual stocks or bonds. Your model may own a dozen different mutual funds covering several asset classes and thousands of securities. You’ll gain access to international markets, real estate holdings and high yield bonds, to name a few. In addition, it’s more efficient to rebalance a globally diversified portfolio of mutual funds allowing you to keep your risk level in check.

As we approach the end of the year, it’s a good time to review your investment strategy and your holdings. Are your accounts aligned to your risk level? Are you aware of the risk in your portfolio? A portfolio review, risk analysis, fee audit, and financial plan can help you answer these important questions – and many more!

Life is a fashion show; the world is your runway.” ~ Marc Jacobs

10/31/2018

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.

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

Correlation: Positive One

A diversified portfolio is always recommended. Balancing your accounts between stocks, bonds, and cash will allow it to grow with less risk than a concentrated portfolio.

A key metric to determine how well diversified your investments are is the correlation coefficient. It ranges from positive one to negative one. If two investments have a correlation of positive one, they’ll move in lock step. They will move in opposite directions with a correlation of negative one – one will zig, the other will zag. For example, large cap stocks and mid cap stocks have a high correlation of .97. These two asset classes will rise and fall as if they’re one.  Real estate investments and small-cap value stocks have a negative correlation of .25, so they’ll often move in opposite directions.

If we apply this metric to food, then swordfish, mahi-mahi, and tilapia are highly correlated.  Swordfish and brussel sprouts are negatively correlated.

Stocks and bonds have low, or negative, correlations and this is one of the reasons your risk will be reduced when you add bonds to your portfolio. In a rising market, investors get frustrated with a high allocation to bonds because it puts a lid on returns. However, when stocks fall, bonds help cushion the blow.

October has been horrible for stocks, bonds, and almost every other publicly traded asset class. During times of duress investors panic and sell their holdings and this causes investments to have a short-term correlation of one, meaning everything is moving in the same direction. When every asset class is in negative territory, emotion overrides logic. During a down draft, investors don’t care about negatively correlated assets, balanced portfolios, or diversified investments because they only want to sell, regardless of long-term consequences.

What can you do if your portfolio is going down and the “safe” investments are failing to stop the slide? Here are a few suggestions.

Review. Have your goals changed in the last thirty days? The recent fall in stocks has been a disruption in the long-term trend of the stock market, but it’s unlikely it will have a lasting impact on your goals. If you’re not sure your investments are aligned to your goals, then a financial plan can help you quantify them.

Rebalance. During times of market turmoil your original asset allocation has probably moved from its original mooring.  If you purchased an equal amount of stocks and bonds ten years ago, your allocation today is approximately 70% stocks, 30% bonds. The stock market has risen dramatically over the past ten years, and, as a result, your portfolio is now too aggressive based on your original asset allocation of 50% stocks, 50% bonds. Rebalancing your accounts annually will keep your risk level intact.

Purchase. Buying investments when everyone is selling is difficult, but it has proved profitable during the past 200 years or so, so I’m not sure why this time will be any different. Adding money to your investments when they are down makes financial and economic sense. If you automate your investing, it will remove some of the emotion from buying when others are selling.

Nothing. Patience is a virtue and a smart investment strategy. Doing nothing is hard, but it could pay dividends in the future. From March 1, 2009 through October 29, 2018, the Dow Jones has risen 221%. During this run, the Dow had negative monthly returns about a third of the time. It was down almost 8% in May 2012. It had 26 different months where it lost between 1% and 6%. If you panicked during these down months, you would’ve missed the long-term trend of the market for the past nine years.

Disconnect. A walk in the mountains or a stroll on the beach will clear your head. It will also take you away from CNBC and the other media outlets who declare every day a state of emergency. It doesn’t matter if the market is rising or falling, because, according to the “experts”, there’s always something lurking. Distancing yourself from the noise will give you perspective about your investments and your goals.

Give. It’s hard to worry about money when you’re giving it away to help others. Giving will reduce your dependence on money. Ron Blue said giving breaks the power of money. Paul Allen, the co-founder of Microsoft, recently died with an estate worth more than $26 billion. Over his life he gave away billions of dollars to several groups and organizations. His estate is expected to give away another $13 billion to charities when it settles.[1] His giving didn’t hinder his wealth accumulation, in fact, it probably enhanced it.

Over time correlations work and diversified portfolios produce solid gains. Time has benefited stock holders for generations, especially those who have had the courage to buy during market mayhem. Trying to time the market is impossible. Rather than trying to figure out if the market will rise or fall from one day to the next, focus on your goals and how your resources can benefit others.

He who observes the wind will not sow, and he who regards the clouds will not reap. ~ Ecclesiastes 11:4

10/30/2018

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.

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

 

 

[1] https://www.heraldnet.com/business/paul-allens-26-billion-estate-will-take-years-to-unravel/, by Simone Foxman and Noah Buhayar / Bloomberg, 10/28/2018

Marathon Investing

Running a marathon with 30 or 40 thousand runners is chaotic – especially the start. When the gun goes off the crowd surges forward, so you better be ready to run or you’re going to get steam rolled. It’s pure emotion and adrenaline.

The first few miles are crazy as runners try to find a little running room. Runners are talking, high-fiving, and taking selfies and there’s always a young guy (always a guy) who’s sprinting at full speed.

At miles five and six the crowd starts to thin a bit and the pack catches the young sprinter. The talking declines and there are no more high-fives.

When runners pass the half-marathon mark there’s no more talking; it has been replaced with the rhythmic hum of running shoes bouncing off the asphalt. Marathoners now have plenty of running room.

Mile twenty is the wall. Runners are now in survival mode as they leave the teens and cross over into the twenties. This is a psychological and emotional barrier. After blowing through this imaginary barricade, the race is now a 10k – a distance marathoners have run thousands of times.

The final two miles are exciting. The finish line is nearing, and all training is about to payoff. Crossing the finish line to the roar of the crowd is an amazing experience. A few feet later runners are given their finishers medal, their new badge of honor.

Investing and running a marathon have several things in common. Day to day the stock market is emotional, chaotic, and unpredictable. It’s impossible to try to figure out how the market will move in the short term. Investors who try to time the market usually get whipsawed and lose money.

Over a five-year time frame the stock market is more predictable, making money for investors about 86% of the time. Extending the time horizon to ten years, it has produced gains 95% of the time. Over a twenty-year period, the stock market has never lost money.[1]

The Vanguard 500 Index Fund has lost 6.34% for investors during the month of October. In the short term, it’s performing poorly, but if we extend the time horizon to 5, 10, and 15 years the results are much better. It has produced an average annual return of 11.55% for five years, 13.95% for ten years, and 8.80% for fifteen. Had you invested $100,000 in this fund fifteen years ago, you’d have $391,192 today.[2]

Runners set a goal to finish a marathon. Investors who want to succeed should also set goals. Short and long-term goals are paramount for you to track your progress. A financial plan will help you quantify the things that are most important to you and your family. Do you want to take a trip? Buy a second home? Create a foundation? All these items, and more, can be part of your plan and moving towards your goals is more important than the day to day movement in the stock market.

Seasoned marathoners rely on tools and technology to help them with their training runs. Watches, heart monitors, fit-bits, etc. record every step. Runners adjust their pace or training methods as needed. They use big data to improve their results. Investors don’t rely on technology as much as they should or could. Today, there are numerous software resources to help investors improve their results.

To become a successful investor, follow the path of a good marathon runner: set goals, take it a day at a time, monitor your performance, adjust as needed, follow your plan, keep your eyes focused on your goals, and think long-term. If you do these things, good things will happen.

The marathon is not really about the marathon, it’s about the shared struggle. And it’s not only the marathon, but the training. ~ Bill Buffum

10/24/2018

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.

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

[1] Ibbotson®SBBI® 2015 Classic Yearbook.

[2] Morningstar Office Hypothetical Tool