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

Sound Familiar?

From November 11, 1974 to November 20, 1974 the S&P 500 fell 9.6%. It dropped because of economic uncertainty and political unrest.

Let’s explore the major themes from 1974.

In August 1974 President Richard Milhous Nixon resigned. He was the first, and only, U.S. President to resign. His resignation was a result of the Watergate scandal.

Because of Nixon’s resignation and the Watergate scandal, Democrats made substantial strides in taking control of Congress and the Senate.[1]

The New York Times published an article accusing the Central Intelligence Agency of spying on U.S. citizens.[2]

Interest rates were soaring. The yield on the U.S. Treasury 10-Year Note rose 43.5% from March 1971 to September 1974. It would peak in 1981 with a yield of 15.84%.

The current yield on the 10-Year is 3.22%. If it followed the same path as it did in the late ‘70s and early ‘80s, it would rise to 3.94%, well below its historical average.

As I mentioned, the S&P 500 fell 9.6% in November 1974, falling from 75.15 to 67.9. Investors who panicked and sold their stock holdings during this rout missed out on enormous future gains.

From November 1974 to October 2018, the S&P rose 4,088%! During its 44-year run, it produced an average annual return of 8.86%.[3]

Today, the themes are similar. We currently have political unrest and rising interest rates. The market is positive for the year, but it has experienced some short-term turbulence. Don’t let the uncertainty derail your long-term plans. Follow your financial plan, stay diversified, and invest for the long haul.

What has been will be again, what has been done will be done again; there is nothing new under the sun. ~ Ecclesiastes 1:9

10/5/18

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] http://history.house.gov/Congressional-Overview/Profiles/93rd/

[2] https://www.nytimes.com/1974/12/22/archives/huge-cia-operation-reported-in-u-s-against-antiwar-forces-other.html

[3] Yahoo! Finance

Di-worse-i-fi-ca-tion?

Diversification or concentration? To create wealth, concentrate; To preserve it, diversify. A concentrated portfolio can produce huge gains, if you own the right stocks. Of course, if you own the wrong ones, your wealth will be wiped out. Buying the right sector, at the right time, at the right price requires multiple factors, most of which are out of your control. The primary ingredient for consistently picking a winning stock is luck.

Let’s look at the best performing sectors for the last 10 years and the returns they generated.

2008: Long term bonds = 33.92%

2009: Emerging Markets = 76.28%

2010: Real Estate = 28.37%

2011: Long term bonds = 33.96%

2012: International Small Cap Stocks = 21.28%

2013: U.S. Small Cap Stocks = 41.32%

2014: Real Estate = 30.36%

2015: International Small Cap Stocks = 9.10%

2016: U.S. Small Cap Stocks = 26.61%

2017: International Small Cap Stocks = 32.73%

2018 U.S. Small Cap Stocks = 14.47%

It might appear easy to pick the winner in advance, but this is not the case. For example, the emerging markets rose 76% in 2009, but lost 51% in 2008. How many investors had the courage or wisdom to invest in emerging markets in 2008? If they did, they were rewarded handsomely one year later.

International small-cap companies have been the best performing sector for 3 out of the last 10 years, so it would make sense to allocate some money to this sector. However, it does come with risks because it generated negative returns in 2008, 2011, and 2014.

Warren Buffett prefers a concentrated portfolio and it doesn’t pay to argue with the greatest investor of all time. Mr. Buffett concentrates his wealth in Berkshire Hathaway stock. Is Berkshire a concentrated or diversified holding?

Let’s look at some of the holdings listed in the 2017 Berkshire Hathaway annual report.[1] Berkshire owned the following publicly traded companies: American Express, Apple, Bank of America, Bank of New York, BYD Company, Charter Communications, Coca-Cola, Delta Airlines, General Motors, Goldman Sachs, Moody’s, Phillips 66, Southwest Airlines, U.S. Bancorp and Wells Fargo.

In addition, Berkshire also owned several privately held companies, including: Acme Brick, Ben Bridge Jeweler, Benjamin Moore, Brooks, Borsheim Jewelry, Burlington Northern, Clayton Homes, Duracell, FlightSafety International, Fruit of the Loom, GEICO, General Re, Helzberg Diamonds, Johns Manville, Jordan’s Furniture, Justin Brands, Kraft Heinz, Lubrizol Corporation, Marmon Holdings, McLane Company, MidAmerican Energy, MiTek Industries, NetJets, Nebraska Furniture Mart, Oriental Trading Company, Pampered Chef, Precision Castparts, Precision Steel Warehouse, Scott Fetzer Companies, See’s Candies, Shaw Industries, and Star Furniture.

Is his portfolio concentrated or diversified? I’ll let you come to your own conclusion, but I think it’s the later.

A balanced portfolio of 60% stocks, 40% bonds generated a 6.93% return for the past 10 years – including the sharp drop in 2008. A million-dollar investment on 8/1/2008 is worth $1.97 million today.[2]

It would be great, and financially rewarding, to always invest in the best investment but this is not possible. For most investors, a diversified portfolio of low-cost mutual funds is recommended. Your portfolio will benefit from the long-term growth generated from global markets.

I am not saying this because I am in need, for I have learned to be content whatever the circumstance. ~ Philippians 4:11

9/27/2018

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] http://www.berkshirehathaway.com/subs/sublinks.html

[2] Morningstar Office Hypothetical – 8/1/2008 – 8/31/2018. IVV, IJR, EEM, EFA, AGG. Returns are gross of fees and taxes.

Where Do Stock Returns Come From?

Peanut butter and jelly. Thelma and Louise. Calvin and Hobbes. Fish and Chips. Wayne and Garth. Some things are better in pairs!

Stock returns consist of two components: dividends and price appreciation. Dividends are paid to shareholders on a quarterly basis from the company’s profits regardless if the stock is up, down or sideways. In addition, investors can profit from price appreciation. Your total return is a combination of the two.

For example, you decide to purchase ABC company at $40 per share. If ABC pays a $1.00 dividend, your current yield will be 2.5% ($1/$40). If you sold your stock at $50, you made 25% ($10/$40). Combining your dividend income with the price appreciation, your total return was 27.5%. If you purchased 1,000 shares, you received $1,000 in income and gained $10,000 giving you a total return of $11,000.

Let’s look at a real-world example. Let’s say you purchased $100,000 worth of Coca-Cola (KO) stock on 8/1/1988 and held it through 8/31/2018. In this example, you generated an annual return of 12.66%. Your $100,000 investment grew to $3.62 million and you received $1.1 million in dividend income. Your dividend income accounted for 31.5% of the total return.

Currently there are 1,269 stocks with a dividend yield of 2% or more. Dividend Aristocrats are companies that have paid, and increased, their dividend for at least 25 years. A few companies on this elite list include: Aflac, Coca-Cola, McDonald’s, Pepsi, Procter & Gamble, Sherwin Williams, Target, and Walmart.

Of course, there are plenty of excellent companies that don’t pay a dividend. Two of the more popular ones are Amazon and Berkshire Hathaway. They plow their profits back into their company rather than pay them to you, the shareholder. In this case, the entire gain comes from price appreciation.  Amazon has generated a 10-year average annual return of 38% while Berkshire has returned 10.5% per year over the same time frame.

The key term to focus on is total return. It doesn’t matter how you make money, so long as you make money.

 two and two, male and female, went into the ark with Noah, as God had commanded Noah. ~ Genesis 7:9

9/12/2018

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.

What’s Your Home Worth – Right Now?

Did you check the price of your home today? Did you get a text on your phone that your home appreciated 5%? Did the commentators on CNBC mention it on TV?

Zillow, and a few other real estate sites, let you check the price of your home daily. When the value rises, do you call your real estate agent to sell it? When it falls in price, do you panic?

The S&P Case/Schiller Index tracks home values across the country. The 12-month return for the 20-city index was 6.31%, the 10-year return was 2.42%. The index fell 20.5% from May 2008 to March 2012.[1]  Did you sell your home because of these price changes? I doubt it. If you’re like most real estate investors, you did nothing.

Home owners are the ultimate buy and hold investors because it’s not easy to move in and out of houses on a regular basis. On a recent trip to Los Angeles I noticed a friends’ home was for sale. He purchased it about 50 years ago for $35,000; it’s currently listed for $850,000. On a gross basis, he generated an average annual return of 6.58% – a decent return. However, if he invested $35,000 in the Investment Company of America mutual fund, he’d have $5.7 million today![2]

Stock investors are obsessed with daily price movements. A tick up, they get excited. A tick down, they get depressed. Stocks are expected to rise so when they fall, investors want to know what’s wrong with the market. Why is it down? Is this the beginning of a correction? Should I sell? Has the market peaked?

Did you know the S&P 500 fell 23% from August 5, 1974 to September 30, 1974? The market lost about a quarter of its value in less than two months and I bet a few investors panicked and sold their stocks. If you apply short-term thinking to long-term problems, you’ll make catastrophic mistakes. The S&P 500 has risen 4,574% since September 30, 1974.[3]

Here are a few suggestions to keep you invested for the long haul.

  • Think generationally. Focus on decades, not days. You may work for 40 years and be retired for another 35. Once you start working and contributing money to your investment accounts, it’s possible you won’t touch your money for 50, 60 or 70 years.
  • Plan. A financial plan will keep you focused on your short and long-term goals. If you know where you’re going, you’re less likely to get distracted by bumps in the road.
  • Buy the dip. The market does fluctuate, so take advantage of down days. Historically, the stock market has risen 73% of the time. When it does drop, use it as an opportunity to buy great companies at discounted prices.
  • Disconnect. TV shows, radio programs and social media sites that report on the stock market cause angst and stir the pot. If you disconnect from TV and social media, you won’t get caught up in the hype. Real estate investors are fortunate because they don’t have to listen to commentator’s pontificate about price movements or stare at a ticker tape scrolling across the bottom of their TV set.
  • Diversify. Purchase several low-cost mutual funds and hold them forever.

Most real estate investors succeed because they think long term and they don’t make thoughtless sell decisions. When they purchase a home, their intent is to own it for several years. Stock investors would be wise to follow their lead. Who cares if the market fluctuates because in the end, it usually wins.

“It fluctuates.” ~ J.P. Morgan

August 30, 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://us.spindices.com/indices/real-estate/sp-corelogic-case-shiller-20-city-composite-home-price-nsa-index

[2] Morningstar Office Hypothetical Tool – 7/1/1968 to 7/31/2018.

[3] https://finance.yahoo.com/quote/%5EGSPC/history?period1=-630957600&period2=1535518800&interval=1wk&filter=history&frequency=1wk

Losers

The Washington Generals have been playing basketball since 1952. During their tenure they’ve won three games, one in each of the following years – 1954, 1958 and 1971.[1] Despite their lackluster output they repeatedly play in front of sold out crowds at over 450 events per year. Why? It’s because their primary opponent is the Harlem Globetrotters.

The Globetrotters win most of their basketball games and, as a result, the Generals must endure a constant thumping. They are perennial “losers” because of their role, however, they’re really winners because of their long-term association with the Globetrotters.

Some investors are classified as “losers” because they routinely purchase stock at the wrong time. They buy stocks when the market hits an all-time high or just before a correction.

The last three corrections in the stock market have been the Great Recession, The Tech Wreck, and Black Monday. If you invested 100% of your money in the stock market on the eve of these three catastrophic events, how would your portfolio have fared?

The Great Recession occurred from October 2007 to March 2009 and the S&P 500 fell 57%. A $100,000 investment in October 2007 fell to $43,000 in March 2009. If you sold during the dark days of the recession, you would’ve lost 57% of your investment. If you held on, your original investment is now worth $226,000 – a gain of 127%! You generated an average annual return of 7.84% from 2007 to 2018.[2]

The Tech Wreck happened from April 2000 to October 2002. During this rout, the S&P 500 dropped 43%. A $100,000 investment in April 2000 fell to $60,000 by September 2002. You lost 43% if you sold at the bottom.  If you held, your original investment is now worth $263,000 – a gain of 163%.[3]

The stock market crash on October 19, 1987 was frightening. The market fell 22% on Black Monday after falling 4.5% the previous Friday. If you invested $100,000 on Thursday, October 15, 1987, you were down more than 26% by the market close on Monday. After two days of investing you lost $26,000. However, 31 years later, your original investment is now worth $1.64 million. You made 1,543% on your investment, or 9.5% per year![4]

If you happen to be a loser and buy stocks at the wrong time, hang on, because, like the Globetrotters, the stock market usually wins in the end.

“I have never known anyone who could consistently time the market. And in fact, I’ve never known anyone who knows anyone, who was able to consistently time the market.” ~ Burton Malkiel

August 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.

Photo Credit: Andrey Popov

[1] https://en.wikipedia.org/wiki/Washington_Generals#Beating_the_Harlem_Globetrotters, website accessed 8/28/18.

[2] Morningstar Office Hypothetical – results as of 7/31/2018.

[3] Ibid

[4] Ibid

Los Angeles to New York

The sound of a train whistle piercing the night sky conjures up images of distant lands and the rhythmic clickety-clack of the wheels on the track is therapeutic.

Riding a train from Los Angeles to New York is an exciting way for passengers to see our amazing country. If a passenger boards the train at Union Station, they’ll arrive at Grand Central in about three and a half days.

Travelling by train is mostly hassle free, but at times it can be frustrating. For example, when the train is going slow or stopped, passengers can become anxious. Some passengers may disembark from the train to explore alternative forms of travel such as a car or plane. If a passenger discards his plan, he might not reach New York. However, if he stays on the train he’ll arrive at his desired destination.

When the train is travelling fast, don’t get too excited. When it’s travelling slow, don’t get overly depressed. When it’s stopped, don’t abandon your trip.

Investing has a lot of similarities to riding a train. In short, if you stay with your plan, you’ll arrive at your destination. If you make too many changes, your plan may get derailed. Investors in a diversified portfolio may own investments going fast, slow or stopped. The urge to reduce your holdings in non-performing assets and purchase better performing ones may be high, but this strategy is not recommended.

The world markets are giving us a mixed bag of results so far. Large-cap growth stocks have risen 10.75% and micro-cap stocks have climbed 11%. International investments, emerging markets, and bonds are down for the year.

What makes for a successful trip? The first component is to select a destination. Once you’ve identified your location, you can complete the rest of the travel process. When will you leave? What will you pack? What train will you take?

A successful investor, like our traveler, needs a destination. Financial goals are paramount if you want to succeed as an investor. Do you want to retire early? Buy a vacation home? Travel the world? Start a business? Once your goals are identified, your financial plan can help you quantify and prioritize them.

You need to commit to your goals for the duration. Jumping in and out of the market because it fluctuates is not wise. If you reject your plan before your goals are reached, you may derail it forever.

The market constantly goes up, down and sideways so don’t abandon your long-term plan because of short-term market moves. All aboard!

There’s something about the sound of a train that’s very romantic and nostalgic and hopeful. ~ Paul Simon

August 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.