What I Know

It’s the start of a new year, and investors want answers, especially regarding the stock market and the economy. They want to know how the market will perform this year or if a recession materializes. Market experts, analysts, economists, and media personalities try to predict market moves and the economy’s direction. Yet, it’s a giant guessing game because no one can forecast the future, yet everybody tries to do it.

Last year, twenty-four market analysts predicted the S&P 500 would close at 4,904 in 2022.[1] How did they do? The index closed at 3,389, falling 19.44%, and they missed their target by thirty percent! Despite not knowing the future, the stock market has left several clues about the future of stock prices, and here is what I know.

Stocks Outperform Bonds

Since 1926, the S&P 500 has trounced long-term bonds by a wide margin. A dollar invested in stocks is now worth $11,526, but that same dollar invested in bonds is worth only $130, and one dollar invested in T-Bills barely grew to $22. Over the past decade, the S&P 500 is up 170%, while Vanguard’s Total Bond Market Fund is down 11.3%. It’s impossible to predict the daily or yearly direction of the stock market. Still, over time, it has increased significantly, and you can create generational wealth if you stay invested in stocks and commit to long-term investing.

Small Caps Outperform Large Caps

Good things come in small packages, and this is true for investments. Since 1927, The Dimensional US Small Cap Index has bettered the S&P 500 index. A $1 investment in Dimensional’s Small Cap index is now worth $50,435, while the S&P 500 index value is $10,327. The valuation of the small-cap index has been five times greater than large caps over the past 95 years. The iShares S&P 600 index has been up 529% for the past twenty years, whereas the iShares S&P 500 index is up 362%. Though small-caps have been more volatile than large companies, they produced superior returns.

Diversification Wins

As the saying goes, the only free lunch on Wall Street is diversification. It’s typical for last year’s winners to be this year’s losers. In 2017, international small-cap stocks were the best-performing sector, soaring 32.7%, but a year later, they finished in last place, falling 17.63%, while short-term bonds were the best asset class in 2018; they were the worst in 2019. Large-cap stocks rose 28.7% in 2021 but fell 18.1% in 2022. Emerging markets lost 17.99% in 2022 but are up 10.77% this year. However, a globally diversified portfolio of stocks and bonds stayed in the middle of all asset class returns, never the best nor the worst. Asset allocation accounts for 93.6% of your investment return, and the remaining 6.4% comes from market timing and investment selection.[2]

Now What?

I don’t know what will happen with the market or the economy this year, but your portfolio can grow, over time, if you own stocks in a globally diversified portfolio. Rather than worrying about the direction of markets, interest rates, or the economy, focus on things you can control, like spending and savings.

Forecasts create the mirage that the future is knowable. ~ Peter Bernstein

January 29, 2023

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on your asset level.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.


[1] https://humbledollar.com/2023/01/tune-out-the-noise/ John Yeigh, January 10, 2013

[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.

Crank Up Your 401(k)!

January is an excellent time to crank up your 401(k) plan, and it probably needs a refresh after a year of losses, dividends, interest payments, and contributions. Here are a few suggestions to help you get started.

  1. Max out your contributions. The maximum amount is $22,500. If you’re fifty or older, you can add another $7,500.
  2. Increase your annual contribution if you’re not maxing out your plan. If you’re contributing 10% of your pay, consider increasing it to 12%. For example, if your annual salary is $50,000, an extra 2% is $1,000 per year, which could grow to more than $57,000 in twenty years. Also, the additional $1,000 annual contribution equates to about $40 per pay period.
  3. Increase your stock allocation. If your current stock allocation is 60%, consider raising it to 70% or 80%. After a losing year, the extra stock exposure could boost your plan as the stock market recovers.
  4. Rebalance your account. The market did not perform well last year, and your asset allocation is probably out of whack. For example, if you started last year with 60% stocks and 40% bonds, it could now be 50% stocks and 50% bonds. January is an excellent time to rebalance and adjust your investments.
  5. Consider a target-date fund if you don’t want to hassle selecting specific investments or rebalancing your accounts. Target-date funds are all-in-one, so all you need to do is pick the year you’re retiring and move your assets to that holding. For example, if you’re retiring in 2030, choose the 2030 target-date fund. Simple.
  6. Update your beneficiary designations. Did you incur a life event last year? Did you get married or have a child? Did you lose a loved one or get divorced? If so, then change your beneficiary designation to reflect your current status.
  7. IRA Rollover. If you lose your job, you can roll over your 401(k) plan to an IRA, leave it with your previous employer, roll it to your new employer, or cash it out. You may incur taxes and penalties if you decide to cash in your plan.  

Retirement comes at you fast, so make sure you’re doing all you can today to ensure your golden years are truly golden.

Retirement is not the end of the road. It is the beginning of the open highway. ~ Anonymous

January 23, 2023

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

Hope Is A Strategy

Hope is in short supply, and people are hurting. We’re battling a global pandemic, fires, floods, racial tension, economic uncertainty, a war, and political turmoil – dark days. It’s hard to imagine times getting better, but they will. Try to find the good among the bad. Mr. Rogers once said, “When I was a boy, and I would see scary things in the news, my mother would say to me, ‘Look for the helpers. You will always find people who are helping.'” Great advice. There’s always a silver lining, and it takes courage to rely on hope and faith, but they are essential ingredients if you want to succeed.

What is hope? Webster’s dictionary defines it as a desire with expectations of obtaining and expecting with confidence. Powerful words. In addition to confidence, it takes patience, humility, and wisdom to rely on hope because we can’t see it or touch it, but it’s there.

The investment community says hope is not a strategy, but I disagree. Financial planners and investment managers, including me, tell clients they must have a plan to achieve their goals. A financial plan is needed, but you also need hope, especially when the stock market crashes like last year. As Mike Tyson said, “Everybody has a plan until they get punched in the mouth.” When your plan is not working and the days are dark, you need faith that things will eventually improve.

I rely on financial planning software, Excel spreadsheets, and my faithful HP12c calculator to help clients obtain their goals. I was full of hope and faith when I launched my firm seven years ago because it’s all I had. I was confident my business would flourish, so I didn’t worry about not having clients. I pursued each day with optimism. And, day by day, I built my business.

In helping others reach their financial goals, I must believe in the stock market’s long-term trend and our country’s economic resilience. I have centuries of data supporting my thesis when I talk to clients about their future, but the information is historical. It already happened, and how do I know it will continue? How do I know the stock market will be higher 100 years from now? I don’t, nor does anyone else. It’s a guessing game. However, based on history, I like my odds of success.

Illustration of lonely boy with bird wing shadow, surreal painting, concept art, conceptual idea of freedom hope and imagination

When times are tough, like now, it’s imperative to have faith in the future. I was talking to a client this week who is struggling. We talked through a few issues, and I suggested he focus on the good things in his life. It’s hard to be upbeat, but it’s necessary to keep moving forward.

Here are a few suggestions to help you keep putting one foot in front of the other.

  • Serve others. Volunteer your time to help those in need. Serving people who can only repay you with a smile, hug, or handshake is time well spent.
  • Donate. Consider donating money to your local food bank or soup kitchen if you have financial assets. A Google search for non-profits in your neighborhood will produce several results. Pick one and send them a check.
  • Deliver. Do you know a neighbor who can use a helping hand? Cook them a meal. Mow their lawn. Wash their car. Buy them a cup of coffee. Listen to their story.
  • Sing. It’s hard to feel sorry for yourself when singing, especially with others. For the record, I have a horrible voice, and I can’t sing, but I do it anyway.
  • Mentor. Kids and young adults need mentors and tutors now more than ever. Do you have time to help someone with their studies or give them career advice?
  • Plant. Plant some trees, bushes, or flowers. Start a garden. Add some color to your backyard. Hang up a hummingbird feeder or install a birdbath.
  • Laugh. Watch a comedy or read comics. My family has a collection of Far Side cartoons by Gary Larson, and we flip through the pages occasionally to get a belly laugh.
  • Exercise. A walk or run can give you a quick reset. Play tennis or golf. Ride a bike. Go for a swim.
  • Watch. Wake up early to watch the sunrise. When I lived in Mission Beach (San Diego), hundreds of people would walk to the boardwalk to see the sunset. I’ve never been disappointed by the beauty of nature.
  • Adopt. A dog or cat can bring joy to your household. Visit your local humane society to adopt an animal. If you don’t want to care for a pet, watch some Youtube videos about animals – it will put a smile on your face.
  • Pray. Plug into the highest power source.  

As a nation, we have endured worse. It’s a difficult time for all, but it will pass. Focus on the things you can control, don’t worry about tomorrow, and keep the faith.

Gotta have hope!

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

January 17, 2023

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

Parrott Wealth Management Annual Letter

Parrott Wealth Management Annual Letter

Tin Cans and Mattresses

Have you been wondering if you should have buried your money in the backyard or stuffed it under the mattress? After all, as you review the year and the performance of our recommendations, it seems evident that stocks and bonds would fall. In 2022, we experienced rising interest rates, inflation, the war in Ukraine, and China’s COVID woes, yet, with those same headwinds and thousands more, the S&P 500 produced an average annual return of 10.12% since 1926, turning $1,000 into $11.5 million. I have the utmost confidence in our models, investments, and financial plans because I have seen them work for over three decades, and I know they will perform well in the future. I’ve learned from more than thirty years in the business that clients who diversify their assets, invest regularly, follow their plans, and remain patient will reap benefits.

The Tortoise and the Hare

Warren Buffett, the CEO of Berkshire Hathaway, is the most successful investor of our generation, with a net worth of $107.6 billion, and his stock currently trades at $468,711 per share and finished last year up 4%. Despite his staggering net worth and stock market performance, he has experienced many down years since 1965. His stock fell 48% in 1974, 23% in 1990, and 32% in 2008. It also fell 30% during COVID and dropped more than 50% in the Great Recession, and from 2007 to 2013, it lost 4.3% per year. If investors panicked and sold the stock over the past thirty years, they would have missed returns of nearly 4,000%. Mr. Buffett believes in patience and said, “Our stay-put behavior reflects our view that the stock market serves as a relocation center at which money is moved from the active to the patient.” He prefers companies with earnings, revenues, cash flows, and dividends – a slow and steady model that we try to emulate.

In contrast, Cathie Woods ARK Innovation fund trades daily and is highly active. The fund owns growth companies that may pay off in the future, like Roku, Robinhood, and Coinbase. During the peak of COVID, her fund soared 152% and, at one point, outperformed Warren Buffett and Berkshire Hathaway by 200%! However, her fund hit a brick wall last year, losing 67%, as investors shifted their focus to companies with solid balance sheets. As a result, Berkshire Hathaway has outperformed ARK by 80% since the crazy days of COVID. The hare wins again!

Indices

The S&P 500, Dow Jones, and NASDAQ suffered terrible losses last year, falling 8.78%, 19.44%, and 33.10%, respectively. What’s interesting about the S&P 500 is that it peaked on January 3, 2022, and fell 12.4% from January to March before the Federal Reserve started raising interest rates. Since the middle of June, it climbed by 2.24%, so most of the damage occurred in the first two and a half months, and five days accounted for 100% of the losses – April 29, May 5, May 18, June 13, and September 13.

As a comparison, the Vanguard Balanced Fund, a low-cost index fund, fell 16.87% last year, and I tracked an unmanaged group of twenty indices, and they fell, on average, 16.5%. There was no place to hide in 2022, but when stocks have dropped by 20% or more since 1957, they returned 29% the following year.

Regardless of the poor performance last year, the indices have performed admirably over the past thirty years. Despite crashes, inflation, rising interest rates, recessions, wars, and pandemics, the Dow Jones soared 1,944%, the NASDAQ jumped 1,845%, and the S&P 500 climbed 1,484%. The average annual return for the big three has been 10.21%. A $100,000 investment in January 1993 is now worth $1.85 million. And, since 1993, stocks have risen 87% of the time. Again, patience rewards successful investors.

Bonds

Bonds produced their worst year ever as the Federal Reserve raised interest rates to try and combat inflation. The yield on the one-month US T-Bill soared 8,140%, rising from 0.00% to 4.12%, and when interest rates rise, bond prices fall. The iShares 20+ Year Treasury Bond Fund ETF (TLT) crashed by 31.24% last year, losing almost as much as the NASDAQ. For the past fifty years, long-term government bonds have averaged 7.20%.

Bonds could be one of the best-performing asset classes this year if the Federal Reserve lowers interest rates. In 1994, the Federal Reserve raised interest rates by 100%, only to start reducing them in 1995. In 1995, long-term bonds soared by 31.7%.

Despite the carnage in the bond market, it now benefits us because we can offer investments yielding 3%, 4%, 5%, or more, and some of the rates are guaranteed. We have not had the luxury of higher rates for some time. For example, the last time the one-month US T-Bill yielded more than 4% was in 2007.

Stay the Course

Few people like advice that says, “Stay the course.” It’s boring, and people hate it, especially when stocks fall. Doing nothing is challenging; it’s hard, and it feels like a cop-out. When stocks fall, clients want action; they want to rearrange the deck chairs and take control of the situation, but it could do more harm than good and could put your financial future at risk.

We recommend a buy-and-hold strategy when managing money which is easy when stocks rise but tough when they fall. It’s a prudent recommendation because stocks rise about three-quarters of the time, and no one can time the market.

When we recommend staying the course, we review multiple components like your financial plan, asset allocation, cash flow needs, and Riskalyze report. We do not make the recommendation lightly. If the data gives us a positive reading, we do not make any changes to your portfolio; if your goals change, we will adjust your plan and investment program accordingly.

Financial Planning

Since I started the firm seven years ago, we have completed more than one hundred and forty financial plans, covering $300 million in assets.

The top five retirement goals are travel, purchasing a new car, home improvement, buying a new home, and celebrations (weddings, anniversaries, etc.).

The most popular expectations for retirees are pursuing an active lifestyle, spending time with friends and family, and living less stressfully. However, don’t wait until you retire to enjoy your life.

The two most common retirement concerns are running out of money and suffering investment losses. Running out of money in retirement is not good, and we want to ensure clients can retire on their terms and, more importantly, stay retired. Running out of money and suffering investment losses are competing concerns, and you must choose between risk now or later. If your investments are too conservative early in your career, you may run the risk of running out of money. If your assets are too aggressive later in life, suffering a significant investment loss can have dire consequences. A financial plan will assist you in selecting the proper balance between risk and reward.

Last year, our clients with financial plans were calm and more confident about their financial future and did not panic. If you want to join this impressive group, give us a call to complete your financial plan.

Recession

Will there be a recession? According to media outlets, pundits, and influencers, the answer is yes. However, the consensus on Wall Street is mixed, and we won’t know if one occurred until long after it has passed. Countless analysts are trying to read the tea leaves and signals from the stock and bond markets to forecast the recession, and, as Paul Samuelson said, “The stock market has predicted nine of the past five recessions.”

The projected global growth for 2023 is 1.8%, and so long as unemployment remains low, job openings stay high, and wages rise, it will be challenging to enter a recession. Still, if the Federal Reserve continues to raise interest rates, we could face a mild recession. Since 1945 we have experienced thirteen recessions, lasting, on average, ten months. If we enter a recession, the Federal Reserve will lower interest rates, which is positive for stocks and bonds.

Cash

The one-month US Treasury Bill is a proxy for cash and is considered the safest investment in the world. It currently yields 4.1%, above its 96-year average annual return of 3%. The S&P 500 closed down 19.4% last year, so a positive 4% return looks appealing.

Cash is a short-term haven if you need liquidity or safety, but it’s a poor investment. The current inflation rate is 7.11%, and the dollar will lose more than half its value over ten years; at the historical inflation rate of 3.25%, the dollar loses 60% of its purchasing power over thirty years. The S&P 500 has risen 1,484% over the past thirty years, averaging 9.65%. Cash always loses the inflation battle, but stocks offer a hedge.

Another negative for cash is that it never grows. Stocks are volatile but allow you to recoup your losses over time; cash won’t. Once you sell stocks to buy T-Bills, you never recover your losses. For example, if you bought the S&P 500 Index in January 2007, you lost more than half your investment (56%) by March 2009. If you panicked and sold, you never recouped your original investment, but if you remained invested through the end of 2022, you could have earned 274%, turning $10,000 into $37,410. In addition to the Great Recession, stocks fell 20% in 2018, lost 30% during COVID, and dropped 20% last year. Even though the market suffered four significant corrections in fifteen years, it almost tripled. The one-month T-Bill returned 0.84% per year before taxes and inflation during the same time frame.

ESG

Environmental, social, and corporate governance (ESG) remain hot topics for investors. Through Morningstar, we can offer direct indexing allowing you to avoid investing in particular companies or industries that do not align with your beliefs. Also, if you work for a company like Apple, we can exclude it from your portfolio, so you’re not adding to your concentrated position. The minimum investment for this service is $250,000.

Expectations

How will the stock market perform in 2023? I don’t have a clue, but I like what JP Morgan said, “It will fluctuate.” Over the past thirty years, the S&P 500 has averaged 9.65% per year, turning $10,000 into $158,400, and was positive 80% of the time. The index experienced consecutive negative years once – from 2000 to 2002. The best one-year stretch occurred from April 2020 to March 2021, when it jumped 56%. The worst one-year period happened from March 2008 to February 2009, when the index dropped 43%.

Inflation has probably peaked, and interest rates should stabilize, benefiting stocks and bonds. A weaker dollar will boost international investments, while lower inflation and interest rates could spell trouble for commodities like gold and silver.

Cash remains attractive for short-term needs. The one-month US T-Bill currently yields 4.25%, significantly higher than rates available from money-center banks like Wells Fargo or Bank of America. The interest rates on US Treasuries could remain at these levels for the foreseeable future.

We continue to shun Bitcoin and other cryptocurrencies and avoid them at all costs. It’s an asset class that continues to fail on several fronts.

Janet Jackson

Janet continues to support our firm with excellence by working directly with our clients helping them open accounts, transfer funds, or handle the required minimum distribution. In addition, she is leading our efforts to join the Schwab platform. Though the merger won’t close until Labor Day, we joined Schwab early through a pilot program, and she has been instrumental in our smooth transition.

Spencer Engelke

Spencer has been a fantastic addition to our team this past year, and he handles most of our financial planning duties and directs our weekly podcasts. He continues to flourish at PWM, and his future is bright.

He completed his coursework for the Certified Financial Planner® designation and will sit for the exam in July.

Starbucks

Our firm continues to grow; we now work with more than 160 households across fourteen states. As a result, our Starbucks growth indicator remains strong, as we increased our card mailing this year by 11%.

Thank You

I know it was a challenging year, and my heart aches for your pain, but markets always recover. We appreciate your loyalty, faith, and trust in our firm.

Sincerely,

Bill Parrott

Bill Parrott

President and CEO

Parrott Wealth Management

Austin, TX

January 7, 2023

Rejoice in hope, be patient in tribulation, be constant in prayer.

~ Romans 12:12

Note: The Financial data is from YCHARTS, TD Ameritrade, Dimensional Funds, and Yahoo! Finance. Past performance does not guarantee future performance,

and your results may vary.

Should You Own Stocks?

Owning stocks is a pain in the rear. They constantly gyrate, bobbing up and down like buoys on the ocean. It’s two steps forward and one step back; they rise slowly and fall quickly. Frustrating.

Stocks dropped like stones last year, led by the Nasdaq, falling 33%. The S&P 500 and Dow Jones followed suit tumbling 19.44% and 8.78%, respectively, wiping out years of gains. Since 2013, the S&P 500 has had four corrections of 12% or more and numerous pullbacks between 3% and 5%. This century, the index has experienced two significant drops, plummeting 46% during the Tech Wreck and 56% during the Great Recession. Most investors still remember Black Monday, October 19, 1987, when the Dow Jones Industrial Average crashed by 22%.

When stocks crash, investors want to sell their holdings, park their funds in a money market account, and wait for the storm to pass. And, when stocks rise 10%, investors want 20%. It’s a no-win situation.

Stocks get a bad rap. Yet, they are more than tickers moving across a screen or certificates in a vault; they are companies that run the world. Can you live your life without Apple, Amazon, or Google? Is it possible to ignore General Mills, Conagra, JM Smucker, or Campbell Soup? What about Krogers or Albertsons or Walmart, or Costco? You possibly drive a car manufactured by Ford, GM, Toyota, or Tesla. Do you drink coffee from Starbucks or eat at Mcdonald’s, Wendy’s, Chipotle, Domino’s, or Texas Roadhouse? Do you binge-watch shows from Disney, Netflix, or Paramount? You may bank at JP Morgan, Bank of America, Wells Fargo, or Citigroup. Your local utility company or phone company trades publicly as well. Your life revolves around common stocks; if you treat them as companies, you’ll do well over time.

Because the Federal Reserve has been raising interest rates to fight inflation, buying individual bonds yielding 4%, 5%, 6%, or more is now possible. Many bond ETFs and mutual funds currently have above-average dividend yields. Why bother with stocks if you can generate decent returns from bonds? It’s a good question. If you want safety and income, buy bonds, but if you’re going to create generational wealth, invest in stocks.

Despite the negative stories surrounding stocks, they create wealth for individuals with the courage and patience to own them through multiple market cycles. Since 1973, the S&P 500 has generated an average annual return of 10.47%, turning $10,000 into $1.43 million. In contrast, the one-month US T-Bill, the most secure asset in the world, averaged 4.38%, and a $10,000 investment is now worth $85,000. Inflation averaged 3.98% for the past fifty years, wiping out most of the gains from the T-Bill.

Though stocks fell last year, they have performed well these past ten years, rising, on average, 191%, while bonds lost 11.5%. If we extend the chart to twenty years, the three indices gained 461%, and bonds lost 6.5%.

Stocks may cause short-term heartache but provide benefits over time, and you must own them if your time horizon is three to five years or more. Turning out the noise and distractions is a superpower for successful equity investors.

Should you own stocks? Yes, without a doubt!

Bye, bye, and buy stocks.

Sponges grow in the ocean. That just kills me. I wonder how much deeper the ocean would be if that didn’t happen. ~ Steven Wright

January 12, 2023

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Mountain Bike Riding And Stocks

I went mountain bike riding this morning with a group of guys, good guys, and I got dropped like a hot potato. I could not keep up. Their bikes were dual-suspension, and a couple rode e-bikes while mine was a lowly hard-tail, equipped only with pedal power. It was a humbling experience, but I thought about the parallels between mountain bike riding and investing while driving home.

During the crazy COVID market of 2020, everybody allegedly made money trading meme stocks, Bitcoin, or speculative growth stocks – friends, neighbors, co-workers, relatives, and high-school students. Like my recent mountain bike excursion, I felt the investment world was leaving me in the dust.  

Meme stocks were the rage during COVID, and it was a bizarre time as stocks like AMC Entertainment Holdings soared 800%, and GameStop rocketed 3,200%; since they peaked, AMC dropped 73%, and GameStop fell 66%. Other meme stocks, like Virgin Galactic, Bed Bath & Beyond, and FUBO TV, also came back to earth.

Bitcoin was another fan-favorite, soaring mightily during the COVID years before peaking last November. Since peaking, it crashed by 72%. It is now languishing because of the headwinds and difficulties from cryptocurrency companies like FTX and Coinbase.

The ARK Innovation Fund was the poster child for growth stocks during the COVID season. It climbed 152% in 2020, only to fall 23.88% in 2021, and lost 67% last year. The fund owns several stocks that are currently struggling but may pay off big in the future, companies like Tesla, Roku, Teledoc, Draftkings, Roblox, and Robinhood.

So what is the connection between mountain biking and investing? Here is a short list.

  • Know your limits. I’m a plodder when I ride, and I go slow, don’t take risks, and know my limits. You may be a gearhead that likes to push the boundaries, go fast, and take significant risks – that’s awesome. You will succeed at mountain bike riding and investing if you know your limits.
  • Slow and steady. As I mentioned, I go slow while riding, and I’m in no hurry to finish or set a land speed record. As meme stocks, bitcoin, and Ark Innovation were screaming higher during COVID, no one cared about buying IBM, Pfizer, McDonald’s, Coca-Cola, or, gasp, an S&P 500 index fund; however, they have performed well the past couple of years, rising on average, 24%.  
  • Cut your losses. While riding this morning, I knew I would not keep up with the pack, so I cut my losses and turned around. I did not want to hold the group back, nor did I want to continue. If your investments are not working, or you’re not comfortable owning them, cut your losses and buy something you want to hold.
  • Take Risks. If you want to speculate and take risks, limit your exposure to 3% to 5% of your investment pool. It is okay to take fliers now and then, but don’t commit all your capital because it will cause significant financial damage if it doesn’t work.  
  • Reevaluate. After I got off the trail, I evaluated my performance. What worked and what didn’t? What could I have done differently to improve my ride? I had several conclusions that will help me next time. If you lost money speculating on meme stocks, bitcoin, or Ark, reevaluate your trades. Why did you buy them in the first place, and what will you do differently next time? You can’t avoid investing mistakes, but you can learn from them.

I love mountain bike riding and investing when I stay within my limits but struggle when I try to push the envelope. If I were younger, my experience today would have bothered me greatly, but now that I’m older (wiser), I dust off my bike and chalk it up to experience.

Happy Riding!

Once we accept our limits, we can go beyond them. ~ Albert Einstein

January 7, 2023

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

Goodbye 2022

Goodbye, 2022, and good riddance. Don’t let the door hit you on the way out. What a brutal year for investors, as most asset classes lost money. In hindsight, I should have buried my money in the backyard or stuffed it under my mattress.

The S&P 500 is having its worst year since 2008. and long-term government bonds have dropped 25.5%, the worst year since 1926 and probably ever. Ever! The stock market posted stellar returns in 2021, rising 26.8%, and soared 72% since 2019. The momentum was on our side until the Federal Reserve raised interest rates by 1,700%. And who wanted to buy a T-Bill yielding 0.06%, which it did in January?

The Federal Reserve is trying to kill inflation by raising interest rates from .25% to 4.25%. The inflation rate is 7.11% after peaking at 8.58% in June. It is falling but still high, and the Federal Reserve will continue to battle the silent economic killer.

Consumer sentiment remains low, and investors are depressed. The US Index of Consumer Sentiment peaked on January 1 and has dropped consistently since the beginning of the year. The current index reading is 59.10, near the lows dating back to 1952, and it has averaged 85.8 for the past 70 years. It peaked at 112 in February 2000 before the S&P 500 fell 43%. You must be excited with the current number if you’re a contrarian or perpetual optimist.

Investors are bearish according to the recent US Investor Sentiment Percentage Bullish reading of 24.3%. 75.7% of investors are negative and expect stocks to fall further, and 24.3% are hopeful they will rise. Last April, the index peaked near 60% as most investors were optimistic about the future direction of stocks. Investors now expect markets to fall more, with little hope for the future. However, a low reading is bullish for stocks.

Cash is attractive relative to falling stocks and bonds, and it’s now possible to buy a one-month US T-Bill yielding 3.8%. Investors love T-Bills because they’re guaranteed and don’t lose money if held to maturity, and they provide relief to weary investors in the near term, but they’re no match for stocks in the long run. Since 1926, T-Bills averaged 3.24%, and stocks produced an annual gain of 10.2%. A dollar invested in T-Bills is now worth $21.97; for stocks, it’s $12,231. Inflation averaged 2.95%, so your net return on T-Bills was 0.29% before taxes. Cash is a short-term gain but causes long-term pain.[1]

I’m excited for 2023 because I believe in free markets and love owning great American companies. I’m also an optimist fond of diversification, asset allocation, and financial planning. And hope springs eternal.

Merry Christmas and Happy New Year! May God’s light shine brightly on you and your loved ones.

What a wonderful thought it is that some of the best days of our lives haven’t even happened yet. ~ Anne Frank

December 15, 2022

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.


[1] Dimensional Fund Advisors Returns Web Tool from January 1926 to November 2022.

Seasons              

Winter is cold, wet, and dreary. Overcast skies, low temperatures, and icy roads are the norm in parts of the world, and some people don’t like this season. I get it. I lived in Connecticut for a few years after growing up in sunny Southern California. My first winter was depressing; I sometimes felt like Jack Nicholson in The Shining. However, I learned to love the winter because I could ski, hike in the snow, and build massive fires, and it was only one season, and eventually, spring would arrive.

Surviving one season is not hard, especially if you learn to take advantage of it, knowing that the three best seasons – spring, summer, and fall, will arrive shortly. If you don’t like winter, use your off-season to prepare for better days by exercising, reading, or learning a new hobby.

Like the four seasons, stocks can fall into quarters. About three-quarters of the time, stocks rise and finish in positive territory, but they lose value a quarter of the time. It’s a good ratio and favors equity investors with a generational mindset. When stocks fall, identify potential winners or prune losers from your portfolio. In addition, fortify your balance sheet by saving more money or cutting expenses. A down market is an opportunity to prepare yourself for better days ahead.

Since the end of WWII, or 1945, the S&P 500 has risen 79% of the time – up 60 times and down 16, producing an average annual gain of 11.65%. A dollar invested in 1945 is now worth $4,845. The best three-year stretch for the index occurred from August 1984 to July 1987, where it returned 33.41% per year. The worst three-year period happened from April 2000 to March 2003, when it declined 16% annually. The S&P 500 has never lost money over a rolling 15-year period dating back to 1945.[1]

The average calendar loss for the S&P 500 from 1945 has been 11.75%, but the gain following the losing year has averaged 25.76%. Buying stocks in down markets has historically been a winning strategy.[2]

In contrast, long-term government bonds lost money 24 times, with an average loss of 4.14%. A dollar invested in bonds is now worth $77.99, or 62 times less than equities. The average gain since 1945 has been 5.82% or exactly half of the S&P 500 return.[3]

Snow and ice eventually melt. Seasons come and go, and markets always recover. Do not fear down markets. Instead, use them as an opportunity to get ready for the next season in your life.

People ask me what I do in winter when there’s no baseball. I’ll tell you what I do. I stare out the window and wait for spring. ~ Rogers Hornsby

December 13, 2022

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.


[1] Dimensional Funds – Returns Web – 1/1/1945 to 12/31/2021

[2] Ibid

[3] Ibid

Rising From The Ashes

The Phoenix, a Greek mythical character, is considered an immortal bird that rises from the ashes of its predecessor.[1]  Of course, it is a myth, but the image of one rising from the ashes to get a new lease on life is powerful. We all want a second shot or do-over, especially with investing.

It has been a challenging year as most asset classes have traded in negative territory, there have been few places to hide, and diversification has not worked. Stocks and bonds reacted negatively to rising interest rates as the Federal Reserve tried to control inflation, and the rate increase was too much to bear for investors.

Are you ready to rise from your investment ashes? Here are a few suggestions to help you soar to new heights.

  • Complete a financial plan. Your plan will help guide your future and quantify your goals, giving you a path to follow. More importantly, it validates your success and can bring you financial peace. Our clients with financial plans appeared more relaxed and better prepared to handle the market’s turbulence this year than those without one.
  • Rebalance your account. If you did not make any changes to your investment portfolio this year, it is probably out of whack from your original allocation. As a result, you may enter 2023 positioned incorrectly, either too conservative or aggressive. Rebalancing your portfolio realigns it to the proper risk level and tolerance. January is a good time to rebalance because all your 2022 dividends and capital gains will have been credited to your account.
  • Review your holdings. Do you have the correct investments for the new year? Will your current portfolio allow you to reach your goals? Use the final few weeks of the year to examine your holdings.
  • Adjust your goals. Is it time to review your goals like spending, retirement date, college funding, or major purchase? Use the coming year to set new goals or update old ones.
  • Buy stocks. The S&P 500 is down 16% for the year, and the last time it had two negative years in a row occurred more than twenty years ago, and since 1941, it only happened twice, and the average gain following a negative year was 25.3%.[2]
  • Buy bonds. Bonds are producing income again after a long hiatus. It’s now possible to buy bonds yielding 3%, 4%, 5%, or more. The one-month US Treasury Bill yield soared 7,720% this year, rising from 0.05% to 3.91%. Will it rise another 7,700% next year? Doubtful. If it did, the yield would increase to more than 300%!

I know it was a tough year, but markets always rebound. The carnage in stocks and bonds can create opportunities for next year, so use the market’s decline to strengthen your portfolio.

In order to rise from its own ashes, a phoenix first must burn. ~ Octavia Butler

December 5, 2022

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.


[1] https://www.greekmythology.com/Myths/Creatures/Phoenix/phoenix.html

[2] Dimensional 2022 Matrix Book – 1941 to 2021

Conversations With My Wife

My wife is wicked smart. She earned her Ph.D. in Gerontology and Public Policy from the University of Southern California. She is a ferocious reader who tackles projects passionately and researches them intensely. Each night we take long walks to discuss various topics and try to solve the world’s problems – including the financial markets. About once or twice a year, however, she freaks out about our financial situation, which forces us to sit down to review our investments and financial plan, and when finished, she feels better.

Her concerns range from losing all our money to living too long. Our conversations run deep when we talk about our future. In addition to her fears, we explore charitable giving and retirement planning.

Let’s explore her main issues.

Will we lose all our money?

The stock market is down significantly; will we lose all our money? It’s a valid concern, especially since the Nasdaq is down 28% and long-term bonds have lost 32%. It has been a brutal year for all asset classes. She sees our account values and pays attention to the market, so she’s aware of the pain caused by falling prices. However, I tell her the odds of us losing all our money are less than zero. It’s impossible because we own stocks and bonds scattered worldwide, diversified by size, category, country, etc. On average, I tell her that stocks drop every four years or so, and I let her know I buy the dips and that the best time to buy stocks is when others are selling. And since the beginning of the year, we have continued to increase our allocation to equities because they will eventually recover. We’ve been married for thirty years, and during that time, the stock market has lost 50% of its value twice and suffered several corrections of 20% or more. Despite the downdrafts, stocks have risen more than 780% since our wedding anniversary, and I’m confident that the market will be considerably higher in another thirty years.

Will we run out of money?

My wife studied and taught gerontology, so she’s aware of longevity and aging. Our family tree also has a history of longevity, and she does not want to run out of money in retirement, which is another valid concern. One of the reasons we allocate more than 80% of our assets to stocks is to not run out of money when we are old and frail. Stocks are the best investment to combat inflation and longevity risk. I tell her I’m not worried about today’s stock market losses because we need our money to last another forty or fifty years. I don’t care that the market is down a few points this year because it will recover and eventually trade higher. Also, if we sell stocks today and buy bonds, we’ll lose money to inflation, a greater risk to our financial future than falling stocks.

What if you die early?

She is worried I might die early and leave her financially stranded. A few years ago, I wrote a love letter to my wife and daughter outlining the steps to take if I die early. The instructions are detailed, and I update them often. In addition to the love letter, we have adequate insurance and a family trust. I also have a succession plan for my business, so we’re covered on multiple fronts when I do pass away. More importantly, I’m going to heaven when I die, so she’ll always know where I hang out.

I treasure my wife and our long walks, and it’s an ideal time to connect and decompress while getting in 10,000 steps. I love our walk and talks because they get us out of the house and put us on neutral territory where all topics are fair game. We’ve solved many problems, but not all of them, so we will continue to walk because it is our most productive hour of the day.

Happy walking.

If you tell the truth, you won’t have to remember anything. ~ Mark Twain

November 18, 2022

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.