Which Market?

The NASDAQ is soaring this year despite the political turmoil, racial tensions, and a global pandemic. It has risen 18% so far, and it’s not showing any signs of slowing down as it climbs a wall of worry. A few media outlets and financial experts are referring to the rise as a bubble. Market Watch had this to say about the stock market, “If you still do old-fashioned, cold analytical analysis based on numbers, you’ll see that the stock market is significantly above the mother of support zones. It is now a bubble.”[1]

When individual investors refer to the market, it is the Dow Jones Industrial Average. Is it up? Is it down? Will it keep rising, or will it crash? If the Dow falls more than 250 points, it’s considered breaking news even though it’s less than a 1 percent decline. The Dow Jones gets all the attention, but what about other markets? Is it fair to lump all markets together? What about the other indices?

Morningstar tracks more than 84,000 indices or markets, so when someone asks what I think about the market, I wonder which one they’re referencing. If you own a diversified portfolio of funds, you probably have exposure to dozens of markets.

To find out if the market is overvalued, let’s dissect a traditional 60/40 portfolio – 60% stocks, 40% bonds.

Large-Cap Growth Stocks. This sector has been red hot for more than a decade. The primary fund for this asset class is the Invesco QQQ Trust – The Qs! Stocks in this index include Apple, Microsoft, Amazon, Facebook, Alphabet, Tesla, NVIDIA, and Netflix. This star-studded index is up more than 490% for the past ten years, and it is up 24% on the year. If stocks are in a bubble, it’s this sector.

Large-Cap Value Stocks. Value stocks have trailed growth stocks by a wide margin for the past few decades, and this year is no different. The Vanguard Value ETF is down 16% for the year and up 115% for the past ten. Companies in this index include Johnson & Johnson, Berkshire Hathaway, Exxon Mobil, Pepsi, and Amgen.

International Developed Markets. International stocks have barely budged for the past ten years, rising a paltry 24%. The MSCI EAFE Index (EFA) is down 10.2% for the year, hardly a bubble. Companies in this sector include Nestle, Novartis, Toyota, and Unilever.

International Emerging Markets. This sector is one of the worst-performing asset classes over the past decade. It has risen 6.4% – total, not per year. A $10,000 investment a decade ago is now worth $10,640. Popular stocks in this category include Alibaba, Tencent, JD.com, and Baidu.

Small-Cap Growth. This sector is showing some life this year because it invests in growth stocks. It is up 2.25% for the year, and it has risen 233% for the past decade. Stocks in this index include DocuSign, Moderna, Teledoc, The Trade Desk, and Pool Corp.

Small-Cap Value. As far as US stocks go, few have fared worse than this sector, falling more than 23%. In the past ten years, it has generated an 87% total return. Small-cap and value have been a disastrous combination this year. Companies in this index include PerkinElmer, Allegion, Gaming and Leisure Properties, and ON Semiconductor.

Mid-Cap Index. Mid-Cap stocks are down 6.6% for the year. Over the past ten years, they’re up 171%. This sector includes companies like Lululemon, Splunk, Chipotle, and Clorox.

International Small-Cap. This international sector is down 12.4% for the year, but up 57% over the past ten years. Companies in this index include Rightmove, Bechtle, and Avast.

Real Estate. Working from home (WFH) is taking a toll on real estate stocks. Malls, shopping centers, office buildings, and senior living centers are not doing well in the COVID-19 environment. Does it make sense to allocate money to this sector with all the negative headwinds? I believe it does because real estate stocks will also give you exposure to data centers, cell towers, storage units, and timber. Real estate stocks are down 16% for the year and up 63% for the past decade.

Short-Term Bonds. Short-term US government bonds are the safest investment in the world. They have risen .42% for the past decade, and they’re up .32% on the year. Treasury bills are shelter investments, providing you with liquidity and safety.

High-Yield (Junk) Bonds. Lower rated bonds, known as high-yield or junk bonds, trade more like stocks than bonds, especially when stocks fall. Junk bonds have lost money for the past ten years, falling 12%, and they’re down 6.75% in 2020. A few names in this sector include Ford, American Airlines, and Netflix.

Corporate Bonds. Corporate bonds are having a good year, rising 6.2%. They have risen 26% for the past decade. Companies in this category typically have strong balance sheets. A few quality names in this sector include Anheuser-Busch, Microsoft, Apple, and Oracle.

Gold. Gold typically does well when investors or scared or there is a hint of inflation. This year gold has risen 18%, and over the past decade, it has risen 42%.

Commodities. A commodity index includes gold, oil, sugar, soybeans, corn, copper, zinc, silver, etc. It has been a challenging decade for commodities, losing 14%. This year it is up 7% rising on the strength of gold, silver, and copper.

Your portfolio may include some of these components. At the start of this year, it would have made sense to allocate 100% of your assets to large-cap growth companies, but it’s not possible to know, in advance, which sector will outperform the others. For example, from 2000 to 2010, the large-cap growth index lost 49%, while emerging markets rose 102%.

So, is the market in a bubble? It depends on the market, of course. One of the best ways to protect your assets is to own a diversified portfolio of low-cost funds and rebalance them as needed. Rebalancing your accounts will keep your asset allocation and risk level intact.

Rather than worrying if we’re in a bubble and trying to time your buys and sells, focus on your goals, think long-term, and let the stock market help you create generational wealth.

History shows us, over and over, that bull markets can go well beyond rational valuation levels as long the outlook for the future earnings is positive.” ~ Peter Bernstein

July 11, 2020

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

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

The data source for the investment categories, names, and returns come from YCharts.

[1] https://www.marketwatch.com/story/the-latest-sign-of-a-stock-market-bubble-small-companies-claiming-to-disrupt-large-industries-2020-07-06, by Nigam Arora, July 7, 2020

What if?

If you have children, you probably answered a million what-if questions. What if the sky falls? What if dogs talked? What if I wear my clothes backward? What if I eat my soup with a fork? What if I become a horse?

What if?

Investors are asking quite a few what-if questions because of the current economic environment and the healthcare crisis — questions with few answers.

Let’s explore some what-if questions.

What if stocks crash? Stocks crash often. According to J.P. Morgan Asset Management, there have been several significant market declines. Stocks fell 86% during the Great Depression. They fell 49% during the tech-wreck in 2000. The S&P 500 fell 53% from 2007 to 2009, and most recently, it fell 34% because of COVID-19. J.P. Morgan highlighted 13 bear markets in their Guide to the Markets® third-quarter outlook. The average drop was 42%, and the downturns lasted for 22 months.[1] From March 2009 to July 2020, the S&P 500 Index has risen 366%, but it closed in negative territory 42% of the time. During this bull-market run, the index dropped more than 10% on several occasions. It fell 16% in 2011, 11% in 2016, 17.5% in 2018, and 34% in March 2020.[2]

What if there is a recession? Since 1900 the U.S. has weathered twenty-four recessions or about once every five years.[3]

What if interest rates rise? The Federal Funds rate jumped from 4.24% in 1970 to more than 20% in 1981. Interest rates climbed to 6.5% in 2000, and from 2000 to 2007, they soared from 1% to 5.25%.[4]

What if there is inflation? The inflation rate in 1920 peaked at 23.5%. After WWII, it touched 19%. In 1980 it spiked to 14%. The 106-year inflation rate has averaged 3.23%.[5]

What if stocks don’t rise? Stocks go nowhere often. During the Great Depression, stocks eked out an average annual return of 1.7% for fifteen years from 1929 to 1944. Stocks produced an average yearly return of .9% from 1973 to 1978. From 2000 to 2012, the market generated an average annual return of 1.7% during the Great Recession.[6]

What if there is a war? The United States has been involved in several wars or conflicts: WWI, WWII, Korea, Vietnam, Iraq, and Afghanistan, to name a few.

What if there is another pandemic? In addition to COVID-19, there have been several global epidemics – the bubonic plague, typhoid, yellow fever, Spanish flu, pneumonic plague, cholera, smallpox, HIV/AIDS, Ebola, MERS, SARS, measles, H1N1, mumps, the flu, and so on.[7]

What if a Republican wins the election? The average annual return with a Republican president in the White House has been 8.6%.[8]

What if a Democrat wins the election? The average annual return with a Democrat president in the White House has been 8.8%.[9]

Despite crashes, recessions, depressions, wars, pandemics, rising interest rates, inflation, and elections, the stock market marches higher. In June 1920, the Dow Jones Industrial Average closed at 90.76. Today, it is 25,832 – a gain of 28,361 percent! The 100-year average annual return for stocks is 10%.

It’s possible to ask more what-if questions about investing, but what’s the point? It’s impossible to know what’s going to happen tomorrow, so don’t try to outsmart the market. It’s a waste of time, energy, and resources. Instead, focus on what you can control, like your spending and your savings.  A financial plan can help you focus and prioritize your goals. It will help you determine your investment allocation and other important decisions. Once your plan is completed, invest in a diversified portfolio of low-cost index funds, and hold them forever.

“Life can only be understood backwards; but it must be lived forwards.” ~ Søren Kierkegaard

July 3, 2020

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

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

[1] J.P.Morgan Asset Management Guide to the Markets® U.S.|3Q 2020|As of June 30, 2020.

[2] YCharts

[3] J.P.Morgan Asset Management Guide to the Markets® U.S.|3Q 2020|As of June 30, 2020.

[4] https://www.macrotrends.net/2015/fed-funds-rate-historical-chart, website accessed July 2, 2020

[5] YCharts

[6] Dimensional Fund Advisors 2019 Matrix Book

[7] https://en.wikipedia.org/wiki/List_of_epidemics

[8] https://www.fidelity.com/learning-center/trading-investing/markets-sectors/stock-returns-and-elections

[9] Ibid

What I Miss?

The NASDAQ, Dow Jones, and S&P 500 are posting positive returns over the past year, and the NASDAQ is up more than 9% for the year. These leading indices were down more than 30% less than three months ago as investors reacted to the COVID-19 virus. Since the virus outbreak, our country has experienced depression-era economic data and witnessed civil unrest. Investors have been scratching their heads to try and reconcile the performance in the stock market with the reality on the streets.

The stock market is up more than 40% from the March 23 low, and it has turned in the best 50-day performance in history. It’s hard to fathom a stock market trading at all-time highs while our economy and cities struggle. We have experienced the worst pandemic in more than 100 years, the bleakest economy since the depression, and, according to some, racial tensions not seen since 1968. However, the market is forward-looking and data-driven, and it’s anticipating our country will realize better days ahead.

In March, investors, and a few financial professionals, panicked. One prominent investment firm in Texas sold their client’s entire stock holdings in early March to ride out the storm. I believe his clients are still in cash.  A renowned hedge fund manager said, “Hell is coming.”[1] Another stated, “I would say it’s one of the most overvalued, maybe the second-most overvalued I’ve seen.”[2] Sometimes the safest investment strategy is to do nothing. And trying to time the market is a fool’s errand

With hindsight, market timing appears easy, but it’s not. It’s impossible. Boeing is now trading above $200, so buying it in March at $95 seemed like a no brainer. But, at the time, airline capacity had fallen by 95%, and Boeing was battling the government to obtain certification for its 737 Max. There are twenty-two analysts that follow Boeing, and their average price target is $157, or 26% below its current price.[3] Despite Boeing’s recent performance, it is still down 47% from its high.

After more than thirty years in the investment business, I’m still looking for a better strategy than buy and hold. Owning a globally diversified portfolio of low-cost funds is still hard to beat. During the first few weeks of the market rout, bonds performed well. They provided safety and support.  As the market recovered, the baton was passed to different asset classes like growth stocks, value stocks, international companies, emerging markets, real estate, and small-cap stocks. Each sector performed well at one time or another. Each category contributed to the performance of the portfolio.

Our investment models were active during the market correction. They are designed to keep our client’s asset allocation and risk tolerance in check. Initially, we were selling bonds to buy stocks, and then as the market rebounded significantly, we sold stocks to buy bonds. At one point, our models were allocating money to real estate funds, despite being down more than 40%. I was hyperventilating as our software allocated funds to this asset class. The real-estate allocation has been a stellar performing asset class over the past couple of months, outperforming most of our other asset classes. Our models are now in positive territory for the past year.

A globally diversified portfolio of mutual funds is not sexy. While some funds are rising, others are falling. It seems I’m forever apologizing for an underperforming asset class. Investors, apparently, only want to own funds that grow in value, but the funds are always changing leadership positions, which is the root of diversification.

What is the best way to find a portfolio that is the right fit for you? A financial plan is a powerful tool to help you define and refine your goals. Your advisor will use the data to align your investments with your objectives. If your finances are in sync with your aspirations, you’re more likely to stay invested through thick and thin. As the markets fell, we were regularly stress-testing our client’s financial plans, and the drop impacted not one. Despite the rout, our client’s financial plans remained intact. If your strategy is working and you’re on track to reach your goals, do not make any changes, and dare to stay invested.

Most experts do not know what’s going to happen tomorrow, and the stock market has been tormenting professionals for centuries. Do not let the opinions of others derail your dreams. Instead, focus on your goals, think long-term, pay attention to your plan, and hold onto your investments.

“Sometimes, the most important thing to do is to do nothing.” ~  Debasish Mridha

June 5, 2020

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

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

 

 

 

 

[1] https://www.theguardian.com/business/2020/mar/27/hell-is-coming-how-bill-ackmans-tv-interview-tanked-the-markets-and-made-him-26bn, Rubert Neate, March 27, 2020.

[2] https://www.marketwatch.com/story/this-is-second-most-overvalued-stock-market-that-billionaire-investor-david-tepper-has-ever-seen-2020-05-13, William Watts, May 14, 2020.

[3] https://money.cnn.com/quote/forecast/forecast.html?symb=ba#:~:text=Boeing%20Co%20(NYSE%3ABA)&text=The%2022%20analysts%20offering%2012,the%20last%20price%20of%20184.30., website accessed June 5, 2020

A Day in the Life of a Market Correction

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

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

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

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

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

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

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

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

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

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

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

Until tomorrow…

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

March 18, 2020

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

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

 

 

 

 

 

 

 

 

Can You Do Nothing?

It’s hard to do nothing. It’s hard to disconnect from a connected world. If you have children, you’ve probably heard them say: “I’m bored; there’s nothing to do!” If you want to see how hard it is to do nothing, turn off everything around you, and close your eyes for ten minutes. Welcome back. How’d you do?

The most challenging investment strategy is the buy and hold model, a strategy that relies on making a few changes to your portfolio over time. You do nothing but sit and wait for your investments to perform. It’s easy to do nothing when stocks rise as they did in 2019, but how about now? It takes courage and conviction to hold your shares during a market rout like we’re currently experiencing.

A buy and hold strategy is boring, and it’s not sexy. Tell people you own a diversified portfolio of index funds that you plan to keep forever, and they’ll roll their eyes. Warren Buffett said that people don’t like to grow rich slowly. If you read the tortoise and the hare, you know slow and steady wins the race.

Several years ago, I worked with a broker who told me he periodically bought and sold stocks to give the appearance he was monitoring his client’s accounts. His activity “strategy” benefited him more than his clients because he generated a commission with each trade.  Activity for activity’s sake is not a strategy.

Pursuing get quick rich trading schemes often end poorly. However, people are attracted to the possibility of day trading their way to riches, especially when market volatility is high like it is now. It appears easy to buy when the market falls 10% and sell when it rebounds 10%, but this is only in hindsight.

Investors get antsy when their portfolio isn’t rising. When turbulence hits, they run for the exits. During the fourth quarter of 2018, investors pulled $133 billion out of the stock market just before it started rising again.[1]

During the previous bull market (2009 to 2020), the S&P 500 rose more than 160%, including yesterday’s 12% drop. The one-month U.S. Treasury Bill considered the safest investment in the world, lost money every year since 2009 when adjusted for inflation.

Of course, there are times when you need to sell your investments or make portfolio changes. Using your funds to generate monthly income or pay off a mortgage is undoubtedly warranted. Rebalancing your account to keep your asset allocation intact is recommended.

A financial plan can help you improve your investment results and give you the necessary tools to stay invested during falling markets. It will provide you with a roadmap on how best to spend your hard-earned dollars by aligning your goals and risk tolerance to your portfolio. Your plan will be your antidote against making poor investment decisions.

Give it a try – do nothing!

The trick is, when there is nothing to do, do nothing. ~ Warren Buffett

March 17, 2020

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

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

 

 

 

[1] https://www.yardeni.com/pub/ecoindiciwk.pdf, Dr. Edward Yardeni, May 9, 2018

Too Late to Sell?

The Dow Jones is down 18.8% for the year, so is it too late to sell? Investors have sold $34 billion in equity mutual funds and $17 billion in bond funds as they seek safety from the rout in global assets.[1] The news is ominous, and the headlines are bleak. Investors are voting with their dollars, and it’s clear they don’t want to own stocks.

In December of 2018, investors sold $133 billion in funds before stocks rose significantly in 2019. In October of 2008, investors liquidated $128 billion in mutual funds, a few months before one of the great bull markets in history.

It’s never too late to sell because stocks can always fall further. William O’Neil, the founder of Investor’s Business Daily, recommends selling your shares if they fall 7% to 8% because a small loss can turn into a big one if you don’t cut your losses. He said, “You don’t want to take a loss, so you wait, and you hope, until your loss gets so large it costs you dearly. This is by far the number one mistake most investors make.” Enron shareholders had the opportunity to sell their shares at $90, or $80, or $70, or $60, or $50, or $40, and so on before it traded to zero. I’m sure investors in Enron would have loved to sell at any price above zero, regardless of their cost basis.

An investor who sold their holdings in August of 1987, avoided the stock market crash on October 19, 1987. If you knew the Oil Embargo of 1973 was coming, you could have sold your stocks in 1972 and avoided a 41% drop in the S&P 500 from 1973 to 1974. If you sold your shares in 2007 before the Great Recession, you missed a 50% drop in the market. Of course, selling before a correction when stocks are at an all-time high is difficult, and predicting the future is impossible.

When stocks are falling, emotions transcend facts. Not many people care that stocks produce superior long-term results when their accounts have lost 20% in a few weeks.

It’s easy to look in the review mirror and say what you would have done, but what should you do today? Should you sell? Here are a few suggestions to help you decide.

  1. If your stocks are keeping you up at night, then sell your shares. If you’re losing sleep, you own too many stocks.
  2. If you need your money in one year or less, do not invest in stocks. My nieces and daughter must use their money to pay for tuition, room, board, and books, so they invested in a money market fund. I don’t need my retirement money for 10 to 15 years, so I’m 75% invested in stocks.
  3. If you’re retiring in the next two or three years, invest in U.S. Treasury Bills to cover three years’ worth of household expenses.
  4. If you don’t have a safety net, sell stocks. A recommended safety net is three to six months of expenses. If your monthly expenses are $10,000, keep $30,000 to $60,000 in cash.
  5. If you have high levels of debt, sell your stock to reduce your obligations – returns are fleeting, expenses are forever.
  6. If you need money to purchase a home, car, boat, plane, or any expensive item, sell your stocks and move the proceeds to cash.
  7. If you’re 100% allocated to stocks, reduce your equity exposure, and sell some of your holdings.
  8. If you know stocks are going to drop 20% tomorrow, sell today.

With the drop in stock prices and interest rates, bonds may be a riskier investment than stocks. The current yield on the 30-Year U.S. Treasury is 1.5%. The ten-year average Is 3.1%, and if rates rise back to the average, bonds will fall by 20%. In 1980, the 30-Year U.S Treasury yield peaked at 15.08%. If rates returned to their all-time highs, bonds would fall 75%![2] The iShares 20+ Year Treasury Bond ETF (TLT) is up 26.3% for the past year, but it fell 10.5% this week as interest rates rebounded from their remarkable lows.

Money market funds and savings accounts offer low rates. The one-month U.S. T-Bill is yielding .33%.  The current inflation rate is 2.33%, so you’re losing 2%, before taxes, to park your money in a safe account. Cash accounts and short-term bonds are not sustainable solutions for creating wealth over time.

The Dow is down 18.7% year-to-date and off 9.8% for the past year. It’s up 30.6% over the past five years, 118% for the past ten years, and 9,390% since 1930.[3] It’s impossible to know what stocks will do tomorrow, but over time they will rise.

My first full year in the investment business was in 1990, and the Dow Jones Industrial Average fell 4.25% that year; from June to December, it dropped 21%. I was devastated because every stock I bought plunged in price. However, 30 years later, the Dow is up more than 740%.

Is it too late to sell? If selling your stocks will bring you peace, then sell. However, stocks have always recovered, so make sure you’re selling for the right reasons and not from a position of fear.

Be strong, keep the faith, follow your plan, think long-term and good things will happen.

We have nothing to fear but fear itself. ~ Franklin Delano Roosevelt

March 15, 2020

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

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

 

 

 

 

 

 

 

 

 

 

[1] https://ici.org/research/stats/flows/combined/combined_flows_03_11_20, Website accessed 3/14/2020.

[2] https://www.macrotrends.net/2521/30-year-treasury-bond-rate-yield-chart

[3] YCharts

Do you remember July 7, 1986?

Do you remember July 7, 1986? I don’t. I was probably concerned with three things. Was I going to the beach? Were the Dodger’s winning? Where was I going to eat lunch?

On July 7, 1986, the Dow Jones dropped 3.3%. I’m sure the newspaper headlines were full of doom and gloom. The “experts” were probably pontificating that this was the beginning of the end and that the buy and hold strategy was over forever.

If you were fortunate enough to buy the S&P 500 Index on that horrible day and hold it until the end of February 2020, you made a lot of money. Let’s say you purchased $100,000 worth of the Vanguard S&P 500 Index Fund on July 7, 1986. Your investment is now worth $2.4 million, generating an average annual return was 10.3%, including this week’s stock market thrashing.

I still believe in the buy and hold strategy. When the market comes down, it allows you to invest in great companies at lower prices. It’s like flying. The only way to get on an airplane is when it’s on the ground. If you’re not on that plane when the pilot leaves the gate and roars down the runway, you lose.

However, I realize that not everybody has the confidence or courage to buy during a market meltdown, so here are a few suggestions to help strengthen your portfolio.

  • If you need your money in one year or less, do not invest in the stock market, keep your money in cash or short term investments like U.S. Treasury Bills or CD’s.
  • If you’re going to retire in five years or less, then I would recommend keeping three years’ worth of expenses in cash, short term CD’s or U.S. Treasuries. For example, if your annual expenses are $100,000, then your cash holdings should be $300,000.
  • If you’re in your 20’s or 30’s, I would back up your pick-up truck and buy as much stock as you can to buy great companies at discounted prices.
  • If you are concerned about international turmoil, invest in small and mid-cap companies headquartered in the United States. Small companies typically do not have much international exposure.
  • Invest in dividend-paying companies. According to YCharts, over 1,588 companies are yielding more than 3%.
  • Asset allocation and diversification still work. A balanced portfolio of stocks, bonds, and cash will treat you well over the long term.
  • If your timeframe is 3 to 5 years or more, I would recommend holding on to your investments.

The current markets are not fun, but this can be an opportunity for you to reexamine your investment holdings and financial goals to make sure they’re in line with your long-term financial plan.

Be on your guard, stand firm in the faith; be courageous; be strong. ~ 1 Corinthians 16:13.

February 10, 2020.

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

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

 

 

How to Survive a Stock Market Correction

The Dow Jones Industrial Average was less than 500 points away from touching 30,000 before the Coronaviraus arrived and spooked investors. In less than two weeks, the Dow Jones has fallen almost 13%, and it appears the selling will continue until a vaccine arrives, hopefully soon. As the market climbed higher, bears were calling for a correction and they finally got their wish. Stock market corrections are common, and they occur about every three to five years. A bear market lasts approximately 18 months, while a bull market will run for about eight years.[1]

How can you protect yourself against a bear market attack? Here are a few suggestions.

  1. Don’t panic! A market drop is normal, painful, but normal.
  2. Don’t make any changes to your portfolio during the initial phase of a market correction. Let the market find its footing before you make any significant changes to your investments.
  3. Cash is king. If you have a cash cushion, you’re less likely to make rash decisions regarding your stock holdings. How much cash is enough?  My recommendation is for you to hold three to six months of expenses in cash. If your monthly expenses are $10,000, then your cash account should be $30,000 to $60,000.
  4. Invest in U.S. T-Bills if you’re nearing retirement. A suggested amount is three years’ worth of expenses. If your annual expenses are $100,000, invest $300,000. The safety of T-Bills will allow you to survive a typical correction. If you invested in October 2007, you could have lived off your T-Bills for three years while waiting for the Great Recession to end. The Great Recession lasted from 2007 to 2009, where stocks fell 53%, so your bonds allowed your stocks to recover.
  5. Diversify your assets. A balanced portfolio of stocks, bonds, and cash will help cushion the blow from a market drop. During a market drop, your bonds will perform well.  During the 2008 market selloff, long-term U.S. government bonds rose 25.9%.[2]
  6. Rebalance your portfolio. You will sell appreciated investments to buy depressed ones, or buy low and sell high. If you rebalance your portfolio, you can take advantage of lower stock prices. Rebalancing allows you to keep your risk level and asset allocation in check.
  7. Eliminate your margin balance. A sure way to lose more money than you intended is to use leverage.  If you use margin to buy securities, I would encourage you to eliminate it. The best way to make a bad situation worse is to employ excessive margin in a down market.
  8. Stay invested. The two days following the stock market crash of October 19, 1987, the Dow Jones Industrial Average rose 16%. Despite the dramatic drop on Black Monday, the Dow ended 1987 in positive territory, and it has since risen 1,380%, including the recent selloff.[3]
  9. Look for bargains. Is your favorite stock now 25% cheaper? If you’re not sure what to purchase, buy a broad-based index fund.
  10. Think long term. A bear market lasts about 18 months. You may own your investments for years, maybe decades, before you need the money, so think generationally to help you get through the dark days of a market downturn.
  11. Markets recover. The stock market has always recovered! It may take time, but they eventually rebound.
  12. Have fun. The market will go up, down, and sideways long after we’re gone. Instead of worrying about the daily moves in the stock market, get outside, and enjoy your friends, family, and hobbies while you wait for stocks to bounce back.

Stock market corrections come and go. The market is a long-term wealth creation machine occasionally disrupted with short-term pullbacks. If you apply these ideas, you may have an opportunity to benefit from the long-term performance of the stock market.

Even though I walk through the darkest valley, I will fear no evil, for you are with me; your rod and your staff, they comfort me.  ~ Psalm 23:4.

February 27, 2020

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

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

 

 

[1] https://www.forbes.com/sites/robertlenzner/2015/01/02/bull-markets-last-five-times-longer-than-bear-markets/#12745f772dd5, Robert Lenzer, January 2, 2015, site accessed 3/10/17.

[2] Dimensional Fund Advisors 2016 Matrix Book.

[3] YCharts. DJIA – October 19, 1987 to February 27, 2020.

How to Survive A Recession

Hurricane Harvey blasted Texas and left a trail of debris in its wake. The refineries couldn’t produce gasoline, and, as a result, Texans faced a gas crisis. As pumps ran dry, people panicked and emptied grocery stores and ATM’s. It was a few days of bedlam.

Barron’s Magazine this week ran several stories about preparing for the worst. One article had the ominous headline: “9 Meals Away from Disaster.” In the article, it quoted British MI5 as saying: “At any given time, we’re nine meals away from anarchy.”[1] Nine meals equate to three days’ worth of food. If Texans panicked over a lack of gas, can you imagine the reaction people would have if they couldn’t feed their families?

Since the Dow Jones peaked July 23rd, it has fallen 6.25% as investors react to recession fears. The Twitter Trade war escalated this past Friday, sending the Dow down by 623 points, or 2.4%. Also, interest rates are inverting, a semi-valuable predictor of recessions. Currently, the 1-month Treasury rate is 2.07% while the yield on the 30-year is 2.02%. You earn more interest in 30 days than you do for 30 years.

What exactly is a recession? Here’s a definition from Investopedia: “A recession is a macroeconomic term that refers to a significant decline in general economic activity in a designated region. It is typically recognized after two consecutive quarters of economic decline, as reflected by GDP in conjunction with monthly indicators like employment. Recessions are officially declared in the U.S. by a committee of experts at the National Bureau of Economic Research (NBER), who determines the peak and subsequent trough of the business cycle which demonstrates the recession.”[2]

A recession is identified by a “committee of experts” after they determine the “peak” and “trough” of the business cycle. In other words, we won’t know we’re in a recession until it’s almost over.

If GDP (Gross Domestic Product) is the barometer, how’s it doing? Currently, real GDP growth is 2.1%. Since 1947 it has averaged 3.2%.[3] During the Great Recession (2007 – 2009) GDP growth bottomed in the fourth quarter of 2008 when it fell 8.4%. In 1954 GDP growth fell 10%.

Since March 1989, GDP has averaged 2.5%. During the past three decades, we’ve had 110 quarters with positive growth and 12 negative ones. We’ve had three recessions: 1989, 2001 and 2008, or about once in every ten years. Below is a chart of the GDP growth with a recession overlay.

IUSRGDPG_chart

How did the market perform over the past 30 years? Since August 1989 it has risen 966.7%. The Dow Jones closed at 2,402.68 on August 24, 1989. It closed at 25,628.90 yesterday. During the Great Recession, the market started to rebound in March 2009, six months before GDP growth turned positive and the recession was declared over.

What should you do if we’re on the edge of another recession? Here are a few suggestions.

  • Buy Gold. From 2007 to 2010 gold (GLD) appreciated 120%. Since 2011 it’s down 5.15%. The precious metal performs well during times of fear, chaos, and duress.
  • Buy Bonds. Long-term bonds soared 28% in 2008. During the Great Recession, they were up 6.4%.
  • Buy Small Caps (Maybe). During the last recession, small-cap stocks rose 3.84%, primarily due to their lack of financial leverage.
  • Raise Cash. Money market funds, savings accounts, or T-Bills will allow you to pay your bills and preserve your assets. How much? According to Mark Zandi, Chief Economist at Moody’s Analytics, recessions last about ten months.[4] So, if you’re concerned about a prolonged recession, then keep two to three years’ worth of household expenses in cash or short-term investments.
  • Store Cash. Keep a few thousand dollars in your household safe in the unlikely event you can’t access your bank or ATM.
  • Buy Stocks. The best time to buy stocks is when everybody else is selling. Wealth creation starts during bear markets. When fear is high, values are low. It takes courage to buy when others are selling. Sir John Templeton bought 100 shares of every stock on the New York Stock Exchange trading below $1 during the Great Depression. His two investment themes were “avoid the herd” and “buy when there’s blood in the streets.” He died in 2008 with a net worth of $13 billion.[5]
  • Doing nothing is a prudent strategy. A balanced portfolio of large, small, and international stocks and bonds produced an average annual return of 7.42% from January 2007 to July 2019. Investing monthly, through the recession, improved your performance to 8.4% per year. If you bought the portfolio on January 1, 2007, and sold on December 31, 2010, you would have made 3.13% – not significant, but positive.[6]  A buy and hold investor survived the Great Recession by doing nothing.
  • Reduce Debt. The last ten years have treated investors well, and you may have substantial capital gains. If so, take your profits and pay off your debt. Reducing your debt level will allow you to survive a recession if your cash flow drops.
  • A recession impacts human capital. If you’re fortunate enough to have financial assets, use them to help others during a time of crisis. Your gift may allow another family to recover from the pit of despair.

Recessions are frightening to be sure. However, no one can predict when, where, or how they’ll arrive. It’s impossible to forecast what factor will take down our economy, and no two recessions are alike. You will die a thousand deaths worrying about an economic collapse, especially if you’re watching the evening news or reading social media sites.

Jesus said it best in Matthew 6:25-34: “Therefore I tell you, do not worry about your life, what you will eat or drink; or about your body, what you will wear. Is not life more than food, and the body more than clothes? Look at the birds of the air; they do not sow or reap or store away in barns, and yet your heavenly Father feeds them. Are you not much more valuable than they? Can any one of you by worrying add a single hour to your life? “And why do you worry about clothes? See how the flowers of the field grow. They do not labor or spin. Yet I tell you that not even Solomon in all his splendor was dressed like one of these. If that is how God clothes the grass of the field, which is here today and tomorrow is thrown into the fire, will he not much more clothe you—you of little faith? So do not worry, saying, ‘What shall we eat?’ or ‘What shall we drink?’ or ‘What shall we wear?’ For the pagans run after all these things, and your heavenly Father knows that you need them. But seek first his kingdom and his righteousness, and all these things will be given to you as well. Therefore, do not worry about tomorrow, for tomorrow will worry about itself. Each day has enough trouble of its own. 

I been to the edge, an’ there I stood an’ looked down. ~ Van Halen, Ain’t Talkin’ ‘Bout Love

August 24, 2019

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

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

 

 

 

 

 

[1] 9 Meals Away from Disaster. Financial Advisors on How to Prepare for the Worst. Mike Zimmerman, August 23, 2019

[2] Investopedia, Recession definition, reviewed by Jim Chappelow, Updated May 6, 2019

[3] YCharts US Real GDP Growth

[4] https://www.usatoday.com/story/money/2019/08/19/recession-what-does-mean-and-what-like/2030642001/, Janna Herron, August 19, 2019

[5] https://en.wikipedia.org/wiki/John_Templeton, website accessed August 24, 2019

[6] Morningstar Hypothetical. Equal weighted portfolio rebalanced annually: IVV, EFA, IJR, TLT.

A Few Ways to Lose Money in The Stock Market

The market loves to rip wealth from the hands of investors who panic as stocks fall. The Dow Jones fell about 7% from its high last week because the yield curve inverted for a few minutes.

Markets have been rising and falling for centuries. Since 1926 they’ve risen about 75% of the time. A quarter of the time they’re falling – hard. When stocks fall, investors panic.

Stocks have risen 173% over the past ten years. A $10,000 investment in 2009 is now worth $27,260. However, during this great bull run, the Dow Jones has fallen several times. It fell more than 10% in 2010, 2011, 2015, 2016 and 2018. In December it fell 25% from its high-water mark. Despite the drops, the market has always recovered. Investors who sold their stocks last December missed a 19% rebound in 2019.[1]

The graph below shows all the drops in the market for the past ten years. Despite these drops, the market has risen substantially since 2009.

^DJI_chart

The chart below shows the gain in the Dow Jones Industrial Average from 1950, producing a gain of 17,790%. Since 1950 the U.S. economy has experienced 17 recessions.

^DJI_chart (1)

As stocks gyrate, here are a few ways to lose money in the stock market.

  • You don’t have a plan on how to invest your assets. You trust your financial future to luck, hope, and chance, playing a guessing game as to which investments will do well.
  • Your investment ideas come from cable television shows or social media sites. Remember, the commentators aren’t talking to you directly; they’re broadcasting their message to millions of viewers.
  • You don’t do any research or homework before you buy a stock. And, more importantly, you don’t have a sell strategy. To make money in stocks, you must have discipline when you buy and sell. Knowing your entry and exit points are paramount to make money when you invest.
  • Investors mistake volatility for risk. If you do, you’re more likely to sell stocks when they’re down. The Dow Jones has a standard deviation of 1%, meaning a 1% drop in the Dow is about 260 points. When investors hear that the market is down 260 points, they panic. However, this move is typical and expected.
  • Time matters when you invest in stocks. The market is efficient in the long-term, but not so much in the near term. If you need money in one year or less, don’t buy stocks.
  • Trying to time the market is impossible. From 1990 – 2018, the S&P 500 returned 9.29%. If you missed the 25 best days, your return dropped to 4.18%.[2]
  • A lack of diversification hurts investors in a downdraft. A well-diversified portfolio owns several investments that rise and fall at different times. If all your investments are moving in the same direction, you’re not diversified. For example, the Dow Jones has fallen 5% for the past month, but long-term bonds have risen 10%.

Over the next 100 years, the U.S. will experience several recessions, maybe even a depression. The market will rise substantially and fall dramatically. No one knows! It’s impossible to predict a recession since most of the economic data is trailing, so by the time it’s been identified, it’s probably half over.

I do understand that market drops are scary. However, holding and buying stocks through market troughs has proven to be a winning strategy. If you invested $10,000 in the Dow Jones on October 1, 2007, just before the start of the Great Recession, your balance would be worth $18,340 today. At the market low, your balance dropped to $6,547. If you sold, you locked in a loss of $3,453. If you held on, you made $8,340.

What I do know is that investors who follow their plan, save money, diversify their assets, invest for the long-term usually win in the end.

Stay the course, my friends.

Even though I walk through the darkest valley, I will fear no evil, for you are with me; your rod and your staff, they comfort me. ~ Psalm 23:4

August 23, 2019

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

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

 

 

[1] YCharts. Website Accessed August 23, 2019

[2] Dimensional Fund Advisors, Investment Principles