Who Cares?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

December 18, 2018

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

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

 

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

 

Photo Credit: Victor Brave

 

 

 

 

Is Bad Good?

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

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

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

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

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

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

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

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

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

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

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

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

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

December 17, 2018

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

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

 

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

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

Can Stocks Go to Zero?

The recent rout in stocks has been unnerving.  The rate of decline has been swift and violent.  In less than two weeks it has fallen more than 9%. Market corrections aren’t fun but they’re normal.  Up markets follow down markets and vice versa just as spring follows winter.   Stocks can’t go to zero and snow eventually melts.

Since 2008 the stock market has climbed more than 106%.  However, this rise hasn’t been without disruption.  Over the past ten years there have been five double digit percentage declines, or about one every two years.  In 2008 it plunged 50%.  In 2011 it dropped 18%.  In 2015 it fell 16%.  In 2016 it declined 13%.  This year it has fallen 9%.  Despite these drops a buy and hold investor still managed to generate an average annual return of 7.5%.  A $100,000 investment ten years ago is now worth $206,100.

Dating back to 1928 the stock market has finished a year in negative territory 24 times, or one in every four years.  Throughout the past 90 years it has averaged an average annual return of 9.6%.

Paradoxically, when stocks fall they become safer.  Valuations become cheaper and dividend yields increase giving you an opportunity to buy at attractive prices.

An investor who purchased the Dimensional Funds Core Equity 1 mutual fund (DFEOX) on October 1, 2007 enjoyed a gain of 135%.  A $100,000 investment grew to $235,000.  If she waited until March of 2009, after the market had fallen 50%, her initial investment would be worth $484,000, a gain of 384%.[1]

What can you do to protect your assets?  Here are a few suggestions.

  1. Follow your financial plan. Your plan should give you peace during a market decline because your investments will be synchronized to your goals. It’s your financial GPS.
  2. Diversify your assets. Diversification is the only free lunch on Wall Street. A diversified portfolio allows you to own securities from around the world.   In addition, you can reduce your risk by adding cash, bonds and alternative investments to your portfolio.
  3. Invest in cash. If your time horizon is three years or less, move some money to a cash account, CD or T-Bill.  Do you have to pay tuition?  Buy a home? Payoff your mortgage? Take a trip? Buy a car?  If so, invest this money in a secure instrument that won’t lose value.
  4. Buy the dips. If your time horizon is greater than five years, buy the dips.  The market in the short-term is unpredictable but over time it has risen.
  5. Buy funds. A portfolio of mutual funds will give you more diversification than one that only invests in common stocks.  A mutual fund will allow you to own thousands of securities.
  6. Dollar cost average. Set up an automatic investment plan that allows you to buy stocks monthly.  Automating this process will remove your emotions from your investment decisions.
  7. Focus on the percentage not the point. A 500 point drop in 1987 was 22%, today it’s 2%.
  8. Think long-term. There are about 72,000 individuals who are older than 100 living in the United States.  This number could rise to 1 million by 2050.[2]   A person who retires at 65 could spend 35 years or more in retirement!
  9. Turn off your media outlets. Pundits, reporters, and commentators do a great job to stir the pot during a market retreat.  They dramatize the information for millions, but they know nothing about your specific situation.

The stock market has been fluctuating for centuries and it will probably continue to do so long after we’re gone.  Focus on your goals, diversify your assets, think long-term and good things should happen.

“Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria” – Sir John Templeton

Bill Parrott is the President and CEO of Parrott Wealth Management an independent, fee-only, fiduciary financial planning and investment management firm in Austin, TX.  For more information please visit www.parrottwealth.com.

2/1/2018

Note:  Past performance is not a guarantee of future returns.  Your returns may differ than those posted in this blog and investments aren’t guaranteed.

 

 

 

 

 

 

[1] Morningstar Hypothetical Tool, returns through January 2018.

[2] http://www.thecentenarian.co.uk/how-many-people-live-to-hundred-across-the-globe.html, Steven Goodman, January 17, 2018.

Points or Percentages?

The Dow Jones is currently trading north of 26,000. As the market climbs higher the range of point moves become more prominent. For example, it’s not uncommon for the Dow to rise or fall 200, 300 or 400 points in a day. When the market has wide moves it catches the attention of the media and investors. A market falling 400 points sounds alarming, but is it?

On October 19, 1987 the Dow Jones fell 508 points, or 22.6%. It was the worst drop in the market since the since the Great Depression. Today, a 500 point drop is less than a 2% move.

In addition to the stock market being higher it’s possible your account value is too. A $1,000 loss has a larger impact on a $20,000 portfolio than one that is valued at $200,000

It’s now time to focus on the percentage change rather than the point change.

You better cut the pizza into four pieces because I’m not hungry enough to eat six. ~ Yogi Berra.

Bill Parrott is the President and CEO of Parrott Wealth Management, a fee-only, registered investment advisory firm.

February 2, 2018

Note: Your investments may perform better or worse than those listed in this blog. Investments are not guaranteed and they may lose money.