A Correction Is Coming!

The NASDAQ is up 388% for the past ten years, so it’s due for a correction, a pullback of epic proportions. When will it happen? I’m not sure, but it is coming. Get ready.

Before you decide to sell your stocks and buy gold or Bitcoin, let’s review the last decade. A $100,000 investment in the NASDAQ is now worth $488,000, a 388% increase. The index averaged 16.9% per year for the past ten years – a remarkable number. A few components include Apple, Tesla, NVIDIA, PayPal, and Netflix, so I’m not surprised the index performed so well.

However, the NASDAQ rise was not straight-up, but a jagged increase peppered with peaks and valleys. Let’s look at a few of the dramatic declines from the past ten years.

  • 2011. The index fell 17% from April to September.
  • 2012. The index fell 8.7% from March to May.
  • 2013 was a mild year, but the index did fall more than 4% in April and August.
  • 2014. The index fell 6.7% in May, 8% in October.
  • 2015. The index fell 9.6% from July to September.
  • 2016. In February, the index fell 9%.
  • 2017 was tranquil, with one minor dip of 3.7% in July.
  • 2018. The index fell 18% from August to December.
  • 2019. The index dropped 8% in May.
  • 2020. The index dropped more than 30%.

So, my prediction of a significant correction is meaningless because the market always fluctuates – rising and falling, like the tide. Do not fear a pullback; instead, use it as an opportunity to buy quality stocks at reduced prices.

If you attempted to time the market for the past ten years while living in fear of a correction, you missed out on astronomical returns.

Stay invested, my friends.

January 11, 2021

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.

Data Sources: YCharts and Macrotrends

Chaos

Yesterday was a dark day for our country. I watched in horror as an angry mob stormed the Capitol Building, besieging the capitol police. Certifying the Electoral College votes is typically a ceremonial event, administered without fanfare, but not yesterday as rioters forced Congress members to put on gas masks and flee the chamber. The last time unruly thugs stormed the Capitol Building was 1812, 209 years ago. Despite the chaos, the market snubbed the news and closed higher, and today it’s trading to all-time highs.

I talked with a few clients yesterday who were concerned about a market sell-off because of the domestic terrorist attack. They wanted to sell their holdings and wait for the storm to pass. I recommended they stay invested since the event would probably be short-lived. As I addressed their concerns, they were surprised the market was trading higher.

The market historically has overlooked political unrest and disruption. As Joe Kernen of CNBC said this morning, “The market has no conscience.” He’s right. It has no soul or moral compass. The stock market focuses on economic activity, earnings, and interest rates, to name a few. It looks forward, paying little attention to today’s news, especially if it does not impact America’s economic engine.

On September 11, 2001, foreign terrorists attacked our country. The Dow Jones fell 17.2% for about two weeks but quickly rebounded. By January 1, 2002, it recovered.

President Ronald Reagan’s assassination attempt was on March 30, 1981. I was in high school, sitting in a psychology class, and my teacher brought in a TV to let us watch the dreadful event. The Dow Jones dropped 2.25% after the shooting, but it regained the losses a few months later.

President Nixon resigned in disgrace on August 9, 1974, because of the Watergate Scandal. The Dow fell more than 20% over the next few months, but it had recuperated the losses by April 1, 1975.

President Kennedy was killed on November 22, 1963, in Dallas, Texas. The Dow dropped 5.6% on the shocking news, but by January 1, 1964, it was trading in positive territory.

If you’re concerned about chaos and uncertainty, here are a few suggestions to help you manage your investments.

  1. Do nothing. During the initial hours or days of an attack or unprecedented event, the market may fall, but it won’t stay down for long if the news isn’t impacting the economy.
  2. Buy more. If there is not a structural hit to our economy, the market will quickly recover. The best bargains for buying stocks are during the dark days of a decline.
  3. Follow your plan. Events like yesterday are short-lived, and your financial plan can last decades, so don’t sacrifice a few days of turmoil for years of growth and prosperity.

I was saddened and upset to watch the attack on our Capitol Building, and I couldn’t believe insurgents breached the security detail. Unfortunately, our country has been littered with horrible and unspeakable acts, like Abraham Lincoln’s assassination, the Pearl Harbor attack, and Bloody Sunday in Selma, Alabama. Our great nation is 245 years young with many great days ahead, and a few domestic terrorists will not derail our country’s ideals or beliefs.

May God continue to bless the United States of America.

America will never be destroyed from the outside. If we falter and lose our freedoms, it will be because we destroyed ourselves. ~ Abraham Lincoln

January 7, 2021

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.

What will the market do?

A popular question this time of year is: What will the market do? I don’t know. I can guess, of course, but it’s just a guess. But, more importantly, what market are you referencing? Stocks? Bonds? Gold? Bitcoin? YCharts identifies twenty-one major indices and tracks several thousand more from ninety different providers. Morningstar follows more than 85,000 global markets.

Last year, market returns varied significantly. The NASDAQ was up 45%, while the energy index fell 33% – a spread of 78%! Small-cap stocks rose 11.9%, real estate dropped 10.9%. Long-term bonds rose 12.4%, junk bonds fell 1%. And the ever-popular 60/40 index rose 6% after being declared dead and obsolete last year.

Some investors are concerned about the valuations of the market. I assume they’re worried about our US market, but I’m not entirely sure. The United States has three primary indices – NASDAQ, S&P 500, and Dow Jones. It’s possible to have exposure to a dozen different indices in a diversified portfolio where the US allocation accounts for about 25%. Does it make sense to liquidate an entire portfolio because of one overvalued market? It does not.

Rather than worry about the market, concentrate on your personal goals, save your money, think long-term, and buy the dip.

January 5, 2021

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.

A Correction Is Coming!

Warning, a stock market correction is coming. The political environment, lack of a financial stimulus package, the pandemic, corporate bankruptcies, civil unrest, and so on will be too much for the market to bear. To prove my point, let’s examine a few previous market cycles.

March 9, 2009, to October 16, 2020

The S&P 500 soared 415% from March 9, 2009, to October 16, 2020. The historic climb started after the market plunged more than 50% during the Great Recession. If you invested $100,000 at the beginning of this bull market, your account would be worth $515,000.

Despite the bull market’s stellar performance, the S&P 500 fell 34% in March 2020. It lost more than 10% nine times and dropped more than 5% on thirteen separate occasions. The average decline during this bull market was 2.71%.

January 1, 1991, to April 1, 2000

The S&P 500 climbed 353% during this bull market, including the late nineties’ melt-up in internet stocks from 1995 to 1999. This market was the first time where investors could trade online, and firms like Schwab, T.D. Ameritrade and E*Trade rose to prominence. A $100,000 investment at the beginning of this bull market grew to $453,800 on April 1, 2000.

However, the late nineties bull market experienced many significant drops, including a 20% drop in 1998 and more than a dozen declines of 5% or more. The average decline during this bull market was 1.89%.

January 1, 1982, to September 1, 1987

The S&P 500 rose 163% during the great ’80s bull market. After a dormant 1970s, the market increased significantly, fueled by declining interest rates. A $100,000 investment grew to $263,900.

Like previous bull markets, this one experienced several severe corrections. In 1982, the market fell more than 16%, and in 1984 it dropped 14%. The average decline for this five-year run was 3.97%.

October 16, 1987 – October 16, 2020

The crash of 1987 occurred 33 years ago today. If you invested $100,000 on the Friday before Black Monday, your account would be worth $1.23 million today, producing an average annual return of 7.9%. In addition to Black Monday, where the index fell 23%, your portfolio also endured the Tech Wreck of 2000, where stocks sank 43%, the Great Recession when stocks dropped 56%, and the recent pandemic where the index tumbled more than 30%.

A correction is coming, but I don’t know when. It could happen tomorrow, next week, next year, or next decade. I don’t know, nor does anyone else. And, people who claim they can predict market moves are full of rubbish.  During every bull market, there are sizeable corrections. If you liquidate your holdings during a crisis, you will miss exceptional gains when stocks recover. If you panic, you lose.

Investors can also lose money while waiting for a stock market correction. If you sold your investments in May expecting a summer pullback, you missed a 16.5% return. Since the market low on March 23, 2020, the S&P 500 is up 56%, and year-to-date it’s up 7.41%.

To be a successful investor, think long term, invest often, buy the dips, and follow your plan.

“Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections themselves.” ~ Peter Lynch

October 19, 2020

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.

Data Source = YCharts

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