Tag: Stock Market

Chaos Theory

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I don’t like chaos. My anxiety, stress, and blood pressure all rise as it increases. Yet, I work in an industry that thrives on it as thousands of experts analyze millions of data points to try and answer a single question, like, will stocks rise today? Finding one answer is impossible because any input can alter the equation.

According to Google AI, Chaos Theory studies math and physics, examining complex patterns to understand and predict behavior. It states that there are underlying patterns within the randomness of chaotic systems. Wall Street analysts constantly search for patterns in the randomness, but they’re hard to find.

Stocks are chaotic, chock-full of turmoil, continuously rising and falling, whereas US Treasury Bills are peaceful and tranquil. My personality trait and risk profile lean toward safety, and I should own T-Bills, but I own stocks. I allocate more than 75% of my assets to stocks, though it’s outside my comfort zone because I must own stocks to achieve my financial goals.

NVIDIA is the stock to own this year, rising more than 210%, but last year it fell 50%. In 2020, it plunged by 35%; in 2018, it dropped by 56%. It’s a volatile stock, full of turmoil, but over the last decade, it has risen by more than 12,000%, averaging 61% annually – a staggering return.

Apple is the world’s largest company, with a market cap of $2.78 trillion; if you own a mutual fund or participate in a 401(k) plan, you probably own it. The stock is up 37% this year but dropped by 26.8% last year. During the Tech Wreck in 2000, it crashed by more than 80%, falling by 58% in the Great Financial Crisis. Apple is up 900% this decade.

Microsoft software is everywhere, and its stock is a perennial favorite. It’s up 39% this year after falling 28% last year. During the Great Recession, it sank 74%; from 2000 to 2016, it lost 4.9%, but over the past ten years, it’s up 973%.

To generate outside returns and create long-term wealth, you must own stocks despite the chaos, turmoil, volatility, and uncertainty. If you invest too conservatively in safe and predictable investments, you risk not having enough money in retirement.

Embrace the chaos!

Anything worth doing good takes a little chaos. ~ Flea

September 9, 2023

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level.

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. Prices and yields are for today only and are subject to change without notice.

Only You             

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Smokey the Bear is a firefighting hero. The US Forest Service and Ad Council created the campaign in 1944, and 96% of adults recognize Smokey Bear and his catchphrase, “Only YOU can prevent wildfires!”[1] According to the National Park Service, humans cause nearly 85% of wildfires in the United States.[2] Smokey Bear was right: Only you can prevent wildfires.

What does Smokey the Bear have to do with investing? Well, only you can provide for your financial future. It’s your responsibility and no one else’s, and it’s up to you to save money and invest wisely. Of course, you can obtain help from financial planners, but you must implement your plan because you are the spark for creating financial abundance. A financial planner provides suggestions and recommendations, but you must act on them to succeed financially. If you ignore them, you risk missing out on achieving your financial goals.

Several years ago, my family and I went camping in rural Texas, and we brought all the necessary items – a tent, firewood, marshmallows, etc. We built a raging fire that lasted well into the evening, and before we called it a night, we doused it with several gallons of water to ensure it was out. We did not want any embers landing on the parched Texas prairie.

How can you control your financial future? Here are a few suggestions.

  • Spending. Spending is in your control. The more money you spend, the more assets you need to retire. It’s simple math.
  • Savings. The more money you can save today, the more you can spend tomorrow.
  • Growth. To grow your wealth and maintain your lifestyle, you must own stocks. If you invest too conservatively during your working years, you risk not having enough resources in retirement.
  • Start. The sooner you start investing, the better. For example, a twenty-five-year-old can save $158 monthly to become a millionaire at age 65. If you’re fifty, you must save $2,412 monthly, or fifteen times someone half your age.
  • Emotions. Self-control is paramount for successful investors. Peter Lynch said, “The key organ in your body is your stomach; it’s not your brain.” Warren Buffett added, “Emotional stability will always beat intelligence in investing.” Investing during a stock market correction is devastating and painful, like a forest fire, but you must not panic and sell your stocks. Stocks, like forests, eventually recover. If you panicked in 2008, 2018, 2020, and 2022, you’ve missed significant gains as the market rebounded.

You’re it. It’s up to you to succeed financially, and you must take control of your financial future to prosper. You need to strike the match and start the fire, but make sure you have a plan before you do.

What matters is hard work and emotional intelligence. ~ Mickey Drexler

September 4, 2023

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

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor. Prices and yields are for today only and are subject to change without notice.

[1] https://www.stateforesters.org/2022/08/03/smokey-bears-birthday-is-fast-approaching-whos-up-for-a-history-lesson/#:~:text=America’s%20favorite%20black%20bear%20turns,old%20on%20Tuesday%2C%20August%209th.&text=Smokey%20Bear%20and%20his%20signature,impressive%2096%25%20of%20adults%20nationwide., Grant Peterson, August 3, 2022

[2] https://www.nps.gov/articles/wildfire-causes-and-evaluation.htm#:~:text=Nearly%2085%20percent*%20of%20wildland,and%20intentional%20acts%20of%20arson.&text=Lightning%20is%20one%20of%20the%20two%20natural%20causes%20of%20fires.

Are Bonds Safe?

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I like bonds, but I’m struggling with their long-term performance. Bonds are inversely related to the direction of interest rates; when rates rise, prices fall like a see-saw in a park, and since the Federal Reserve started raising interest rates in 2022, the one-month US Treasury Bill rate has soared by more than 2,600%. As a result, the prices of bonds have fallen since 2022, wiping out decades of gains.

The one-month US Treasury Bill is considered the safest investment in the world and has never lost money if held to maturity, and since 1926, it has produced an average annual return of 3.25%. A $1 investment is now worth $22.63. If you want a safe investment, look no further than the T-Bill. However, inflation averaged 2.95% during the same period, so your net gain was 0.30% before taxes.

Over the past decade, stocks have been on a wild ride, dealing with four significant corrections, including the COVID crash in 2020 and last year’s down draft, where the S&P 500 fell by more than 18%. Despite the headwinds of COVID, war, inflation, rising interest rates, and multiple corrections, the index soared 171%, averaging 10.50% per year and outperforming bonds by 182%.

The outperformance of stocks this past decade is not an anomaly. As I mentioned, a $1 investment in T-Bills in 1926 grew to $22. Investing that same dollar in the S&P 500 would be worth $13,474, or 612 times more than the safe investment. Stocks appear risky, but I believe they are safer than bonds over time.

Our clients with significant stock exposure have outperformed our conservative clients by a wide margin and recovered losses quickly. It has not been easy for our stock-oriented clients to remain invested, especially after last year’s market performance, but they have stayed the course and are reaping the benefits of a rising stock market.

To maintain your lifestyle and protect your wealth, you must own stocks. There is no alternative.

What would life be if we had no courage to attempt anything? ~ Vincent Van Gogh

August 29, 2023

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level.

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. Prices and yields are for today only and are subject to change without notice.

One Bad Mistake

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Bill Buckner committed one of the worst errors in baseball history. During game six of the 1986 World Series, the Boston Red Sox led the New York Mets three games to two. In extra innings, a ground ball went through his legs, allowing the winning run to score. The Mets would go on to win the game and the World Series. People don’t remember that Mr. Buckner had 2,715 career hits, was the National League batting champion in 1980, and played for twenty-one seasons. He was a good player, but people only remember his one bad mistake.

The stock market has risen 75% of the time, averaging 10% annually since 1926. Yet, investors primarily focus on corrections like the Great Financial Crisis (GFC)  from 2007 to 2009 or the Tech Wreck from 2000 to 2003. When I started my career, investors worried about another October 19, 1987, when the Dow Jones fell 22%. Few people want to talk about the strength of the market, like the period from 2009 to 2017, where the S&P 500 averaged 15.3% per year, or 1990 to 1999, which returned 20.9% annually – another winning streak occurred from 1982 to 1989, where it gained 18.9% yearly. People remember corrections and crashes but ignore the market’s long-term trend.

Investors can create generational wealth if they own stocks, invest regularly, and avoid big mistakes. What’s a big mistake? It occurs when investors panic during corrections and scary times like 1987, 2000, 2008, 2018, 2020, or 2022. The October 19, 1987 crash was the worst since the Great Depression, yet the Dow Jones finished the year in positive territory. After the Tech Wreck, the S&P 500 climbed 66% from 2003 to 2007. It soared 141% after the Great Financial Crisis (GFC). The stock market crashed 31% in thirty days during the initial days of COVID, but from March 2020 to December 2021, it jumped 113%. If you stayed in the game, your assets recovered quickly.

After the GFC, I talked with investors who said they sold their investments in 2007, before the correction. I congratulated them on their market timing skills and asked, “When did you get back in the market?” Several years later, most did not because they feared stocks would fall further or crash again. Though they allegedly timed the market correctly, they failed to return to the market to ride the rebound.

Since 1972, the S&P 500 has risen 78% of the time. The index finished in negative territory eleven times, falling on average 14.4%, while the average gain during the positive forty years has been 19%. Rebounds and recoveries last a long time, and the index has averaged 10.27% annually for the past fifty-one years.

How can you avoid big mistakes? Here are a few recommendations.

  • Diversify. Diversify your assets across size, sector, and country. Own a basket of small, medium, and large companies across the globe in different industries.
  • Plan. A well-constructed financial plan can keep you informed and invested during the dark days, allowing you to benefit from the long-term trend of stocks after they recover.
  • Patience. Buy stocks if your time horizon is three to five years or more. If you need money in the short term, buy US T-Bills. Time in the market is your friend.

I played Senior Babe Ruth baseball in high school, and in one game, I was playing left field. It was the last inning, and we were winning when I missed a fly ball. The runner on second base started running, and I took my eye off the ball; it rolled to the fence, and we lost the game. We would have won the game if I caught it. I occasionally think about that game and ignore the ones where I played well. It’s human nature.

Play ball.

“If one picture is worth a thousand words, you have seen about a million words, but more than that, you have seen an absolutely bizarre finish to Game 6 of the 1986 World Series. The Mets are not only alive, they are well; and they will play the Red Sox in  Game 7 tomorrow!” ~ Vin Scully

August 17, 2023

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level.

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. Prices and yields are for today only and are subject to change without notice.

Financial Storms              

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Mountain storms are extraordinary, powerful, and frightening. Last week, my wife and I experienced an incredible lightning show in Vail, Colorado. The lightning lit up the sky, and the thunder reverberated through the valley. It was quite the display of nature. However, the sun shone the next day, and the sky was blue, a bluebird day.

The stock market experienced a financial storm last year as the S&P 500 dropped by 19.8%, the steepest decline since 2008. It was a challenging year for large, medium, and small stocks, and there was no place to hide. And investors fled the markets, withdrawing more than $126 billion from mutual funds and ETFs. Investors were searching for shelters to protect themselves from the financial storm. Storms are temporary and eventually pass.

The markets are recovering from last year’s correction, as the three major stock indices are trading in positive territory. Stocks are trading higher this year, but you must endure the storm to benefit from the gains because it’s impossible to time the market. Markets started rebounding last June during the height of the storm, and that’s when investors began withdrawing money from their mutual funds and ETFs. Investors panicked during the darkest hour. By the end of May, investors removed more than $100 billion from funds, and since then, the Nasdaq is up 13.9%, the S&P is up 10.2%, and the Dow Jones is up 7.4%. The market is forward-looking and knew the storm was passing long before investors did. It pays to be patient. Do not panic.

Preparation and planning are the best ways to prepare for a storm. Climbers and hikers carry backpacks with water bottles, headlamps, compasses, jackets, GPS, first aid kits, etc., because they know mountain storms can arrive anytime. The same applies to financial storms; they can come anytime, without warning. Diversify your assets and follow your financial plan. A well-diversified investment portfolio based on your financial plan should survive financial storms and stock market corrections. Storms pass. Markets recover. Time moves on.

Follow your plan, think long-term, invest often, and good things will happen.

After every storm, the sun will smile; for every problem, there is a solution, and the soul’s indefeasible duty is to be of good cheer. ~ William R. Alger

July 24, 2023

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

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor. Prices and yields are for today only and are subject to change without notice.

Vail’s Legendary Back Bowls

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Vail is massive. The skiable terrain is 5,317 acres, 195 runs, 32 ski lifts, and a vertical rise of 3,450 feet! From Vail Village, the mountain looks immense, and it is, but it only tells part of the story because more than fifty percent of the ski resort is in the back bowls, which you can only see after riding a gondola to mid-Vail and then riding a ski lift to its peak. The back bowls of Vail are stunning, with fabulous ski runs and hiking trails like Seldom, Never, Cow’s Face, Dragon’s Teeth, Red Zinger, Chicken Yard, and the Ptarmigan Loop. It’s paradise.

First-time visitors are awed by the front side of Vail, but if they’re willing to explore the mountain, they will realize there is more to it than meets the eye – much more.

Investors spend too much time focusing on the here and now, looking at the recent headlines to try and make long-term investment decisions. If you only focus on current headlines, you’re missing out on long-term investment opportunities because when a story reaches the front page of the Wall Street Journal or the lead story on CNBC, the market has already moved on; it’s yesterday’s news.

During the market correction, financial experts and economic gurus were predicting a stock market crash with runaway inflation. One world-renowned financial author encouraged investors to buy tuna and baked beans because you can’t eat gold, silver, or bitcoin.[1] The founder of Twitter warned of hyperinflation, saying, “It’s happening.”[2] What happened? The S&P 500 jumped 14.51% and inflation fell 65%. If you only focused on what you can see, you missed a double-digit return in the stock market. Sorry Charlie!

Fear sells, and news headlines are scary. A popular money manager predicting a stock market correction generates more publicity than one who says everything is fine and nothing to worry about. A vociferous investor with a megaphone can move markets in the near term, but the long-term fundamentals of stocks win in the end. Since 1926, the S&P 500 has risen three-quarters of the time and generated an average annual return of 10% despite endless predictions for vicious corrections and economic disasters.

Do not let today’s headlines interrupt your long-term financial goals. It’s already old news. Instead, focus on your goals, invest often, and enjoy life.

My family and I hiked Vail’s legendary back bowls last week, which was incredible. The views were endless, and the wildflowers were spectacular. If we only stayed in Vail Village, we would have missed the most significant part of Vail. Investing, like hiking, is best when you take the road less traveled and don’t follow the crowd.

There’s a big, wonderful world out there for you. It belongs to you. It’s exciting and stimulating and rewarding. Don’t cheat yourselves out of this promise. ~ Nancy Reagan

July 24, 2023

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

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor. Prices and yields are for today only and are subject to change without notice.

[1] https://markets.businessinsider.com/news/stocks/robert-kiyosaki-rich-poor-dad-tuna-gold-silver-bitcoin-inflation-2022-6 June 13, 2022

[2] https://www.cnbc.com/2021/10/23/twitter-and-square-ceo-jack-dorsey-says-hyperinflation-will-happen-soon-in-the-us-and-the-world.html, Jeff Cox, October 22, 2021

Do You Like Paying Taxes?

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Do you like to pay taxes? I doubt it, but taxes are a function of successful investing. Paying a capital gain tax on a profitable trade is part of the game, yet some investors hold on to a stock too long because they don’t want to pay any taxes. In some cases, a stock will drop, eliminating all the profit and capital gains, which is worse than paying taxes. Let’s look at a few examples.

Cisco Systems

Cisco was the poster child for internet stocks in the late 1990s and early 2000s. From 1995 to March 2000, it soared more than 4,015%, rising from $1.95 to $80.25 – a nice little profit. However, some investors did not sell because they thought it would trade higher, but by October 2002, it dropped by 88%, wiping out capital gains for many investors. At its peak, Cisco traded at a price-to-earnings ratio of 205, or more than 13 times its historical average, and hasn’t eclipsed its all-time high set twenty-three years ago. Cisco Systems initiated a dividend in 2011, long after it corrected.

Disney

Disney has fallen on hard times, and the stock is struggling, trading near a nine-year low of $87.18 as issues mount at its theme parks, movie studios, and other outlets like ESPN. At its peak, it sold for more than $200 per share. Over the past decade, Disney traded from $64 per share to $200, gaining 214%. Since March 2021, Disney has fallen 56%. Its PE ratio touched 300 as it started to correct, fifteen times the historical average for Disney. Disney also eliminated its dividend in 2021, another sign it may be time to lock in your profit.

3M Co

3M has been a financial powerhouse, but the stock has dropped because of pending litigation related to forever chemicals and earplugs. From January 2000 to January 2018, it soared 428% but has since dropped 60%, trading near a ten-year low. At its peak, the PE ratio was 32, which was not significantly overvalued but more than two times its average. The dividend yield dropped to 1.5%, more than half its historical average of 3.9%.

NVIDIA Corp

NVIDIA is the current “it” stock because of artificial intelligence and has risen more than 200% this year and more than 12,000% since 2013. It has not given up its gains, and investors are holding on for more. Will it correct like the other stocks? Who knows, time will tell. It trades at a price-to-earnings ratio of 230, or six times its historical average, so it may be wise to lock in some profits. NVIDIA’s dividend yield is .04%, or 60% below its average of .1%.

Of course, selling a stock at its peak is more luck than skill and easier said than done. Hindsight is twenty-twenty. However, do not let your capital gain tax drive your investment decision. It never hurts to realize a profit if the stock valuation is overvalued or extended. I have seen too many investors give up gains to avoid paying taxes.

Once you acquire your stock, calculate your target price so you have a general idea of where to sell it. The PE ratio and dividend yield are two financial metrics you can use to calculate a ballpark range for selling your shares.

  • Price-to-earnings ratio. The PE ratio is a common metric for stock valuation. It’s not foolproof; some analysts don’t like it, but it will give you a general idea of the future valuation of your shares. For example, if the historical PE ratio is 20 and the projected earnings per share are $5, the stock valuation is $100 (20 x $5). If your stock is selling for $80, it’s undervalued; if it is selling for $140, it’s overvalued. As the price rises, so does the PE ratio. Do not automatically sell your stock if it hits your price target. Reevaluate it based on new data or information. If nothing changes, consider selling a few shares.
  • Dividend Yield. The dividend yield is another financial metric you can use to determine the price target for your stock. For example, if the company pays a $2 dividend and the average dividend yield is 5%, the stock valuation is $40 ($2 divided by .05). It’s undervalued at $30 and overvalued at $50. The dividend yield drops as the price of the stock rises.

Finding historical financial data is relatively easy on Yahoo! Finance, Morningstar, or Value Line. A quick calculation can identify which stocks to sell or buy for your portfolio.

Happy Trading.

Then Jesus said to them, “Give back to Caesar what is Caesar’s and to God what is God’s.” And they were amazed at him. ~ Mark 12:17

July 23, 2023

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

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor. Prices and yields are for today only and are subject to change without notice.

Data sources: YCHARTS and Value Line

Ten Percent Returns

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The S&P 500 has generated ten percent annual returns since 1926. A dollar invested in 1926 is now worth  $13,474.[1]  Because of the 97-year average, most investors expect or demand a 10% return each year without risk. In fact, when analysts update their annual stock market return projections, the answer is usually 10%, a safe prediction because of the index’s history.

Generating index returns is a mix of euphoria and despair. From 1982 to 1999, the index averaged 18.5% per year. From 2000 to 2012, it averaged a paltry 0.6%. After World War II, the best one-year return was in 1954, when it soared 52.6%—the worst year occurred in 2008, plummeting 37%.[2] However, you must endure a few years of pain and underperformance to receive double-digit stock returns. It would be nice to time the market to avoid the dips, but it’s impossible.

The  S&P 500 is up 17.25% this year after falling 18.1% in 2022. What is the ten-year average return for the index? It is 10.35% despite the correction in the fourth quarter of 2018, last year’s drop, and the COVID crash in 2020. Since July 2013, the index has risen 168%.

As we move into the second half of this year, focus on your long-term goals and less on stock market returns. The market has delivered exceptional returns for decades, and I expect the future will also. Of course, it will rise in some years and fall in others. As it increases, don’t get overly excited or too depressed when it falls. In the long run, a well-diversified portfolio can produce market returns; if you capture them, you’ll do well.

I’m optimistic about the market’s future – stay invested, my friends!

It’s a wonderful thing to be optimistic. It keeps you healthy, and it keeps you resilient. ~ Daniel Kahneman

July 13, 2023

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

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor. Prices and yields are for today only and are subject to change without notice.

[1] Dimensional Fund Advisors Returns Web – 1/1/1926 to 60/30/2023

[2] Ibid

The Magnificent Seven

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Seven stocks are generating most of the returns this year, named the Magnificent Seven. Meta, Apple, Amazon, Alphabet, Microsoft, Nvidia, and Tesla are the seven companies, and they’re delivering an Oscar-worthy performance.

These seven stocks are up 90% year-to-date as a group, led by Nvidia, up 191%. The group’s laggard is Alphabet because it’s “only” up 35%. The drive to artificial intelligence (AI) and the Fed’s projected slowdown in raising interest rates is fueling the move in these stocks.

It seems obvious that these stocks are rallying because AI is everywhere, and everyone knows the Federal Reserve will stop raising interest rates eventually. However, these seven stocks were down 45% in 2022, with Meta and Tesla falling 65%. If these companies were poised to soar this year, why did they crash last year?

Ycharts tracks 9,820 US stocks. The Magnificent Seven represents 0.07% of the companies in its database. Is it possible to identify the seven best-performing stocks before they move higher? I doubt it. And if it were, how come no one mentions Propel Media, Sky Petroleum, Freedom Holdings, Arno Therapeutics, Ai Technology Group, Diamond Holdings, or Pineapple Express? These stunning seven stocks are up 41,000% this year!

Owning the best-performing stocks before they move higher is mostly luck. Finding the needle in the haystack consistently is impossible, but investors keep trying. Why not. If you find a few companies before they take off, you can make a lot of money.

Here are a few ideas to help you find hidden gems.

  • Diversify your assets across multiple stocks and sectors. Widen your net.
  • Invest in moonshots. Moonshots are risky and speculative, but you can generate significant returns if they pay off. Limit your allocation to 3% to 5% of your investment portfolio.
  • Look for stocks with solid moats and little competition.
  • Read as much as possible to find innovative companies. In addition to reading popular periodicals like the Wall Street Journal or Barron’s, look to trade magazines and industry journals.
  • Practice patience and courage. It takes strength to own the best-performing companies because they’re volatile. For example, Amazon fell 95% in 2001. Last year, Tesla slid more than 70% from its previous high. If you own stocks at the peak, you must hold them in the valleys.
  • High-flying stocks are expensive. The average PE ratio for the Magnificent Seven is 106. You will pay up in valuation to buy solid-performing stocks. Coca-Cola is a company that delivers consistent performance, and the market rewards it with a high multiple. The 10-year average PE ratio for Coke is 27.29. A company with a low PE ratio could be a value trap. For example, the average PE ratio for Intel is 10.6, and the stock is down 47% from January 2000, 23 years!
  • Review and rebalance. Stocks and trees don’t grow to the sky, so reevaluate your holdings often. Do you remember Sears, Roebuck & Company? It was once the most dominant company in America, now it’s a former shell of itself, and the stock is worthless.
  • Ride your winner for as long as possible. One Secretariat is worth more than a thousand average racehorses. If you own a great company, let it run.

They fought for the ones who couldn’t fight for themselves, and they died for them, too. All to win something that didn’t belong to them. It was – magnificent. ~ Emma Cullen, Magnificent Seven

July 8, 2023

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

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor. Prices and yields are for today only and are subject to change without notice.

Patience Is A Virtue

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Markets are rebounding. The S&P 500 is up 14% this year, performing much better than in 2022. The popular index has responded to lower inflation numbers and a tamer Federal Reserve. And It does not appear concerned about Russia or China.  

Investors, like warthogs, have short memories and have all but forgotten last year’s troubles and tribulations. Speculators are buying call options and driving the price of Bitcoin higher. The tech-heavy Nasdaq has risen 30% as the Magnificant Seven – Nvidia, Tesla, Meta, Apple, Amazon, Microsoft, and Google soar to all-time highs.

If we extend the time horizon for the S&P 500, the returns look even better.

  • 3-Year Return = 45.5%
  • 5-Year Return = 62.1%
  • 10-Year Return = 171.3%
  • 20-Year Return = 348.3%
  • 30-Year Return = 877.9%
  • 50-Year Return = 4,120%

The moral of the story is: time wins, stay invested!

During the 2022 market correction, we relied on our financial planning models to convince clients to remain invested, stay the course, do not panic. It was a difficult ask, as it is in all down markets, but most clients took our advice. A financial plan is central to our client’s portfolios because it gives us the confidence to advise them better about their financial futures. Last March, we tested our portfolios for a 50% market correction and 5% inflation to see how they would perform if conditions worsened. The exercise furthered our confidence that most accounts could weather the storm, but what about the ones that could not? If an account failed our test, we contacted the client to discuss several scenarios and make the appropriate adjustments. However, we did not expect the market to fall by 50%, and it didn’t.

It is not easy to be patient, especially when your net worth is dropping swiftly, but it’s paramount if you want to be successful as an investor.

Here are a few tips to help you during the next market correction.

  • Diversify your assets across stocks, bonds, and cash.
  • Build an emergency fund to cover several months of expenses.
  • If you’re retiring in the next few years, allocate three years of expenses to US Treasury Bills.
  • Create a financial plan. It is a financial GPS.
  • Buy the dips.
  • Don’t panic. Markets recover.

Enjoy this year’s market run, but always be on guard for a correction. A well-balanced portfolio and financial plan can help you during the market and economic chaos.

Be patient, my friend. Your older self will thank you.

We could never learn to be brave and patient if there were only joy in the world. ~ Helen Keller

June 28, 2023

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

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor. Prices and yields are for today only and are subject to change without notice.