PWM Weekly Stock Market Update

The stock market and the economy are sending mixed messages. The Dow Jones Industrial Average is up 31% from the March lows while the economy is posting depression era numbers. 20.5 million people lost their job in April, and the unemployment rate spiked to 14.7%. Despite the terrible economic news, investors are optimistic about a potential vaccine and the possibility of returning to work. The market is a leading indicator, and it is looking past the recent data – hopefully, there is good news on the horizon.

Our investment models were quiet this week as volatility continues to drop. The volatility index (VIX) is down 66% from its peak, and the lower it goes, the better it is for investors.

The American Association of Individual Investors (AAII) tracks several indicators. The percentage of individual investors who are bullish, or expect stocks to rise, fell to 23.67% – a low rating. This AAII indicator is a contrarian indicator. When individual investors are pessimistic about the future direction of the stock market, the market usually rises and vice versa. For example, the index reading on January 23, 2020, was 45.6%, before the Dow Jones fell 36%. The thirty-three-year average AAII indicator is 38.23%.[1]

The NASDAQ is now positive, and it’s up 14.5% for the past year as Microsoft, Amazon, and Apple lead the way. The S&P 500 is also trading in positive territory for the past year.

Shanghai Disneyland is reopening on Monday, and tickets sold out within minutes. Starbuck’s is planning to open 85% of its stores here in the U.S., and Walgreen’s is returning to regular operating hours.

Retailers continue to struggle as Neiman Marcus and J.Crew file for bankruptcy protection. Nordstrom’s is permanently closing 16 stores (sorry Mom).

Several pharmaceutical companies, including Gilead, Pfizer, Amgen, Johnson & Johnson, and Regeneron, are racing to produce a vaccine for the Coronavirus.

The Thunderbirds will fly in formation above San Antonio and Austin on Wednesday to show their support for healthcare workers, first responders, and essential personnel.

Here’s how stocks, bonds, and other asset classes performed this past week.

  • The S&P 500 rose 3.74%
  • The NASDAQ rose 5.77%
  • International Stocks rose 2.82%
  • Emerging Markets rose 4.46%
  • Long-Term Bonds fell 2.36%
  • Gold fell .18%
  • Energy Stocks rose 7.85%
  • Chinese Stocks rose 5.79%

Despite the recent performance of the market, we do remain cautious on stocks in the near term, so diversify your portfolio, follow your plan, think long-term, and be patient.

Here is the story of The Tortoise and The Hare, a great reminder about being patient and following your plan – enjoy: http://read.gov/aesop/025.html

Patience and perseverance have a magical effect before which difficulties disappear, and obstacles vanish. ~ John Quincy Adams

Have a great weekend, and keep the faith!

May 9, 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. http://www.parrottwealth.com

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] YCharts

It Still Works

After the Great Recession, a friend asked me if diversification still made sense. He followed up with another question before I could answer. He asked, “If my assets are diversified, how come I’m losing money?” I said diversification still works, but it doesn’t protect you against a loss. Diversification helps reduce your risk allowing you to create generational wealth.

During the Great Recession, bonds outperformed stocks, but stocks have topped bonds for the past ten years as the market rebounded from the recession lows. This year, so far, bonds are winning. Investing is not a binary event. Few investors allocate 100% of their assets to bonds or stocks and flip between the two depending on their temperament

Stocks can decline, especially after a 10-year bull market. Stocks enter correction territory about every three to five years. Over the past two decades, the market has realized drops of 30%, 40%, and 50%. The average decline for the past twenty years has been 9.3%.[1] The market is always correcting, always adjusting, so it should not surprise you when it falls.

Microsoft, Apple, Amazon, Facebook, Alphabet, and Netflix account for 21% of the S&P 500 Index and 48% of the NASDAQ 100. These super six companies generated an average total return of 280% for the past five years compared to a 39% return for the S&P 500. However, they have experienced periods of underperformance relative to diversified portfolios. Microsoft fell 71% from January 2000 to March 2009, and it took 17 years for it to reclaim its previous high. Apple fell 75% in 1985, 74% in 1998, and 80% in 2003. Amazon fell 93% during the Tech Wreck. And risk arrives quickly – like lightning. Last year Hilton, Hertz, and Southwest Airlines were up, on average, 33%. This year, as a group, they’re down 56%, and Hertz is contemplating bankruptcy.[2]

Stocks, bonds, and cash are components we use to build diversified portfolios. Stocks for growth, bonds for income, and cash for safety. Stocks are subdivided into large, small, and international companies. Bond maturities vary between a few months to several years.

A diversified portfolio has many moving parts, and depending on the market cycle; some are up while others are down. One goal of a balanced account is to keep people invested for the long-term, despite the roller coaster ride of the market. Dimensional Fund’s 60% stock and 40% bond portfolio is down 10.5% for the year. It has averaged 7.5% for the past twenty years, and it has risen 75% of the time. Since 1926 it has been profitable 78% of the time and generated an average annual return of 8.9%.[3]

How do you develop a diversified portfolio? It starts with your financial plan. Your plan will incorporate your hopes, dreams, and fears. It will integrate essential financial components to determine your risk tolerance and asset allocation. If your investments are aligned to your goals, you’re more likely to remain invested so you can capture the long-term trends from the market. A balanced account is designed to withstand several market conditions and endure for generations. Diversification still works because we don’t know in advance which investments will perform well. Therefore, a globally diversified portfolio of mutual funds is the best way for most people to invest. If you want to invest in individual stocks or concentrate your investments, do so in a taxable account so you can take advantage of the tax code.

As we continue to deal with uncertainty from the virus and rumble through a volatile market, focus on your goals, create a plan, think long-term, and good things will happen.

But divide your investments among many places, for you do not know what risks might lie ahead. ~ Ecclesiastes 11:2

May 7, 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] YCharts

[2] Ibid

[3] Dimensional Fund Advisors – January 1, 1926 to April 30,2020

Weekly Stock Market Update

Happy Saturday,

Finally, some good news for investors as the Dow Jones rose 12.84% for the week. On Tuesday, the index rose 11.37%, the best day in 91 years, and the fourth-best percentage move of all-time. The Dow Jones posted its first consecutive up days since February 5 and 6.

Our models continue to rebalance weekly, looking to sell expensive assets and buy inexpensive ones. This week we sold bonds and purchased real estate investment funds —the model’s trade without emotion, which is good because I would not have made this trade. The real estate sector soared 17.38% this week.

We are selling individual corporate bonds, especially companies whose balance sheets are suspect. In 2008, companies with weak financials saw the price of their bonds drop significantly, some trading to zero. Boeing and Gap are two bonds we sold this past week.

We’re taking advantage of the drop in stocks to harvest losses in taxable accounts. Tax-loss selling will allow you to realize losses today to offset gains tomorrow.

Citigroup tracks market sentiment through their Panic/Euphoria Model, and it’s reasonably accurate. It is now in panic mode, a positive sign for stocks because stocks like to climb a wall of worry, and the best time to buy stocks is when fear is high. If you wait for the “all-clear” signal, it’s too late.

Here’s how stocks, bonds, and other asset classes performed this past week.

  • The S&P 500 rose 10.50%
  • The NASDAQ rose 8.55%
  • International rose 12.35%
  • Emerging Markets rose 5.75%
  • Long-Term Bonds rose 5.19%
  • Gold rose 8.66%
  • Oil fell 9.05%
  • Chinese Stocks rose 6.20%

Our Government leaders passed the Cares Act this week, and it’s powerful. Here are the highlights.

  • The IRS will issue $1,200 checks to individuals. Families with children under age 17 will receive $500 per child. The income threshold is $150,000 for married couples, $75,000 for individuals. Your payout will be reduced by $50 for every $1,000 you’re over the income limit. (Kitces & Levine)
  • You can withdraw up to $100,000 from your IRA for Coronavirus-Related issues. The 10% penalty will be waived, and you can repay your IRA over three years. Your income can also be spread out over three years. (Kitces & Levine)
  • The loan limit amount in 401(k) plans is now $100,000 up from $50,000. (Kitces & Levine)
  • All 2019 and 2020 Required Minimum Distributions (RMD’s) from IRA’s are waived. You do not need to take a distribution from your IRA in 2020. (Kitces & Levine)
  • Student loan payments are deferred until September 30, 2020 (Kitces & Levine)
  • Individual small businesses may qualify for loans up to $10 million, or 2.5 times average payroll costs, to cover payroll, rent, mortgage interest, insurance, etc. (Kitces & Levine)
  • The 2020 AGI limit is waived for charitable contributions. You may be able to eliminate all your 2020 tax liability through charitable donations. If you’ve never used your resources to help others, this is a great year to start. (Kitces & Levine)

Here is what Warren Buffett said about the 2008 stock market correction in the Berkshire Hathaway Annual Report: “Amid this bad news, however, never forget that our country has faced far worse travails in the past. In the 20th Century alone, we dealt with two great wars (one of which we initially appeared to be losing); a dozen or so panics and recessions; virulent inflation that led to a 21 1⁄2% prime rate in 1980; and the Great Depression of the 1930s, when unemployment ranged between 15% and 25% for many years.

America has had no shortage of challenges. Without fail, however, we’ve overcome them. In the face of those obstacles – and many others – the real standard of living for Americans improved nearly seven-fold during the 1900s, while the Dow Jones Industrials rose from 66 to 11,497. Compare the record of this period with the dozens of centuries during which humans secured only tiny gains, if any, in how they lived. Though the path has not been smooth, our economic system has worked extraordinarily well over time. It has unleashed human potential as no other system has, and it will continue to do so. America’s best days lie ahead.”

The shelter-in-place is challenging, but also encouraging. In my neighborhood, people are enjoying the outdoors by walking dogs, riding bikes, and hiking trails. A group of kids is painting rocks and leaving them on the sidewalks. Families have been coloring their driveways with heart-warming messages, and kids have put teddy bears in windows for a neighborhood-wide “bear hunt.” Since we might be homebound for some time, I started reading War and Peace! What books are you reading?

“Wealth isn’t primarily determined by investment performance, but by investor behavior.” ~ Nick Murray, Simple Wealth Inevitable Wealth

Have a great weekend, and keep the faith!

If you want more information, please call me at 512-922-4429.

Sincerely,

Bill Parrott, CFP®

President and CEO

Parrott Wealth Management

www.parrottwealth.com

 

Do you remember July 7, 1986?

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

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

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

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

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

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

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

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

February 10, 2020.

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

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

 

 

A Flight to Safety

This decade is off to a tough start. The Coronavirus is disrupting global trade, travel, markets, and economies. The 2020 U.S. Presidential election will also add to the uncertainty and confusion. With increasing risk, should you buy, sell, or hold your existing investments?

When forecasts are dire, and projections are bleak, selling your stock positions and moving to cash makes sense. It seems prudent to sell your investments and park the money in a bank until the storm passes, and, when it does, you can repurchase your stocks.

Let’s say, for fun, you invested $1 million in the S&P 500 in 2005 – 100% of your assets. After three years, your strategy paid off. Your account at the end of 2007 is worth $1.172 million, a gain of 17.2%![1]

Here’s where it gets interesting because, we now know, 2008 was a horrible year for the S&P 500. If you decided to hold, you lost 38.3%. Your original investment of $1 million is now worth $747,392, a loss of 25.2%.

With hindsight, you would have sold your investment on December 31, 2007, to lock in your gains. If you sold, you would’ve been a hero, admired for having the foresight and courage to sell after three years of substantial profits. However, it’s unlikely you would’ve moved from cash to stocks in January of 2009 because we were in the midst of the Great Recession. You probably would have waited two or three more years to get back in the market, missing a 40.5% return. If you reinvested in January 2009, you made 23.6% for the year. If you had the conviction to buy the dip in 2008 and 2009, you made even more when stocks recovered.

If you ignored the bear market and held your stocks during the correction of 2008, you made $2.76 million from 2005 to the year-end of 2019, an increase of 227%. Now that your account balance is $2.76 million, what should you do -sell or hold? If you sell, you’ll pay a capital gains tax of 20%, or $455,243 – a significant number. If you hold, you may encounter another stock market correction. A repeat of 2008 would mean a loss of $1.25 million, but still above your original investment of $1 million.

It’s impossible to time the market, but they’re a few strategies you can employ to protect your assets. The first is to diversify your holdings to include different asset classes like small companies, international stocks, and bonds. A globally diversified portfolio of mutual funds would have lost 20.3% in 2008, not great, but better than a loss of 38%. True, you give up some upside, but you protect your assets to the downside. A balanced portfolio of 60% stocks, 40% bonds generated an average annual return of 6.5% since 2005. Your $1 million investment grew to $2.48 million.[2]

More stock means more risk, but it also means more reward. Buy and hold investors have been rewarded for their patience, and, hopefully, this time will not be different.  If you want to find out the risk exposure in your portfolio, give us a call.

“Go out on a limb. That’s where the fruit is.” — Jimmy Carter

February 3, 2020.

Bill Parrott, CFP®, CKA®, is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. 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] YCharts – IVV, 1/1/2005 to 12/31/2019.

[2] Morningstar Office Hypothetical

The Christmas Eve Trouncing

Christmas Eve is a time of peace and joy as Christians celebrate the birth of Christ, and children of all ages anxiously await the arrival of Santa Claus. It’s a wonderful time to spread good cheer.

Pre-holiday trading days are usually benign as traders and investors leave their computers and trading desks to spend time with friends and families.  Volume and trading activity are light, and savvy traders can take advantage of price swings to profit as markets usually rise the day before a holiday.[1]

However, trading on Christmas Eve last year was a nightmare. The Dow Jones fell 1,462 points, or 6.3%, from the high on December 21 to the low on Christmas Eve, a brutal day for all. The dropped capped off a terrible fourth quarter, as the Dow Fell 12.5%.[2] Investors were worried about rising interest rates and an escalating trade war.

During the fourth quarter, investors panicked and removed $183 billion in assets from mutual funds. They ran for cover, looking for safety in money markets and U.S. Treasury investments.  The long-term U.S. Treasury ETF (TLT) rose 4.6% during the equity assault.

Market strategists were not optimistic about equities in 2019. Bank of America Merrill Lynch “…urges investors not to overlook the potential attraction of cash.”[3] Morgan Stanley was calling for “an outright earnings recession.”[4]

What happened since the Christmas Eve drubbing? Were investors wise to sell stocks? Was cash the answer? Let’s look.

From Christmas Eve of 2018, the Dow Jones has risen 31.05%. Not to be outdone, the NASDAQ rose 44.3%, the S&P 500 added 37.2%. Staggering returns.

When markets swoon, don’t panic. Fear is never beneficial for the long-term investor. If the market is cratering, do nothing. Wait for the storm to pass before you make any financial decision. Markets always recover.

If you’re a long-term investor, buy the dip. Use a market drop to add to your equity holdings. Look for quality stocks to put in your stockings as you’ll be rewarded with an excellent gift when stocks recover.

If you’re concerned about a market drop, buy bonds. Bonds perform well when stocks fall.

2019 has been an excellent year for investors as every major asset class is in positive territory.  As we close out the year, and the decade, follow your plan, celebrate your success, and enjoy the holidays.

Merry Christmas!

Happy Christmas to all, and to all a good night!” ~ A Visit from St. Nicholas, by Clement Clarke Moore

December 24, 2019

Bill Parrott, CFP®, CKA®, is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. 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://school.stockcharts.com/doku.php?id=trading_strategies:the_pre-holiday_effect, website accessed 12/23/2019

[2] YCharts

[3] https://www.forbes.com/sites/johntobey/2018/12/16/barrons-2019-outlook-professionals-sense-recession-risk/#c75cb9239d85, John S. Tobey, December 16, 2018.

[4] Ibid

Are You Earning 20 Percent?

The stock market is soaring this year with index returns topping 20 percent. The NASDAQ, S&P 500, and Dow Jones have risen 27.3%, 23%, and 18.4%, respectively. It’s a good year to own stocks despite Brexit, The Trade War, and the Boeing disasters.

Are you earning 20 percent? If so, congratulations. A 20% return is twice the long-term historical average of 10% for the stock market.

NASDAQ, Dow Jones, & S&P 500:

^IXIC_^DJI_^SPX_chart

If your assets are diversified, you’re probably earning less than 20 percent. Most likely, you also own small-cap and international companies along with a few bonds. Your exposure to large-cap stocks might be less than 25% of your total portfolio. The more stock exposure you have, the higher your returns are for this year.

Various Asset Classes:

IJR_VWO_TLT_SHY_EFA_chart

How have the other asset categories performed this year? Small-cap stocks = 17.3%, international stocks = 16%, emerging market stocks = 12.6%, long-term bonds = 11.6%, and short-term bonds = 1.2%.  A balanced portfolio of these asset classes has risen 17.3% this year.

Balanced Portfolio: 60% stocks, 40% bonds:

P176514_chart

Investing all your assets in the S&P 500 this year would have been a wise decision if you knew in advance the market would rise substantially. Remember, the market was down 16% last December, and few people dared to buy the dip. Last year the S&P 500 lost 6.24%, and during the Great Recession from 2007 to 2009, it fell 56%. During the Tech Wreck from 2000 to 2003, the index dropped 49%.

The Great Recession:

^SPX_chart (2)

The Tech Wreck:

^SPX_chart (3)

The 1970s was also a tough time for stocks. From 1973 to 1979, the S&P 500 lost 8.6%.

The Seventies:

^SPX_chart (4)

Should you invest all your assets in the stock market? If you have a high tolerance for risk and you can handle the volatility, then go for it — however, a more prudent recommendation is to invest in a low-cost globally diversified portfolio of mutual funds.

How do you know if you can handle the heat of a single index? Here are a few suggestions.

Investing requires patience and prudence. Do not chase returns or get lured into risky investment strategies, because if it looks too good to be true, it probably is. Instead, focus on your goals, invest often, keep your fees low, and think long term.

The simple believes everything, but the prudent gives thought to his steps. ~ Proverbs 14:15

November 11, 2019

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

Stocks are soaring and nearing all-time highs. As they continue to climb a wall of worry, they’re leaving nervous investors stranded on the sidelines. I started thinking about the historical performance of the stock market and wondered why investors don’t buy the best performing funds?

After a quick screen of Morningstar’s database[1], I found the five best mutual funds over the past 15 years, and here they are:

Berkshire Focus Fund (BFOCX) has generated an average annual return of 15.25% for the past 15 years. A $10,000 investment in 2004 is now worth $81,300.

Fidelity Select IT Services Fund (FBSOX) has generated an average annual return of 15.34% for the past 15 years. A $10,000 investment in 2004 is now worth $82,790.

ProFunds Internet UltraSector Fund (INPIX) has generated an average annual return of 18.40% for the past 15 years. A $10,000 investment in 2004 is now worth $126,620.

Rydex NASDAQ 100 – 2X Strategy Fund (RYVLX) has generated an average annual return of 17.95% for the past 15 years. A $10,000 investment in 2004 is now worth $115,220.

T. Rowe Price Communication and Technology Investor Fund (PRMTX) has generated an average annual return of 15.37% for the past 15 years. A $10,000 investment in 2004 is now worth $84,950.

If you invested $10,000 in each of these five funds in 2004, your nest egg is now worth $491,611, a gain of 883%. By comparison, the S&P 500 generated a total return of 264%.

Why not put all your eggs in this high-octane basket? Good question. These high-flying funds have $10.8 billion in combined assets, which sounds like a lot, but that’s less than 3% of Vanguard’s S&P 500 fund, which currently manages $487 billion.

If these funds are so good, why don’t they have more assets?

The short answer is risk. The portfolio turnover for these funds averages 162% per year while the S&P 500 turnover is 4%. A fund with high turnover will generate short-term capital gains.

The beta for the portfolio is 1.36, or 36% more volatile than the S&P 500. If the stock market drops 10%, the portfolio will fall by 13.6%.

During the Great Recession, the best five fund portfolio fell 74%. Last December it dropped by 29%. In May if fell 11.5% and since August it’s down 8%. To harvest the gains, you must endure the rainy seasons.

Of course, hindsight is 20/20. It’s unlikely you would have picked these five funds in 2004 and held them for the past 15 years. It’s easy to pick winners while looking in the rear-view mirror.

And there are two sides to a coin. What if, instead, you picked the five worst funds for the past 15 years?

The five worst funds:

ProFunds Ultra Short NASDAQ 100 Fund (USPSX) has a 15-year average annual return of -29.96%

Rydex Inverse NASDAQ 100 2X Strategy Fund (RYCDX) has a 15 -year average annual return of -29.42%.

ProFunds Ultrashort Small Cap Fund (UCPSX) has a 15-year average annual return of -27.82%.

Direxion Monthly Small Cap Bear 2X Fund (DXRSX) has a 15-year average annual return of -27.48%.

ProFunds UltraShort Mid Cap Fund (UIPSX) has a 15-year average annual return of -26.54%.

An equally weighted portfolio of these funds generated an average annual loss of 28.24% per year. A $10,000 investment in 2004 is now worth $68.90, enough to buy dinner for two at a decent restaurant. Despite their atrocious performance, these funds still manage about $60 million.

The moral of the story. You won’t choose the best fund, nor will you pick the worst. Avoid leverage. Don’t short the market. Buy a diversified portfolio of low-cost mutual funds based on your goals and stay the course.

The benefit of hindsight is we only really talk about those things that did work out. ~ Jonathan Ive

 

October 15, 2019

Bill Parrott, CFP®, CKA® is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. 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 than those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

 

 

 

[1] Morningstar Office Hypothetical, 2004 – 2019. YCharts data 2004 – 2019.

All Time Highs!

A record number of climbers reached the peak of Everest this year. In fact, it was so crowded that climbers had to wait in a long line to reach the summit and the approach to the peak was described as a “traffic jam.”[1] A climber spends about two months getting acclimated to the elevation before they start their ascent to the highest point on earth.[2] After a few minutes at the top snapping a few selfies to capture the view they’ll start descending to base camp. A slow climb to the top, a faster descent home.

This past week the S&P 500 hit an all-time high of 3,013. It’s been a long, slow ascent for the index to reach its current peak. In 1998 it crossed 1,000 for the first time. It broke through 2,000 in 2014. Fifty years ago, it was at 92. When I started in the business it was 330 and the Dow Jones was trading below 3,000!

The rise from 92 to 3,000 hasn’t been straight up, of course. During the Great Depression the index produced a return of .6% per year (1929 – 1943). In the decade of the ‘70s it rose 15 points, or 1.5% per year. It fell 42% from August 2000 to September 2002. It cratered 46% from October 2007 to March 2009. Despite these rough patches, the index managed to generate an average annual return of 10% dating back to 1926.

What now? Will the S&P 500 fall back to earth? Will it dip or dive soon? Who knows? I’m sure it will be as volatile as it has been in the past. When it does drop, use it as an opportunity to buy a few quality stocks or funds. Buy the dip, historically, has been good advice.

If you’re concerned about a descent from the ascent, here are a few strategies you can incorporate today to protect your assets.

  • Take some gains and sell your stocks. Locking in a profit never hurts. You can sell your winners or losers to raise cash. Ideally, you’ll want to sell your winners in a tax deferred account like an IRA and sell your losers in a taxable account for the tax write off. Regardless, selling stocks to raise cash makes sense if you’re concerned about a drop.
  • Buy bonds. Buying bonds yielding 1% to 2% sounds boring. It is. Bonds reduce risk and volatility in your account. During times of duress, however, you’ll be glad you own bonds. In the drops I mentioned above, bonds performed well. During the Great Depression, long-term government bonds averaged an annual return of 4.3% (1929 – 1943). During the ‘70’s they averaged 5.5%. In 2000 bonds rose 21.5% and they climbed 25.9% in 2008.
  • Buy puts. Use put options to hedge your portfolio for short term moves. Options are used to protect individual positions like Amazon or indices like the S&P 500. This strategy is expensive, so use it sparingly. Let’s look at a put option for Amazon. Amazon is currently trading at $2,012. Buying the August 16, 2019 $2,010 put option will cost $6,155 for every 100 shares you own. If Amazon falls below $2,010 on, or before, August 16 you may profit on your trade. If Amazon stays above $2,010, you’ll lose 100% of your investment. If a short-term option strategy is too risky, you can extend the maturity date. For example, the January 17, 2020 $2,010 put option will cost $13,410. Still expensive and risky. To employ this strategy only work with an advisor who is well versed in trading options.
  • Do nothing. Be still and let your stocks run. Trying to time the market may cost you more than a market correction. Over time, a buy and hold strategy performs well. A recent study by Dimensional Fund Advisors highlights this point. From 1926 to 2018, they found the market is significantly higher after a market reaches a new high. According to their study, the market is 14.1% higher one-year after reaching a new high. The three-year average is 10.4% and the five-year average is 9.9%.[3] Don’t sell your stocks If your only reason to sell is because the market has reached a new high.

Everest will always be there and so will the stock market. Unlike Everest, the S&P 500 can continue to soar to new heights – without limit. I’m not sure what the market will do in the next few months, but I’m convinced it will be significantly higher 50 years from now. My recommendation is to stay the course and enjoy the view.

I lift up my eyes to the mountains – where does my help come from? ~ Psalm 121:1

July 13, 2019

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

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

 

 

 

[1] https://www.washingtonpost.com/world/2019/05/24/mount-everest-has-gotten-so-crowded-that-climbers-are-perishing-traffic-jams/?utm_term=.6d6dd10799e9, May 25, 2019 by Siobhan O’Grady

[2] https://www.nepalsanctuarytreks.com/how-long-does-it-take-to-climb-mount-everest/

[3] file:///C:/Users/parro/Downloads/Timing%20Isn%E2%80%99t%20Everything.pdf, July 2019

E Ticket

Growing up in Southern California I went to Disneyland often.  In the ‘70s they issued tickets rather than an all-inclusive pass. Their ticket system used letters – A through E, with an E Ticket being the most coveted. They were the most popular and exciting rides like the Matterhorn or Space Mountain.  The ticket book consisted mostly of A tickets with a couple of E tickets. My friends and I would scour the park looking for E Tickets if we ran out of money to buy more. At the end of the night, I’d go home with several A tickets stuffed into the front pocket of my Toughskin jeans

The Matterhorn and Space Mountain were a blast to ride. Rising, falling, and twisting at high speeds is a thrill – but not for everybody. Slow, steady climbs followed by steep and rapid drops aren’t for the faint of heart.

The stock market is like a roller coaster. It’s a slow steady climb punctuated by a few steep and rapid declines. Last year is a perfect example.  From January 1 to October 3 the Dow Jones rose 8.5%. From October 3 to December 24 it fell 18.7%.

The VIX is the volatility, or risk, index and it spiked 210% as the market fell during the fourth quarter of last year. The VIX is currently trading around 16. At 16, it projects a 1% daily move in the stock market. With the Dow currently trading at 26,000 a 1% move means the market can rise or fall 260 points daily.

To calculate how much an index, or stock, can move divide the implied volatility by the square root of 256. What is the square root of 256? It’s 16. Why 256? There are approximately 256 trading days during a calendar year. The current implied volatility of the VIX is 16, 16 divided by the square root of 256 is 1. If implied volatility spikes to 32, then the daily move in the market would be 2%, or 520 points – up or down.

The implied volatility of Apple is about 28, meaning a daily move of 1.75% (28/16). Apple is currently trading for $189, so a 1.75% move is $3.30 – up or down.

Volatility returned to the market in May. From January through April the Dow Jones rose 14% with barely a ripple. In May it fell 6.1% while volatility leaped 26.4%.

Risk, volatility and wealth are intertwined. The stock market carries risk, and therefore you can earn an equity premium, and this is where wealth is created. Since 1926 stocks have risen around 75% of the time, averaging 10%. U.S. T-Bills are safe and have never lost money, however, after taxes and inflation are factored into your returns, they become negative.

How should you handle volatility?

Buy the dip. Stocks rise and fall. When they drop, use it as an opportunity to buy quality stocks or index funds. If you had the courage to buy stocks on Christmas Eve, you would’ve made 19% on your investment.  During the Christmas Eve rout stocks fell 6.3% or about 1,400 points, so buying stocks would’ve required fortitude and grit.

Keep a shopping list. Identify stocks or funds you want to purchase at lower prices and when the market falls it will give you an opportunity to buy some shares.  For example, the price of Apple dropped to $146 in December. It’s now trading at $190 – a gain of 30%.

Automate. Automate your investments to remove emotion from the buying process.  Set up a monthly draft from your bank to your investment account and you’ll be able to dollar cost average into the stock market regardless if it’s up, down or sideways. Investing $100 per month for the past 20 years in the Vanguard S&P 500 index fund is now worth $64,266 – an average annual return of 8.13% per year.

Buy bonds. If you’re concerned about volatility in the stock market, buy bonds. U.S. Government bonds are a great hedge for falling stocks. As stocks fell in May, long-term U.S. Government bonds rose 6.4%. During the market meltdown in 2008 government bonds rose 28%.

Do nothing. Volatility is like turbulence; it will eventually pass. When an airplane hits a turbulent patch, the pilot reminds us to stay seated and tighten our seatbelt. The pilot knows it will be temporary.  Flying is a few moments of fear mixed in with hours of boredom. May is gone and the first week of June is looking good for stocks. In fact, it’s the best weekly performance of the year.

Don’t panic. Investors without a plan sell stocks when the market falls and buy when it rises. When the market isn’t cooperating – sit tight. In December investors withdrew $183 billion from mutual funds as the market fell. When the market rebounded in January and February, they added $43 billion. If you sell when the market is falling, you’ll miss the rebound and the opportunity to generate meaningful long-term gains.

Volatility is part of investing. It is a tool you can use to enhance your returns, if you use it correctly.

Stay in your seat come times of trouble. Its only people who jump off the roller coaster who get hurt. ~ Paul Harvey

June 7, 2019

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

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