FOMO

Tesla, Plug Power, Fiverr, Stitch Fix, Sunrun, Zillow, Chewy, Pinterest, and Peleton – the list goes on. Many stocks soared last year, rising more than 100%. Do you feel like you’re on the outside looking in as others get rich buying stocks highlighted by a few storybook names?

It would take hundreds of thousands of dollars to buy every company traded on the market. If you could, it would give you access to high-flyers – at all times. Yet, there is a way to buy the market with one fund. The Vanguard Total Stock Market Index Fund gives you access to nearly every publicly traded company.

The Vanguard Total Stock Market Index Fund owns micro -, small -, mid-, and large-cap stocks. A few of the top 25 holdings include Apple, Amazon, Tesla, NVIDIA, Home Depot, and Netflix, each of these companies turned in stellar performances last year. The fund itself earned 21% last year and 31% in 2019. The 15-year average annual return has been 9.88%, and since 1992 it has produced an average annual return of 10.29%, outperforming the S&P 500. A $10,000 investment from 1992 is now worth $166,250.[1]

If you’re worried about missing out on the party, consider a total stock market index fund.

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.


[1] YCharts. Vanguard Total Stock Market Index Fund (VTSAX), 4/27/1992 to 1/5/2021.

Shiny Objects

After years of investing prudently, following his plan, and spending wisely, a young ruler was ready to retire and enjoy the fruits of his labor. He met with his trusted advisors to see if it was feasible. They affirmed his decision, and congratulated the young ruler on his accomplishment, and wished him well.

The young ruler was excited to retire and pursue a life of leisure and travel. His investments would afford him a comfortable lifestyle if he were smart. So, off he went.

The young ruler noticed the town residents looking at their phones often. They were checking their high-flying investments. Was it time for him to explore these risky assets? Could he invest a portion of his nest egg into a couple of new ideas? It couldn’t hurt, he thought, despite not knowing anything about their business models. He noticed the companies weren’t profitable, but it didn’t matter because he was sure they’d make money eventually. He took the plunge and bought some shares.

His new retirement strategy was working, and the investments appreciated significantly, better than his traditional investments. Now he was questioning his overall investment philosophy, sure his long-term investments did well, but maybe it was time for a change. Should he transfer more assets into his highflyers?

He was not alone in his thinking. The townspeople shoveled more money into these speculative assets. Enjoying their newfound riches, they bought jewelry, watches, and exotic sports cars, flaunting their wealth to others. The young ruler followed suit and spent lavishly on things he did not need. The entire town was in a buying frenzy; each assured their investments would rise forever, so they leveraged their accounts to buy gadgets with future profits that were sure to come.

One day the young ruler noticed his investments were down, a surprise after months of rising profits; convinced the dip was temporary, he bought more. And more. He continued buying as they dropped further. He was not concerned that his account value was dwindling because these high-flying stocks would certainly rebound soon, but they did not. The young ruler traded his account to oblivion, and he lost everything. He no longer had enough assets to enjoy a comfortable retirement and was forced to sell his mansion and return to work.

Moral of the story: Don’t abandon your plan if it’s working.


Joseph Heller, an important and funny writer now dead, and I were at a party given by a billionaire on Shelter Island. I said, “Joe, how does it make you feel to know that our host only yesterday may have made more money than your novel ‘Catch-22’ has earned in its entire history?” And Joe said, “I’ve got something he can never have.” And I said, “What on earth could that be, Joe?”
And Joe said, “The knowledge that I’ve got enough.” ~ Kurt Vonnegut

December 24, 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.

The Hare, The Tortoise, & Stocks

The Hare and the Tortoise is a classic Aesop fable. A story we know well.  The hare mockingly asking the tortoise, “Do you ever get anywhere?” Of course, we know how the story ends. The tortoise “kept going slowly but steadily, and, after a time, passed the place where the Hare was sleeping.” Practicing a life of slow and steady is harder than it looks. We are an impatient nation addicted to getting our way as quickly as possible.

I recently lost a client who wanted to arrive at the finish line faster than scheduled. He mentioned a relative who was investing in growth stocks and generating returns of “20% to 30% or more.” Since the market low on March 23, the NASDAQ has risen 71%, and stocks like Shopify and The Trade Desk have risen more than 320%. The recent pandemic has turned Robinhood traders into stars, and one celebrity repeatedly mocks Warren Buffett and has said, “Trading is easy.”

The curious thing about my call with my former client is that it resembled one I had with another client in December 1999. At the time, the NASDAQ had risen 53% in two months as investors speculated on internet and dot com stocks. He, too, wanted to grow his account faster. He was not satisfied with his returns, and he felt like he was missing his chance to strike it rich. The NASDAQ would rise another 24% as it reached a peak in March 2000. The NASDAQ would fall 78% before it hit rock bottom in December 2002. If you invested at the market top in 2000, you had to wait sixteen years before the index eclipsed its previous high.

At times, I think it’s easier to make 50%, 100%, or more in short-term trading bursts than earn 8% for 10, 20, or 30 years. It’s possible to catch lightning in a bottle, but the key to creating generational wealth is how you react after a market crash. How many investors in 1999 remained invested for sixteen years to recover their costs or buy stocks at low prices? My guess, not many.

When the market corrects, the slow and steady crowd takes over, systematically investing while following their plan. Warren Buffett said, “The stock market is a device for transferring money from the impatient to the patient.”

The 100 year average for stocks has been 10%, and it’s been 5.6% for long-term bonds. Since 1926, a portfolio consisting of 50% stocks, 50% bonds generated an average annual return of 8.55%, and it has made money 79% of the time, which means 21% of the time it lost money.[1] And, in some years it lost a lot. In 1931, the portfolio lost 38%; from 1984 to 1987, it dropped 19.8%. How you manage your investments and emotions in down years determines your wealth in up years.

A 50/50 portfolio has performed well for 1, 3, 5, and 10-years, averaging 12.18%, 12.10%, 10.54%, and 10.73%, respectively.[2] The 20-year average annual return has been 7.87%. You don’t need to make substantial gains to achieve your goals, though it would be nice. If you earn 8% per year, you can double your money every nine years.

I started my investment career in May 1989, and since then, the NASDAQ, Dow Jones, and the S&P 500 are up considerably, rising 2,660%, 1,130%, and 1,070%, respectively. However, during the past thirty years, the market has fallen several times. The NASDAQ fell 78% from 2000 to 2002. In 2008 and 2009, the S&P 500 dropped 48%. In December 2018, the Dow Jones pulled back 18.15%. This year, the three indices fell an average of 33.5%.  If you invested in each index equally for the past three decades, your average annual return was 8.94% before dividends. A $10,000 investment is now worth $130,500.

Individuals who complete a financial plan are likely to stay invested through good markets and bad. If you don’t have a plan, you may panic and sell your stocks when times are tough. In March and April, we fielded several calls from clients who wanted guidance on how to handle the sell-off. We reviewed their plans and told them to remain invested because the market correction did not impact their financial goals.

The hare lost the race because he was impatient and overconfident. If he had a plan and followed it, he would have beaten the tortoise by a mile, and Aesop would not have written his famous fable.

The race is not always to the swift. ~ Aesop Fable

November 13, 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.


[1] Dimensional Funds Returns Web 

[2] Ibid

Evidence

I like math. It’s pure and definite; the answers are indisputable. In junior high and high school, I had spirited conversations with my English teachers because our interpretation of events differed considerably. It was my opinion against theirs, and they frequently won because they were grading my papers. However, I always felt a little cheated because if they didn’t like my topic or handwriting, they’d knock me down a notch or two. One teacher didn’t like athletes, so she was upset when I turned in a book report on Roberto Clemente. On the other hand, my math teachers evaluated my work based on facts and time-tested formulas, which made sense.

Opinions, guesswork, and assumptions run rampant on Wall Street, especially in the absence of facts. Without facts, individuals create a story that is often wrong. Convinced the market would fall if Biden won the election, investors sold stocks. Others felt COVID would continue to drive stocks down in value. But, since election day, the Dow Jones Industrial Average is up almost 8%. Helping propel the Dow higher is news from Pfizer that they may have found a vaccine for COVID.[1] Short-term thinking is an investor’s worse enemy.

A bit of market knowledge may help you stay invested during times of turmoil and ambiguity. Here are a few facts.

  • Individuals who complete a financial plan have three times the assets of those who do little or no planning.[2]
  • Stocks outperform bonds. The 93-year average annual return for common stocks has been 10.2%, while long-term government bonds returned 5.6%. A $1 investment in large-company stocks is now worth $9,237, while $1 invested in bonds is worth $175.[3] 
  • Small-company stocks outperform large-company stocks. The Dimensional U.S. Small Cap Value Index averaged 13.2% from 1928 to 2019. A $1 investment is now worth $90,337.  The Dimensional Large-Cap Value Index averaged 11.2%. A $1 investment in this large-cap index is now worth $17,219.[4]
  • Asset allocation accounts for 93.6% of your investment return. The remaining 6.4% comes from market timing and investment selection.[5]
  • Passive index investing is better than active stock picking. The Standard & Poor’s passive v. active study reveals that over 15 years, 95% of active fund managers fail to outperform their benchmark, also the case for 1, 3, 5, and 10 years.[6]
  • Lower fees are imperative. Less is more. Your advisor should provide you a list of charges for their services, including the investments they offer. If your advisor is charging you more than 1% of your assets, a high hourly rate, or a monthly retainer, you may need to make a change.
  • Working with an investment advisor can help you increase returns. A study by Vanguard quantified an advisor relationship can add 3% in net returns.[7] An advisor can help with financial planning, estate planning, investment planning, charitable planning, and much more. 
  • US stocks rise about 75% of the time. Since 1926, the S&P 500 has risen 69 times and fallen 25.
  • Since 1926, inflation has averaged 2.9%, and US T-Bills have returned 3.3% per year. Your net return, before taxes, has been .4%.
  • The stock market always recovers. In March, the Dow Jones was down 37%, falling to 18,591. Today it’s approaching 30,000 – a record level.

To create generational wealth, own stocks, overlook short-term moves, focus on facts, ignore conjecture, and good things will happen.

“These are the facts of the case – and they are undisputed.” ~ Kevin Bacon, A Few Good Men

November 9, 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.


[1] https://www.pfizer.com/news/press-release/press-release-detail/pfizer-and-biontech-announce-vaccine-candidate-against

[2] http://www.nber.org/papers/w17078

[3] Dimensional Funds 2020 Matrix Book.

[4] Ibid.

[5] Determinants of Portfolio Performance, Financial Analyst Journal, July/August 1986, Vol 42, No. 4, 6 pages; Gary P. Brinson, L. Randolph Hood, Gilbert L. Beebower.

[6] https://us.spindices.com/documents/spiva/spiva-us-year-end-2016.pdf

[7] https://www.vanguard.com/pdf/ISGQVAA.pdf

Same As It Ever Was

Election day has come and gone, and pollsters once again missed their mark. In 2016, they forecasted a Clinton landslide, and she lost. This year, Biden was projected to win by double digits, and a blue-wave would overtake the House and Senate. The election is not officially over, but it won’t be a double-digit victory, and we did not experience a blue-wave. Same as it ever was.

In 1948, Thomas Dewey was declared a winner over Harry Truman by the Chicago Tribune. They were wrong. Harry Truman famously held up their newspaper with the headline: “DEWEY DEFEATS TRUMAN.”[1]

In 1946, Darryl Zanuck, movie producer at 20th Century Fox, said, “Television won’t last because people will soon get tired of staring at a plywood box every night.”[2] Have you binged on Netflixed lately?

Decca Recording Company refused to sign the Beatles in 1962 because “We don’t like their sound, and guitar music is on the way out.”[3] They probably had a hard day’s night by not signing the Beatles.

Ken Olson, president, chairman, and founder of Digital Equipment Corporation, said, “There is no reason for any individual to have a computer in his home.”[4] Can you imagine working from home without a computer during the pandemic?

The San Francisco 49ers were a pre-season favorite to win Super Bowl 55, but since they started playing actual games, they will finish in the middle of the pack, at best.

Forecasting anything is challenging, especially in the short-term.

It will snow in Colorado this year, but who knows when it will start, how much will accumulate, and when it will end. No one knows if it will snow on December 7 in Estes Park, but it may.

Trying to predict the direction of the stock market may be the most challenging to forecast. Fortune Magazine told readers last week to “Buckle up, investors: it might be a rough few days.” One Wall Street veteran said, “The S&P 500 ‘could easily dip into correction territory on Monday; it wouldn’t be surprising if that happened.'”[5]  What happened? The Dow Jones rose 5.08% or 1,346 points.[6]

The stock market has averaged 10% per year for the past 100 years regardless of who wins the Super Bowl, snows in Colorado, or occupies the White House.

The bottom line is that no one knows what will happen today, tomorrow, next week, or next year.

As an investor, what can you do if no one can predict the future? Here are my suggestions.

  1. Invest according to your goals. A financial plan can help you quantify and prioritize your goals. Are you saving for college or retirement? Do you want to buy a new car or a vacation home? Your goals will determine your asset allocation. If you need your money in one year or less, invest in cash. If your time horizon is five years or more, invest in stocks.
  2. Invest for growth. For the past twenty-five years, my asset allocation has been 75% stocks, 25% bonds regardless of market conditions. When stocks rise, I rebalance my portfolio to buy more bonds. When they fall, I sell bonds to buy stocks. I don’t care what the stock market does today because I don’t need my money for another fifteen years or so. And, on some days, I can’t remember if the market was up or down.
  3. Don’t time the market. After the market correction in March, several investors sold stocks and parked their money in cash, missing a 50% rebound in stocks. Last week, I fielded a few calls to see if we should sell stocks before the election and repurchase them after it was over. I told them to stay invested, thankfully. Investing is not a binary event. Moving from stock to cash and back is a loser’s game.
  4. Save early and invest often. The amount of money you save will significantly impact your wealth more than trying to time the market. Investing $1,000 per month at 7% will be worth $1.2 million in thirty years. The more money you save today, the larger your account balance will be tomorrow; it’s simple math.
  5. Invest in a globally diversified portfolio of low-cost funds. Global exposure will give you access to large, small, and international companies. A diversified portfolio works well over time because you never know when, where, or why which markets will move.

Trying to predict the future is a waste of time and energy, so don’t do it. Rather than worrying about what will happen tomorrow, live for today, enjoy your life, love your neighbor, and count your blessings.

Therefore do not worry about tomorrow, for tomorrow will worry about itself. Each day has enough trouble of its own. ~ Matthew 6:36

November 5, 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.


[1] https://www.history.com/news/7-failed-predictions-from-history

[2] https://www.boredpanda.com/bad-future-predictions-timeline-history/?utm_source=google&utm_medium=organic&utm_campaign=organic

[3] http://www.atchuup.com/famous-predictions-proven-wrong/

[4] Ibid

[5] https://fortune.com/2020/10/30/the-sp-500-could-easily-dip-into-a-correction-before-the-election-on-tuesday/, Anne Sraders, October 30, 2020

[6] YCharts – DJIA, 10/30/2020 – 11/4/2020

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