What is the S&P 500?

What did the market do today? Was it up? Down? When people refer to the “the market” it’s usually the S&P 500® Index. But what is it? It’s a key benchmark money managers, mutual funds, and other professionals use to measure performance.

The S&P 500® Index is a collection of the 500 largest publicly traded U.S. corporations. It’s a market weighted index meaning the largest companies have the greatest impact on performance – good and bad.  The largest company in the index is Microsoft; the smallest is News Corp. When Microsoft moves, so will the index. The 10 largest companies in the index are Microsoft, Apple, Amazon, Berkshire Hathaway, Facebook, Johnson & Johnson, JP Morgan Chase, Alphabet, Exxon Mobil, and Bank of America. The largest sectors are Information Technology, Healthcare and Financials.

Standard & Poor’s launched the now famous index on March 4, 1957. It’s a better gauge of the market because of the breadth of its holdings especially when compared to the Dow Jones Industrial Average which only holds 30 companies.[1] The Dow Jones index was founded in May 1896.

Because of the breadth and consistency over time there are currently $9.9 trillion in assets linked to this index. The most popular one is the Vanguard S&P 500 Index Fund founded by Mr. John Bogle. Mr. Bogle recently passed away and this put a spotlight on this popular category. Mr. Bogle started the fund in 1976 to a less than stellar opening. His goal was to raise $150 million but he only received $11.4 million – a rounding error on Wall Street.[2] The fund currently has assets of $400 billion! If you had invested $10,000 in this fund when it opened, your account balance would be worth $744,951 today. It has generated an average annual return of 10.71% since its feeble beginning.

Wall Street was not a fan of Mr. Bogle’s fund because of its low fee structure and average returns. What investor would want to own a fund generating average returns when active fund managers and stock pickers could do so much better? Makes sense. However, active stock pickers rarely outperform the S&P 500® Index. In fact, 91% of active fund managers failed to outperform the S&P 500® over a 10-year period and 95% of funds with high fees lagged this key benchmark. The active managers were below average, well below.[3]

Rather than average returns consider market returns. If you can generate market returns over time, your wealth should grow despite the occasional drop in value or spike in volatility. A low cost, diversified investment like the Vanguard S&P 500® Index Fund is a great candidate for most investors.

As a side note, the S&P 500 owns 505 companies!

Happy Investing.

“The two greatest enemies of the equity fund investor are expenses and emotions.” ~ John C. Bogle

February 1, 2019

Bill Parrott 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.

 

 

 

[1] file:///C:/Users/Bill%20Parrott/Downloads/fs-sp-500.pdf

[2] https://www.inc.com/magazine/201210/eric-schurenberg/how-i-did-it-john-bogle-the-vanguard-group.html, B Eric Schurenberg, 9/25/2012

[3] https://office.morningstar.com/research/doc/Aug%2023%202018_Active_vs_Passively_Managed_Funds_Takeaways_from_Our_Mid-Year_Report__880196, Ben Johnson, August 23, 2018

Expectations

At the beginning of each football season every NFL team has high hopes of winning the Super Bowl, even the Cleveland Browns. Enthusiasm and expectations are high.

During the 1970s the Minnesota Vikings were one of the most dominant football franchises in the NFL, winning 78% of their games from 1969 to 1977. Because of their stellar play they had the opportunity to participate in four Super Bowls. Despite their regular season success, they failed to win one title. They were the first team to lose four Super Bowls.

Not to be out done, the Buffalo Bills conquered their opponents in the early 90s. They won 76% of their games and appeared in four consecutive Super Bowl’s, the first team to do so. They lost all four.

These two teams had four chances to win a Super Bowl but failed to do so. Despite losing every title game, were their seasons successful? I’m sure there was disappointment, but they did win several games and play in multiple Super Bowls, an opportunity lost on most teams.

In January, investor hopes were high as the Dow Jones soared more than 5%, crossing 26,000 for the first time. In hindsight, we should’ve sold all our stocks in January and moved to cash. After it peaked, it promptly fell 10.3%.

As we approach the end of the year, most asset classes are trading in negative territory. U.S Stocks remain in positive territory, but bonds, international investments, emerging markets, real estate, and commodities have negative returns. A challenging year for diversified portfolios.

Dimensional Fund Advisors Global 60/40 (60% stocks, 40% bonds) Fund has generated an average annual return of 8.1% since 1984. This fund is diversified across multiple countries, several sectors, and thousands of securities. It has made money 78% of the time, a similar winning percentage to the Vikings and Bills during their Super Bowl runs.

The S&P 500 Index has posted positive annual returns 73% of the time and since the end of World War II it has averaged 11.3%.

Despite stellar winning percentages and generous annual returns, sometimes investments, all investments, fail to live up to expectations.

What should you do if your investment hopes and dreams have been dashed this year? Here are a few suggestions.

Be Patient. No trend lasts forever. Circumstances change. After the Dow Jones fell 10% in January, it rose 15% for the next eight months. In 1994, the S&P 500 gained a paltry 1.4% before rising 144% from 1995 to 1999. Long-term government bonds fell 14.9% in 2009. They appreciated 41% over the next three years.

Plan. During the volatile months of February and October, I was able to stress test client portfolios and no one’s goals were impacted due to the market’s downturn. The financial plan allowed me to review client goals and portfolios in real time. The analysis gave us comfort despite the lack of cooperation from the markets. A financial plan may help you with your long-term goals and give you peace of mind when markets fall.

Rebalance. As markets move around the world, it’s likely your asset allocation has changed. If your portfolio is off kilter, rebalance it back to its original state. The best time to reset your portfolio is in January after your year-end capital gains and dividend distributions have been credited to your account.

Nothing. If your goals have not changed and your asset allocation is normal, stay the course. Don’t trade. Let your portfolio find its footing. For example, if you purchased the Dimensional Global Portfolio in 2008, you lost 22.7%. However, if you did nothing and held it through the end of 2017, you made 6.1% per year.

Pursue. During market disruptions there’s always opportunities to find good investments. If you have cash to invest, look for investments you can add to your portfolio for future growth.

As we close out 2018, spend some time honing your goals and reviewing your portfolio. In a few weeks it will be a new year, a new season and hope springs eternal.

“Winning means being unafraid to lose” ~ Fran Tarkenton

November 19, 2018

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

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

 

 

 

 

My Two Best Days

Tommy Lasorda once said, “The best possible thing in baseball is winning the World Series. The second-best thing is losing in the World Series.” He added, “When we win, I’m so happy I eat a lot. When we lose, I’m so depressed, I eat a lot. When we’re rained out, I’m so disappointed I eat a lot.” Mr. Lasorda didn’t let his circumstance alter his mood. He recognized the beauty of playing baseball regardless if his teams won, lost or were rained out. His two favorite days were managing when the team won and managing when they lost.

When I’m asked about how the market is performing, I’m not sure how to respond because up days and down days both provide excellent opportunities to investors. Of course, everybody likes to make money from a rising market. When stocks are rising consumer confidence is high and people feel good about their wealth and they spend money.

When the market is falling, people feel depressed and frightened because they see their assets dropping in value. When stocks fall, investors lose confidence and spend less money.

Should it matter if stocks are rising or falling? Over time, the answer is no. Stocks have risen about 73% of the time since 1926 and 54% of the time they’ve been the best performing asset class.[1] Since 2009 the S&P 500 Index has risen 267%, averaging 14.15% per year. It has not had a losing year since 2008, including this year.

A winning percentage of 73% is pretty good, but what about the remaining 27%? The market has finished in negative territory 27% of the time since 1926 and we have experienced some doozies. The market fell 43% in 1931, 35% in 1937, 26% in 1974, 22% in 2002, and 37% in 2008. Despite these disruptions, the market has averaged 10% per year for almost 100 years.

When markets drop, fear rises. However, when stocks fall you have an opportunity to buy great companies at better prices. Investors loved Amazon at $2,050.50 but hated it after falling 26% to $1,520. Why? Amazon was the same company on October 17 at its high as it was on October 30 near the low. If the market rises most of the time, why not use down days to add stocks to your portfolio? Instead of fearing a drop, get excited that you can now add great companies to your account.

As I mentioned, the S&P 500 has been the top performing asset class 54% of the time, meaning 46% of the time another investment is doing better. In 2008, long-term bonds soared 26%. Last year emerging markets climbed 35%. No trend lasts forever, so a diversified portfolio is recommended so you can take advantage of all global markets.

A globally diversified portfolio of mutual funds with a mix of 60% stocks, 40% bonds has generated an average annual return of 7.5% for the past 20 years despite the lost decade from 2000 to 2010.[2] A $100,000 investment in 1998 is now worth more than $424,000.

To stay invested for the long haul and to benefit from the rise in global markets, you need a plan. Your plan will align your goals, risk tolerance, asset allocation and investment selection. With this alignment you can enjoy the up days and tolerate the down ones. Your plan will keep you focused on those things that matter to you and your family most.

I like up days and down days, so, to me, the market is always doing well regardless of the daily moves. Markets have been rising and falling for centuries, so take advantage of up and down days to generate wealth for you and your family.

Man, I did love this game. I’d have played for food money. It was the game… The sounds, the smells. Did you ever hold a ball or a glove to your face? ~ Shoeless Joe Jackson (Ray Liotta – Field of Dreams)

11/12/2018

Bill Parrott 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.

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

[1] Ibbotson® SBBI® 2015 Classic Year Book

[2] Dimensional Fund Advisors 2018 Matrix Book

10%

Ten percent has been the average annual return for the S&P 500 since 1926. One dollar invested in 1926 grew to $7,347 by the end of 2017.[1]  Because of the 91-year average most investors expect (demand) a 10% return every year. In fact, when analysts give their stock market return projections for the coming year the answer is usually 10%. It’s a safe prediction because of the history of the index.

Despite the historical average annual return, the index has never closed at 10%. The closest it came to the average was 2004 when it returned 10.9%.

The road to average is paved with euphoria and despair. From 1982 to 1999 the index averaged 18.5% per year. From 2000 to 2012 it returned a paltry .6% per year. The best one-year return, after World War II, was 1954 when it soared 52.6%. The worst year occurred in 2008, plummeting 37%.[2]

During the Great Depression the market fell 85% and because of the Oil Embargo of the ‘70s it dropped 41%.  It declined 43% throughout the Tech Wreck and 37% amid the Great Recession.

To date, the S&P 500 is up 4.64%. It started the year at 2,695 and by the end of January it had already risen 6.5%. The gains didn’t last long as the market rolled over in February, falling 10% from its all-time high.  From the low of 2,581 it has rallied back to its current level of 2,820.

Most investors don’t allocate 100% of their assets to a single fund or index. A diversified portfolio is the norm but some question whether it’s better to concentrate or diversify. To create wealth, concentrate your holdings and to preserve it, diversify.

Concentration in technology stocks is working well in 2018. A portfolio of FANGs – Facebook, Amazon, Apple, Netflix and Google (now Alphabet) is up 35%. A diversified portfolio of large, small, and international mutual funds mixed in with some bonds is up a measly .81%.[3]

I know these results all too well as my daughter’s account is soaring due to a few of the FANGs, one of which she’s owned for more than 17 years. My account, on the other hand, is well diversified and it’s flat for the year.

As we venture into the second half of the trading year focus more on your long-term goals and less on stock market averages. The market has delivered exceptional returns for decades and the future will be similar. Of course, some years it will rise and others it will fall. As it rises don’t get overly excited or too depressed when it falls. In the long run, a well-diversified portfolio will deliver you market returns and if you capture them you’ll do better than most investors.

I’m optimistic on the future of the market – stay invested my friends!

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

July 25, 2018

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

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

[1] Dimensional Fund Advisors 2018 Matrix Book

[2] Ibid

[3] Morningstar Office Hypothetical Tool. The diversified portfolio consists of VOO, VB, VXUS and BND.

A Stock Picker’s Market

The panelist on CNBC’s Halftime Report today mentioned we’re currently in a stock picker’s market. A stock picker’s market is one where money managers actively pursue strategies that will outperform the indices. They’ll try to cherry pick winners and avoid losers by employing several techniques such as charting and timing.

After the show ended, I searched Morningstar’s database looking for funds with a high turnover and a 5-year track record. What does turnover mean? A fund with a turnover of 100% will replace its entire portfolio over a 12-month period.[1] The average mutual fund has a turnover of 130%.[2] The three funds I found have an average turnover of 3,775% – that’s a lot of stock picking!

Rydex S&P 600 Pure Value Fund (RYSVX) has an annual turnover of 1,832%. The initial fee to purchase this fund is 4.75% and the ongoing expense is 1.53%. A few of the holdings are Finish Line, Barnes & Noble, and Zumiez. This fund has underperformed the S&P 500 on a 3, 5, and 10-year basis. In 2008 it dropped 43.64%. A $10,000 investment in this fund five years ago is now worth $13,662. The average annual return has been 6.43%.[3]

Salient Tactical Plus Fund (SBTAX) has an annual turnover of 3,584%. The initial fee to purchase this fund is 5.5% and the ongoing expense is 1.98%. It currently owns four investments. It has underperformed the S&P 500 on a 1, 3, and 5-year basis and it’s trailing the market in 2018. A $10,000 investment in this fund five years ago is now worth $12,016. The average annual return has been 3.74%.[4]

PSI Strategic Growth Fund (FXSAX) has an annual turnover of 5,910%. The initial fee to purchase this fund is 5.75% and the ongoing fee is 2.31%. It owns 8 investments or twice as many as Salient. It has underperformed the S&P 500 on a 1, 3, and 5-year basis. This year it’s down almost 15%. A $10,000 investment in this fund five years ago is now worth $9,225. The average annual return has been a negative 1.6% per year.[5]

By comparison, the Vanguard 500 Index Fund (VFINX) has an annual turnover of just 3%. It doesn’t have a sales charge and the ongoing fee is .14%. It has generated market returns since 1976, minus its miniscule fee. A $10,000 investment in this fund five years ago is now worth $18,274. It has generated an average annual return of 12.82% per year.[6]

I hope we’re not in a stock picker’s market if these funds are an indication of one. Funds with high turnover and excessive fees should be avoided at all costs. Instead, look for mutual funds that generate market returns such as the Vanguard 500 Index Fund.

Investors regularly try to outperform the market by utilizing tools, tricks, and trading only to fall short time and time again. Rather than trying to find a market beating strategy focus on your financial plan and invest in low-cost mutual funds. It’s okay to grow rich slowly.

Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” – Paul Samuelson

June 22, 2018

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

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

[1] https://www.investopedia.com/articles/mutualfund/09/mutual-fund-turnover-rate.asp, Stephan Abraham, April 23,2018.

[2] Ibid

[3] Morningstar Office Hypothetical Tool

[4] Ibid

[5] Ibid

[6] Ibid

3 Percent

Three is not a lonely number but it is a crowd and a bit odd.  The number three appears in stories like the Three Musketeers and the Three Little Pigs. The Nina, Pinta, and Santa Maria sailed the ocean blue as a threesome.  Famous athletes who have worn the number include Babe Ruth, Dwayne Wade, Candice Parker, Russell Wilson, and Dale Earnhardt.  Let’s not forget the Three Stooges.

Lately, investors have been agitated because the yield on the 10-Year US Treasury Note breached 3%.  Rising rates usually don’t bode well for financial instruments like stocks or bonds but should we be worried?

The last time the 10-Year yield poked its head above 3% was December 2013.  If you purchased the Vanguard S&P 500 Index fund in January 2014, after the 10-Year rose above 3%, you would’ve generated an average annual return of 10.89%.  A $100,000 investment in the Vanguard fund is now worth $155,510.

The yield on the 10-Year Treasury never fell below 3% from 1962 to 2008 and peaked at 15.84% in September 1981. Since 1962 it has averaged 6.23%. Rates are relative and 3% seems low next to the historical average but high when compared to the low of 1.37% it touched in July 2016.[1]

From 1962 to 1981 the 10-Year yield soared 275%.  This period included the Cuban Missile Crisis, the Civil Rights Movement, the Vietnam War and the Iran Hostage Crisis. Despite these headwinds the stock market managed to generate an average annual return of 6.8%.  A $100,000 investment in the Investment Company of America mutual fund in 1962 grew to $547,780 by the end of 1981. Of course, the stock market didn’t go straight up, it fell several times including a 41% loss from 1973 to 1974.[2]

The S&P 500 Index has averaged 10.8% from 1962 to 2018 with interest rates rising and falling. Incorporating a buy and hold strategy in the index, a $100,000 investment in 1962 grew to $34.11 million at the end of March 2018.[3]

Should you be afraid of rising rates? It all depends on why rates are rising. Currently they’re rising for positive reasons because of our strong economy, low unemployment, and robust earnings.

To keep your investments moving forward here are three things you can do now.

Plan. A financial plan will help crystallize your goals and quantify your objectives. It will serve as the cornerstone for your investment portfolio and help guide your through a myriad of market conditions.

Invest. A diversified portfolio of stocks, bonds and cash will help cushion your investments from a rate shock.  Adding international and alternative investments to your account will further balance your portfolio.

Repeat. Rebalancing your accounts once or twice per year will keep your asset allocation intact and your risk level in your desired range.

The American economy continues to thrive, and the long-term trend of the stock market can move higher despite the gravitational pull of interest rates.  Focus on your goals, look to the horizon, and invest often.

“We ignore outlooks and forecasts… we’re lousy at it and we admit it … everyone else is lousy too, but most people won’t admit it.” ~ Marty Whitman

April 25, 2018

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

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

 

[1] https://fred.stlouisfed.org/series/DGS10

[2] Morningstar Office Hypothetical Tool

[3] Ibid

Is Cash King?

The U.S. stock market has already risen 7.5% for the year and it shows no signs of slowing down.  This strong start is following a 21.8% return in 2017 and a 11.9% return in 2016.  In the S&P 500 Index about 140 companies have already produced a double-digit return.

By several metrics the market is trading at extreme valuations. The ratio and sentiment readings are at all-time highs.  The Cyclically Adjusted PE Ratio (CAPE) is 34.75.  The CAPE peaked in December of 1999 at 44.19.  Prior to Black Monday, October 19, 1987 it was 18 and on the eve of the 1929 stock market crash it was 30.[1]  The AAII Index, American Association of Individual Investors, lists 54.1% of its members as bullish.  The average reading for the index is 38.4%.[2] The Citigroup Panic/Euphoria Model is flashing the euphoria warning.  In September it was near panic levels.

With market and metrics peaking investors might want to sell their stocks and move the money to cash.  In the short term, this may be a prudent move.  Cash is a security blanket in times of uncertainty and it may provide comfort if the stock market were to fall.

The prior peak in the stock market was October 2007 when the Dow Jones closed at 14,198.  After it topped it fell 54% to a low of 6,469 in March 2009.  If you were able to sell at the top and buy at the bottom you’d be a legend.  This probably didn’t happen to you or anybody you know.  When an investor moves his money to cash to avoid a stock market correction he’ll usually buy again before it stops falling or well after it has recovered. In both cases he loses.

If you bought stocks in October 2007, a horrible time to invest, you still doubled your money at the end of 2017.  A $10,000 investment in the Vanguard S&P 500 Index Fund on October 1, 2007 grew to $21,309, a gain of 113%.  If you were dollar-cost-averaging by investing $1,000 monthly into this fund you gained 237% because you were buying stocks on the way down and the way up.  By investing monthly your original investment grew to $272,946.[3]

Does it make sense to sell your stocks and move your money to cash to avoid a stock market correction? Cash, as measured by the one-month US Treasury Bill, has averaged 3.4% since 1926.  A $1 investment in a T-Bill in 1926 “grew” to $21 at the end of 2015.  During this same time frame inflation averaged 2.9% so the return on your investment, before taxes, was .5%.  By comparison, $1 invested in the S&P 500 grew to $5,386.[4]

Since 2007 cash has had an average annual return of .7% and inflation 1.8% so you lost 1.1% per year by investing in a safe asset class.

Cash is looking more attractive as interest rates rise.  The Federal Reserve is expected to raise interest rates four times this year so the rate on your cash account should rise as well.  However, as interest rates rise so does inflation.  The rise in inflation will always reduce the return you earn on your cash investment and when taxes are applied it’s probable your annual return will be negative.

Diversification is a better alternative for an investor with a long-term perspective.  A balanced portfolio of 60% stocks and 40% bonds returned 8.4% per year for the past 31 years, a $20,000 investment is now worth $245,000.   This portfolio endured four major market corrections and during the most recent one, 2008, it did fall 16%.   A double-digit loss is not fun but losing 16% is much better than losing 54%.[5]

As the market continues to rise diversify your assets, rebalance annually, invest monthly, and follow your financial plan.  Your long-term goals are more important than short-term market moves.

“I am an old man and have known a great many troubles, but most of them have never happened.” ~ Mark Twain

Therefore, do not worry about tomorrow, for tomorrow will worry about itself. ~ Matthew 6:34

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

January 27, 2018

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

 

 

 

 

 

[1] http://www.multpl.com/shiller-pe/

[2] http://www.barrons.com/public/page/9_0210-investorsentimentreadings.html

[3] Morningstar Office Hypothetical Tool.

[4] Dimensional Funds 2016 Matrix Book

[5] Morningstar Office Hypothetical Tool, 12/31/1986 – 12/31/2017, Vanguard S&P 500 Index Fund and Vanguard Total Bond Fund.

10 Things to Crash the Stock Market.

The U.S. stock market continues its historic run with no signs of slowing down.  Since March of 2009 the Dow Jones Industrial Average has soared 262%.  As the market ticks higher, investors are looking for the top so they can sell their stock holdings before the market crashes.

Timing the stock market is futile because no one knows when the market will fall nor, do they know what will drive it lower but here are a few culprits that may bring the stock market down.

  1. Rising interest rates. A rise in interest rates will eventually become a threat to stock prices.  If investors can receive a 6% to 7% risk free rate of return, then money will leave stocks and move to bonds.  We’re a long way from bonds yielding 6% or more.  The current U.S. Ten Year Treasury Note is yielding 2.4% and the historical rate has been 4%.
  2. Inflation. Inflation and interest rates are linked and the two will rise together.   Inflation is the increase in prices for goods and services meaning a dollar today with be worth less tomorrow.  The U.S. postage stamp is a great example of price inflation.  In 1974 the price of a postage stamp was $.10 and today stamps costs $.49, an average annual increase of 3.74%.   Over the past 12 months, the Consumer Price Index has increased 2.24% and the Gross Domestic Product has risen 2.3%.
  3. Valuation. The current price to earnings ratio for the Dow Jones Industrial average is 20.4 and the Shiller CAPE ratio is 31.51.  The CAPE ratio is a cyclically adjusted PE ratio and it’s based on the inflation adjusted earnings from the previous 10 years.[1]  The peak for the ratio was 44.19 in December of 1999.  The lowest level for the CAPE was in 1920 at 4.74.  In 1929 it peaked at 30.[2]
  4. Washington D.C. A failure for our government to pass a tax bill will be problematic.  In addition to the tax bill, the government is working on a new health care bill and an infrastructure spending package.  The government needs to pass these items for the market to continue rising.
  5. North Korea. If North Korea launches a missile and it lands in a populated area, the stock market will sell off.
  6. Bitcoin. Bitcoin by itself is not a threat to the market but the behavior to buy Bitcoin may be a problem.  As speculators chase the price of Bitcoin they sell stocks and other assets to fund their purchases.  If the price of Bitcoin corrects, this may bring down the price of the other assets.
  7. Debt. The public debt as a percentage of GDP is currently 103%.   By comparison, the debt level in 2007 was 62%.[3]   A high debt level protrudes trouble because it eventually must be paid off and investors may sell assets to cover these debt payments.
  8. Failed Merger. In 1989 the failed acquisition of United Airlines sent the Dow Jones down by 190 points, the largest drop since the 1987 correction.[4]   There are a few high-profile mergers in the works and the failure to get these done could send the market down.
  9. Time. The current bull-market is 8 ½ years old.  The average bull market typically lasts about 3 to 5 years.  However, bull markets rarely die of old age.
  10. Other. The next bear market will be triggered by some other event as no two corrections are the same.  The next correction will come out of left field and catch investors off guard.  Hindsight and a 20/20 review will seem obvious to those who study market corrections but we won’t know about it until after the fact.

It’s extremely difficult to try and time the market and sell before a correction arrives.  Market timing works both ways.  If you’re lucky enough to sell your stocks before a fall, when do you decide to buy back into the market?  Buying stocks at a market bottom is much harder than selling stocks at a market top.

An investor who purchased an S&P 500 index fund in October of 2007 endured a drop of 41.5% in 2008, however, if they held on through last month they would’ve more than doubled their money.  The average annual return for the S&P 500 since October of 2007 has been 7.35%.

If you’re concerned about a stock market correction, my recommendation is to diversify your holdings across cash, bonds, small stocks, large stocks, international stocks, real estate, and other asset classes.

There is a time for everything, and a season for every activity under the heavens… ~ Ecclesiastes 3:1

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

November 11, 2017

Note:  Past performance is not a guarantee of future returns.  Your returns may be more or less than those posted in this blog.

[1] http://www.multpl.com/shiller-pe/, website accessed 11/11/17

[2] Ibid.

[3] https://fred.stlouisfed.org/series/GFDEGDQ188S, website accessed 11/10/2017.

[4] http://articles.latimes.com/1989-10-15/news/mn-225_1_stock-market, 10/15/1989, Associated Press.

It is time to sell. Everything!

Is it time to sell everything?  You should not sell everything but you may want to sell something.  The stock market continues to underwhelm in 2016 and this trend looks like it may remain in the near term.   The fear of the downside is real and growing among investors especially if you pay attention to the posts, papers and pundits.   The general consensus among the masses is for the doom and gloom to linger. 

Should you be a seller?   Here is a list of individuals who should sell their stock holdings.

1.       You should sell if you need your money in one year or less.   According to Morningstar and Ibbotson the stock market has made money 73% of the time on a one-year basis between the years of 1926 and 2014.   However, the range is wide.  The best year was 1933 with a gain of 53.99% and the worst year was 1931 with a loss of 43.34% (Ibbotson®SBBI® 2015 Classis Yearbook).

2.       You should sell if you are going to buy something with the money invested in the stock market.  If you are going to buy a home, car, boat or plane then this money should be in cash.

3.       You should sell if you have to pay for an event like a wedding or a college education.   My daughter will be leaving the nest soon and heading off to college in the fall.   As a result, I sold half of her investment account two years ago and invested the proceeds in U.S. Treasuries knowing that a tuition payment is imminent.   I did not want to have 100% exposure to stocks before she left for college.

4.       You should sell if you are retiring in 3 to 5 years.   You don’t need to sell all of your stock holdings just enough to cover 3 years’ worth of household expenses.  For example, if your annual household expenses are $100,000, then you should have at least $300,000 in cash in your retirement or investment accounts.

5.       You should sell if you are up to your eyeballs in debt.  This can be mortgage, credit card, consumer, auto or margin debt.  Debt is debt and the less you have the better.  A rule of thumb is that your total monthly debt payments should be less than 38% of your gross income.  For example, if your gross income is $10,000 per month, then your total debt payments should be no more than $3,800.

6.       You should sell if you don’t have a financial plan.  If you don’t have a financial plan, this is analogous to driving a car without a steering wheel or sailing a ship without a rudder.   How can you invest your assets if you have no idea where you are going?  A financial plan will help guide your investments and make you a better investor.   A well-constructed financial plan will be your life guide.

7.       You should sell if your account is 100% invested in stocks.   A portfolio that is invested in 100% stocks has had an average annual return of 10.1% with a standard deviation of 20.1.   A portfolio that is 70% in stocks and 30% in bonds has had an annual return of 9.2% and a standard deviation of 14.3.  The bonds reduced your risk by 29% and your returns by .9% per year.   The time frame for these returns is from 1926 to 2014. (Ibbotson®SBBI® 2015 Classis Yearbook).

8.       You should sell if you can find a superior long term investment that outperforms great American and International companies.

9.       If you do not fall into one of the above categories, then you should be a buyer of stocks!

Happy Investing.

Bill Parrott is the President and CEO of Parrott Wealth Management, LLC.  www.parrottwealth.com

1/30/16

 

 

 

Straight Up!?

The stock market has gone straight up since March of 2009.  An investor who had the courage to buy stocks on March 9, 2009 has enjoyed an average annual return of 19.16% and a cumulative return of 336%!  A $10,000 investment on that day is now worth $43,602.[1]   During this historic run the stock market hasn’t had a down year.   2009 was the best year with a gain of 67.8% and the worst year was 2015 with a modest gain of 1.38%.   Has this run been pure bliss?

During this epic run the stock market has fallen 45% of the time with the worst one day drop of 6.5%.  The market also experienced several down days of 2%, 3%, or 4%.

Let’s look at a few of the down days that occurred during this historic rise.[2]

  • October of 2009 the market fell 5.54%.
  • January of 2010 the stock market fell 5.17%.
  • May of 2010 the stock market fell 7.81%, followed by an 8.79% drop in June and July and a 4.18% drop in August.
  • July and August of 2011 the stock market fell 17.12%.
  • September of 2011 the stock market fell 7.02% and through November it dropped another 10.07%.
  • April of 2012 the stock market fell 7.97%.
  • August of 2013 the stock market fell 4.7%.
  • January of 2014 the stock market fell 5.11% and in April it dropped another 4%.
  • September and October of 2014 the market fell 7.5%.
  • August of 2015 the stock market fell 11.68% and in September it dropped another 5.8%.
  • January of 2016 the stock market started the year with a drop of 8%.

The investor who didn’t sell during these market drops was rewarded with above average market returns.  The investor who sold during these down days missed out on an opportunity to realize historic returns.

The market experts are currently calling for a stock market pullback because it’s overvalued based on a few metrics like the CAPE ratio.[3]  The CAPE ratio is the Cyclically Adjusted Price Earnings Ratio developed by Robert Shiller.   The CAPE ratio is currently 29.66 and has only been at this level twice before: 1929 and 1999.

The stock market, experts, and commentators will give you plenty of reasons to sell your stocks.   Should you listen to the noise?  My recommendation is to focus on your goals and don’t let the market shake you from your game plan.   The stock market has been rising and falling for centuries but the long-term trend has always been higher.  You’d be wise to stay the course and let history be your guide.

 Immediately Jesus reached out his hand and caught him. “You of little faith,” he said, “why did you doubt?” ~ Matthew 14:31.

Bill Parrott is the President and CEO of Parrott Wealth Management, LLC.  For more information on financial planning and investment management, please visit www.parrottwealth.com.

August 6, 2017

 

[1] Morningstar Office Hypothetical Tool.

[2] Yahoo! Finance – 3/9/2009 to 8/4/2017.

[3] https://seekingalpha.com/article/4085454-shiller-cape-ratio-misleading-right-now, Geoffrey Caveney, July 3, 2017.