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.

 

 

 

 

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.