Tag: Stock Market

Same Fund, Different Day

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Vanguard’s Balanced Index fund is a solid performer, averaging 8% annually for three decades. The fund is a mixture of stocks and bonds, a standard 60/40 asset allocation. However, your individual returns will vary greatly depending on your market timing skills.

February 18, 2020

Concerns over COVID crashed the market the day you purchased the fund; one month later, you’re down 21.5%, but it eventually recovered, returning 13.27%, or 3.91% annually. A $100,000 investment is worth $113,270 – not a great return, but it’s better than losing money!

March 20, 2020

If you waited one month to buy the fund, your account was up 44.5% by the end of the year. Your timing was perfect, and your friends and family think you’re a financial genius. The fund has averaged 12.30% per year, and your $100,000 is now worth $144,350.

December 30, 2021

You sat on the sidelines during the COVID correction, and after watching the Vanguard Balance Fund rise, you finally invested. Trouble! You’ve lost 11.8%, turning $100,000 into $88,190, and you’re probably upset and kicking yourself for not waiting until market conditions improve.

October 12, 2022

You deferred your purchase to October 12, 2022 – a smart move. The fund is up 11.75%, and your $100,000 investment is worth $111,750.

February 2, 2023

It’s Groundhog Day, and, so far, the market peak, and after three months, you’re down 1.13%. Your $100,000 is worth $98,870.

March 10, 2023

You picked the near-term bottom, and your account is up 4.88%. If the trend continues, you could earn more than 28% on your investment. Your $100,000 investment is worth $104,880.

November 9, 1992

Vanguard launches the Balanced Index Fund, and you invest $100,000, and you don’t make any changes to your holding, and it is now worth $1.04 million. You’ve done well!

Time eclipses timing. Do not worry about the daily gyrations in the market because you will never buy at the low or sell at the top. Instead, focus on your financial goals and let the long-term trend of the market work for you and your family.

You make most of your money in a bear market; you just don’t realize it at the time. ~ Shelby Cullom Davis

May 20, 2023

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

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

Timing Matters  

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Timing the market can improve your odds of investment success, but it is impossible to do. Since 1998, the S&P 500 has produced an average annual return of 7.6%, but if you missed the best thirty days in the market, your yearly return dropped to 0.28%![1] The best days in the market usually follow the worst, so riding out market storms to generate positive returns is necessary.

We are conducting first-quarter reviews for our clients, and the returns are mixed. If a client joined us during COVID, the returns would have been spectacular because we invested near market lows. If we started investing after April 2021 or before June 2022, the account values would have been down. Timing matters.

April 2021 to June 2022 is a short window and will eventually be a blip on a long-term investment chart. Investors who stay invested can ultimately experience gains, but patience is required.

Dollar-cost averaging is another victim of timing. When markets rise, investors buy stocks at higher prices, and if they initiated a monthly investment program in 2020 or 2021, the account values are down. The key to successful long-term dollar cost averaging programs is volatility and falling markets because you can purchase stocks at lower prices. In time, markets recover, benefiting the patient investor.

If you began your investment program two years ago, have faith and keep investing.

The two most powerful warriors are patience and time. ~ Leo Tolstoy, War and Peace

April 19, 2023

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

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

[1] YCHARTS, Time in the market, March 20, 2023

A Recovering Stock Picker

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The siren of individual stocks has drawn me in for decades since I entered the brokerage business thirty-plus years ago. I envisioned becoming the next Warren Buffett, Peter Lynch, or Jesse Livermore. I’ve read several books on investing, charting, and trading. The data has been priceless, and I also acquired tremendous knowledge talking to clients about their stock positions and investment strategies.

In the early ’90s, I answered calls from clients at my Dean Witter office who wanted stock quotes. I shared a Bunker-Ramo terminal with another broker, and I was limited to 12 stock symbols on my side of the monitor. Giving quotes was tedious, especially if a client had an extensive portfolio. If they wanted more information, they had to wait until the following day to read the newspaper or review their month-end brokerage statement.   

Merrill Lynch, Goldman Sachs, Smith Barney, Paine Weber, and Dean Witter dominated pre-internet information on common stocks. Individual investors coveted their voluminous research reports, and Wall Street firms controlled the information flow and held most of the power to move the market.

The internet is the ultimate equalizer. Investors can receive real-time quotes and trade with a click of the finger. Acting on company news is impossible because of how fast information travels. In addition, The Securities and Exchange Commission instituted Regulation Fair Disclosure (Reg FD), ruling that all publicly traded companies must release material information to all investors simultaneously, leveling the playing field, so trying to trade on news flow is futile.

Individuals still like to trade stocks, especially if a company like AMC or Gamestop goes viral on Twitter, Reddit, or TikTok. I understand the attraction to try and find the next big winner or needle in the haystack, but it’s challenging. And if you pick the wrong stock, it could destroy your portfolio. Recently, SVB Bank collapsed, wiping out shareholders. There are numerous studies on diversification and how many stocks you must own. According to The Motley Fool, you need at least twenty-five individual stocks to diversify your portfolio.[1] Apple, Microsoft, and Amazon account for 16% of the S&P 500 index, and the top twenty-five holdings comprise 41%. If you own twenty-five stocks or more, it will be hard to outperform an index fund, so you’re better off buying one and holding it for decades.

The data also support a move to index funds away from stock picking and actively traded mutual funds. A recent S&P SPIVA® study found that over 20 years, 96.73% of large-cap money managers failed to beat their benchmark. These results are similar for small, mid, and international money managers, and this underperformance also occurs on a 1, 3, 5, 10, and 15-year basis.[2] The data is historical, of course, so trying to select a stock or fund to top an index in advance is nearly impossible.

Vanguard’s Total Stock Market Index Fund (VITSX) gained 1,670% since 1992, averaging 9.73% annually, turning $10,000 into $176,000. A passive buy-and-hold strategy is challenging to defeat, and this fund gives you access to 3,941 publicly traded stocks.

Warren Buffett, the definitive stock picker, won a bet against hedge fund manager Protégé Partners. He bet them the S&P 500 Index would outperform a basket of five actively managed hedge funds over ten years. How did it turn out? The S&P 500 trounced the hedge funds by 89%! The S&P 500 returned 125%; the hedge funds, 36%.[3]

Over the years, I’ve converted most stocks to low-cost index funds, reducing my expenses and stress. It’s been hard to wean myself off stocks and move the money to a diversified portfolio of index funds, but it’s been for the better. I’ve been able to spend more time helping clients crystallize their goals through financial planning since I’m not tethered to a monitor watching stocks rise or fall. A similar move may benefit you, especially if you want financial peace and freedom.

Don’t look for the needle in the haystack. Just buy the haystack! ~ John Bogle

March 28, 2023

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

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

[1] https://www.fool.com/investing/how-to-invest/stocks/how-many-stocks-should-i-own/

[2] https://www.ifa.com/articles/despite_brief_reprieve_2018_spiva_report_reveals_active_funds_fail_dent_indexing_lead_-_works

[3] http://money.cnn.com/2018/02/24/investing/warren-buffett-annual-letter-hedge-fund-bet/index.html, by Jackie Wattles, 2/24/2018.

A Recession Is Coming

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Is a recession imminent because of the collapse of Silicon Valley Bank? First Republic Bank, Signature Bank, and Silvergate Bank are also on the ropes, and I’m sure there are more to come as individuals withdraw their money to buy US Treasuries or bury it in the backyard. If bankers are nervous, they will stop lending funds to businesses and homeowners, which is not a good recipe for economic growth.

Because of the recent bank failures, loans to domestic banks touched an all-time high. The government has insured all deposits, causing the assets in the discount window to soar. According to PBS Newshour, the Fed loaned $300 billion to banks, allowing depositors to retrieve their funds.[1] As a comparison, the Feds loaned $50 billion to banks during COVID and $538 billion during the Great Financial Crisis.

In addition to bank failures, several technology companies have laid off tens of thousands of employees. Morningstar said more than 139,000 employees had lost their jobs this year.[2] The unemployment rate is hovering near historic lows at 3.60%, but it can climb quickly if the pace of layoffs intensifies.

Another headwind for the economy is the yield curve. Though rates have declined this past week significantly, the yield curve is still inverted. The yield on the US 2-Year Treasury is 4.14%, and the 10-Year yield is 3.56%. The yield curve is inverted when short-term rates are higher than long-term rates, which could signal a recession.

Gross Domestic Product (GDP) growth, or lack thereof, is a crucial recession indicator. The true definition of a recession is two consecutive negative GDP quarters, and so far, this metric is not flashing a warning. In fact, it continues to rise. GDP has increased by 5.68% over the past year, up 21.38% since COVID.

There have been thirteen recessions since the end of World War II, or about once every six years, lasting about ten months in length. Despite the recessions, the S&P 500 is up more than 23,000% since 1945, averaging 11.02% annually. The best three-year stretch for the S&P 500 occurred from 1984 to 1987, following the 1982 recession, averaging 33.4% annually, and the index never lost money during any 15-year rolling period. A one-dollar investment grew to $3,274. The one-month US T-Bill, the safest investment in the world, averaged 3.80% annually during this period, turning a dollar into $17.96.[3]

A recession is coming, but I don’t know when, nor does anyone else. According to historical data, the last one occurred in 2020, so we may experience another between now and 2026. If you’re concerned about a recession, sell stocks, buy bonds, and increase your cash balance. If your time horizon is three to five years or more, and you’re not worried about volatility, buy stocks in a globally diversified portfolio.

The recent bank failures are another thing to worry about, but don’t let them distract you from your financial goals. The stock market is resilient and has survived worse calamities. As I often say, follow your plan, think long-term, diversify your assets, and good things will happen.

As sure as the spring will follow the winter, prosperity, and economic growth will follow a recession. ~ Bo Bennett

March 18, 2023

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

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

[1] https://www.pbs.org/newshour/economy/federal-reserve-lent-300-billion-in-emergency-funds-to-banks-in-the-past-week

[2] https://www.morningstar.com/news/marketwatch/20230317465/more-than-139000-tech-sector-employees-have-lost-their-jobs-since-the-start-of-2023, James Rogers, March 17, 2023.

[3] Dimensional Fund Adviosr Returns Web Tool.

Nothing Is Working

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Another day, another market sell-off. The latest culprit is the failure and seizure of Silicon Valley Bank after a bank run. It’s two steps forward, one step back. Before COVID, the Ukraine War, rising interest rates, and persistent inflation, the S&P 500 was up nearly 200%, averaging 11.4% annually since 2010. However, most asset classes have traded down over the past two years. Frustrating.

The market has performed poorly for extended periods, but that does not make me feel better. Of course, the worst period for stocks was from 1929 to 1944, when the S&P 500 averaged 1.7% per year. It averaged 1.2% from 1965 to 1974, and from 2000 to 2011, it averaged 1.7%. The S&P 500 barely budged for thirty-eight years, or 40% of the time since 1926. Despite doing nothing for decades, the S&P 500 has averaged 10% annually for 93 years.

Each day the market gives us a reason not to invest. If it’s not a bank failure, it’s war or inflation, but if it were not for uncertainty or volatility, it would be impossible to create generational wealth. When stocks fall, they become cheaper, allowing enterprising and courageous investors to buy them at favorable prices. When the storm passes, they can sell them at higher prices – the best times to invest in this millennium occurred during the corrections in 2000, 2008, and 2020.

As the markets continue to suffer, here are a few ideas to fortify your financial future.

  • Keep an emergency fund of three to six months for your household expenses. If you spend $10,000 monthly, your emergency fund should range from $30,000 to $60,000. If your job is at risk or you’re concerned about the markets, extend your savings to nine to twelve months. An emergency fund allows your investments to recover without selling them at lower prices.
  • Buy US Treasuries because they act as a hedge against falling stock prices and are guaranteed. In times of uncertainty, investors flock to Treasuries. The yield on the 2-year US T-Bill dropped from 5% to 3.9% recently, a significant decline, as investors hunted for safety.
  • Allocate a portion of your assets to bonds. Long-term bonds have jumped 4.5% since the collapse of Silicon Valley Bank. As interest rates fall, bond prices rise.
  • Eliminate single-stock exposure. Over the past few days, First Republic Bank (FRC) wiped out a decade of gains. We typically sell stocks when they cut the dividend, lower earnings guidance, terminate thousands of employees, or face significant litigation. In my experience, it’s only a matter of time before companies fall or trade sideways for years after an adverse corporate event.
  • Continue saving and investing because markets eventually recover. After the Great Depression, stocks produced an annual gain of 11.3%; after the Great Recession, they generated a yearly return of 13.24%.[1] Investing during the darkest hours can deliver the best returns.
  • Diversify your assets across borders, sectors, and sizes. A globally diversified portfolio gives you the best opportunity to create long-term wealth. For example, international stocks climbed 36% from 2000 to 2011 as the S&P 500 faltered. Long-term bonds jumped 18% during the Great Recession, while stocks fell 53%.

Patience is a powerful tool for a successful investor. The ability to wait for stocks to recover is challenging but necessary. The Chinese Bamboo tree takes five years to start growing. For the first four years, it does nothing but fortify its roots, and then it can spurt more than ninety feet in weeks.[2] And the Agave Americana blooms once every 100 years.

Be patient, grasshopper.

The days are long, but the years are short. ~ Gretchen Rubin

March 15, 2023

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

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

[1] DFA Returns Web, period ending 2/28/2023.

[2] https://jdmindcoach.com/plant-takes-5-years-start-growing/#:~:text=While%20most%20trees%20grow%20steadily,grow%20at%20an%20astonishing%20rate. JD Mind Coach, January 28, 2018

Scary Times

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Silicon Valley Bank gives us another reason to panic and freak out over our financial future. The FDIC seized the sixteenth-largest bank in the country on Friday, the second-largest bank takeover in US history. At the time of the collapse, twenty-two Wall Street analysts rated the stock a buy or hold, and Jim Cramer urged investors to buy it last month.[1] It was a stellar performer until its collapse, rising more than 80,000 percent since going public, but now it’s gone – risk happens fast!

Silicon Valley Bank is the first bank failure since 2020 when four banks went belly up. The FDIC annexed 510 banks from 2007 to 2014, representing $700 billion in assets, and the current bailout is $209 billion.[2]

Honestly, I’m tired of writing about bank failures, stock market crashes, and financial calamities. Unfortunately, they’re embedded in our history and will continue for the foreseeable future. Despite constant headwinds, the stock market has been resilient. In the last twenty years, the market has recovered from the Tech Wreck, the Great Financial Crisis, and the bankruptcies of Lehman Brothers and Bear Stearns. In fact, since Lehman and Bear Stearns imploded in September 2008, the S&P 500 is up 124%.

In the meantime, here is a list of items you can employ to protect your family’s assets.

  • Buy US Treasuries because they’re insured and guaranteed regardless of how much you invest.
  • Review your cash balances held at your bank. The FDIC limit is $250,000 per person, per institution, and per account. If your balance exceeds the threshold, open a new account or buy US Treasuries. According to the FDIC website, no depositor has lost a penny of FDIC-insured funds since its founding in 1933.[3]
  • Reduce or eliminate your debt, regardless of the current interest rate. If your debt level is low, you can withstand a financial storm.
  • Buy physical real estate. My grandfather loved real estate and hated stocks despite my arguments that stocks can produce significant returns. He owned several homes, commercial properties, and a couple of ranches, and he did not panic when stocks dropped or banks failed. Real estate is a good inflation hedge that can generate substantial rental income and is excellent for transferring assets between generations. And you already know the key to successful real estate investing: Location, Location, Location.
  • Diversify your asset across investment categories, countries, etc. A globally diversified portfolio of stocks and bonds gives you access to thousands of investments designed to grow and protect your wealth over time.
  • Avoid single-stock exposure. Silicon Valley Bank wiped out thousands of shareholders in less than 48 hours, and I can give you a long list of companies that evaporated overnight. Instead, invest in mutual or exchange-traded funds to reduce your risk from individual stocks. The Invesco Small Cap Value fund (VSRAX) held a 1.50% position in the bank stock, and the fund was down less than 1% on Friday because it owns more than 112 securities.

The recent bank failure adds to a list of issues the stock market has dealt with recently, including COVID, the Ukraine War, and political turmoil. Still, it continues to rebound and recover, as it has historically. Today’s events will barely register on a long-term stock chart in a decade or two. For example, the October 19, 1987 stock market crash is but a blip on the chart below.

Markets like to climb a wall of worry, and many successful investors recommend buying when others sell. For now, follow your plan, think long-term, and good things will happen.

If you the bank $100, that’s your problem. If you owe the bank $100 million, that’s their problem. ~ J. Paul Getty

March 11, 2023

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

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

[1] https://www.foxnews.com/media/cnbcs-jim-cramer-eviscerated-touting-silicon-valley-bank-weeks-disastrous-collapse, Alexander Hall, Fox News

[2] https://www.fdic.gov/bank/historical/bank/

[3] https://www.fdic.gov/resources/deposit-insurance/understanding-deposit-insurance/

 Holding Pattern

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Several years ago, I flew from Connecticut to Los Angeles with a layover in Chicago. Nearing Chicago, the pilot informed us we were in a holding pattern due to a winter storm. I was stuck and could not do anything, and it lasted several hours before we finally landed.

Stocks are in a holding pattern as inflation and interest rates continue to rise, and there is no near-term catalyst for them to trade higher. Nor is there one to take them lower, an actual holding pattern. The Dow Jones is down 1.2%, while international stocks are down 0.30% over the past year. The markets remain stuck until inflation and interest rates turn lower.

Here are a few ideas to improve your portfolio since we are in a holding pattern and range bound.

  • Build a financial plan. As markets meander, now is an ideal time to build your financial plan, and it will guide your steps, give you a roadmap to financial freedom, and help you form a solid foundation for your future. At our firm, our clients with financial plans were calmer and less likely to panic during last year’s market rout.
  • Buy US Treasuries. If you hold a significant cash balance, buy US T-Bills. The 1-Year T-Bill yields 5.03%, better than CDs, money market funds, or savings accounts.
  • Review your asset allocation. Do you have the proper asset allocation based on your goals and risk tolerance? If you ignored your investments in the past year or two, your portfolio has probably drifted from the original allocation. As a result, your assets could be too aggressive or conservative for the next move in the market. Establishing an annual rebalancing program will solve this problem.
  • Buy dividend-paying stocks or funds. Companies that pay dividends have solid balance sheets and positive cash flow. Also, they tend to raise their dividends annually, giving you a raise. For example, Pepsi has grown its dividend by 102% over the past ten years, and the stock is up 117%. The dividend was $2.27 in 2013, and it is now $4.60. If you bought Pepsi in 2013 at $77, your current yield is 6%!
  • Increase your 401(k) contribution. If you’re not maxing out your 401(k) contribution, consider raising your amount by 2% to 3%. If you contribute 5%, increase it to 7%.
  • Consider a Roth conversion. Your IRA account balance is likely down in value over the past couple of years which is an excellent reason to consider a Roth conversion. After you convert your IRA to a Roth and the market recovers, all your gains are tax-free. And you no longer need to take your required minimum distribution.
  • Create an emergency or opportunity fund. Consider moving money from your checking account to your savings account each pay period. Most banks allow you to transfer funds automatically between accounts, and the funds in your savings account are liquid and accessible if you need them for any reason.
  • Pay off debt. Regardless of your interest rate, consider paying off your debt, especially if you carry a balance on a credit card. Returns are fleeting, but expenses are forever. You can give yourself a raise by eliminating your debt.
  • Give. You don’t need to wait until December to give money to charities or groups you support. People are hurting now and need help, and donating to your local food bank, non-profit, or church pays enormous dividends.

Stocks eventually recover, but it may take time. Be patient and follow your plan. In the meantime, use the current holding pattern to fortify your financial foundation.

Patience, persistence, and perspiration make an unbeatable combination for success. ~ Napoleon Hill

March 4, 2023

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

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

Should You Buy US Treasuries?

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The one-year US T-Bill currently yields 5.1%. It’s an attractive rate compared to the 1.15% the S&P 500 has returned over the past two years, and it’s guaranteed. Stocks are volatile, interest rates are rising, the Ukraine War rages on, and China is a constant threat, so buying T-Bills sounds like an excellent investment choice. It seems like a no-brainer.

The current rate is the highest since 2007 and well above its 30-year average of 2.57%. If you invest $1 million in a one-year US T-Bill, you’ll earn $51,000 annually at today’s rate – not too shabby.

Let’s explore reasons to buy a one-year US Treasury Bill.

  • Buying a T-Bill makes sense if you need your money in one year or less, and it is a wise investment.
  • You can earn more interest in a T-Bill than you can from your checking account, savings account, CD, or money market fund. If you are sitting on a large cash balance, buy a T-Bill.
  • If you’re worried about a stock market crash or a financial disaster, buy a T-Bill. The US Government guarantees a T-Bill and offers tax benefits if you live in a state with an income tax, and it’s an excellent hedge for a stock portfolio.

Let’s explore reasons not to buy a one-year US Treasury Bill.

  • The current inflation rate is 6.41%, so you lose 1.31% annually.
  • The T-Bill produced an average annual return of 1.12% over the past thirty years, while inflation averaged 2.67%, so your net yearly loss was 1.55%.
  • Over the past thirty years, the S&P 500 has increased 811%, inflation 121%, and T-Bills 39%. The S&P 500 has outperformed the one-year T-Bill by 772% since 1990.
  • Buy stocks if your time horizon is three to five years or more.

Consider buying a T-Bill if you need the money in one year or less, as a stock market hedge, or if you hold a significant cash position. A T-Bill can be part of a diversified portfolio, but it’s a poor choice for creating generational wealth.

Despite the headline news and recent market turbulence, stocks are still the best investment for the long run.

Inflation is taxation without legislation. ~ Milton Friedman

February 25, 2023

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

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

What I Know

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It’s the start of a new year, and investors want answers, especially regarding the stock market and the economy. They want to know how the market will perform this year or if a recession materializes. Market experts, analysts, economists, and media personalities try to predict market moves and the economy’s direction. Yet, it’s a giant guessing game because no one can forecast the future, yet everybody tries to do it.

Last year, twenty-four market analysts predicted the S&P 500 would close at 4,904 in 2022.[1] How did they do? The index closed at 3,389, falling 19.44%, and they missed their target by thirty percent! Despite not knowing the future, the stock market has left several clues about the future of stock prices, and here is what I know.

Stocks Outperform Bonds

Since 1926, the S&P 500 has trounced long-term bonds by a wide margin. A dollar invested in stocks is now worth $11,526, but that same dollar invested in bonds is worth only $130, and one dollar invested in T-Bills barely grew to $22. Over the past decade, the S&P 500 is up 170%, while Vanguard’s Total Bond Market Fund is down 11.3%. It’s impossible to predict the daily or yearly direction of the stock market. Still, over time, it has increased significantly, and you can create generational wealth if you stay invested in stocks and commit to long-term investing.

Small Caps Outperform Large Caps

Good things come in small packages, and this is true for investments. Since 1927, The Dimensional US Small Cap Index has bettered the S&P 500 index. A $1 investment in Dimensional’s Small Cap index is now worth $50,435, while the S&P 500 index value is $10,327. The valuation of the small-cap index has been five times greater than large caps over the past 95 years. The iShares S&P 600 index has been up 529% for the past twenty years, whereas the iShares S&P 500 index is up 362%. Though small-caps have been more volatile than large companies, they produced superior returns.

Diversification Wins

As the saying goes, the only free lunch on Wall Street is diversification. It’s typical for last year’s winners to be this year’s losers. In 2017, international small-cap stocks were the best-performing sector, soaring 32.7%, but a year later, they finished in last place, falling 17.63%, while short-term bonds were the best asset class in 2018; they were the worst in 2019. Large-cap stocks rose 28.7% in 2021 but fell 18.1% in 2022. Emerging markets lost 17.99% in 2022 but are up 10.77% this year. However, a globally diversified portfolio of stocks and bonds stayed in the middle of all asset class returns, never the best nor the worst. Asset allocation accounts for 93.6% of your investment return, and the remaining 6.4% comes from market timing and investment selection.[2]

Now What?

I don’t know what will happen with the market or the economy this year, but your portfolio can grow, over time, if you own stocks in a globally diversified portfolio. Rather than worrying about the direction of markets, interest rates, or the economy, focus on things you can control, like spending and savings.

Forecasts create the mirage that the future is knowable. ~ Peter Bernstein

January 29, 2023

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

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

[1] https://humbledollar.com/2023/01/tune-out-the-noise/ John Yeigh, January 10, 2013

[2] 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.

Should You Own Stocks?

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Owning stocks is a pain in the rear. They constantly gyrate, bobbing up and down like buoys on the ocean. It’s two steps forward and one step back; they rise slowly and fall quickly. Frustrating.

Stocks dropped like stones last year, led by the Nasdaq, falling 33%. The S&P 500 and Dow Jones followed suit tumbling 19.44% and 8.78%, respectively, wiping out years of gains. Since 2013, the S&P 500 has had four corrections of 12% or more and numerous pullbacks between 3% and 5%. This century, the index has experienced two significant drops, plummeting 46% during the Tech Wreck and 56% during the Great Recession. Most investors still remember Black Monday, October 19, 1987, when the Dow Jones Industrial Average crashed by 22%.

When stocks crash, investors want to sell their holdings, park their funds in a money market account, and wait for the storm to pass. And, when stocks rise 10%, investors want 20%. It’s a no-win situation.

Stocks get a bad rap. Yet, they are more than tickers moving across a screen or certificates in a vault; they are companies that run the world. Can you live your life without Apple, Amazon, or Google? Is it possible to ignore General Mills, Conagra, JM Smucker, or Campbell Soup? What about Krogers or Albertsons or Walmart, or Costco? You possibly drive a car manufactured by Ford, GM, Toyota, or Tesla. Do you drink coffee from Starbucks or eat at Mcdonald’s, Wendy’s, Chipotle, Domino’s, or Texas Roadhouse? Do you binge-watch shows from Disney, Netflix, or Paramount? You may bank at JP Morgan, Bank of America, Wells Fargo, or Citigroup. Your local utility company or phone company trades publicly as well. Your life revolves around common stocks; if you treat them as companies, you’ll do well over time.

Because the Federal Reserve has been raising interest rates to fight inflation, buying individual bonds yielding 4%, 5%, 6%, or more is now possible. Many bond ETFs and mutual funds currently have above-average dividend yields. Why bother with stocks if you can generate decent returns from bonds? It’s a good question. If you want safety and income, buy bonds, but if you’re going to create generational wealth, invest in stocks.

Despite the negative stories surrounding stocks, they create wealth for individuals with the courage and patience to own them through multiple market cycles. Since 1973, the S&P 500 has generated an average annual return of 10.47%, turning $10,000 into $1.43 million. In contrast, the one-month US T-Bill, the most secure asset in the world, averaged 4.38%, and a $10,000 investment is now worth $85,000. Inflation averaged 3.98% for the past fifty years, wiping out most of the gains from the T-Bill.

Though stocks fell last year, they have performed well these past ten years, rising, on average, 191%, while bonds lost 11.5%. If we extend the chart to twenty years, the three indices gained 461%, and bonds lost 6.5%.

Stocks may cause short-term heartache but provide benefits over time, and you must own them if your time horizon is three to five years or more. Turning out the noise and distractions is a superpower for successful equity investors.

Should you own stocks? Yes, without a doubt!

Bye, bye, and buy stocks.

Sponges grow in the ocean. That just kills me. I wonder how much deeper the ocean would be if that didn’t happen. ~ Steven Wright

January 12, 2023

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