Tag: Stock Trading

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 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.

Seasons              

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Winter is cold, wet, and dreary. Overcast skies, low temperatures, and icy roads are the norm in parts of the world, and some people don’t like this season. I get it. I lived in Connecticut for a few years after growing up in sunny Southern California. My first winter was depressing; I sometimes felt like Jack Nicholson in The Shining. However, I learned to love the winter because I could ski, hike in the snow, and build massive fires, and it was only one season, and eventually, spring would arrive.

Surviving one season is not hard, especially if you learn to take advantage of it, knowing that the three best seasons – spring, summer, and fall, will arrive shortly. If you don’t like winter, use your off-season to prepare for better days by exercising, reading, or learning a new hobby.

Like the four seasons, stocks can fall into quarters. About three-quarters of the time, stocks rise and finish in positive territory, but they lose value a quarter of the time. It’s a good ratio and favors equity investors with a generational mindset. When stocks fall, identify potential winners or prune losers from your portfolio. In addition, fortify your balance sheet by saving more money or cutting expenses. A down market is an opportunity to prepare yourself for better days ahead.

Since the end of WWII, or 1945, the S&P 500 has risen 79% of the time – up 60 times and down 16, producing an average annual gain of 11.65%. A dollar invested in 1945 is now worth $4,845. The best three-year stretch for the index occurred from August 1984 to July 1987, where it returned 33.41% per year. The worst three-year period happened from April 2000 to March 2003, when it declined 16% annually. The S&P 500 has never lost money over a rolling 15-year period dating back to 1945.[1]

The average calendar loss for the S&P 500 from 1945 has been 11.75%, but the gain following the losing year has averaged 25.76%. Buying stocks in down markets has historically been a winning strategy.[2]

In contrast, long-term government bonds lost money 24 times, with an average loss of 4.14%. A dollar invested in bonds is now worth $77.99, or 62 times less than equities. The average gain since 1945 has been 5.82% or exactly half of the S&P 500 return.[3]

Snow and ice eventually melt. Seasons come and go, and markets always recover. Do not fear down markets. Instead, use them as an opportunity to get ready for the next season in your life.

People ask me what I do in winter when there’s no baseball. I’ll tell you what I do. I stare out the window and wait for spring. ~ Rogers Hornsby

December 13, 2022

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.

[1] Dimensional Funds – Returns Web – 1/1/1945 to 12/31/2021

[2] Ibid

[3] Ibid

4 Covered Call Ideas

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Writing options on stocks you own, or want to own, is an excellent way to generate income and reduce risk. Below are four stock and options ideas.

Amazon

Symbol: AMZN

Price: $92.44

Strike Price: $105

Expiration: 2/17/2023

Option Premium: $3.60

Option Income (1,000 shares): $3,600

Stock Return: 13.59%

Option Return: 3.89%

Total Return: 17.84%

Annualized Return: 80.77%

Caesars Entertainment

Symbol: CZR

Price: $48.86

Strike Price: $54

Expiration: 12/30/2022

Option Premium: $1.37

Option Income (1,000 shares): $1,370

Stock Return: 10.52%

Option Return: 2.80%

Total Return: 13.32%

Annualized Return: 162.11%

Netflix

Symbol: NFLX

Price: $280.88

Strike Price: $310

Expiration: 03/17/2023

Option Premium: $20.55

Option Income (1,000 shares): $20,550

Stock Return: 10.37%

Option Return: 7.32%

Total Return: 17.68%

Annualized Return: 60.32%

RH

Symbol: RH

Price: $275.90

Strike Price: $305

Expiration: 12/16/2022

Option Premium: $6.40

Option Income (1,000 shares): $6,400

Stock Return: 10.55%

Option Return: 2.32%

Total Return: 12.87%

Annualized Return: 293.53%

Options trading involves risk and is not suitable for every investor. Your returns could differ significantly from those posted in this blog, and you could lose money. Do not use margin or leverage to trade options. Please refer to the Characteristics and Risks of Standardized Options to learn more about options trading and writing – https://www.theocc.com/. We have no affiliation with the OCC or the Options Industry Council.

Price and return data is from November 30, 2022, and is subject to change without notice. Data sources: Value Line, YCharts, and TD Ameritrade.

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

Stay The Course

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Stay the course is boring financial advice, and people hate it, especially when stocks fall. Doing nothing is challenging; it’s hard, and it feels like a cop-out. When stocks fall, clients want action; they want to rearrange the deck chairs and take control of the situation, but it could do more harm than good.

Most financial planners recommend a buy-and-hold strategy when managing money which is simple when stocks rise but challenging when they fall. It’s a popular recommendation because stocks rise about three-quarters of the time, and no one can time the market.

Pilots set their coordinates for their final destination and rarely diverge from their route unless necessary. They will change course to avoid storms or turbulence, but, for the most part, they keep the nose of their plane headed toward their target. This past summer, my wife and I drove thousands of miles visiting several national parks. Each day we’d set our GPS for the next park, and we did not deviate from the directions and arrived safely each time.  

I’ve gotten in trouble whenever I ignore a trail map while hiking, biking, or skiing. When my daughter was about ten, we went skiing at Crested Butte, and I decided to take her on an unmarked shortcut back to the ski lift. It did not go well. We got stuck in waist-deep powder and could not move. We had to forge our path; it took a long time before we could return to the trail. It was a scary ordeal.

A financial plan will help guide you to your destination by quantifying your goals, assessing your risk tolerance, and measuring your time horizon. It will lead you through a perilous market and treacherous economy. When markets are falling, and clients are worried about losing money, a financial plan can bring peace. The likely recommendation from the advisor is to remain calm and stay the course because of the plan.

Investors have liquidated nearly $100 billion from growth-equity mutual funds over the past year, likely transferring the money to a money market fund or savings account.[1] This strategy might be safe in the near term, but it could prove disastrous over time. The report ended on September 30, 2022, and since then, the Dow Jones has risen nearly 13%, its best monthly performance in more than 35 years! To get above-average returns, you need to stay in the market. As I’ve told clients, “If you’re not on the plane when it takes off, you’re not getting on.” Selling from a position of fear is not wise. If your plans change, then alter your investment strategy. However, if you don’t need your money and your goals remain intact, stay the course!

I recently met with an individual who is interviewing several financial advisors. He is looking for one who can trade the hottest and most popular sectors, in this case, energy and commodities. I informed him that we select a buy-and-hold portfolio based on his financial goals and do not trade sectors or chase securities. I then showed him a 10-year chart of how the Dow Jones Industrial Average destroyed commodities. He was not impressed and is convinced that there is an advisor out there somewhere who can time the market. I wished him well.

It’s a difficult market; returns stink, but stocks recover. Be patient, follow your plan, and stay the course.

What kind of man would live where there is no daring? I don’t believe in taking foolish chances, but nothing can be accomplished without taking any chance at all.” — Charles A. Lindbergh

October 28, 2022

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

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

[1] YCHARTS Fund Flow Report – 9/30/2022

Return Expectations

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Growing up, I was a picky eater and tried to limit my intake to peanut butter sandwiches, chips, and M&M’s. It worked for several years, but I needed to expand my palate as I grew older. My expectations for fruits and vegetables were low, but I began to appreciate more refined foods as I grew older.

Investment returns are abysmal this year as inflation rises to a 42 – year high. As inflation soars, so do interest rates forcing stocks and bonds to retreat. The S&P 500 is down 22.5%, its worst performance since the Great Recession in 2008, and investors expect further weakening.

Focusing on year-to-date returns is depressing, especially since stocks have fallen significantly. If we step back from the daily moves, we get a better picture of the long-term returns from stocks. Here is an extended view of S&P 500 returns.[1]

  • Three-Year Return: 24%
  • Five-Year Return: 44%
  • Ten-Year Return: 157%
  • Fifty-Year Return: 3,280%
  • Seventy-Year Return: 15,210%

Since 1926, the S&P 500 has generated an average annual return of 10.2%, long-term government bonds returned 5.3%, cash has gained 3.2%, and inflation averaged 3%. Let’s explore expected returns using historical data.

  • 100% stock allocation: If you allocate all your money to stocks, your expected return is 10.2%, and after subtracting inflation, your net return is 7.12% (10.2% – 3% = 7.2%).
  • 100% bond allocation: If you allocate all your money to bonds, your expected return is 5.3%, and after subtracting inflation, your net return is 2.3% (5.3% – 3% = 2.3%).
  • 100% cash allocation: If you allocate all your money to cash, your expected return is 3.2%, and after subtracting inflation, your net return is 0.2% (3.2% – 3% = 0.2%).

Allocating all your funds to one asset class does not make sense, so let’s explore a few asset allocation models using the same historical data.

  • 70% stocks and 30% bonds: The expected return is 8.73%, and the net return is 5.73% after inflation.
  • 60% stocks and 40% bonds: The expected return is 8.24%, and the net return is 5.24% after inflation.
  • 50% stocks and 50% bonds: The expected return is 7.75%, and the net return is 4.75% after inflation.
  • 40% stocks and 60% bonds: The expected return is 7.26%, and the net return is 4.26% after inflation.
  • 30% stocks and 70% bonds: The expected return is 6.77%, and the net return is 3.77% after inflation.

A diversified portfolio owns large, small, and international stocks, short, intermediate, and long-term bonds, and it may hold an alternative asset class like real estate. In a diversified portfolio, one investment is always down; if there isn’t, the portfolio is not diversified. We must apologize for at least one asset class that loses money each year. A typical Wall Street saying is, “Diversification means always having to say you’re sorry.”

Warren Buffett’s holding period is forever, and that’s why he is worth $100 billion. He does not get rattled when stocks fall and has said, “Be greedy when others are fearful.” When we build portfolios, we choose the most prolonged time horizon possible for our review to account for various economic and market cycles. Sometimes, the data goes back more than a hundred years, and we’re not concerned with daily, weekly, monthly, or yearly returns because we think generationally.

A financial plan is a vital component for successful investors, and it will quantify your goals and determine your asset allocation. During difficult economic times, we encourage our clients to follow their financial plans and not lose sight of their goals. If your financial plan is working, there is no need to abandon it or your investment portfolio.

Here are a few suggestions to help you with your investments.

  • Think generationally.
  • Expand your time horizon when reviewing your portfolio.
  • Follow your plan.
  • Rebalance your accounts.
  • Don’t panic.
  • Buy the dip.

As markets oscillate, focus on your financial goals because your future self will thank you.

What the hell is a gigawatt? ~ Marty McFly, Back To The Future

October 20, 2022

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

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

[1] DFA Matrix Book and Returns Web

How To Survive A Stock Market Crash

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The first rule for surviving a stock market crash is not to panic, and the second is not to sell on the day of the correction. Markets typically rebound after a sharp sell-off as investors hunt for bargains, so wait before liquidating your portfolio. For example, two days after the 1987 crash, the S&P 500 jumped 15%, and the Dow Jones climbed nearly 20% from December 1929 to March 1930, following Black Tuesday, October 29, 1929. You probably won’t recover all your losses, especially if you bought stocks the day before the correction, but it will help.

The S&P 500 has fallen 23% this year, and the NASDAQ is down 31%. Will markets fall another 25% or 30% from here? It could, I guess, but no one knows for sure, especially the experts. It would be one of the worst corrections in history if it did.

One popular money manager said, “We’re being forced to choose between two overpriced assets. That is not always a terrific choice to make because there is a third choice, and that is, don’t play the game and hold money in cash.” He also recommended investors buy commodities for the next ten or twenty years and encouraged investors to sit in cash until stocks fell. His comments occurred in 2010. How did his prediction turn out? Since 2010, the S&P 500 soared 204%, while commodities dropped 9%.[1]

A famous economist said, “US stocks will fall, and the government will nationalize more banks.” He predicted a correction in 2009 after The Great Recession, where stocks dropped 53%. The S&P 500 has climbed 343%, and the government has not nationalized more banks since his comments.[2]

A prominent author wrote books about a depression starting in 2009 and a stock market crash in 2011, and neither happened. The market climbed more than 300% since 2009 and rose 2.1% in 2011.[3]

The S&P 500 is up 151% this century despite numerous corrections. The index dropped 46% from 2000 to 2003, 53% from 2007 to 2009, 30% during COVID, and it’s currently down 23%. Most investors consider a correction or crash a one-day event like October 19, 1987, or October 29, 1929. However, stocks routinely fall 10% or 20%, and the market usually finishes in negative territory about once every four years. The last down year occurred in 2018 when the S&P 500 fell by 4.4%.[4]

In the twelve months preceding Black Tuesday, October 29, 1929, the S&P 500 soared 58%, and from September 1926 to August 1929, it generated an average annual return of 40.3%. The S&P 500 rose 167% during the preceding five years and was up 35% through August before Black Monday, October 19, 1987. After the correction, the S&P started to recover, and by January 1990, it erased all its losses by rising by 57%.[5] Before this correction, the market was up 81%. Despite a crash, you may still have significant capital gains if you have been a long-term investor. 

Corrections are scary, violent, and short-lived, so here are a few suggestions to help you survive a stock market crash.  

  • Buy US T-Bills. The one-year US T-Bill currently yields 4.2%, and it’s guaranteed if you hold until maturity.
  • Fortify your emergency fund. We recommend an emergency fund covering your household expenses for three to six months. If you’re concerned about a further drop in the market, extend the duration to twelve to eighteen months.
  • Diversify your assets. A balanced portfolio of stocks, bonds, and cash will soften the blow of a market drop. During market drops, bonds perform well. In 2008, long-term US government bonds rose 25.9%, while stocks dropped 45%.
  • Buy stocks. Buy stocks if your time horizon is three to five years or more. According to Dimensional Funds, the 5-year average cumulative return after a 20% decline is a 72% gain.
  • Rebalance your portfolio. If you rebalance your portfolio, you can buy investments at lower prices. Rebalancing your accounts keeps your risk level and asset allocation in check.
  • Eliminate margin. One way to lose more money than you intended is to use leverage. If you margin your securities, eliminate it. Margin will make a bad situation worse.
  • Think long-term. You may own your investments for years, maybe decades, before you need the money, so think generationally.
  • Markets recover. The stock market has always recovered! It may take time, but they eventually rebound as they did in 2020, 2018, 2008, 2002, 2001, 2000, 1990, 1981, 1977, 1974, 1973, 1969, 1966, 1962, 1957, 1953, 1946, 1941, and 1929.

Stock market corrections come and go, and the market is a long-term wealth creation machine occasionally interrupted by short-term pullbacks. Do not fear a downdraft. Instead, use it as an opportunity to buy excellent companies or funds at enhanced prices.

I’ve done a lot of thinking about fear. For me the crucial question is not how to climb without fear-that’s impossible- but how to deal with it when it creeps into your nerve endings. ~ Alex Honnold

September 26, 2022

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management, located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so you 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. We have waived our financial planning fee for the remainder of the year, so your cost is $0.00.

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

[1] https://www.cnbc.com/2010/11/11/have-cash-wait-for-stocks-to-fall-jeremy-grantham.html, Michelle Lodge, November 11, 2010

[2] https://www.cbsnews.com/news/nouriel-roubini-misses-another-prediction/, Larry Swedroe, May 20, 2011

[3] The Great Depression ahead, 2009 and the The Great Crash Ahead, 2011, both written by Harry Dent

[4] YCHARTS

[5] Dimensional Fund Advosrs Returns Web