Buy, Buy or Bye, Bye?

My wife is an extraordinary shopper. She can hunt bargains with the best of them, whether at a grocery or clothing store. If there is a discount to be found, she’ll find it. She is also patient and willing to buy straw hats in the winter.

An ideal time to buy stocks is when they are on sale, trading at a discount, or offered at a lower price, because who doesn’t love a bargain? Apparently, many people don’t because the market is down considerably this year, and there are few signs of buyers. In reality, when stocks fall, most investors sell, and they do not buy. Wall Street is the only place no one shows up when there is a sale.

To buy stocks as they fall requires patience and courage. It’s not easy to buy while others are selling. It’s a contrarian strategy. Also, if you buy stocks when they’re down, they might not recover for several years. If you purchased Microsoft after the Tech Wreck in 2000, it took more than sixteen years for the price to recover, but if you bought it and held on, you’re up more than 300% on your investment!

To acquire great companies in a bear market requires foresight, homework, and a shopping list. Identify a few names you want to own so that you can pounce when they fall into your buy zone.

I recently used Value Line’s search engine to screen for stocks with pristine balance sheets, and I found more than fifty companies. Some names include Pepsi, FedEx, McDonald’s, Walmart, Pfizer, Tractor Supply, and Fastenal. These companies are down this year but still up over the past three, five, and ten years. In addition to buying great companies at lower prices, you may generate above-average income. The average dividend yield is 2.43% if you buy these stocks today. Last year, they rose an average of 29% – same companies, different year. Besides the market falling, not much has changed for these stocks.

Like the tide, stocks rise and fall regularly, so don’t be shocked when they’re down. In fact, stocks drop about once every four years. The Dow Jones fell 10% or more often over the past decade, including a 37% correction in March 2020. If you had the wisdom and fortitude to buy stocks during the initial phases of COVID when stocks traded near their lows, you’d be up 56% today, but if you waited until they rebounded, you only gained 1.3%.[1] Walter Deemer, a retired institutional market analyst, said, “When the time comes to buy, you won’t want to.”

Of course, stocks could fall further as several experts predict, but if your time horizon is three to five years or more, it’s a good time to buy.

A few names on my shopping list include Garmin, Tractor Supply, and Starbucks. What’s on your list?

Happy buying!

Always buy your straw hats in the winter. ~ Benjamin Graham

June 17, 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 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

Pay Me Now or Pay Me Later

FRAM oil filter ran a series of commercials in the 1970s and 1980s with the tag line, “Pay me now, or pay me later.” The message was clear. You could spend a few dollars today to change your oil filter or put it off and pay thousands to repair your engine. Small actions today can have significant implications for tomorrow.

As global stock and bond markets fall, investors are making short-term moves that could impact their financial future. Liquidating your holdings may feel good in the near term, but is it a wise move? A client recently capitulated and moved their assets to cash, and, as a result, their long-term success rate for retirement dropped below 30%, meaning there is a 70% chance they could run out of money.

Since 2000, the Dow Jones has averaged 8%, despite trading in negative territory 30% of the time. The index fell 37% in 2008, 22% in 2002, and it’s down 18% this year. It also soared 32% in 2013 and 2019. If you sell during the down years, you could miss the up years. My job would be easier if stocks and bonds always went up, but it’s not how markets and capitalism work. To enjoy significant gains, you must endure a few years of pain. In fact, most investors build generational wealth during bear markets.

The market is unpredictable minute to minute, hour to hour, and day to day, but it has climbed higher over decades. Time wins, and staying put is a superpower. Our superpower is the financial plan because it gives us the confidence to provide advice rooted in facts, not opinion or emotion. During times of duress, we routinely scan our client’s financial plans to ensure they are still on track to meet their short and long-term goals. Despite the recent volatility, their plans are still standing strong.

Emotions run hot when stocks fall, and media outlets stoke the fire of fear. In my office, I have CNBC playing in the background, and despite more than thirty years in the business, I sometimes want to curl up into a little ball and hide under my desk because they make it sound like the end of the world is near.

 The US Index of Consumer Sentiment recently touched 50.2, the lowest print in 70 years! Investors are more worried now than they were during the Great Recession, the Tech Wreck, Desert Storm, Black Monday, the 1970s inflation spike, Watergate, Vietnam, the racial riots in the 1960s, the assassinations of JFK and MLK, the Cuban Missile Crisis, the Korean War, and the Cold War. Are things that bad? I don’t believe they are, and since 1952, the Dow Jones has risen 10,980%![1]

Here are a few suggestions to help you navigate the market.

  • If you need money in one year or less, buy T-Bills.
  • Establish an emergency fund to cover nine to twelve months of expenses.
  • Buy stocks if your time horizon is three to five years or more. And, if you retire at age 65, you may live for another thirty to thirty-five years. One of my mom’s aunts recently passed at age 103!
  • Create a written financial plan outlining your hopes, dreams, and fears. A financial plan will keep you focused on your future.
  • Ignore experts pontificating about the future of stocks, bonds, interest rates, or inflation. No one knows what’s going to happen tomorrow.
  • Get outside, take a trip, volunteer, visit a friend, start a hobby, mentor a child, because this too shall pass.

However, no one knows the day or hour when these things will happen, not even the angels in heaven or the Son himself. Only the Father knows. ~ Matthew 24:36

June 18, 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 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

What If I’m Wrong?

During my final semester of college, I discovered the stock market through an investment class. The professor opened my eyes to the possibility of creating wealth by owning great American companies. In the Fall of 1987, I experienced Black Monday in my college classroom; I didn’t lose money because I didn’t own stocks. Despite the crash, or because of it, I became enthralled with equities.

Since 1987, I’ve been a student of the stock market reading thousands of books and articles, studying legendary investors like Graham, Buffett, Lynch, Templeton, Miller, Bogle, Marks, etc. – each one a raging capitalist who believed in America’s economic engine. These notable investors bought stocks during troubled times, which is why they’re worth multi-millions and billions. Warren Buffett, at 91, continues to purchase companies and could care less about market drops or corrections. In fact, he has been on a buying spree this year, despite the decline in the market.

Since 1926, stocks have averaged 10% per year despite wars, recessions, corrections, and inflation spikes. The market has always rebounded from previous pullbacks, but what if this time is different? What if stocks don’t recover? Is this the beginning of the end for equities? What if the sun does not rise tomorrow? Is it time to bury your money in the backyard or under your mattress? Maybe it is. Perhaps now is the time to abandon equities and embrace cash.

It feels like the end of times because stocks are off to their third-worst start ever while bonds posted their worst returns. The S&P 500 is down 19%, and Bloomberg’s US Aggregate Bond index is off nearly 10%! It’s unusual for stocks and bonds to perform poorly simultaneously. Historically, when stocks fall, bonds rise. During the previous five S&P 500 Index corrections, where stocks fell 20%, bonds rose 2.2%.[1] According to the Capital Group, the average annual return for the ten years ending December 2021 was 16.5%, and the average annual return for 10-year rolling periods dating back to 1974 was 15.74%. From 2012 to 2021, a $10,000 investment grew to $37,900, but if you missed the 40 best days, your valuation dropped to $10,050.[2] According to Bloomberg, bonds have made money 100% of the time during every rolling 5-year period dating back to 1926.[3] Time in the market is more important than timing the market.

Inflation spikes have occurred about fifteen times over the past 108 years or every seven years. We last experienced a severe increase more than forty years ago, from 1977 to 1980. Once inflation started to wane, the stock market soared to all-time highs from 1982 to 1999, rising by 1,211%. The market declined slightly in 1990, closing down 6%, but the bull run did not end until 2000, when stocks crashed during the Tech Wreck.[4] What about 1987? On October 19, 1987, stocks fell more than 22% or 508 points. Despite the drop, the market finished the year in positive territory.

Is it possible that McDonald’s stops selling hamburgers or Apple no longer offers earbuds? Will people stop shopping at Amazon, Target, or Walmart? Will Budweiser halt selling beer at baseball games? Will Norfolk Southern and Union Pacific quit shipping materials across the country? Will Tesla stop building electric cars? Will Southwest Airlines leave the airline industry, or gasp, Starbucks exits the coffee business? It’s possible but not probable.

I spent considerable time a McDonald’s while attending college, and when I ordered food, I didn’t care if its stock was up or down. I started my investment career in 1990, and my first recommendation was McDonald’s because people must eat. It fell 15% in 1990, and clients were worried it would fall further. I told them to visit any McDonald’s in the world at noon, and if it was empty, we would sell the stock. I never received a call. Since 1990, McDonald’s stock has risen 5,210%. A $100,000 investment is now worth $5.35 million.

The Dow Jones has weathered many storms and achieved several milestones, but investors were nervous when the index was 30, 300, 3,000, and 30,000. When it reaches 300,000, investors will be anxious —human nature. Do not let your short-term fears derail your long-term goals, and don’t bet against great American companies.

Rather than worry about the market, invite a friend to McDonald’s and enjoy the day.

It’s the end of the world as we know it, and I feel fine. ~ REM

May 19, 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 our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

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


[1] https://www.capitalgroup.com/ria/insights/articles/how-to-handle-market-declines.html

[2] IBID

[3] chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://www.blackrock.com/us/financial-professionals/literature/investor-education/student-of-the-market.pdf

[4] DFA 2022 Matrix Book

Cut In Half

Please do me a favor. Add up all your financial assets – retirement accounts, investment accounts, checking, savings, etc. After calculating your asset amount, divide it in half. How do you feel? Could you survive financially? Do you need to adjust your lifestyle? The answer to your question will determine how to pursue your future investment strategy.

Since 1930, the Dow Jones Industrial Average has lost half its value on a few occasions, like the Great Depression and the Great Recession. It has declined more than 30% many times, and it appears like it falls at least 10% annually. The average decline since 1930 has been approximately 18.5%, and this year the Dow has dropped 12.5%. Despite the downdrafts, the market has averaged 10% per year since 1926. Unfortunately, we must endure painful down days to reap the rewards from the long-term trend in the stock market.

One client recently said, “If you know the market will drop, why the ***k do we own stocks?” It’s a fair question despite the added color. We don’t know why or when stocks will recover, but they always have, and if you don’t own stocks when they rebound, you’ll miss significant returns. After the Dow Jones fell 31% in March 2020 due to COVID, the market soared 55% from March to September. If you panicked and sold, you missed a robust recovery. During the Great Recession, the Dow crashed 53%. If you sold during the onslaught, you missed a 150% return from 2009 to 2013. I’ve noticed that people who sell stocks when they fall rarely repurchase them when they start to recover.

Let’s revisit my original question. How would you feel if you lost half your assets? Of course, you’re upset, and you’re probably sick to your stomach because no one likes to lose money. However, if a 50% reduction in your assets does not impact your life, a market correction is a mere inconvenience and a buying opportunity.

If the market falls by half and significantly impacts your life, consider changing your investment allocation. Here are a few suggestions:

  1. Reduce your stock allocation. If a market correction alters your lifestyle, reduce your stock exposure to lower your risk level. Less risk equates to less return and less volatility.
  2. Buy bonds. Individual bonds are safe and predictable, especially US Treasuries, and they have performed well in previous corrections. During the 2008 correction, long-term US Treasuries climbed 26%. When stocks fell 43% from 2000 to 2003, bonds soared 43%.
  3. Increase cash. An emergency fund provides liquidity during a market collapse. If you can access some money during a crisis, it will allow your stocks time to recover.
  4. Reduce spending. If you reduce your spending, then you need fewer assets to live.

The Dow Jones is up 54% over the past five years, and if you’ve been a long-term investor, you’re still making money, but this brings little comfort to new investors or those who bought stocks a few months ago. I know it’s a challenging environment, but markets have always recovered. In the meantime, review your asset allocation, expenses, investments, fees, and goals.

If you think of the stock market as a cauldron of minestrone soup that occasionally somebody sticks a ladle in and stirs up, it takes a while before all the vegetables float back to the level that they were at before. ~ Seth Klarman

May 18, 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 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.

What Is Safe?

What Is Safe?

When I started my investment career more than thirty years ago, a Wall Street veteran said investing in stocks is not for the faint of heart. He added it takes courage, stamina, and faith to remain invested during the difficult years. He knew what he was talking about because he started his career during the bear market of 1973 and 1974, when the S&P 500 fell 41%. I was young and didn’t appreciate the power of his words then, but I do now. Investing is a game of survival, and if you can hold on, stocks usually win in the end.

During times of a market rout, it would be nice to sell stocks, buy T-Bills and ride out the storm, but it’s impossible to time a market correction or its duration. Investors panic when stocks fall and buy US Treasuries because they’re safe, but what is safety? In the near term, investing in T-Bills appears prudent, especially when stocks fall, because you can protect your assets. In October 1987, the S&P 500 fell 21.5%, while 1-Month T-Bills rose 0.60%. Last month, stocks tumbled 8.7%; T-Bills were flat. In fact, since 1972, T-Bills have outperformed stocks forty percent of the time! In other words, over the past fifty years, T-Bills beat stocks for a combined twenty years.

If T-Bills beat stocks 40% of the time, why not invest in this safe asset class? Well, the long-term returns for T-Bills are anemic. Fifty years ago, a dollar invested in T-Bills is worth $8.66 today for an average annual return of 4.4%. It’s true that T-Bills are safe and have never lost money, but their returns have trailed inflation before taxes. A T-Bill is an excellent choice if you need money in the near term, but it’s a poor investment for creating generational wealth.

On the other hand, stocks are volatile, and they often crash, including this year. Since 1972, the S&P 500 has finished a calendar year in negative territory ten times or twenty percent of the time. From July 1982 to July 1983, the index fell 43%, and during the Tech Wreck from 2000 to 2002, it dropped by the same amount. In 2008, it declined 37%, and this year the index is already down 16%. And, from 2000 to 2010, stocks averaged a paltry 0.6% per year!

Despite violent moves, stocks produced an average annual return of 10.7% since 1972, and $1 turned into $162, or more than nineteen times that of the “safe” T-Bill. If your goal is to create wealth, buy stocks.

Tennessee Williams said, “You can be young without money, but you can’t be old without it.” Don’t let your short-term fears derail your long-term goals. Your older self will thank you!

May 11, 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 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.

What To Do Now?

What a crazy week! Last week I was at Wind River Ranch in Colorado with a few mighty men from my church, helping the ranch hands prepare for the summer season. Shortly, the ranch will welcome hundreds of horses and thousands of guests. We shoveled snow, oiled saddles, dug holes, mended fences, moved furniture, cleaned signs, greased bearings, cut logs, and trimmed trees. Ranch work is hard, especially for a city slicker like me who rides a desk for a living.

Working in the Rocky Mountains is exhilarating and challenging. In addition to the elements, we worked near cows and horses and saw moose, elk, eagles, and rabbits. It was a wild week in the mountains, and it was also a rough week on Wall Street.

Last week, the markets were volatile as investors reacted to the Fed’s rate hike and comments. The Federal Reserve raised its primary interest rate by one-half percent or fifty basis points, its second hike this year. The market soared 3% Wednesday but fell 3.5% on Thursday. Despite the volatility, the S&P 500 finished down a measly 0.21%.

It’s a challenging year for investors as most asset classes are trading in negative territory. Stocks, bonds, and real estate holdings are down double digits, and there is no end in sight as to when the carnage will end. Investors continue to fret over inflation, rising interest rates, and Ukraine, and, as a result, they’re selling securities and moving their funds to cash.

As markets continue to tumble, what should you do now? Here are four suggestions to help you manage your investments.

  1. Sell all your investments and ride out the storm from the safety of your savings account or money market fund. Transferring your assets to cash will preserve your capital and bring you peace. You can wait on the sidelines and watch others worry about declining stock prices and falling asset values. In the short term, you will look smart as others lose money. However, how long will the storm last? Days? Weeks? Months? Years? No one knows. And when the storm passes, stocks and bonds will return to their winning ways. When they start to climb again, will you be wise enough to get back in the market? When you decide to liquidate your holdings, you must be right twice – when you sell and buy. During the COVID correction, the S&P 500 fell 30% in thirty days. It was a bloodbath, as investors sold stocks for fear of entering another bear market or recession, but the market soon recovered, and by the end of the year, it had gained 16.3%. In addition, the S&P 500 soared 26.9% in 2021. If you sold during the panic and failed to buy back your holdings, you missed a 48% gain!
  2. Buy US government-guaranteed bonds If you’re worried about losing your principal. They’re currently yielding more than 3% interest. The 5-year Treasury Note now offers a yield of 3.06%, while the 20-year Treasury Bond pays 3.4%.[1] The rates are guaranteed if you hold them to maturity. If you buy these bonds, you don’t need to worry about market fluctuations because you’ll receive a constant income stream and a guaranteed return on your principal. For every $10,000 you invest, you’ll receive approximately $300 per year. Guaranteed income sounds nice until you factor in inflation and taxes. Since 1914, inflation has averaged 3.24%, so your net return is less than zero before you pay taxes on your income.
  3. Buy stocks if your time horizon is two years or more. Time heals all wounds, especially when it comes to stocks and markets. I don’t know when markets will recover, but they’ll eventually rebound. It is scary to buy stocks, but that’s usually the best time to add great companies or funds to your portfolio. It pays to be a buyer when others are selling, especially if they’re in panic mode, and they are.
  4. Hunker down and do nothing. If you’re comfortable with your investments and asset allocation, ride out the storm. It takes patience and courage to sit tight while others panic and sell, but your assets should recover over time. A classic 60% stock and 40% bond portfolio is down 14.15% for the year as stock and bonds fall. Despite the negative year-to-date return, it has averaged 10.04% over the past fifty years. It averaged 9.31% for three years, 9.74% for five, and 9.84% for ten. It soared 49.66% from July 1982 to June 1983, after the market fell 26% in the previous months.[2] If you adopted a buy-and-hold strategy, you would have enjoyed generous returns.

Working on the mountain reminds me that life finds a way to recover and returns to normal. There were signs of life under the snowmelt, dead trees, and broken limbs as flowers, seedlings, and the grass were starting to sprout. A rebirth is taking shape, and the long dark winter will soon be a distant memory, and the markets will recover, and the painful bear market will be a thing of the past, just like the previous twenty-eight bear markets.[3]

Our peace shall stand as firm as rocky mountains. ~  William Shakespeare

May 8, 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 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.

Photo Credit: Mr. James Stanley


[1] YCHARTS as of 5/8/2022

[2] Dimensional Funds Returns web, 4/30/1972 to 4/30/2022.

[3] https://seekingalpha.com/article/4483348-bear-market-history

Can You Lose All Your Money?

Stocks and bonds continue to plummet, and there appears to be no end to the misery. The S&P 500 is down 9.6%; bonds have dropped 9.8%. As bad news mounts, can you lose all your money from stocks or bonds? The odds are pretty low if you diversify your assets across classes, sectors, and countries.

Since 1926, a 60% stock and 40% long-term government bond portfolio averaged 9.16% per year, but it has not been without blemishes. During the Great Depression, it lost 45%, and in 1974 it fell 14.13%, it dropped 11.85% in 2008.

You can reduce your risk and downside By adding more components to your portfolio. Adding small-cap stocks, international holdings, and real estate investments to a portfolio decreased the downside from 44% to 36%.

Here is a look at some asset categories and their worst investment years.

  • Large-cap stocks lost 66% in 1932.
  • Small-cap stocks lost 67% in 1932.
  • Mid-cap stocks lost 43% in 1982.
  • International small-cap stocks lost 53% in 1985.
  • International developed stocks lost 50% in 1985.
  • Emerging markets lost 51% in 2009.
  • Real estate holdings lost 61% in 2009.
  • Government bonds lost 4.5% in 1981.

As I mentioned, the 60/40 portfolio lost 45% during the Great Depression, but from 1932 to 1936, it rebounded by 91%. After the 1974 decline, it climbed 47% from 1975 to 1976, and it soared 102% from 2009 to 2017 following the Great Recession.

Will you lose all your money from a diversified portfolio of mutual funds or ETFs? I doubt it. Actually, if history is our guide, buying investments when they’re down has been financially rewarding if you are patient.

I don’t know when stocks and bonds will recover, but it will happen eventually. In the meantime, follow your plan and diversify your assets.

April 221, 2022

www.parrottwealth.com

Note: Past performance is no guarantee of future performance.

Data Sources: Dimensional Fund Advisors Returns Web and YCHARTS.

Should You Sell Your Losers?

Bill Ackman, founder, and CEO of Pershing Square, recently realized a $400 million loss after liquidating the firm’s Netflix position, which he purchased in January.[1] After Netflix reported earnings, the stock fell 35%. It currently trades for $218.24 per share, down 68% from its peak.

Pershing Square manages approximately $18.5 billion in assets, and the Netflix loss represents about 2% of the firm’s assets. No one likes to lose money, but cutting your losses and limiting your downside is wise, especially if you lose faith in the company.

The S&P 500 is down 6.44%, a challenging year, as market participants react to rising inflation, higher interest rates, and war in Ukraine. Several stocks are down 40%, 50%, and 60%, including Etsy, PayPal, Fubo TV, DocuSign, NIO, Uber, Spotify, Zoom, etc. What should you do if you own a loser or two?

My recommendation is to follow Mr. Ackman’s lead and sell your losers. Though he lost $400 million on Netflix, his firm generated stellar returns in 2021, so he probably can offset the gains with his loss. You can do the same thing. For example, if you own Vanguard’s 500 Fund (VOO), you can sell it to realize the loss and buy iShares Core S&P 500 ETF (IVV). You can recognize the loss and establish a new position in a similar security.

Bonds are performing poorly as well. The Bloomberg US Aggregate Bond Index is down 9.85%, matching its worst year from April 1979 to March 1980.[2] If you own the iShares Core US Aggregate Bond ETF (AGG) sell it to buy Vanguard’s Total Bond Market ETF (BND).  

When should you realize your loss? My answer is before a modest loss becomes a large one. Some investors wait until the end of the year to recognize losses, but then they miss out on opportunities to recoup losses or offset gains. We realized  losses during the COVID correction in March 2020 through our rebalancing software and individual trades. As the market rebounded, we absorbed the losses with  gains.

Be careful, however, if you want to buy back one of your losers. If you still like PayPayl but want to realize your loss, you must wait thirty-one days before repurchasing it to avoid the wash sale rule.

Investment losses are a fact of life; you’re not going to win on every trade, so when a loss occurs, use it to your advantage – never waste a good tax loss.

Happy Trading.

April 22, 2022

www.parrottwealth.com

Note: Past performance is no guarantee of future performance.


[1] https://www.wsj.com/articles/william-ackmans-hedge-fund-sheds-stake-in-netflix-11650498903, Gunjan Banerji, April 20, 2022.

[2] YCHARTS and Dimensional Funds Returns Web Tool

The Middle Child

Being the middle child is tough; ask Jan Brady, Lisa from the Simpsons, or Malcolm in the Middle. Most of the attention falls on the firstborn child or the family’s baby. Mid-cap stocks suffer the same fate because investors want to own large-cap or small-cap stocks.  

Since 1980, mid-cap stocks have outperformed the S&P 500, generating an average annual return of 12.72%. The returns have been higher than large caps, but the downside has been similar. From July 1982 to June 1983, the mid-cap index soared 82%, whereas the S&P 500 rose 61%. During the Great Recession, both fell by 43%.[1]

Mid-cap stocks make an excellent portfolio choice because they survived the startup and small-cap phase, but they still have room to grow. Some popular mid-cap companies include Kroger’s, Dollar Tree, RH, Dick’s Sporting Goods, and Skechers.

The Dow Jones US Mid Cap Index has been up 215% over the past ten years, producing an average annual gain of 12.14%, similar to its 40-year average annual return.

Consider mid-cap stocks if you want to give your portfolio a boost.

April 20, 2022

www.parrottwealth.com

Note: past performance is not a guarantee of future performance.


[1] Dimensional Funds Returns Web – January 1, 1980 to March 31, 2022

Small Things      

Good things come in small packages, which is true for small company stocks. Since 1972 Dimensional Fund’s small-cap index has more than doubled the return of its large-cap index, generating an annualized return of 12.7%, compared to 10.9% for large caps. The index returns date to 1927, and the best one-year return was 259% during the Great Depression. During the first phase of COVID, the small-cap index produced a 107% return from April 2020 to March 2021.[1] Though returns for small stocks have been better than larger ones, so has the risk level.

However, large-company stocks have outperformed small caps over the past 1-, 3-, 5-, and 10-year periods.

Will large companies continue to best small ones? Will the trend continue? Time will tell, but I believe small-cap stocks will again post better returns than large-caps as they have done for the past 95 years.

April 19, 2022

www.parrottwealth.com

Note: past performance is not a guarantee of future performance.


[1] DFA Returns Web – 1927 to 2022