4 Covered Call Ideas

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

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

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

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

Have Stocks Bottomed?

Have stocks bottomed, or is this a bear trap? Since Mid-June, the Nasdaq has risen by more than 20%, which, by definition, is a bull market. However, the tech-heavy index is still down 16% on the year. On August 10, The Wall Street Journal declared a new bull market had arrived. [1] I hope they are right.

No one likes losing money, but some of the best market moves occurred during bear markets as sophisticated investors exploited anxious investors. For example, the Nasdaq has had a dozen moves where it climbed 3% or more this year and has made three runs where it jumped by more than 12%. Will this time be different? Have stocks bottomed?

The Nasdaq produced a measly 2.6% return from 2000 to 2014. From 2000 to 2002, during the Tech Wreck, it crashed by 75%, and during the Great Recession, it fell by 51%. A few months after the Tech Wreck began, the Nasdaq snapped back by 23% in April 2000 but fell 61% over the next 18 months before rallying again in April 2001. The index appeared to bottom in October 2001 when it climbed 35% but lost another 43% the falling year. The market recovered 150% from 2002 to 2007 but was still down 31% from January 2000, and it would not breach that level until 2014. The bear market lasted more than fourteen years, but the Nasdaq still delivered several significant up moves as it tried to recover.

Is the current rebound a bear trap or a bull market? I don’t know, but I do know that if you try to time the market by jumping in and out, you will eventually lose money regardless of the market’s direction. Typically, investors sell stocks as they fall and repurchase them after they have risen significantly. If they do the opposite, they might make some money.

Here are a few steps to help you become a better investor during bear markets.

  • Develop a financial plan. It will keep you focused on your financial goals. I’ve noticed that individuals with a plan are less likely to panic and liquidate their investments when markets sour. Instead, they look for buying opportunities as stocks fall.
  • Create three different investment buckets to meet your short, intermediate, and long-term needs. If you need money in one year or less, buy US T-Bills, and if your time horizon is three to five years, consider a mix of cash, bonds, and stocks. If your timeframe is five years or more, buy stocks.
  • Buy the dip. It is challenging to buy stocks as they fall, but the market has always recovered. Identify quality companies or funds you want to own if the price drops.
  • Rebalance your accounts. Our rebalancing software screens our models weekly, and if it finds portfolios that are off-kilter, it will rebalance them back to their original allocation. Rebalancing removes emotion from the buy and sell decisions because it is automated. In June, our models sold bonds to buy growth funds, which, so far, has proved correct. If you rebalance regularly, it will keep your risk level and asset allocation in check.

Media pundits and Wall Street experts love to call tops and bottoms, but it is impossible. Ignore people with megaphones on big stages telling you to buy or sell because they can lead you to financial ruin because they know nothing about your financial hopes, dreams, or fears. Focus on your goals, think long-term, and good things will happen.

The idea that a bell rings to signal when to get into or out of the stock market is simply not credible. After nearly fifty years in this business, I don’t know anybody who has done it successfully and consistently. I don’t even know anybody who knows anybody who has. ~ Jack Bogle

August 15, 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. My asset allocation is approximately 75% stocks and 25% bonds and cash, where it has been for the past thirty years or so.


[1] https://www.wsj.com/articles/global-stocks-markets-dow-update-08-10-2022-11660116855, Sam Goldfarb, August 10, 2022

Time To Buy?

The Nasdaq soared more than 12% in July, its best monthly return since 2020. Small-cap stocks, international holdings, and bonds also participated in the broad-based rally, providing some relief to weary investors. The markets are trying to recover from rising interest rates and persistent inflation, and since the near-term bottom in June, the Nasdaq is up 16.5%. Will the trend continue? Is it time to buy?

The Nasdaq was down 32% when it touched its June low, and if you panicked and sold, you may suffer from FOMO. Of course, no one knows what will happen tomorrow, but the recovery looks robust so far, particularly if inflation retreats and interest rates subside.

Let’s explore projected recovery times for portfolios with three different allocations and investment holdings.

  • An evenly balanced portfolio of stocks and bonds, 50% stocks and 50% bonds, produced an average annual return of 8.3% since 1926.[1] If you keep this allocation, it could take about three years to recover your loss if you were down 20% to start the year.
  • If you sold your investments after a 20% drop, it would take approximately twelve years to recover your loss if you only invested in US T-Bills yielding 2%.
  • If you were down 20% and buried your money in a bank account earning 0.1%, you would never recoup your loss because it would take 224 years to compound your interest payments.

It’s tempting to call a market bottom and buy stocks, but no one knows when they will recover. And the market does not go up in a straight line. They fluctuate like the tide. From 1995 to 1999, the Nasdaq climbed 441%, generating an average annual return of 40%! Staggering! Despite the meteoric rise, it routinely fell 10% or more, and in October 1998, it dropped 30%. If you remained invested through the dips, dives, and drops, you enjoyed exceptional returns, but if you liquidated your holdings, your returns were significantly less.

If you sold your holdings these past few months, is it time to repurchase them? Let’s examine a few scenarios.

  • Do not buy stocks if your time horizon is one year or less. Buy T-Bills or keep your funds in a savings account or money market fund.
  • Is the money earmarked for a significant purchase like a downpayment, tuition bill, or new car? If so, do not buy stocks. Keep your money in short-term cash investments.
  • Buy stocks if your time horizon is three to five years or more. Time wins, and stocks recover, so take advantage of down days to buy quality funds and companies.
  • Are you working and contributing to your company’s retirement plan? If so, keep buying. 401(k) plans are an excellent tool for creating generational wealth because you buy stocks every two weeks regardless of the market conditions.
  • Is your money invested in an IRA that you can’t touch for decades? If so, buy stocks.
  • Buy stocks if the bear market is not impacting your financial plan or long-term goals. A financial plan is paramount if you want to succeed as an investor.

Our investment philosophy is to buy and hold diversified portfolios of stocks and bonds through low-cost mutual funds or ETFs because we don’t know when, where, or why markets will recover, and trying to time the market is a fool’s errand. It’s like getting on an airplane after it has taken off; it’s impossible. Rather than selling stocks when they fall, follow your financial plan, think long-term, and buy the dip.

Success is a result of consistent practice of winning skills and actions. There is nothing miraculous about the process. There is no luck involved. ~ Bill Russell

August 1, 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. I like watching Shark Tank, and Wall Street was one of my favorite movies. I’m a Los Angeles Lakers fan, but I always admired the Celtics and Bill Russell.


[1] DFA Returns Web

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.