Better Off Dead?

Dr. Daniel Crosby is the author of The Behavioral Investor. In his book he highlights a story about Fidelity Investments and their attempt to identify their best performing retail accounts. They found that the individuals who owned these accounts had forgotten they existed, or the original account owner had passed away.[1] Fidelity was probably looking for an investment theme to duplicate. However, they discovered that these accounts weren’t being traded or tainted by human hands – living or deceased.

He tells of another story from the book Behavioral Investment Management: An Efficient Alternative to Modern Portfolio Theory written by Greg B. Davies and Arnaud de Servigny. The authors discuss a study about how often people check their investment accounts and their corresponding performance. They found that people who check their account balances daily experienced a loss 41% of the time. Individuals who checked their balances every five years experienced a loss about 12% of the time and those who checked it every 12 years never lost money.[2]

Stocks have never lost money during a rolling 20-year period according to multiple studies. From 1926 to 2018 there have been 74 rolling 20-year periods and stocks have made money 100% of the time.[3] The most recent period, 1998-2018, finished with a positive return. An investment in the SPDR S&P 500 ETF (SPY) on 1/1/1998 generated an average annual return of 7.10% through 1/1/2018. However, during this 20-year period you would’ve experienced significant losses on several occasions. From 2000 to 2002 the market fell 43.07% and in 2008 it dropped 36.81%. As I mentioned, if you checked your balances daily, your chance of a realized loss was high.[4]

It’s hard to ignore your accounts especially if you’re connected to Twitter, Facebook, and other social media sites. Custodians and brokerage firms also have apps allowing you to check your accounts 24/7. Investment firms offer trading alerts and other notices to keep you in the know. It’s a fast-paced world and reacting to headline news stories may wreak havoc to your long-term wealth.

To protect your wealth from irrational reactions turnoff your account alerts and notices. Rather than reviewing your balances daily, try extending it to a month, then three months, and so on. Extending the time frame for reviewing your accounts will reduce your anxiety and potentially increase your returns.

You don’t have to die to generate solid returns. Rather, incorporate a buy and hold investment strategy with a balanced portfolio of low-cost investments. A diversified portfolio of low-cost mutual funds will reduce your dependence to constantly check your accounts. In doing so you’ll be able to enjoy your life while you’re living.

And lead us not into temptation, but deliver us from the evil one. ~ Matthew 6:13

February 11, 2019

Bill Parrott is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.

 

[1] The Behavioral Investor by Daniel Crosby, Ph.D. – Kindle Edition, location 2673, accessed 2/10/19.

[2] Greg B. Davies, Behavioral Investment Management: An Efficient Alternative to Modern Portfolio Theory (McGraw-Hill, 2012), p. 53. The Behavioral Investor by Daniel Crosby, Ph.D. – Kindle Edition, location 1423, accessed 2/10/19.

[3] Ibbotson® SBBI® 2015 Classic Yearbook

[4] Morningstar Office Hypothetical – SPY, 1/01/1198 to 1/1/2018.

What is the S&P 500?

What did the market do today? Was it up? Down? When people refer to the “the market” it’s usually the S&P 500® Index. But what is it? It’s a key benchmark money managers, mutual funds, and other professionals use to measure performance.

The S&P 500® Index is a collection of the 500 largest publicly traded U.S. corporations. It’s a market weighted index meaning the largest companies have the greatest impact on performance – good and bad.  The largest company in the index is Microsoft; the smallest is News Corp. When Microsoft moves, so will the index. The 10 largest companies in the index are Microsoft, Apple, Amazon, Berkshire Hathaway, Facebook, Johnson & Johnson, JP Morgan Chase, Alphabet, Exxon Mobil, and Bank of America. The largest sectors are Information Technology, Healthcare and Financials.

Standard & Poor’s launched the now famous index on March 4, 1957. It’s a better gauge of the market because of the breadth of its holdings especially when compared to the Dow Jones Industrial Average which only holds 30 companies.[1] The Dow Jones index was founded in May 1896.

Because of the breadth and consistency over time there are currently $9.9 trillion in assets linked to this index. The most popular one is the Vanguard S&P 500 Index Fund founded by Mr. John Bogle. Mr. Bogle recently passed away and this put a spotlight on this popular category. Mr. Bogle started the fund in 1976 to a less than stellar opening. His goal was to raise $150 million but he only received $11.4 million – a rounding error on Wall Street.[2] The fund currently has assets of $400 billion! If you had invested $10,000 in this fund when it opened, your account balance would be worth $744,951 today. It has generated an average annual return of 10.71% since its feeble beginning.

Wall Street was not a fan of Mr. Bogle’s fund because of its low fee structure and average returns. What investor would want to own a fund generating average returns when active fund managers and stock pickers could do so much better? Makes sense. However, active stock pickers rarely outperform the S&P 500® Index. In fact, 91% of active fund managers failed to outperform the S&P 500® over a 10-year period and 95% of funds with high fees lagged this key benchmark. The active managers were below average, well below.[3]

Rather than average returns consider market returns. If you can generate market returns over time, your wealth should grow despite the occasional drop in value or spike in volatility. A low cost, diversified investment like the Vanguard S&P 500® Index Fund is a great candidate for most investors.

As a side note, the S&P 500 owns 505 companies!

Happy Investing.

“The two greatest enemies of the equity fund investor are expenses and emotions.” ~ John C. Bogle

February 1, 2019

Bill Parrott is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.

 

 

 

[1] file:///C:/Users/Bill%20Parrott/Downloads/fs-sp-500.pdf

[2] https://www.inc.com/magazine/201210/eric-schurenberg/how-i-did-it-john-bogle-the-vanguard-group.html, B Eric Schurenberg, 9/25/2012

[3] https://office.morningstar.com/research/doc/Aug%2023%202018_Active_vs_Passively_Managed_Funds_Takeaways_from_Our_Mid-Year_Report__880196, Ben Johnson, August 23, 2018

Who Cares?

Who cares that the current bull market has risen more than 260% when stocks have dropped 7% in the past month? Does it matter that stocks have generated an average annual return of 10% for the past 100 years or markets rise 75% of the time when this year will be negative? Stocks have outpaced bonds and cash for decades, but so what? This year bonds and cash have the upper hand.

The current bull market started on March 9, 2009 after a grueling 17-month bear market. The current recovery is (was) over nine years old – one of the longest recoveries on record.  Did the market go straight up during this historic run? Of course not. It was littered with several corrections.

During this bull market, the Dow Jones experienced 68 days when it fell 2% or more and 45% of the time it produced a return of 0% or worse. The average daily gain has been .06% – yawn.

Here is a year by year look at this bull market.

2009 – After the bull market started, it dropped 7.42%. It finished the year up 18.82%.

2010 – During this year the market fell 7.6%, 13.5% and 5.12%. It finished the year up 11.02%.

2011 – During this year the market fell 6.28%, 7.12%, 16.26%, and 8.17%. It finished the year up 5.53%.

2012 – During this year the market fell 8.87% and 7.75%. It finished the year up 7.26%.

2013 – During this year the market fell 4.86%, 5.6%, and 5.75%. It finished the year up 26.50%.

2014 – During this year the market fell 13.75%, 4.5%, 6.64%, and 4.95%. It finished the year up 7.52%.

2015 – During this year the market fell 14.44%. It finished the year down 2.23%.

2016 – During this year the market fell 10.12%. It finished the year up 13.42%.

2017 – During this year the market fell 1.9% – a mild year. It finished the year up 25.08%.

2018 – This year the market has fallen 11.58%, 4.75%, and 12%. The year isn’t over yet!

As you can see, this bull market experienced significant drops, but it always recovered. Will this time be different? Who knows? Time will tell.

Here are a few suggestions if you’re concerned about the recent market volatility.

  1. If you need money in the next one, two or three years, do not invest it in the stock market. Rather, invest in a money market fund, CD or U.S. Treasury Bill.
  2. If the market is keeping you up at night, your allocation to stocks is too high. Sell your stocks to your comfort level.
  3. Work on your financial plan. Your plan will determine your asset allocation based on your goals. If your plan, goals, and asset allocation are aligned, you’re more likely to stay invested through good times and bad.
  4. Time the market. Sell at the top; buy at the bottom. Just kidding. No one has been able to consistently time the market, but who knows, you may be the one to do it.

These past three months have been brutal. The market downturn has turned a decent year into a poor one. This happens occasionally. During the next two weeks spend some time reviewing your goals. If they’re still intact, stay the course.

People who succeed in the stock market also accept periodic losses, setbacks, and unexpected occurrences. Calamitous drops do not scare them out of the game. ~ Peter Lynch

December 18, 2018

Bill Parrott is the President and CEO of Parrott Wealth Management firm located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process to help our clients pursue a life of purpose.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.

 

Source: YCharts. Year by year data does not include dividends.

 

Photo Credit: Victor Brave

 

 

 

 

Slow Money

CNBC’s Fast Money is “America’s post-market show to bring you the actionable news that matters most to investors.” The panel of traders discuss stocks, ETF’s, options, and bitcoin. They talk in technical terms and use graphs and charts to highlight their main points. They sound convincing and make it look easy as if all you had to do was buy a stock after it bounces off the 200-day moving average and ride it until it hits resistance where you can sell it for a tidy profit.

Trading is like a sporting event with winners and losers. It’s also profitable to brokerage firms and exchanges. The more you trade, the more money they make. If they make more, you make less.

When you trade you’ll be competing against professionals and large Wall Street firms capitalized with trillions of dollars. Your emotional behavior will have a huge impact on your trading success more so than professional traders. Will you be able to set strict trading rules? How will you react when your stock breaks the 200-day moving average and falls 20% in a single trading session? Will you sell it? Will you buy more convinced that you’re correct and that everybody else is wrong? Will you sit on your loss hoping it rebounds to your purchase price? Day traders in J.C. Penny (JCP), Sears Holdings (SHLDQ), and GE are still waiting. Did you notice the “Q” in the Sears symbol? It represents bankruptcy.

What if you want to trade the market? If you want to commit your hard-earned dollars to trading, limit it to 2% to 3% of the money invested in your taxable account. Do not trade in your IRA because you can’t write off your losses.

Let’s look at three different companies – Company A, B and C. All three have different chart patterns. Company A is rising and trading at all-time highs. Company B is in a free fall trading near historical lows. Company C is in a holding pattern and it appears to be building a base. Which stock would you buy? Which one looks more appealing?

 

AMZN A

 

AMZN B

 

 AMZN C

Company A is Amazon from June 1, 1997 to July 31, 1998 not long after it launched its IPO. The stock rose 1,100% during this window.

Company B is Amazon from November 1, 1999 to October 31, 2001 where it fell 92%. Amazon was hit hard during the tech-wreck.

Company C is Amazon from July 1, 2004 to March 31, 2007 where it gained 2.2%. It’s hard to believe, but for about three years the stock barely budged.

The best time to have bought Amazon was after it fell 92%, as it did in chart B. If you had the courage to buy at the low, you would’ve made over 23,000%! In hindsight it appears easy, but if you bought it in 2001, you would have endured 19 different months where it dropped 10% or more. Its worst monthly drop occurred in July 2004, falling 31%. It takes courage, conviction and luck to time the market.

Is there a better way? A slow money strategy based on your financial goals and dreams can treat you well over time. A financial planner can design a portfolio of low cost, globally diversified mutual funds based on your objectives. This strategy can minimize your investing mistakes and costs, allowing you to keep more of what you earn.  Your plan will help you prioritize the things that are most important to you and your family allowing you to grow your wealth across generations.

Short term trading with fast money can be detrimental to your long-term wealth, so go slow instead!

It doesn’t matter how slow you go so long as you do not stop. ~ Confucius

11/7/2018

Bill Parrott is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.

 

 

When to Sell A Stock?

A few high-flying growth stocks came crashing back to earth after posting poor earnings. Facebook fell 21%, Netflix dropped 19%, and Twitter cratered 27%.  In the days leading up to the Facebook announcement, it rose 4.5% to close at an all-time high of $218.62. If investors knew it was going to collapse, they would’ve shorted the stock or bought puts to profit from the drop.

Facebook went public in May 2012 at $38 per share. It has returned 354% for investors, or 27.5% per year from its initial public offering. However, after a few days of trading it fell 25% and by Labor Day it had dropped more than 50%. In Fact, Barron’s Magazine gave it a thumb’s down in their September 24, 2012 issue with a price target of $15.[1] It never hit $15 per share and since the article appeared Facebook has risen 1,050%!

Facebook has had double digit losses in each year it has been a publicly traded company. If you sold it on every wiggle, twitch, or flutter, you’d never make any money. A buy and hold investor has probably made the most money in this stock if she’s been able to ignore the volatility.

As a stock gyrates, how do you know if it’s the beginning of the end or a temporary pause in an upward trend? How do you know when it’s the right time to sell?  Here are a few suggestions.

Allocation. If your single stock holding is more than 25% of your portfolio, it’s a good time to sell and diversify your assets. A 3% to 5% allocation to a single stock is recommended.

Price Target. If your stock hits your pre-determined price target, take your gain. If you buy a company at $15 per share with a price target of $20, take your profits if it trades to your mark.

Ratios. A rising stock is fun to own. As it climbs, keep an eye on the key ratios like price to earnings, price to sales, and price to book. The higher the level of the ratios, the lower the future performance of your stock may be. Comparing current and historical ratios is advised. You can view this data in Morningstar, Value Line, or Yahoo! Finance.  Netflix stock price soared 126% in less than a year and despite the recent 20% drop, it still trades at a price to earnings ratio of 125, well above historical norms.

Balance Sheet.  A company with negative cash flows or high debt levels should be avoided. If it’s cutting or eliminating its dividend, it’s a good candidate to sell. Tesla has been a polarizing stock for a decade and since 2008 it has had (growing) negative cash flows.

Goals. Your financial goals may change over time. If your account value has increased and you want to preserve your assets, sell some of your stock holdings and buy bonds. This will reduce your stock exposure and risk level.

Taxes. If you have realized gains, sell stocks with a loss to offset the gains. If you have realized losses, take gains. You can offset gains and losses dollar for dollar.

Timing. Selling a stock at an all-time high is always preferred. However, it’s better to buy at the right price, but this is hard to do because the stock is probably in a slumber or hitting new lows. The best time to have bought Facebook was September 4, 2012 at $17.73 after it had fallen 53%. Obvious today, but it would’ve been a difficult purchase at the time because it was engulfed in negative news as evident by the Barron’s article. It was also a new platform not known to many. If you have the courage to buy a stock that everyone hates, you may be rewarded over time.

A strategy I recommend is to purchase a basket of low-cost mutual funds giving you exposure to thousands of companies. A globally diversified portfolio of mutual funds will free you from making any buy and sell decisions allowing you to focus on your long-term goals.

You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you’re not ready, you won’t do well in the markets. ~ Peter Lynch


August 1, 2018

Bill Parrott is the President and CEO of Parrott Wealth Management firm located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog. Please consult your CPA or tax advisor before implementing any of these strategies to see if it makes sense for your situation.

[1] https://www.barrons.com/articles/SB50001424053111904706204578002652028814658, Andrew Bary, 9/24/2012.