Tag: Stock Trading

Do You Like Paying Taxes?

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Do you like to pay taxes? I doubt it, but taxes are a function of successful investing. Paying a capital gain tax on a profitable trade is part of the game, yet some investors hold on to a stock too long because they don’t want to pay any taxes. In some cases, a stock will drop, eliminating all the profit and capital gains, which is worse than paying taxes. Let’s look at a few examples.

Cisco Systems

Cisco was the poster child for internet stocks in the late 1990s and early 2000s. From 1995 to March 2000, it soared more than 4,015%, rising from $1.95 to $80.25 – a nice little profit. However, some investors did not sell because they thought it would trade higher, but by October 2002, it dropped by 88%, wiping out capital gains for many investors. At its peak, Cisco traded at a price-to-earnings ratio of 205, or more than 13 times its historical average, and hasn’t eclipsed its all-time high set twenty-three years ago. Cisco Systems initiated a dividend in 2011, long after it corrected.

Disney

Disney has fallen on hard times, and the stock is struggling, trading near a nine-year low of $87.18 as issues mount at its theme parks, movie studios, and other outlets like ESPN. At its peak, it sold for more than $200 per share. Over the past decade, Disney traded from $64 per share to $200, gaining 214%. Since March 2021, Disney has fallen 56%. Its PE ratio touched 300 as it started to correct, fifteen times the historical average for Disney. Disney also eliminated its dividend in 2021, another sign it may be time to lock in your profit.

3M Co

3M has been a financial powerhouse, but the stock has dropped because of pending litigation related to forever chemicals and earplugs. From January 2000 to January 2018, it soared 428% but has since dropped 60%, trading near a ten-year low. At its peak, the PE ratio was 32, which was not significantly overvalued but more than two times its average. The dividend yield dropped to 1.5%, more than half its historical average of 3.9%.

NVIDIA Corp

NVIDIA is the current “it” stock because of artificial intelligence and has risen more than 200% this year and more than 12,000% since 2013. It has not given up its gains, and investors are holding on for more. Will it correct like the other stocks? Who knows, time will tell. It trades at a price-to-earnings ratio of 230, or six times its historical average, so it may be wise to lock in some profits. NVIDIA’s dividend yield is .04%, or 60% below its average of .1%.

Of course, selling a stock at its peak is more luck than skill and easier said than done. Hindsight is twenty-twenty. However, do not let your capital gain tax drive your investment decision. It never hurts to realize a profit if the stock valuation is overvalued or extended. I have seen too many investors give up gains to avoid paying taxes.

Once you acquire your stock, calculate your target price so you have a general idea of where to sell it. The PE ratio and dividend yield are two financial metrics you can use to calculate a ballpark range for selling your shares.

  • Price-to-earnings ratio. The PE ratio is a common metric for stock valuation. It’s not foolproof; some analysts don’t like it, but it will give you a general idea of the future valuation of your shares. For example, if the historical PE ratio is 20 and the projected earnings per share are $5, the stock valuation is $100 (20 x $5). If your stock is selling for $80, it’s undervalued; if it is selling for $140, it’s overvalued. As the price rises, so does the PE ratio. Do not automatically sell your stock if it hits your price target. Reevaluate it based on new data or information. If nothing changes, consider selling a few shares.
  • Dividend Yield. The dividend yield is another financial metric you can use to determine the price target for your stock. For example, if the company pays a $2 dividend and the average dividend yield is 5%, the stock valuation is $40 ($2 divided by .05). It’s undervalued at $30 and overvalued at $50. The dividend yield drops as the price of the stock rises.

Finding historical financial data is relatively easy on Yahoo! Finance, Morningstar, or Value Line. A quick calculation can identify which stocks to sell or buy for your portfolio.

Happy Trading.

Then Jesus said to them, “Give back to Caesar what is Caesar’s and to God what is God’s.” And they were amazed at him. ~ Mark 12:17

July 23, 2023

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

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

Data sources: YCHARTS and Value Line

Ten Percent Returns

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The S&P 500 has generated ten percent annual returns since 1926. A dollar invested in 1926 is now worth  $13,474.[1]  Because of the 97-year average, most investors expect or demand a 10% return each year without risk. In fact, when analysts update their annual stock market return projections, the answer is usually 10%, a safe prediction because of the index’s history.

Generating index returns is a mix of euphoria and despair. From 1982 to 1999, the index averaged 18.5% per year. From 2000 to 2012, it averaged a paltry 0.6%. After World War II, the best one-year return was in 1954, when it soared 52.6%—the worst year occurred in 2008, plummeting 37%.[2] However, you must endure a few years of pain and underperformance to receive double-digit stock returns. It would be nice to time the market to avoid the dips, but it’s impossible.

The  S&P 500 is up 17.25% this year after falling 18.1% in 2022. What is the ten-year average return for the index? It is 10.35% despite the correction in the fourth quarter of 2018, last year’s drop, and the COVID crash in 2020. Since July 2013, the index has risen 168%.

As we move into the second half of this year, focus on your long-term goals and less on stock market returns. The market has delivered exceptional returns for decades, and I expect the future will also. Of course, it will rise in some years and fall in others. As it increases, don’t get overly excited or too depressed when it falls. In the long run, a well-diversified portfolio can produce market returns; if you capture them, you’ll do well.

I’m optimistic about the market’s future – stay invested, my friends!

It’s a wonderful thing to be optimistic. It keeps you healthy, and it keeps you resilient. ~ Daniel Kahneman

July 13, 2023

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

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

[1] Dimensional Fund Advisors Returns Web – 1/1/1926 to 60/30/2023

[2] Ibid

The Magnificent Seven

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Seven stocks are generating most of the returns this year, named the Magnificent Seven. Meta, Apple, Amazon, Alphabet, Microsoft, Nvidia, and Tesla are the seven companies, and they’re delivering an Oscar-worthy performance.

These seven stocks are up 90% year-to-date as a group, led by Nvidia, up 191%. The group’s laggard is Alphabet because it’s “only” up 35%. The drive to artificial intelligence (AI) and the Fed’s projected slowdown in raising interest rates is fueling the move in these stocks.

It seems obvious that these stocks are rallying because AI is everywhere, and everyone knows the Federal Reserve will stop raising interest rates eventually. However, these seven stocks were down 45% in 2022, with Meta and Tesla falling 65%. If these companies were poised to soar this year, why did they crash last year?

Ycharts tracks 9,820 US stocks. The Magnificent Seven represents 0.07% of the companies in its database. Is it possible to identify the seven best-performing stocks before they move higher? I doubt it. And if it were, how come no one mentions Propel Media, Sky Petroleum, Freedom Holdings, Arno Therapeutics, Ai Technology Group, Diamond Holdings, or Pineapple Express? These stunning seven stocks are up 41,000% this year!

Owning the best-performing stocks before they move higher is mostly luck. Finding the needle in the haystack consistently is impossible, but investors keep trying. Why not. If you find a few companies before they take off, you can make a lot of money.

Here are a few ideas to help you find hidden gems.

  • Diversify your assets across multiple stocks and sectors. Widen your net.
  • Invest in moonshots. Moonshots are risky and speculative, but you can generate significant returns if they pay off. Limit your allocation to 3% to 5% of your investment portfolio.
  • Look for stocks with solid moats and little competition.
  • Read as much as possible to find innovative companies. In addition to reading popular periodicals like the Wall Street Journal or Barron’s, look to trade magazines and industry journals.
  • Practice patience and courage. It takes strength to own the best-performing companies because they’re volatile. For example, Amazon fell 95% in 2001. Last year, Tesla slid more than 70% from its previous high. If you own stocks at the peak, you must hold them in the valleys.
  • High-flying stocks are expensive. The average PE ratio for the Magnificent Seven is 106. You will pay up in valuation to buy solid-performing stocks. Coca-Cola is a company that delivers consistent performance, and the market rewards it with a high multiple. The 10-year average PE ratio for Coke is 27.29. A company with a low PE ratio could be a value trap. For example, the average PE ratio for Intel is 10.6, and the stock is down 47% from January 2000, 23 years!
  • Review and rebalance. Stocks and trees don’t grow to the sky, so reevaluate your holdings often. Do you remember Sears, Roebuck & Company? It was once the most dominant company in America, now it’s a former shell of itself, and the stock is worthless.
  • Ride your winner for as long as possible. One Secretariat is worth more than a thousand average racehorses. If you own a great company, let it run.

They fought for the ones who couldn’t fight for themselves, and they died for them, too. All to win something that didn’t belong to them. It was – magnificent. ~ Emma Cullen, Magnificent Seven

July 8, 2023

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

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

Timing Matters  

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

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

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

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

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

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

April 19, 2023

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

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

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

A Recession Is Coming

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

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

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

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

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

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

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

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

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

March 18, 2023

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

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

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

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

[3] Dimensional Fund Adviosr Returns Web Tool.

Nothing Is Working

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

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

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

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

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

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

Be patient, grasshopper.

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

March 15, 2023

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

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

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

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

Scary Times

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

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

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

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

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

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

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

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

March 11, 2023

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

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

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

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

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

 Holding Pattern

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

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

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

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

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

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

March 4, 2023

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

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

Should You Own Stocks?

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

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

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

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

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

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

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

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

Should you own stocks? Yes, without a doubt!

Bye, bye, and buy stocks.

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

January 12, 2023

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

Seasons              

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

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

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

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

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

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

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

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

December 13, 2022

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

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

[2] Ibid

[3] Ibid