Which Market?

The NASDAQ is soaring this year despite the political turmoil, racial tensions, and a global pandemic. It has risen 18% so far, and it’s not showing any signs of slowing down as it climbs a wall of worry. A few media outlets and financial experts are referring to the rise as a bubble. Market Watch had this to say about the stock market, “If you still do old-fashioned, cold analytical analysis based on numbers, you’ll see that the stock market is significantly above the mother of support zones. It is now a bubble.”[1]

When individual investors refer to the market, it is the Dow Jones Industrial Average. Is it up? Is it down? Will it keep rising, or will it crash? If the Dow falls more than 250 points, it’s considered breaking news even though it’s less than a 1 percent decline. The Dow Jones gets all the attention, but what about other markets? Is it fair to lump all markets together? What about the other indices?

Morningstar tracks more than 84,000 indices or markets, so when someone asks what I think about the market, I wonder which one they’re referencing. If you own a diversified portfolio of funds, you probably have exposure to dozens of markets.

To find out if the market is overvalued, let’s dissect a traditional 60/40 portfolio – 60% stocks, 40% bonds.

Large-Cap Growth Stocks. This sector has been red hot for more than a decade. The primary fund for this asset class is the Invesco QQQ Trust – The Qs! Stocks in this index include Apple, Microsoft, Amazon, Facebook, Alphabet, Tesla, NVIDIA, and Netflix. This star-studded index is up more than 490% for the past ten years, and it is up 24% on the year. If stocks are in a bubble, it’s this sector.

Large-Cap Value Stocks. Value stocks have trailed growth stocks by a wide margin for the past few decades, and this year is no different. The Vanguard Value ETF is down 16% for the year and up 115% for the past ten. Companies in this index include Johnson & Johnson, Berkshire Hathaway, Exxon Mobil, Pepsi, and Amgen.

International Developed Markets. International stocks have barely budged for the past ten years, rising a paltry 24%. The MSCI EAFE Index (EFA) is down 10.2% for the year, hardly a bubble. Companies in this sector include Nestle, Novartis, Toyota, and Unilever.

International Emerging Markets. This sector is one of the worst-performing asset classes over the past decade. It has risen 6.4% – total, not per year. A $10,000 investment a decade ago is now worth $10,640. Popular stocks in this category include Alibaba, Tencent, JD.com, and Baidu.

Small-Cap Growth. This sector is showing some life this year because it invests in growth stocks. It is up 2.25% for the year, and it has risen 233% for the past decade. Stocks in this index include DocuSign, Moderna, Teledoc, The Trade Desk, and Pool Corp.

Small-Cap Value. As far as US stocks go, few have fared worse than this sector, falling more than 23%. In the past ten years, it has generated an 87% total return. Small-cap and value have been a disastrous combination this year. Companies in this index include PerkinElmer, Allegion, Gaming and Leisure Properties, and ON Semiconductor.

Mid-Cap Index. Mid-Cap stocks are down 6.6% for the year. Over the past ten years, they’re up 171%. This sector includes companies like Lululemon, Splunk, Chipotle, and Clorox.

International Small-Cap. This international sector is down 12.4% for the year, but up 57% over the past ten years. Companies in this index include Rightmove, Bechtle, and Avast.

Real Estate. Working from home (WFH) is taking a toll on real estate stocks. Malls, shopping centers, office buildings, and senior living centers are not doing well in the COVID-19 environment. Does it make sense to allocate money to this sector with all the negative headwinds? I believe it does because real estate stocks will also give you exposure to data centers, cell towers, storage units, and timber. Real estate stocks are down 16% for the year and up 63% for the past decade.

Short-Term Bonds. Short-term US government bonds are the safest investment in the world. They have risen .42% for the past decade, and they’re up .32% on the year. Treasury bills are shelter investments, providing you with liquidity and safety.

High-Yield (Junk) Bonds. Lower rated bonds, known as high-yield or junk bonds, trade more like stocks than bonds, especially when stocks fall. Junk bonds have lost money for the past ten years, falling 12%, and they’re down 6.75% in 2020. A few names in this sector include Ford, American Airlines, and Netflix.

Corporate Bonds. Corporate bonds are having a good year, rising 6.2%. They have risen 26% for the past decade. Companies in this category typically have strong balance sheets. A few quality names in this sector include Anheuser-Busch, Microsoft, Apple, and Oracle.

Gold. Gold typically does well when investors or scared or there is a hint of inflation. This year gold has risen 18%, and over the past decade, it has risen 42%.

Commodities. A commodity index includes gold, oil, sugar, soybeans, corn, copper, zinc, silver, etc. It has been a challenging decade for commodities, losing 14%. This year it is up 7% rising on the strength of gold, silver, and copper.

Your portfolio may include some of these components. At the start of this year, it would have made sense to allocate 100% of your assets to large-cap growth companies, but it’s not possible to know, in advance, which sector will outperform the others. For example, from 2000 to 2010, the large-cap growth index lost 49%, while emerging markets rose 102%.

So, is the market in a bubble? It depends on the market, of course. One of the best ways to protect your assets is to own a diversified portfolio of low-cost funds and rebalance them as needed. Rebalancing your accounts will keep your asset allocation and risk level intact.

Rather than worrying if we’re in a bubble and trying to time your buys and sells, focus on your goals, think long-term, and let the stock market help you create generational wealth.

History shows us, over and over, that bull markets can go well beyond rational valuation levels as long the outlook for the future earnings is positive.” ~ Peter Bernstein

July 11, 2020

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.

The data source for the investment categories, names, and returns come from YCharts.

[1] https://www.marketwatch.com/story/the-latest-sign-of-a-stock-market-bubble-small-companies-claiming-to-disrupt-large-industries-2020-07-06, by Nigam Arora, July 7, 2020

7 Stock Picks

Are you looking for a few hidden stock gems as the market climbs higher? You’re probably familiar with big cap names like Facebook, Apple, Amazon, and so on, but what about smaller companies? Here are seven stocks that may justify a look.

Altra Industrial Motion (AIMC). Altra Industrial Motion Corp is a United States-based company that designs, manufactures, and markets mechanical power transmission components. The company’s reportable segments are Power Transmission Technologies, which includes Couplings, Clutches and Brakes, Electromagnetic Clutches and Brakes, and Gearings; and Automation and Specialty segment consist of Kollmorgen, Portescap, Thomson, and Jacobs Vehicle Systems. It generates a majority of its revenue from the Power Transmission Technologies segment.

Bloom Energy (BE). Bloom Energy Corp is engaged in providing electric power solutions. The solution of the company includes Bloom Energy server, which is a stationary power generation platform to provide uninterrupted power. It earns revenue from the sale and installation of its energy servers to direct and lease customers, provides services under its operations and maintenance contracts, and by selling electricity to customers under PPA agreements.

Clarus (CLAR). Clarus Corp engages in the design, manufacture, and marketing of outdoor equipment and apparel for climbing, mountaineering, backpacking, skiing, and other outdoor recreation activities. The company’s products are principally sold under the Black Diamond, Sierra, and PIEPS names through specialty and online retailers, distributors, and original equipment manufacturers throughout the U.S. and internationally. The operating segments of the company are Black Diamond, which is the core revenue generator, and Sierra. Black Diamond segment offers products including high-performance activity-based apparel, rock-climbing footwear and equipment; technical backpacks and high-end day packs; trekking poles; headlamps, and lanterns; gloves and mittens; and skincare and other sport-enhancing products.

iRadimed (IRMD). iRadimed Corp is a US-based company that mainly develops, manufactures, markets, and distributes a Magnetic Resonance Imaging (MRI) compatible intravenous (IV) infusion pump system, and MRI compatible patient vital signs monitoring system, and accessories and services relating to them. The company provides a non-magnetic IV infusion pump system which is designed to be safe for use during MRI procedures. The MRI products of the company are sold primarily to hospitals and acute care facilities in the United States and internationally.

Malibu Boats (MBUU). Malibu Boats Inc designs, manufacture, and sells performance sports boats. The boats are used for water sports, such as water-skiing, wakeboarding, and wake surfing. The performance boats are sold under the Malibu and Axis Wake Research brands. The company uses an independent dealer network to sell its products, primarily in the United States and other countries. It operates under the segments of US, Australia, and Cobalt. The U.S. operating segment primarily serves markets in North America, South America, Europe, and Asia while the Australia operating segment principally serves the Australian and New Zealand markets.

PaySign (PAYS). PaySign Inc is a prepaid debit card payment solutions provider as well as an integrated payment processor that has many prepaid debit cards in its portfolio. It designs and develops payment solutions, prepaid card programs, and customized payment services. Through the platform, it provides services, including transaction processing, cardholder enrollment, value loading, cardholder account management, reporting, and customer service. It manages programs for many of the pharmaceutical manufacturers with co-pay assistance products designed to maximize new patient acquisition, retention, and adherence.

The Meet Group (MEET). MEET s a leading provider of interactive live streaming solutions designed to meet the universal need for human connection. The company’s ecosystem of live-streaming apps enables users to interact through one-to-many live streaming broadcasts and text-based conversations. The apps, MeetMe, LOVOO, Skout, Tagged, and Growlr deliver live interactions and meaningful connections to millions of users daily.

All you need for a lifetime of successful investing is a few big winners, and the pluses from those will overwhelm the minuses from the stocks that don’t work out.” – Peter Lynch

June 18, 2020

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.

Disclaimer: Names, data, and descriptions are from Ycharts. PWM does not own any individual positions in the seven securities. The post is not an offer to buy or sell securities.

 

PWM Weekly Stock Market Update

Happy Saturday,

Another good week for stocks. The Dow Jones Industrial Average jumped 3% on Friday and finished up 2.2% for the week. The NASDAQ 100 is positive for the year, and it is up more than 15% for the past twelve months. Small-cap stocks continue to rebound, and international stocks are looking better. The S&P 500 has risen 29% from the March lows.

Why are stocks rebounding? We’re starting to see optimistic signs from around the world. Gilead Sciences is using its drug remdesivir to treat COVID-19 patients, and the results are encouraging. Boeing is resuming production in Seattle, Germany is going to let small businesses open on Monday, and the PGA Tour is teeing off June 11 at the Colonial Golf Course in Fort Worth, Texas. Speaking of Texas, Governor Greg Abbot plans to open some businesses on April 27.

Our investment models were quiet this week as volatility continues to drop. We only rebalanced ten accounts on Tuesday, a year low – which is a good sign.

It has been near impossible to buy U.S. Government securities because large institutions are gobbling them up for their money market funds. As a result, we are purchasing Certificates of Deposits from around the country for our cash and bond holdings. CD’s are federally insured to $250,000 per person, per account.

The CBOE put/call ratio is an indicator I watch closely. It relies on options to determine if investors are greedy or fearful. An option is a contract that allows you to control 100 shares of stock for every contract you own. A put option will rise in value when the price of a stock falls. A call option will increase in value when the price of a stock rises. If investors purchase several puts, fear is high. When confidence is high, they will buy calls. If the ratio is over one (more put buyers than call buyers), investors are nervous; below one, they’re confident. In March, the indicator peaked at 1.83. The ten-year average is .94; the current reading is .91. The ratio has dropped 50% from the peak, an encouraging sign for investors.

Corporate insider buying has been bullish for the past few weeks. Executives and insiders are buying shares of their company stock because of the compelling valuations.

Here’s how stocks, bonds, and other asset classes performed this past week.

  • The S&P 500 rose 3%
  • The NASDAQ rose 7%
  • International Stocks rose .34%
  • Emerging Markets rose 2.2%
  • Long-Term Bonds rose 1.4%
  • Gold fell .17%
  • Oil fell 17.2%
  • Chinese Stocks rose 3%

I decided to run the Boston Marathon in 2009; however, I needed to qualify for the race first. Due to the marathon calendar and my schedule, I missed the window for 2009 and 2010, so I set my sites on 2011. To qualify, I signed up to run the 2010 Austin Marathon, and as a backup, I registered for the Los Angeles Marathon, scheduled for three weeks later. To run Boston, I needed a plan, and it included a two-year training schedule, weight training, and better eating habits.

Training for a marathon is tedious and lonely, especially on runs of 15 to 20 miles or more, and running in Texas is challenging because temperatures will climb north of 100 degrees in the summer and drop into the teens during the winter.

I qualified for the Boston Marathon based on my time in Austin. On race day, my goal was to run each mile under 8 minutes and not fixate on the finish line, 26.2 miles from the start. If I kept my pace, I would finish the race in 3 hours and 30 minutes or better. I followed my plan and ran the race one step at a time, one mile at a time, and finished in 3 hours and 22 minutes – a personal best!

Runners who struggle to finish a marathon become overwhelmed by the magnitude of the race, especially when they obsess over the entire 26.2 miles. To get to the finish line, follow your plan, focus on your goal, keep to your pace, and enjoy the journey.

A journey of a thousand miles begins with a single step. ~ Chinese Proverb

Have a great weekend, and keep the faith!

 

Weekly Stock Market Update

Happy Friday,

The stock market is closed today in observance of Good Friday.

The S&P 500 gained 10.4% this week, the best weekly performance since 1974 as the Federal Reserve unleashed another $2.3 trillion in lending for small businesses, cities, and states. The stock market has risen 27.5% from the low on March 23.

Our models continue to rebalance weekly to keep your asset allocation and risk tolerance in check. This week our models purchased small-cap stocks, which rose 15.3%. A few weeks ago, we bought real estate holdings, and they were up 20.5% this week.

The central theme for our models is diversification because we never know which sector will take the lead. It’s like a horse race. When the horses enter the gate, we do not know which one is going to win. The lead will change several times during the race, but when it’s over, one horse will come in first, one will finish last, and the remainder of the field will fall somewhere in between.

I grew up near Santa Anita Race Track in Arcadia, California, and I went to the races often. A former neighbor of mine entered the horse racing business, and I asked him how he trained successful horses. He said, “Sometimes you just got to let ‘em run.” We’re letting our models run.

We’re entering the earning season, and it won’t be pretty as companies will report terrible news. However, this news is baked into the market. If it’s “less bad,” it will be good. Make sense? Companies will write off as much as they can this year, so next year their balance sheets look immaculate. The stock market is forward-looking, so it has already set its sites on next year.

Here’s how stocks, bonds, and other asset classes performed this past week.

  • The S&P 500 rose 10.4%
  • The NASDAQ rose 7.9%
  • International Stocks rose 6.6%
  • Emerging Markets rose 4.5%
  • Long-Term Bonds fell 1.6%
  • Gold rose 4.4%
  • Oil fell 3.5%
  • Chinese Stocks rose 2.6%

In Punjuab, a city in northern India, the residents can see the Himalayan mountain range for the first time in thirty years as pollution has dropped during the global shutdown. Here’s the article: https://www.cnn.com/travel/article/himalayas-visible-lockdown-india-scli-intl/index.html

Astronaut Scott Kelly spent a year in space, and he dealt with isolation by staying busy, committing to a daily plan, keeping a journal, following a schedule, going outside, and participating in a hobby. Here’s the article: https://www.nytimes.com/2020/03/21/opinion/scott-kelly-coronavirus-isolation.html

“When I first looked back at the Earth, standing on the Moon, I cried.” ~ Alan Shepherd

Have a great weekend, and keep the faith!

Sincerely,

Bill Parrott, CFP®

President and CEO

Parrott Wealth Management

www.parrottwealth.com

 

Weekly Stock Market Update

Volatility dropped as investors reacted to some positive Coronavirus news, the stimulus package, and the USNS Comfort arriving in New York under the watchful eye of the Statue of Liberty.

The Chicago Board Options Exchange’s VIX is known as the fear gauge, and when it is high, investors are scared. It dropped 29% this week, and it’s down 43% from the high. It closed at 46.80 on Friday – still high, but an encouraging sign it’s falling. By comparison, the VIX closed at 13.68 on Valentine’s Day. What does the VIX measure? It measures volatility. A VIX level of 46.80 means the market should move up or down by 2.9% on any given day. When the VIX was at 82.69 three weeks ago, the volatility range was 5.1%. A falling VIX is positive, and the lower it goes, the better. The 30-year average is 19.32, so the daily volatility of the market is 1.2%. To calculate the daily volatility, divide the VIX by 16. Why 16? It’s the square root of 256, and there are about 256 trading days in a year.

Value Line is an investment research firm founded in 1931. They give a 3 to 5-year projection every week, depending on the valuations of the stocks in their database. The current 3 to 5-year forecast calls for stocks to rise 105%. On March 9, 2009, the previous market low, the indicator was 185%.

I continue to monitor your financial plans, and, so far, the market correction is not having any impact on your goals. Our planning software incorporates down markets, up markets, and flat markets, so the recent drop is part of the plan. It also includes inflation, deflation, taxes, and other factors that will impact your financial future. If you have yet to complete your financial plan, please give us a call to start the process. Financial planning is not an exact science, and in the words of John Maynard Keynes, “It is better to be roughly right than precisely wrong.”

Here’s how stocks, bonds, and other asset classes performed this past week.

  • The S&P 500 fell 2.04%
  • The NASDAQ fell .084%
  • International Stocks fell 3.59%
  • Emerging Markets fell .61%
  • Long-Term Bonds rose .68%
  • Gold rose .03%
  • Oil rose 32.13% – The largest percentage move in history!
  • Chinese Stocks rose .64%

The Paycheck Protection Program is up and running as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. If you operate a business or non-profit, you should apply.

Last September, the men’s group at my church hosted a former Navy SEAL for dinner. He talked about his service to our country and what it was like to be part of an elite group. It was captivating. When he discussed surviving Hell Week and BUD/S Training, his primary goal was to make it to the next event, whatever it was. For example, if he was on a morning run, his goal was to finish and make it to lunch. After lunch, his goal was to get to dinner, and so on. He concentrated on what he could control. He said individuals who failed fixated on the entire length of training, and they were overwhelmed by how long it would be to finish. His advice applies to the virus. No one knows when it will end, so focus on what you can control and take it one day at a time, look for daily victories.

The only easy day was yesterday. ~ Popular Navy SEALs saying.

Have a great weekend, and keep the faith!

April 4, 2020

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.

 

 

 

 

 

Can You Afford a 50% Loss?

Global stock markets are selling off, oil is crashing, and the Coronavirus is spreading. Year-to-date, the Dow Jones is down about 15%, and things can get worse before they get better.

No one wants to experience a significant drop in stocks, but they do occur. Over the past fifty years, there have been three periods where stocks fell by 50% or more.[1]

Stocks fell 56% in 1973 and 1974 because of the Arab Oil Embargo.

Stocks fell 49% from 2000 to 2002 during the Tech Wreck.

Stocks fell 53% from October 2007 to March 2009 during the Great Recession.

The worst period for shareholders occurred during the Great Depression, where stocks fell 76%.

How will your life change if stocks fell by 50%? To find out, divide your assets by two and then multiply your answer by 4%. If your current assets are $1,000,000, divide by 2 to get $500,000. Multiply $500,000 by 4% to get $20,000. With assets of $1 million, you can expect an annual income of $40,000. At $500,000, the income declines to $20,000. Will the drop in assets impact your daily living or current activity? If so, consider adjusting your portfolio. But, before you make a major change, let’s look at a few investors – Ginny, Barbara, and Margaret.[2]

Ginny is 100% invested in stocks, so when stocks rise, she’ll benefit, when stocks fall, she’ll suffer. If she invested in the Dimensional Funds Global Equity Index Fund (DGEIX), she would have enjoyed an average annual return of 7.46% for the past 20 years. In 2008, her fund dropped 41.3%. Ginny invested $10,000 in this fund on January 2, 2000; it’s now worth $32,100.

Barbara is more conservative, and she allocates her investments 60% to stocks and 40% to bonds by investing in Dimensional Funds Global Allocation 60/40 Fund (DGSIX). Her fund has produced an average annual return of 6.01% for the past 20 years. Her fund lost 22.7% in 2008, considerably less than Ginny’s account. Barbara invested $10,000 in this fund on January 2, 2000; it’s now worth $25,750.

Margaret is very conservative, so she allocates 25% of her investments to stocks and 75% to bonds by investing in Dimensional Funds Global Allocation 25/75 Fund (DGTSX). Her fund generated an average annual return of 4.26% for the past twenty years. Her fund lost 7.3% in 2008. Margaret invested $10,000 in this fund on January 2, 2000; it’s now worth $19,670. Her fund didn’t lose much money during the Great Recession, but her assets are substantially less than Ginny’s.

To obtain high returns, you need to invest in risk assets, and that means enduring a few years where stocks underperform conservative assets.  If your risk level is high, allocate a significant proportion of your assets in stocks. However, if you’re not ready to lose 50% of your assets, diversify your holdings. A 40% bond allocation reduces risk by 33%, compared to an all-equity portfolio.[3]

A financial plan will help you refine your goals and determine how much money you should allocate to various asset classes. A plan will help you balance your short term needs with your long-term goals. An investor who is too conservative may run out of money when they’re older. Likewise, an investor who is too aggressive may lose their assets during a market downturn. Risk and reward will be forever linked.

Stock market corrections and downturns are normal. Since 1970, the S&P 500 has closed in negative territory ten times or 20% of the time, with an average drop of 14.9%. However, 80% of the time, stocks finished the year in positive territory. A $100,000 investment on January 2, 1970 is now worth $3,196,100.[4]

Here are some suggestions to help you through the market’s turbulence.

  • Don’t panic. Stocks rise and fall every day. If you want to sell, wait for them to rebound. On October 19, 1987, stocks fell 22.6%. In the next two days, the Dow Jones rose by 16%.
  • Diversify your assets. To reduce risk, add bonds and other asset classes to your portfolio. During the decade of the 2000s, The S&P 500 had a negative return, but if you added bonds, international investments, small company stocks, and real estate holdings, your account finished in positive territory.
  • Follow your plan. A financial plan will guide you through a market downturn. It will help you determine how much money you’ll need to fund your goals. It will also quantify your risk level.
  • Examine your risk level. How much risk is embedded in your portfolio? If you’re not sure, give us a call.
  • Look for opportunities. In a crisis, there’s always an opportunity. You’ll probably be early on the purchase, but, over time, your stocks may recover.
  • Don’t time the market. It’s tempting to hunt for bargains, but you’re not going to pick the bottom, so don’t worry about buying at the lowest tick. You’ll know in about five years if you made a wise investment decision or not.
  • Avoid margin. When stocks are falling, avoid margin. A margin balance will magnify losses.
  • Rebalance your account. An annual or quarterly rebalancing will keep your asset allocation and risk level intact.

Today is the eleventh anniversary of the stock market low of March 9, 2009. The S&P 500 closed at 676, and it currently is trading at 2,972 – a gain of 339%.[5] The phenomenal increase follows the bear market loss of 53%. It hardly makes sense to buy during the dark days of a stock market thrashing, but it’s in the depth of despair where you get the best prices. And, to quote my dad, the sun will come up tomorrow.

In the middle of difficulty lies opportunity. ~ Albert Einstein

March 9, 2020

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] Dimensional Funds 2019 Matrix Book

[2] YCharts for the three portfolios – January 2, 2000 to March 9, 2009

[3] RiskAlyze

[4] YCharts

[5] Ibid

There Will be Blood!

There Will be Blood, a 2007 movie starring Daniel Day-Lewis, is based on Upton Sinclair’s book Oil!, published in 1927. Mr. Sinclair’s novel dealt with the struggle of greed and fear that many faced in the early days of the oil industry in Southern California. If Mr. Sinclair were writing his book today, 93 years later, the storyline would probably be similar.

The decline in the price of oil is one of the catalysts for the recent stock sell-off. Below is a look at some of the significant plunges in the price of oil since 1980[1].

  • April 2011, through the recent low, the price of oil is down 71%.
  • May 1980 to April 1986, the price of oil dropped 77.2%.
  • October 1990 to December 1998, the price of oil dropped 74.4%.
  • July 2008 to February 2009, the price of oil dropped 69.6%.
  • November 2000 to January 2002 the price of oil dropped 43.8%

The price of oil declined by 86% from May 1980 to December 1998, while the S&P 500 climbed 1,005%. The 18-year bull market in stocks averaged 17.6% per year. During this run, there were 2,526 up days and 2,193 down days. One of the down days was October 19, 1987, when stocks fell by 25.7%.

As markets remain volatile, stay diversified, focus on the long-term, and follow your plan. And, as a reminder, the stock market has always recovered.  It might take one week, one month, or one year, but it has always bounced back. If you need proof, please look at the following years: 1907, 1915, 1929, 1930, 1931, 1932, 1934, 1937, 1939, 1940, 1941, 1946, 1953, 1957, 1962, 1966, 1969, 1973, 1974, 1977, 1981, 1990, 2000, 2001, 2002, 2008, and 2018.

There is no free market for oil. ~ T.Boone Pickens

March 8, 2020

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 declines 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.macrotrends.net/1369/crude-oil-price-history-chart, website accessed March 8, 2020

7 Reasons to Sell Stocks.

The Coronavirus is winning; global stock markets are losing. The Dow Jones is down 7.5% for the year, and volatility has spiked. In uncertain times, investors sell stocks to buy safe investments like U.S. Treasuries, CDs, or money market funds. Investors are seeking a port in the storm.

Does it make sense to sell stocks? Maybe. Here are seven reasons to sell.

  1. You’re 100% invested in stocks. If you’re allocated 100% to equities, sell shares to add bonds or cash to your portfolio. The bonds and cash will lower the volatility in your account.
  2. You need the money in one year or less. Stocks are unpredictable in the short term. On an annual basis, stocks finish in positive territory 73% of the time. Over twenty years, they have never lost money.[1]
  3. You need the money for a new home, to pay for college, buy a new car, or some other purpose. Invest in short-term bonds or keep your money in a money-market account. Liquidity is paramount.
  4. Your risk exposure is too high. Last year, stocks soared. If you didn’t rebalance your account, your stock exposure might be too high. For example, if your target equity exposure is 70%, and it jumped to 80% last year, sell 10% of your holdings to reduce your risk.
  5. Your goals have changed. If your financial goals changed, adjust your asset allocation to meet your current needs.
  6. You’re retiring this year. If this is your year to retire – congratulations! If so, buy bonds to cover three years of expenses, so you don’t have to worry about the stock market volatility. If your annual expenses are $100,000, purchase $300,000 in bonds.
  7. You’re donating your shares to charity. Donating stock to charity is not a sell, but a transfer. Regardless, you’re reducing your equity exposure. If you have appreciated securities or a concentrated position, consider donating your shares to your favorite charity. Your donation will lower your risk, but more importantly, you’ll help those in need. And, there’s always a need.

Selling from a position of fear has historically been a poor decision because stocks recover. When you react to volatility or a drop in prices, you’re probably selling near a bottom. If you sell your shares, when do you repurchase them? Uncertainty is a central theme for investors, and we never know what’s going to happen tomorrow. What is the price of safety? Currently, a one-year Treasury Bill is yielding .58%. The inflation rate is 2.49%, so if you invest your money in the T-Bill, you’re losing 1.91%, before taxes. Does it make sense to lose 2% per year while you wait for stocks to recover?

A financial plan will help you focus on your goals and your investment allocation. Most financial plans model for stock market drops through Monte Carlo simulations. Money Guide Pro, for example, will run a thousand scenarios to determine the soundness of your plan. It’s better to be partially right than completely wrong. The recent market swings have been wide, but, so far, it is not having any impact on our client’s financial plans.

If your time horizon is three to five years or more, use down days to buy great companies at lower prices. It’s hard to buy low and sell high, but if you dare to do so, you’ll be happy when prices rebound. Will people stop buying cell phones or hamburgers? I don’t think so, so take advantage of people’s fear to add to your stock holdings.

Stocks, like the tide, fluctuate daily, and they have been doing so for centuries. The Coronavirus will eventually pass as did SARS, Ebola, and Zika. And, unfortunately, we will have to battle another villain that will drive stock prices lower.

Create a plan, focus on your goals, think long-term, and good things will happen.

Therefore do not worry about tomorrow, for tomorrow will worry about itself. Each day has enough trouble of its own. ~ Matthews 6:34

March 4, 2020

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] Morningstar Classic Year Book – 2015

Are You Emotionally Attached to Your Stocks?

It’s easy to fall in love with a stock, especially if you handpicked it yourself. Over the years, I’ve talked to scores of investors about their favorite stocks, and most prefer to hold on to them forever regardless of allocation or performance. If you’re emotionally attached to a company, try not to overlook several risk factors.

It’s easy to get anchored to your original purchase price. If your stock falls below your purchase price, you might be reluctant to sell it for a loss for fear of admitting you were wrong. Another challenge for investors is when a stock drops below the all-time high. If it hit the high price once, it must do it again. Of course, it doesn’t have to do anything.

Enron traded at an all-time high on August 23, 2000, closing at $90.75 per share. At its peak, Enron’s market-cap was more than $70 billion, and, at the time, it was the 7th largest publicly traded company.[1] Two years later, it would be worthless. As a comparison, Berkshire Hathaway is currently the 7th largest publicly traded company.

Here are a few companies that are currently trading off their all-time highs: IBM peaked at $215 on March 14, 2013. It’s now trading at $135, down 37%. Boeing peaked at $440 on March 1, 2019. It’s currently trading at $339, down 23%. Tesla traded to an all-time high of $385 on September 18, 2017. It’s currently trading at $328, down 15%. Exxon traded at $104.37 on June 28, 2014, and it is now $69.25, down 34%. 3M sold at $258 on January 26, 2018. It’s currently selling for $166, down 36%. These companies may return to their peaks, but in the meantime, they’re a drag on portfolios.

During my career, I’ve found investors fall in love with three types of stocks. The first is a company located in their backyard, the second is a story stock highlighted on TV, and the third is a mega-cap stock.

Locals in California, pick Apple. Oregonians run with Nike, Washingtonians click on Amazon or Microsoft. Texans ooze over Exxon and Tennesseans like the way FedEx delivers. Investors who own homegrown stocks like to hold them forever.

Story stocks get big headlines. Tesla gets a lot of screen time, as do recent IPOs like Uber, Peloton or Beyond Meat. If it’s new, it must be a winner, but not always.

Mega-cap stocks like Apple, Microsoft, Alphabet (Google), Amazon, Facebook, Berkshire Hathaway, Visa, JP Morgan, Walmart, and Procter & Gamble are popular holdings, and, rightfully so. These battleship stocks have stood the test of time and have rewarded shareholders handsomely. Mega-cap stocks also have another benefit to shareholders in that consumers use their products daily.

By investing in homegrown stocks, you might miss opportunities in companies scattered around the globe.  Advantest Corporation is a Japanese company, which is up 148% year-to-date. Fortescue Metals Group in Australia is up 137%. Li Ning Company in China is up 213%, and Hotai Motor in Hong Kong is also turning in a stellar performance, up 108%.

A basket of globally diversified index funds will remove the emotional attachment of investing and give you exposure to thousands of companies. It’s easy to fall in love with Tesla, not so much with a small-cap international index fund. Also, your diversified portfolio will allocate a portion of your assets to bonds, and no one falls in love with a bond fund. However, when the market corrects, you’ll be glad you own a bond fund or two.

A financial plan will also help you with your emotional attachment. A good plan will quantify and prioritize your financial goals. Your plan will also direct your advisor on how best to construct your investment portfolio. Your plan and portfolio will synch to your goals.

Despite the numerous benefits of financial planning, a recent study by Vanguard found, “many advisors are not preparing financial plans for their clients.” Their study found that only 47% of advisors created a formal plan for clients with $100,000 to $1,000,000.[2]

To achieve long-term financial success, create a financial plan, invest in a globally diversified portfolio of mutual funds, and keep your fees low.  If you follow this plan, you might fall in love with your results!

Love is patient and kind; love does not envy or boast; it is not arrogant or rude. It does not insist on its own way; it is not irritable or resentful; it does not rejoice at wrongdoing but rejoices with the truth. Love bears all things, believes all things, hopes all things, endures all things. ~ 1 Corinthians 13:4-7

 

October 28, 2019

Bill Parrott, CFP®, CKA®, 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.begintoinvest.com/enron-stock-chart/, Website accessed on October 23, 2019

[2] The Vanguard Advisor’s Alpha® Guide to Proactive Behavioral Coaching, Donald G. Bennyhoff, November 2018.

Should You Invest in an IPO?

We like shiny new objects. For investors, the object is the initial public offering or IPO. Getting in on the ground floor of a hot offering is a huge draw. A few high-profile private companies are now publicly traded. Companies like UBER, Pinterest, Slack, Lyft, Chewy, Beyond Meat, Levi Strauss, Zoom Video, Smile Direct, and Peloton are now trading publicly. How have they performed?[1]

  • UBER = Down 24%
  • Pinterest = Up 11%
  • Slack = Down 41%
  • Beyond Meat = Up 110%
  • Lyft = Down 47%
  • Zoom Video = Up 28%
  • Chewy = Down 23%
  • Levi Strauss = Down 16%
  • Smile Direct = Down 13%
  • Peloton = Down 7%

According to CNBC, 120 IPOs have come public this year, and 57 are trading down, 48% of the issues are trading in negative territory.[2] Not all IPOs are bad, of course, as Coke, Pepsi, McDonald’s, Starbucks, Home Depot, Costco, Walmart, Amazon, Apple, and Google have performed well over time.

When a company issues shares to the public, the founders and early investors are cashing out. Companies hire investment banks like Goldman Sachs or Morgan Stanley to help sell and market their shares. The banks conduct roadshows to introduce the company to investors and receive indications of interests. If you’re lucky, your broker will give you a few shares of the offering. Once the deal closes, the stock will start trading on the open market where investors who weren’t able to get shares during the offering phase can now purchase the stock.

For Example, the IPO price for Beyond Meat was $25 per share. It started trading at $46 and quickly popped to $72.95 before closing at $65.75. The founders, owners, and early-stage investors were in well before the offering. Investors in the IPO received shares priced at $25. The public was able to buy it between $65.75 and $72.95. On the first day of trading Beyond Meat soared 192%! However, only early stage investors and IPO participants realized this gain. If you bought it at the top, you lost about 10% on the first day.

The IPO market is reeling because of the poor stock performance of Peloton, Uber, Lyft, Slack, and a few other high-profile names. As a result, We Work, and Endeavor Group Holdings canceled their offerings. Endeavor has sited “weak stock market demand” as a reason for suspending their IPO launch.[3] We Work, on the other hand, will be a Harvard Business School case study someday on how not to handle an IPO. Investors grew concerned with the company’s valuation, the CEO, and the lack of profitability. Since We Work announced they’re terminating their IPO, the CEO has stepped down and the company may lay off one-third of their workforce.

Mutual funds and large institutions are significant players in the IPO market, and some are speculating that they may forego investing in IPOs in the future because of the recent poor performance. Don’t hold your breath. Do you remember the Tech-Wreck? From April 2000 to October 2002, the S&P 500 fell 44% because of the extreme valuation in technology stocks, and the feeding frenzy with dot.com IPOs. Investors bid up the prices of Pets.com, eToys, and Webvan only to have them evaporate into thin air a few months later. Despite the disastrous performance of the IPOs in the early 2000s, large institutions are still investing in new offerings.

I worked at Morgan Stanley during the insane days of IPO listings and investors couldn’t wait to buy a new offering regardless of what the company did or where it would price. They didn’t care because their intent was to flip the stock as soon as possible and pocket big money. This strategy worked until it didn’t. Tulip Mania?

Should you invest in IPOs? Most brokerage firms have strict policies on who gets shares. You won’t be able to cherry-pick the best stocks and you’ll be forced to buy both good and bad names. And most allocations to retail investors are small. In a hot IPO like Peloton, you may only receive 25 shares. If you want to participate in this arena, limit your allocation to 3% to 5% of your investment capital.

Shiny objects eventually fade, but speculators will always be attracted to peddlers promising short-term gargantuan gains. If you’re late to the party, you could lose a significant amount of money.

Be careful. Do your homework. Invest wisely.

What has been will be again, what has been done will be done again; there is nothing new under the sun. ~ Ecclesiastes 1:9

September 27, 2019

Bill Parrott, CFP®, CKA® 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.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than 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

[2] CNBC, Carl Quintanilla Twitter @carlquintanilla, September 26, 2019 @ 10:54

[3] https://www.cnbc.com/2019/09/26/endeavor-pulls-plug-on-ipo-day-before-debut-wsj-reports.html, Riya Bhattacharjee, September 26, 2019