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

Stocks or Funds?

Is it better to buy individual stocks or mutual funds? It depends, of course, on several factors like how much to invest or how much risk you’re willing to take. If you have a high tolerance for risk and millions of dollars to invest, you may be a good candidate to own individual stocks. If you only have $1,000 to invest, a mutual fund is a better option.

When building a portfolio for your future focusing on your goals will help you determine the best strategy. How much to invest? What is your tolerance for risk? How involved will you be in managing your assets? How much time will you commit to researching new investment ideas?

A portfolio of 30 individual stocks or more is recommended for a diversified portfolio.[1] A report on Morningstar’s website suggests 18 to 20 names.[2] When individuals pick their own stocks, they focus primarily on large companies with brand name recognition like Apple, McDonald’s, or Pfizer. Few investors add small or international stocks to their portfolio.

RiskAlyze® helps investors and advisors quantify risk. The risk score for the S&P 500 is 74 on a scale of 1 to 99. A T-Bill, by comparison, has a risk score of 1. I sent a list of 20 large-cap companies to a client for review. The risk profile for the portfolio was 73, or 1 point lower than the S&P 500 Index. If the risk levels are similar, why not buy the index? The Vanguard S&P 500 fund owns 500 companies with exposure to every sector; it’s also cheaper than buying 20 individual stocks.

What about the FAANGs – Facebook, Amazon, Apple, Netflix and Google? Yes, if you owned these 5 stocks you destroyed the S&P 500 over the past 5 years. The FAANG portfolio soared 272%, bettering the S&P 500 by 205%!  How do you identify these companies in advance? The best performing stock in the S&P 500 index this year is Xerox, a stock that has underperformed the market by more than 100% for the past 10 years. Last year it dropped 30%. Xerox was probably not on your radar screen. The other stocks rounding out the top ten are Cadence Design, Advanced Micro Devices, Chipotle, MSCI, Anadarko Petroleum, Total System Services, Synopsys, Global Payments, and DISH Network. These 10 stocks have outperformed the FAANGs by 33% this year! Finding consistent winners to beat the market each year is tough – if not impossible.

Investing in large companies with brand name recognition makes sense on the surface, but it ignores a fair chunk of the global market. Vanguard’s Total World Stock fund invests 73% of its assets in large-cap stocks with 57% allocated to the United States. An all large-cap U.S. portfolio ignores bonds, small companies, real estate, gold, and international investments.

Picking individual stocks also takes time. An hour per stock, per week has been suggested. If you own 20 stocks, you’ll need to set aside 20 hours per week for research. Can you commit 20 hours per week to review your portfolio?

For most investors a globally diversified portfolio of low-cost mutual funds based on your financial goals is the best path to take.

Diversification is your buddy. ~ Merton Miller

July 5, 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.

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.

 

 

 

[1] https://www.investopedia.com/articles/stocks/11/illusion-of-diversification.asp, Jason Whitby, June 25, 2019.

[2] https://news.morningstar.com/classroom2/course.asp?docId=145385&page=4

Where Do Stock Returns Come From?

Peanut butter and jelly. Thelma and Louise. Calvin and Hobbes. Fish and Chips. Wayne and Garth. Some things are better in pairs!

Stock returns consist of two components: dividends and price appreciation. Dividends are paid to shareholders on a quarterly basis from the company’s profits regardless if the stock is up, down or sideways. In addition, investors can profit from price appreciation. Your total return is a combination of the two.

For example, you decide to purchase ABC company at $40 per share. If ABC pays a $1.00 dividend, your current yield will be 2.5% ($1/$40). If you sold your stock at $50, you made 25% ($10/$40). Combining your dividend income with the price appreciation, your total return was 27.5%. If you purchased 1,000 shares, you received $1,000 in income and gained $10,000 giving you a total return of $11,000.

Let’s look at a real-world example. Let’s say you purchased $100,000 worth of Coca-Cola (KO) stock on 8/1/1988 and held it through 8/31/2018. In this example, you generated an annual return of 12.66%. Your $100,000 investment grew to $3.62 million and you received $1.1 million in dividend income. Your dividend income accounted for 31.5% of the total return.

Currently there are 1,269 stocks with a dividend yield of 2% or more. Dividend Aristocrats are companies that have paid, and increased, their dividend for at least 25 years. A few companies on this elite list include: Aflac, Coca-Cola, McDonald’s, Pepsi, Procter & Gamble, Sherwin Williams, Target, and Walmart.

Of course, there are plenty of excellent companies that don’t pay a dividend. Two of the more popular ones are Amazon and Berkshire Hathaway. They plow their profits back into their company rather than pay them to you, the shareholder. In this case, the entire gain comes from price appreciation.  Amazon has generated a 10-year average annual return of 38% while Berkshire has returned 10.5% per year over the same time frame.

The key term to focus on is total return. It doesn’t matter how you make money, so long as you make money.

 two and two, male and female, went into the ark with Noah, as God had commanded Noah. ~ Genesis 7:9

9/12/2018

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.

Why Own Bonds?

Bonds are boring, secure and predictable.  Interest rates are at historical lows because of this high level of safety.   The 30-Year Treasury Bond is currently yielding 2.75%.  With rates this low does it make sense to own a bond for three decades?

Interest rates are low, but they’re expected to rise in 2018.  Rising rates means more income for bond holders.  However, this could be trouble because when rates rise, bond prices fall.   A 1% rise in interest rates will lower the price of the 30-Year Treasury Bond by 17.8%.

Investing is a tradeoff between short and long-term goals.   Stocks and bonds can be used together to help you achieve your financial goals.  A diversified portfolio of stocks, bonds and cash is recommended.

Stocks have outperformed bonds because of the risk associated when investing in the stock market.  This is referred to as the equity premium and economist have pegged it at 5.5% over a 30-year period.[1]   If a risk-free bond is paying 2%, then stocks should return 7.5%.

Three reasons to own bonds.

  1. If your time horizon is less than three years, owning high quality bonds is recommended.
  2. If you need to meet an obligation like a college tuition payment or the purchase of a new home.
  3. If you’re retired and need a secure income stream.

Three reasons to own stocks.

  1. If your time horizon is longer than 20 years, buy stocks. They’ve averaged a 10% return per year since 1926 and they’ve never lost money over a 20-year period.
  2. If you’re contributing to your company retirement plan, allocate a large percentage to stocks. Your money shouldn’t be touched for many years so take advantage of the long-term trend of the stock market. You’ll also purchase stock through a payroll deduction and this will help smooth out the short-term volatility of the stock market because you’re buying at different price points.
  3. If you want to create long-term wealth, stocks must be the focal point of your portfolio.

Let’s compare the performance of stocks to bonds with two Vanguard Funds – The S&P 500 Index Fund and The Total Bond Market Index Fund.   From 12/11/1986 to 11/30/2017, the S&P 500 Index Fund averaged an annual return of 9.74%.  A $100,000 investment 31 years ago is now worth $2.06 million.  A $100,000 investment in the Total Bond Market Index on the same day is worth $597,556 and it generated an average annual return of 5.94%.  The stock fund outperformed the bond fund by $1.46 million or 3.8% per year.[2]

A financial plan can assist you in deciding how much to allocate between stocks and bonds.  These two investments have different characteristics, and therefore they both belong in your portfolio.

Without good direction, people lose their way; the more wise counsel you follow, the better your chances. ~ Proverbs 11:14 (MSG)

 

 

Bill Parrott is the President and CEO of Parrott Wealth Management an independent, fee-only, fiduciary financial planning and investment management firm in Austin, TX.  For more information please visit www.parrottwealth.com.

December 11, 2017

Note:  Past performance is not a guarantee of future returns.  Your returns may differ than those posted in this blog.  Investments aren’t guaranteed and involve risk.

 

 

 

 

 

[1] https://www.investopedia.com/terms/e/equityriskpremium.asp, website accessed 12/11/17.

[2] Morningstar Office Hypothetical Tool, 12/11/1986 to 11/30/2017.

A Tale of Two Companies.

It was the best of times, it was the worst of times for two companies, Qualcomm and GE.   These two companies have had a challenging year, and both were following a similar path until the first week of November.  On November 1st, Qualcomm closed at $53.46, down 15.7% for the year.  GE was selling for $20.02, down 35.15% for the year.

During the first week of November Qualcomm’s situation improved greatly and GE’s turned for the worse.  Broadcom announced a takeover for Qualcomm at $70 per share on November 6th.   At the time of the announcement Qualcomm was trading for $52 per share so the buyout price was a 25.71% premium to the current price.  The announcement was welcomed news for shareholders of Qualcomm.  Qualcomm has since rejected the overture and it’s currently selling for $66.

A few days later GE delivered horrific news to its shareholders.  They announced a major restructuring, lowered their earnings guidance for 2018, and reduced their dividend 50%.  The news caught most investors flat footed as the shares fell 15% over two days.

An investor who purchased Qualcomm and GE on November 1st saw their Qualcomm shares rise 23.4% and their GE shares fall 13%.

GE is down 41% for 2017.  GE is 125 years old, founded by Thomas Edison, and it has morphed multiple times so I’m pretty sure it will recover; however, it will take time.   Since 1962 GE has finished a calendar year with double digit losses ten times.  It dropped 47% in 1974, 37% in 2002, and 54% in 2008.[1]

These two companies share some similar metrics (see chart below).   Both companies held a Morningstar Fair Value rating of four (one being overvalued, five being undervalued) as of November 1st.  The largest shareholder for both companies is Vanguard.  The S&P rating for Qualcomm is A while GE’s is AA-.  The yield for Qualcomm was 4.62% and GE’s was 3.91%. The historical PE ratio for Qualcomm is 16 and GE’s is 15.

In 2015 Qualcomm had free cash flow of $4.5 billion, GE’s was $12.5 billion.   Today the free cash flow for Qualcomm is $4 billion and GE’s has gone negative. The debit level for Qualcomm is 36%, GE’s is 46%.  Institutions own 79% of Qualcomm and 61% of GE.

Of course, no one can predict the price movement for stocks so what can investor do when stocks start to diverge from your price target?

  • Diversify. Diversifying your investment holdings may help you increase your odds of finding winners while potentially limiting your losses from the losers.  To be diversified you should own at least 30 companies with some studies suggesting a minimum of 1,000![2]   My recommendation is to limit each stock holding to 1% to 3% of your total investable assets.
  • Plan. A trading plan will help you deal with the ups and downs of your investment portfolio. Setting a price target before you buy a stock can remove the emotions when it rises or falls to your predetermined sell level.
  • Buy Funds. A better alternative for most investors is to purchase mutual funds or exchange traded funds (ETFs).  These funds will own hundreds, if not thousands, of companies and give you instant diversification.  For example, the Dimensional Core Equity I Fund owns over 2,600 companies.
  • Review.  I recommend reviewing your stock holdings quarterly to make sure you still want to own the company.  If the answer is yes, let it ride.   If no, sell it and move the money into a new investment.

Here is a side by side comparison of Qualcomm and GE as of November 1, 2017.

Category Qualcomm GE
Morningstar Fair Value Ranking 4 (1 is lowest, 5 is highest) 4 (1 is lowest, 5 is highest)
Average PE Ratio 16 15
Fair Value Price Target $68 $26
EPS Projection $3.40 $1.75
Average Dividend Yield 3% 3.5%
Current Price $53.46 $20.02
Current Dividend Yield 4.49% 4.80%
S&P Rating A AA-
Debt Level 36% 46%
Institutional Ownership 79.32% 61.17%
Largest Shareholder Vanguard Vanguard
Price Target (PE x EPS) $54.40 $26.25
Price Target (Dividend/Yield) $80 $27.42
Free Cash Flow – 2015 $4.53 Billion $12.5 Billion
Price on 11/15/2017 $66 $18.25

As you build your investment portfolio focus on your plan and diversification.  Reviewing your plan and investment strategy on a regular basis is wise counsel and it may require you to be patient at times.

Rejoice in hope, be patient in tribulation, be constant in prayer. ~ Romans 12:12

Bill Parrott is the President and CEO of Parrott Wealth Management an independent, fee-only, fiduciary financial planning and investment management firm.  For more information please visit www.parrottwealth.com.

November 15, 2017

Note:  Past performance is not a guarantee of future returns.  Your returns may differ than those posted in this blog.

Data:  Morningstar, Value Line & Fast Graphs.

 

 

[1] Morningstar Office Hypothetical Tool, GE stock return – 1962 – 2017.

[2] https://www.investopedia.com/articles/stocks/11/illusion-of-diversification.asp, By Jason Whitby, website accessed 11/15/2017.

October 19, 1987.

Today marks the 30-year anniversary of Black Monday when the Dow Jones Industrial Average fell over 22%!  It was a dark day as stocks fell to historic lows.  Despite the drop, the Dow finished the year with a gain of 2.26% and it climbed 11.85% in 1988 and 26.96% in 1989.

In 1937, during the Great Depression, Sir John Templeton purchased $100 worth of every stock trading below $1 per share.  A few years later he sold most of them for a substantial profit.[1]  The Standard & Poor 500 fell 35% in 1937.  It’s not easy, but when investors are in a panic selling mode it allows the patient investor to buy great companies at bargain prices.

Here are a few stocks you could’ve purchased on Black Monday.[2]

  • Coca-Cola: A $10,000 investment in KO is now worth $453,514.
  • Boeing: A $10,000 investment in BA is now worth $556,532
  • McDonald’s: A $10,000 investment in MCD is now worth $590,529.
  • Johnson & Johnson: A $10,000 investment in JNJ is now worth $634,413.
  • Apple: A $10,000 investment in AAPL is now worth $1.44 million.

Will we ever experience another Black Monday?  Forever is a long time so it’s likely we’ll witness another dramatic drop.  When the market does fall again, here are a few survival tips to help you navigate the correction.

  • Buy. Stocks sell for bargain prices when individuals sell out of fear.  I’d recommend creating a list of companies you want to purchase before the correction arrives so you’ll be ready to pounce on your ideas during the market turmoil.
  • Wait. If you’re not sure what to do during a market meltdown, don’t do anything.  Your best strategy may be to wait until the storm passes and then you can make changes to your portfolio.
  • Diversify. A diversified portfolio will help reduce the losses in your portfolio.  In 1987 the international index (MSCI-EAFE Index) was up 24.6% and the one-month T-Bill was up 5.5%.[3]
  • Rebalance. During a steep stock market drop your asset allocation will change significantly.  Rebalancing your portfolio will return your account to its original allocation.
  • Review. Reviewing your investment plan and financial goals is always recommended, especially when the stock market is falling.  Are your goals still intact or do you need to make changes?
  • Think. What’s the root cause of the correction?  Flash crash?  Political event? Failed merger?  Knowing the reason behind the crash may give you some time to think about selling your holdings.

From October 2007 to March 2009, the Great Recession, the Dow Jones Industrial Average fell 53.5%.  It bottomed on March 9, 2009 and since then it has climbed 257%.

Corrections are petrifying but markets have always recovered.  In fact, today, the Dow Jones closed at an all-time high of 23,157!

“Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market.” ~ Warren Buffett

Bill Parrott is the President and CEO of Parrott Wealth Management.  For more information on financial planning and investment management, please visit www.parrottwealth.com.

October 19, 2017

Note:  Your returns may differ than those posted.  Past performance isn’t a guarantee of future performance.

[1] http://www.investopedia.com/university/greatest/johntempleton.asp, By Nathan Reiff, website accessed 10/16/17.

[2] Morningstar Office Hypothetical Tool – 10/19/1987 to 9/30/2017.

[3] Dimensional Funds 2017 Matrix Book.

Stock Picking v. Indexing.

Individual stock picking is exciting and the thrill of selecting a winning stock is exhilarating.  Investors are constantly searching for the next big winner hoping to find another Amazon.  Stock pickers try to outperform the market, usually the S&P 500, by buying winners and ignoring losers.  The top ten stocks in the S&P 500 this year are up 67% while the bottom ten are down 41%.  How do you find the best stocks?

I’ve found most investors primarily focus on large companies with brand name appeal like Apple, McDonalds and Boeing and ignore other sectors such as small companies or international investments.  Investors also tend to overload on stocks in their own backyard so individuals who live in Houston are likely to own shares in Exxon.

Trying to pick stocks to outperform the S&P 500 Index is futile because in a diversified portfolio you may only have 25% exposure to companies in the S&P 500.  In a million-dollar account with 60% invested in stocks and 40% in bonds, the large cap holdings will account for 25% of the entire portfolio.  With $250,000 to invest you can allocate $25,000 to ten stocks.   Morningstar currently tracks over 20,000 companies so how do you pick the ten best?  If you limit your search to the S&P 500, you’d have to identify the top 2% of this index to find your ten stocks.

To create more diversification in your portfolio, you need to add more stocks.  As you add more stocks, your account starts to resemble an index fund.  A study by Dimensional Fund Advisors found that if you own 50 stocks, your probability of outperforming the stock market on a one-year basis is 56%.   Over a ten-year period, the probability of outperforming the market is 69%.   How many stocks do you need to own to get close to outperforming the market?  The answer is 1,000![1]

Most investors don’t have the financial resources to own 1,000 stocks nor do they have the time to follow and research each individual company.   Jim Cramer says you need to dedicate an hour each week to each position to fully grasp the stocks you own.[2]   If you own 1,000 companies, you need to allocate 1,000 hours to study your holdings and a week only has 168 hours so you can do the math.

A better alternative for your investment portfolio, is to purchase a basket of index funds based on your financial goals.  Your financial goals will help determine your asset allocation and investment selection.   Instead of spending thousands of hours on stock research, devote your time and effort to refining your goals.

Teach us to number our days, that we may gain a heart of wisdom. ~ Psalm 90:12.

Bill Parrott is the President and CEO of Parrott Wealth Management, LLC.  If you want more information on financial planning and investment management, please visit www.parrottwealth.com.

August 19, 2017

 

[1] Dimensional Fund Advisors, The Importance of Diversification, June 1979 to June 2016.

[2] https://www.thestreet.com/static/rules6.html

Worst Crash Ever?

Jim Rogers is a legendary investor and prolific author.   In a recent interview with Business Insider, Mr. Rogers called for the worst correction ever and added we’re headed for disaster.[1]  In fact, Mr. Rogers has made similar predictions for the past six years.[2]

Worst ever?  The Dow Jones Industrial Average closed at 21,235 on June 12, 2017.  A correction of 85% would send the index to 3,185 a level not seen since December 1991.

The U.S. stock market has suffered some doozies over the years.   Notable stock market corrections include 1907, 1973/74, 1987, 2000 and 2008.    On October 19, 1987, the stock market fell 22.5%.  During the Great Recession of 2008 the stock market dropped 37%.   The Great Depression lasted ten years and is considered the worst (economic) time in our country’s history with the stock market falling 85% from 1929 to 1932.  Despite these thunderous corrections the stock market has always recovered.

When I started my investment career my grandfather asked if I’d read The Great Depression of 1990 by Dr. Ravi Batra.  I told him I hadn’t because I didn’t think it would happen.  He said it’s important to read several points of view to make informed decisions.  I read the book.  The stock market of the 1990s increased 426% hitting 10,000 before 2000.  A $10,000 investment in the Vanguard S&P 500 Index Fund (VFINX) on 1/1/1990 was worth $52,668 by 12/31/1999 averaging 18.07%.[3]

We, too, must be leery of overly optimistic forecasts.  Harry S. Dent, Jr., The Roaring 2000’s: Building the Wealth and Lifestyle You Deserve in the Greatest Boom in History, projected the Dow Jones Industrial Average would reach 35,000 by 2008.   It closed at 8,776.  A $10,000 investment in the Vanguard S&P 500 Index Fund (VFINX) on January 1, 2000 was worth $10,361 by December 31,2000 averaging .32%.[4]

It’s not wise to invest on conjecture, however, if you’re concerned about the worst correction ever here are a few steps you can employ to protect your assets.

  • Avoid excessive leverage and debt. Your total debt load should be less than 38% of gross income.  If your monthly gross income is 38%, your total debt payments should be less than 38%.   Likewise, your investment account should avoid excessive margin.  You’re allowed to margin (or borrow) 50% of your account balance to buy additional investments. I’d recommend limiting your margin balance to 10% of your account balance.
  • Keep a cash reserve. A cash hoard of three to six months of expenses is recommended.  If your monthly expenses are $10,000, your cash value should be between $30,000 to $60,000.
  • Invest in Treasury Bonds. U.S. Treasury investments will perform well during times of calamity.   They are inversely related to stocks.  If stocks fall, treasuries will rise.  During the correction of 2008 U.S. Treasury Bonds rose 25.9%.
  • Rebalance your account. A portfolio of stocks, bonds and cash will fluctuate with market conditions.   Rebalancing once or twice per year will return your account to its original allocation.  It will help reduce your portfolio risk.
  • Diversify. Diversify your holdings across stocks, bonds and cash.  The stock holdings should be spread between large, small and international companies.
  • Avoid Concentration. Individual stock positions comprising more than 10% of your account balance should be trimmed to 3% to 5%.  Reducing your dependence on one or two stocks will benefit you during a market meltdown.

Will Mr. Rogers prediction come true? I hope not.  It’s difficult to make investment decisions based on predictions, forecasts or opinions because they rarely come true.   Invest according to your financial plan.  A plan built on your hopes, dreams and fears will treat you well in good times and bad.

Tomorrow, tomorrow, for I know not when tomorrow will be. ~ Abigail Adams.

Therefore keep watch, because you do not know on what day your Lord will come. ~ Matthew 24:42

Bill Parrott is the President and CEO of Parrott Wealth Management.  For more information on financial planning and investment management, please visit www.parrottwealth.com.

June 12, 2017

 

[1] http://www.businessinsider.com/jim-rogers-worst-crash-lifetime-coming-2017-6, Jacqui Frank and Kara Chin, June 9, 2017.

[2] http://awealthofcommonsense.com/2017/06/bulls-bears-charlatans/, Ben Carlson, June 11, 2017

[3] Morningstar Office Hypothetical Tool.

[4] Ibid.