Tag: Stocks

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

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.

5 Covered Call Ideas

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Writing options on stocks you own, or want to own, is an excellent way to generate income and reduce risk. Below are five stock and options ideas.

Advanced Micro Devices

Symbol: AMD

Price: $63.96

Strike Price: $67.50

Expiration: 1/20/2023

Premium: $1.06

Option Income (1,000 shares): $1,060

Stock Return: 5.53%

Option Return: 1.66%

Total Return: 7.19%

Annualized Return: 218.76%

AstraZeneca

Symbol: AZN

Price: $70.80

Strike Price: $75

Expiration: 2/17/2023

Premium: $0.88

Option Income (1,000 shares): $880

Stock Return: 5.93%

Option Return: 1.24%

Total Return: 7.18%

Annualized Return: 65.47%

The Walt Disney Company

Symbol: DIS

Price: $93.92

Strike Price: $110

Expiration: 03/17/2023

Premium: $1.38

Option Income (1,000 shares): $1,380

Stock Return: 17.12%

Option Return: 1.47%

Total Return: 18.59%

Annualized Return: 99.79%

Expedia Group

Symbol: EXPE

Price: $94.11

Strike Price: $115

Expiration: 04/21/2023

Premium: $3.04

Option Income (1,000 shares): $3,040

Stock Return: 22.2%

Option Return: 3.23%

Total Return: 25.43%

Annualized Return: 90.11%

Eli Lilly and Company

Symbol: LLY

Price: $362.94

Strike Price: $400

Expiration: 02/17/2023

Premium: $2.30

Option Income (1,000 shares): $2,300

Stock Return: 10.21%

Option Return: 0.63%

Total Return: 10.84%

Annualized Return: 98.96%

Options trading involves risk and is not suitable for every investor. Your returns could differ significantly from those posted in this blog, and you could lose money. Do not use margin or leverage to trade options. Please refer to the Characteristics and Risks of Standardized Options to learn more about options trading and writing – https://www.theocc.com/. We have no affiliation with the OCC or the Options Industry Council.

Price and return data is from January 8, 2023, and is subject to change without notice. Data sources: Value Line, YCharts, TD Ameritrade and Yahoo! Finance

Bill Parrott is the President and CEO of Parrott Wealth Management – www.parrottwealth.com

Rising From The Ashes

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The Phoenix, a Greek mythical character, is considered an immortal bird that rises from the ashes of its predecessor.[1]  Of course, it is a myth, but the image of one rising from the ashes to get a new lease on life is powerful. We all want a second shot or do-over, especially with investing.

It has been a challenging year as most asset classes have traded in negative territory, there have been few places to hide, and diversification has not worked. Stocks and bonds reacted negatively to rising interest rates as the Federal Reserve tried to control inflation, and the rate increase was too much to bear for investors.

Are you ready to rise from your investment ashes? Here are a few suggestions to help you soar to new heights.

  • Complete a financial plan. Your plan will help guide your future and quantify your goals, giving you a path to follow. More importantly, it validates your success and can bring you financial peace. Our clients with financial plans appeared more relaxed and better prepared to handle the market’s turbulence this year than those without one.
  • Rebalance your account. If you did not make any changes to your investment portfolio this year, it is probably out of whack from your original allocation. As a result, you may enter 2023 positioned incorrectly, either too conservative or aggressive. Rebalancing your portfolio realigns it to the proper risk level and tolerance. January is a good time to rebalance because all your 2022 dividends and capital gains will have been credited to your account.
  • Review your holdings. Do you have the correct investments for the new year? Will your current portfolio allow you to reach your goals? Use the final few weeks of the year to examine your holdings.
  • Adjust your goals. Is it time to review your goals like spending, retirement date, college funding, or major purchase? Use the coming year to set new goals or update old ones.
  • Buy stocks. The S&P 500 is down 16% for the year, and the last time it had two negative years in a row occurred more than twenty years ago, and since 1941, it only happened twice, and the average gain following a negative year was 25.3%.[2]
  • Buy bonds. Bonds are producing income again after a long hiatus. It’s now possible to buy bonds yielding 3%, 4%, 5%, or more. The one-month US Treasury Bill yield soared 7,720% this year, rising from 0.05% to 3.91%. Will it rise another 7,700% next year? Doubtful. If it did, the yield would increase to more than 300%!

I know it was a tough year, but markets always rebound. The carnage in stocks and bonds can create opportunities for next year, so use the market’s decline to strengthen your portfolio.

In order to rise from its own ashes, a phoenix first must burn. ~ Octavia Butler

December 5, 2022

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

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

[1] https://www.greekmythology.com/Myths/Creatures/Phoenix/phoenix.html

[2] Dimensional 2022 Matrix Book – 1941 to 2021

Stay The Course

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Stay the course is boring financial advice, and people hate it, especially when stocks fall. Doing nothing is challenging; it’s hard, and it feels like a cop-out. When stocks fall, clients want action; they want to rearrange the deck chairs and take control of the situation, but it could do more harm than good.

Most financial planners recommend a buy-and-hold strategy when managing money which is simple when stocks rise but challenging when they fall. It’s a popular recommendation because stocks rise about three-quarters of the time, and no one can time the market.

Pilots set their coordinates for their final destination and rarely diverge from their route unless necessary. They will change course to avoid storms or turbulence, but, for the most part, they keep the nose of their plane headed toward their target. This past summer, my wife and I drove thousands of miles visiting several national parks. Each day we’d set our GPS for the next park, and we did not deviate from the directions and arrived safely each time.  

I’ve gotten in trouble whenever I ignore a trail map while hiking, biking, or skiing. When my daughter was about ten, we went skiing at Crested Butte, and I decided to take her on an unmarked shortcut back to the ski lift. It did not go well. We got stuck in waist-deep powder and could not move. We had to forge our path; it took a long time before we could return to the trail. It was a scary ordeal.

A financial plan will help guide you to your destination by quantifying your goals, assessing your risk tolerance, and measuring your time horizon. It will lead you through a perilous market and treacherous economy. When markets are falling, and clients are worried about losing money, a financial plan can bring peace. The likely recommendation from the advisor is to remain calm and stay the course because of the plan.

Investors have liquidated nearly $100 billion from growth-equity mutual funds over the past year, likely transferring the money to a money market fund or savings account.[1] This strategy might be safe in the near term, but it could prove disastrous over time. The report ended on September 30, 2022, and since then, the Dow Jones has risen nearly 13%, its best monthly performance in more than 35 years! To get above-average returns, you need to stay in the market. As I’ve told clients, “If you’re not on the plane when it takes off, you’re not getting on.” Selling from a position of fear is not wise. If your plans change, then alter your investment strategy. However, if you don’t need your money and your goals remain intact, stay the course!

I recently met with an individual who is interviewing several financial advisors. He is looking for one who can trade the hottest and most popular sectors, in this case, energy and commodities. I informed him that we select a buy-and-hold portfolio based on his financial goals and do not trade sectors or chase securities. I then showed him a 10-year chart of how the Dow Jones Industrial Average destroyed commodities. He was not impressed and is convinced that there is an advisor out there somewhere who can time the market. I wished him well.

It’s a difficult market; returns stink, but stocks recover. Be patient, follow your plan, and stay the course.

What kind of man would live where there is no daring? I don’t believe in taking foolish chances, but nothing can be accomplished without taking any chance at all.” — Charles A. Lindbergh

October 28, 2022

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

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

[1] YCHARTS Fund Flow Report – 9/30/2022

How To Survive A Stock Market Crash

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The first rule for surviving a stock market crash is not to panic, and the second is not to sell on the day of the correction. Markets typically rebound after a sharp sell-off as investors hunt for bargains, so wait before liquidating your portfolio. For example, two days after the 1987 crash, the S&P 500 jumped 15%, and the Dow Jones climbed nearly 20% from December 1929 to March 1930, following Black Tuesday, October 29, 1929. You probably won’t recover all your losses, especially if you bought stocks the day before the correction, but it will help.

The S&P 500 has fallen 23% this year, and the NASDAQ is down 31%. Will markets fall another 25% or 30% from here? It could, I guess, but no one knows for sure, especially the experts. It would be one of the worst corrections in history if it did.

One popular money manager said, “We’re being forced to choose between two overpriced assets. That is not always a terrific choice to make because there is a third choice, and that is, don’t play the game and hold money in cash.” He also recommended investors buy commodities for the next ten or twenty years and encouraged investors to sit in cash until stocks fell. His comments occurred in 2010. How did his prediction turn out? Since 2010, the S&P 500 soared 204%, while commodities dropped 9%.[1]

A famous economist said, “US stocks will fall, and the government will nationalize more banks.” He predicted a correction in 2009 after The Great Recession, where stocks dropped 53%. The S&P 500 has climbed 343%, and the government has not nationalized more banks since his comments.[2]

A prominent author wrote books about a depression starting in 2009 and a stock market crash in 2011, and neither happened. The market climbed more than 300% since 2009 and rose 2.1% in 2011.[3]

The S&P 500 is up 151% this century despite numerous corrections. The index dropped 46% from 2000 to 2003, 53% from 2007 to 2009, 30% during COVID, and it’s currently down 23%. Most investors consider a correction or crash a one-day event like October 19, 1987, or October 29, 1929. However, stocks routinely fall 10% or 20%, and the market usually finishes in negative territory about once every four years. The last down year occurred in 2018 when the S&P 500 fell by 4.4%.[4]

In the twelve months preceding Black Tuesday, October 29, 1929, the S&P 500 soared 58%, and from September 1926 to August 1929, it generated an average annual return of 40.3%. The S&P 500 rose 167% during the preceding five years and was up 35% through August before Black Monday, October 19, 1987. After the correction, the S&P started to recover, and by January 1990, it erased all its losses by rising by 57%.[5] Before this correction, the market was up 81%. Despite a crash, you may still have significant capital gains if you have been a long-term investor. 

Corrections are scary, violent, and short-lived, so here are a few suggestions to help you survive a stock market crash.  

  • Buy US T-Bills. The one-year US T-Bill currently yields 4.2%, and it’s guaranteed if you hold until maturity.
  • Fortify your emergency fund. We recommend an emergency fund covering your household expenses for three to six months. If you’re concerned about a further drop in the market, extend the duration to twelve to eighteen months.
  • Diversify your assets. A balanced portfolio of stocks, bonds, and cash will soften the blow of a market drop. During market drops, bonds perform well. In 2008, long-term US government bonds rose 25.9%, while stocks dropped 45%.
  • Buy stocks. Buy stocks if your time horizon is three to five years or more. According to Dimensional Funds, the 5-year average cumulative return after a 20% decline is a 72% gain.
  • Rebalance your portfolio. If you rebalance your portfolio, you can buy investments at lower prices. Rebalancing your accounts keeps your risk level and asset allocation in check.
  • Eliminate margin. One way to lose more money than you intended is to use leverage. If you margin your securities, eliminate it. Margin will make a bad situation worse.
  • Think long-term. You may own your investments for years, maybe decades, before you need the money, so think generationally.
  • Markets recover. The stock market has always recovered! It may take time, but they eventually rebound as they did in 2020, 2018, 2008, 2002, 2001, 2000, 1990, 1981, 1977, 1974, 1973, 1969, 1966, 1962, 1957, 1953, 1946, 1941, and 1929.

Stock market corrections come and go, and the market is a long-term wealth creation machine occasionally interrupted by short-term pullbacks. Do not fear a downdraft. Instead, use it as an opportunity to buy excellent companies or funds at enhanced prices.

I’ve done a lot of thinking about fear. For me the crucial question is not how to climb without fear-that’s impossible- but how to deal with it when it creeps into your nerve endings. ~ Alex Honnold

September 26, 2022

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management, located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so you can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets. We have waived our financial planning fee for the remainder of the year, so your cost is $0.00.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

[1] https://www.cnbc.com/2010/11/11/have-cash-wait-for-stocks-to-fall-jeremy-grantham.html, Michelle Lodge, November 11, 2010

[2] https://www.cbsnews.com/news/nouriel-roubini-misses-another-prediction/, Larry Swedroe, May 20, 2011

[3] The Great Depression ahead, 2009 and the The Great Crash Ahead, 2011, both written by Harry Dent

[4] YCHARTS

[5] Dimensional Fund Advosrs Returns Web

Investing Is Easy

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I recently read a post where an advisor said investing is easy, and he recommended buying two or three index funds and holding them forever. While I agree with his thesis, investing is challenging because it requires emotional fortitude, and that’s where we fail. To create generational wealth, you must buy and hold stocks through the down years, which is the hard part. Shelby Davis said, “You make most of your money in a bear market; you just don’t realize it at the time.”

Since 1926, the S&P 500 has generated an average annual return of 10%, but to receive this return, you had to start investing 96 years ago, allocate 100% of your assets to stocks, and never sell. I doubt this person exists. This year, US stocks are down 18.5%, international equities have fallen 23.2%, and global bonds have dropped 13%. A traditional 60% stock and 40% bond portfolio is down 14.5%. Long-term gains come from short-term pain because risk and reward are related.

Advisors compile raw data and say if you had bought XYZ fund ten years ago, you’d be up X% today, but the numbers do not capture the emotional component of the investor. Emotions make investing difficult. I can access hundreds of thousands of data points, but it doesn’t matter if a client is losing money and panicking. Their primary concern is getting out of the market, and they could care less about historical data.

From 1961 to 1979, inflation soared from 0.7% to 13.3%, an increase of 1,800%. During that time, the S&P 500 produced an annual return of 7.2%, international stocks averaged 9.8%, and long-term bonds gained 2.95% per year. US stocks lost 39% from 1973 to 1974, long-term bonds dropped 12.5% from 1968 to 1969, and international stocks fell 56% in 1975. A few years later, you met the stock market crash in 1987, the Gulf War in 1991, the Tech Wreck in 2000, the Great Recession in 2008, COVID in 2020, and the current correction. However, if you still own your investments from 1961, your equity returns averaged 10.36%, international stocks returned 10.8%, and long-term bonds produced an average annual gain of 6.52%. Small-cap stocks delivered an average annual return of 12.7%. Time in the market wins.

Picking a few funds or stocks is easy, but managing your emotions is challenging. We are our own worst enemies.

Here are a few suggestions to help you improve your investing program.

  • Create a financial plan. Your financial plan quantifies your goals and dreams and can keep you grounded when stocks and bonds fall. It can change your time horizon from days to decades and keep you focused on what is important to you and your family.
  • Ignore the media. Media outlets and social media sites constantly post news about markets, especially when falling. Markets in turmoil? If you want to buy or sell a stock because of a media story, wait a few days to ensure it is the correct decision. In addition, write down the reasons why you want to buy or sell an investment.  
  • Diversify your assets. A balanced portfolio of stocks and bonds, diversified across countries and sectors, and asset classes, allows you to weather financial storms better than concentrated portfolios.
  • Keep your costs low. Buying index funds with low fees and avoiding excessive trading can improve your long-term results.

Investing is difficult, but you can improve your odds by following your financial plan, buying low-cost index funds, and extending your time horizon.

We have met the enemy, and he is us. ~ Pogo

September 21, 2022

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

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

Real Estate Is Crashing!

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According to Zillow, the value of my home fell 6.2% last month. I was shocked because I thought real estate always went up, especially in Austin, Texas, the home of Longhorn football, BBQ, live music, and weekend bridal shower parties. Is it time to panic and sell my home?

The recent housing data is terrible, as housing starts have fallen 20% from the April peak, and existing home sales are down 26% from January. Mortgage rates increased 84% from last year, and the current 30-year rate is 5.13%. The combination of rising interest rates and inflation is making homes less affordable.

Real estate is volatile but not as visible as stocks because homes don’t trade on a public exchange. However, Zillow and a few other real estate sites now post estimated home values and recent price changes, so you can track your home value if you want. The Case Shiller Home Price Index compiles valuation data from several markets, including a national average. Since 1987 the index has risen 304% despite a 20% correction during the Great Recession from 2007 to 2009.

Should I sell my home? Of course not. I don’t care the value fell by 6.2% last month because it has soared 109% since 2013, and I’m not moving for several years, and I know it will rebound as most homes did from the previous recession. I will not panic and make a poor financial decision because the price dropped, and if I ask most people if I should sell my home because the price has fallen, they would tell me I’m crazy because real estate always rises. In fact, they would consider it foolish and unwise.

Yet, when stocks fall, people panic and sell their holdings, moving to cash to avoid a further meltdown. The S&P 500 lost 8.25% in June, and investors sold billions of equities. What happened in July? The S&P 500 surged 9.25%. Since 2018, the index incurred seven monthly drops of 6% or more, and each time it recovered. In December 2018, it crashed by 9.03% but climbed 17.2% over the next four months, and over the past decade, the S&P 500 jumped 255%.

I’m not sure why people panic and sell stocks when they fall, but they do. Stocks and real estate are growth assets, creating generational wealth if you hold them through all market cycles. If people treat stocks like homes, fewer people will sell them when they fall, and some might even buy the dip. I believe real estate investors do well because they own their home for decades, don’t track the value daily, or panic if it drops. Also, it is a hassle to move from one home to another. I believe that real estate returns would be considerably less if you could buy or sell a house with a click of a mouse as they do with stocks.

Investors relish real estate because most have made money over time, especially if they live in a desirable location like Bend, Oregon, or Alpine, Wyoming. However, since 1990, the S&P 500 has trounced the Case Shiller Home Price Index by 1,903%.

Here are a few suggestions to help you improve your stock market returns.

  • Treat your stock holdings like real estate, and own them for decades.
  • Review your investment accounts annually.
  • Rebalance your accounts as needed.
  • If you don’t need the money for three to five years or more, buy stocks when they fall.
  • Analyze your stock holdings on weekends so you can’t trade them instantaneously.
  • Document the reasons why you want to buy or sell your equity investments.
  • If you want to sell stocks during a market selloff, wait a few days because they could rebound.
  • Since 1926, stocks have averaged a 10% annual return, but it has not been in a straight line. Incorporate a buy and hold mentality so you can capture the long-term return from stocks

I know my home will recover because everybody is moving to Austin, so it’s only a matter of time before it starts to rise again. In the meantime, I will continue to mow the lawn, vacuum the house, and pay my property taxes.

Location, location, location. ~ Anonymous

August 24, 2022

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management, located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so you can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets. We have waived our financial planning fee for the remainder of the year, so your cost is $0.00.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor. I’m a California transplant by way of Connecticut living in Austin.