50 Days or 50 Years?

The summer season started 50 days ago, and 50 years ago, Neil Armstrong walked on the moon. One short-term, one long.

Traders are short-term focused, and they use a bevy of indicators to try to gain an edge. One of their tools is the moving average. What is a moving average? Here is a definition from Investopedia: “A moving average (MA) is a widely used indicator in technical analysis that helps smooth out price action by filtering out the “noise” from random short-term price fluctuations. It is a trend-following, or lagging, indicator because it is based on past prices.” Since it’s a trend following system, traders will try to ride it for as long as possible.

Traders can focus on several moving averages – 10, 20, 30, 50, 100, or 200 days. When an index trades above its moving average, it’s considered a bullish sign for it to climb higher. When the index dips below it, traders consider it a bearish sign that the market will fall further.

Traders and commentators love to focus on a moving average as a key indicator of short-term moves in the market because it’s an easy indicator to follow. When the index crosses above the moving average, buy. When it dips below, sell. It sounds so simple.

Here’s a look at the most recent 50-day moving average for the S&P 500.

^SPX_chart

Currently, the S&P 500 is trading below it’s 50-day moving average. Should you sell? If you bought the index 50 days ago when the index was trading above the moving average, you’d be down 1.2% if you held on through yesterday’s close. In the past 50 days, the index has crossed through its 50-day moving average six different times.

Traders also rely on the Golden Cross and Death Cross. The Golden Cross occurs when the 50-day crosses above the 200-day, a bullish sign. The Death Cross occurs when the 50-day crosses through the 200-day and falls below it, an extremely bearish signal.

Should you trade the moving averages? If you’re a disciplined short-term trader, it may give you an edge. However, stocks and indices move through their moving averages constantly so you may get whipsawed by the numerous buy and sell signals.  And which indicator should you follow? A 10-day indicator will give a different signal than the 200-day moving average.

A buy and hold investor can save time and stress by ignoring the moving averages. Rather than looking for trading indicators, focus your efforts on identifying your financial goals so you can take advantage of the long-term trend of the stock market.

Fifty years ago, the S&P 500 closed at 93.94. This past Friday the index closed at 2,918.65 – a gain of 3,006%! If you tried to trade each move through the moving average, your returns probably would’ve been a lot less.

^SPX_chart (2)

The long-term trend of the market is hard to beat, but it hasn’t been a straight line. It has been littered with violent moves. The index has fallen 30% or more seven times since 1969, or about 1 in every 7 years. From September 2000 to February 2013 the index traded flat. Investors who grew frustrated with 13 years of poor performance and sold their holdings missed a 93% return from 2013 to 2019.

Is it better to focus on a short-term trading strategy or concentrate on a long-term buy and hold model? I prefer the buy and hold model. Here are a few suggestions to help you answer your own question.

  • If you need the money in one year or less, keep your assets in short-term vehicles like CDs, Treasury Bills, or money market funds.
  • If your money is earmarked for something like paying for college or buying a new home, then keep your money in short-term investments regardless of the time frame. For example, if you plan to buy a new home in three years, then your money should be kept in short-term, conservative investments.
  • If you want to try your hand at short-term trading, limit your risk capital to 3% to 5% of your investable assets. If you’re successful, it will enhance your returns. If you’re not, it won’t bring financial ruin.
  • If your time horizon is 3 to 5 years or more, invest in stocks.
  • Work with a Certified Financial Planner® to help you identify and quantify your goals.

Timing the market is extremely difficult regardless of the indicator you choose. Rather than trying to time the market, spend time focusing on your financial goals.

We don’t really look at the stock, you know. Because for us, it’s about the long term. And so, we’re very much focused on long-term shareholder value but not the short-term kind of stuff. ~ Tim Cook


August 11, 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.

A $4 Billion-Dollar Loss.

Bill Ackman of Pershing Square Holdings recently sold his position in Valeant Pharmaceuticals realizing a $4 billion-dollar loss.  Valeant peaked in July of 2015 at a price of $257.53 and is currently trading around $11.  From peak to trough Valeant lost 95% of its stock market value.   For Valeant to return to its all-time high it will need to generate a return of 2,236%!

$4 Billion is a big number.  In fact, Mr.  Ackman could have given $12,500 to everyone in America.  A family of four would receive $50,000.   The gift from Mr. Ackman would’ve been tax free since the IRS allows individuals to give away $14,000 per person, per year to as many people as one wants.   Think of the good will Mr. Ackman could have generated.

In the United States, there are currently 5,272 publicly traded companies with a market cap of $4 billion or less.

4 billion seconds is the equivalent of 126.8 years.

During the heyday of Valeant, a client called to inquire if we should add the company to his portfolio.  After a quick visit to a few financial websites and some clicks on my trusted HP12C, I recommended we not purchase Valeant.   I’m thankful he doesn’t own it in his portfolio today.

What should you do if you’re in a situation where one of your investments has turned sour.  Here a few suggestions.

  1. Cut your losses. A small loss can turn into a large loss quickly.  It’s not easy to take a loss but your goal as an investor is to live to see another day.
  2. Limit your holdings. If you purchase individual stocks, limit your exposure to 3% to 5% for each company in your portfolio.  In the event your golden idea turns into a lead balloon, you can sell your holding and move the money into a new investment.  It’s easier to sell a stock when it is 3% of your portfolio versus 53%.
  3. Replace it with an index fund. If you no longer like your stock but love the sector, consider buying an index fund.  Instead of buying one stock, buy a few hundred through an index fund.  In the case of Valeant, Mr. Ackman could have purchased the Vanguard Health Care ETF.
  4. Don’t get married to a company. Don’t let your love for a company cloud your vision to what is happening to the stock price.  A good company can be a bad stock and vice versa.  There are plenty of other fish in the sea.
  5. Offset your gains with losses. In the unfortunate event you must take a loss use it to offset your gains.   You can offset gains with losses.

This is a big public loss for Mr. Ackman but, at the end of the day, he’ll be fine.  The Valeant story will make for a great business school case study at some point.  Hopefully we can all learn a thing or two from the Valeant trade.  To be a successful investor it’s important to study both winning and losing trades.

Blessed are those who find wisdom, those who gain understanding… ~ Proverbs 3:13.

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.

March 15, 2017

 

 

 

 

Dump the Trump Bump?      

The stock markets (all of them) continue to soar to new heights.   Since the presidential election, the Dow Jones Industrial Average is up 14.5%.   Several experts are a calling for the market to give back these gains and then some.   One advisor has called for the stock market to fall as far as 11,500 a drop of 44% from the current level.[1]  Another has called for a “$68 trillion biblical collapse.”[2]  Finally, one economist has said the stock market is currently 80% overvalued.[3]  Scary.

Is it wise to sell your investments and ride out the coming stock market decline?

Let’s look at some history.

The Standard & Poor’s 500 Index is up 20% on a year over year basis.  For the past five years, it’s up 93.3%.  During the last fifteen years, it has gained 173.2%.  Over the past twenty years it has risen 321%.  For the record, the stock market has never fallen 321%!

Looking back to 1987, a portfolio owning the Vanguard S&P 500 Index Fund and the Vanguard Total Bond Fund generated a total return of 977%.   A $100,000 investment is now worth $1,075,000.  During the past thirty years, this portfolio’s best year was in 1995 gaining 27.80%.  2008 was the worst year as it dropped 16.57%.  In this simple portfolio, you own some of the markets best performers including Apple, Microsoft, Amazon, Berkshire Hathaway and Facebook.

What should you do as the market continues to climb to new heights?   Here are few suggestions.

  1. Nothing. You don’t have to do anything.  History tells us that time in the stock market is the best way to create a mountain of money and produce generational wealth.
  2. Diversify. If 100% of your money is invested in the Dow Jones or S&P 500, move some of it to other investments like small companies, international companies or bonds.
  3. Plan. What does your financial plan say?  Have you arrived at your financial destination because of the markets rise?  If so, sell some of your equity holdings to reduce your risk exposure.
  4. Buy. If the market does drop 20% or 30%, then buy the dip.  Adding to your equity holdings when the market drops has proven to be a prudent financial strategy.
  5. Give.  If you have benefited from the rise in the market, take some gains and donate the money to your favorite cause.

Of course, no one knows what the stock market will do or when.   The best strategy is to focus on your goals, save your money and think long term.

Predicting rain doesn’t count. Building arks does. ~ Warren Buffett.

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

February 14, 2017

 

Note:  Your investment returns may be more or less than those posted in this blog.  Past performance is no guarantee of future results.  The financial data has been generated from the Morningstar Office Hypothetical Tool as of 2/14/17.
 

[1] http://www.cnbc.com/2016/06/22/dow-11500-is-a-matter-of-when-not-if-advisor.html, Michelle Fox, June 22, 2016,.

[2] http://thesovereigninvestor.com/exclusives/80-stock-market-crash-to-strike-in-2016/, JL Yastine, January 30, 2017.

[3] Ibid.

Are You a Control Freak?

Do you like to be in control?  Do you need specifics?  Do you have a hard time with delegation? Do you always have to be right?  I’m not a control freak but I like to have a say in the outcome.  I prefer driving to flying because I feel I’m in control even though I know flying is safer than driving.   When I board an airplane, I surrender control to the pilot and the laws of physics.   The pilot is well trained and the plane is well built but I’m not in the cockpit and it makes me a tad nervous.

Investors try to control their stock purchases by doing their homework and research on companies to buy.  Investors feel entitled for their stock to rise because they have spent hours (minutes) crunching numbers and doing channel checks.

A few years ago, a neighbor’s son purchased a few shares in a company he frequented.  After his purchase the earnings report was announced and the stock went down.  He was upset because he had done his homework and the store was always crowded.  A stock doesn’t know you own it and it could care less how much research you did prior to your purchase.

Investors also try to control the market through market timing.  Shareholders will move money in and out of stocks trying to find the optimal time to buy or sell.   Market timing is a waste of time.   The S&P 500 returned 9.2% from 1994 to 2013.  An investor who missed the 50 best days during this run ended up with a return of negative 2.8 percent (-2.8%).[1]

What can you control?  You can control how much you spend and how much you save.   The more you save and the less you spend will mean more money in your pocket.

You can control your emotions.  To make money in the stock market you need to control your emotions on the upside and downside.   When stocks rise, don’t get overly excited.  When stocks drop, don’t get overly depressed.   The stock market has been fluctuating longer than we’ve been alive.

Is it possible for you to change your narrative when stocks fall?  Investors are more concerned about the market dropping than rising.  It’s not fun to ride stocks through a correction.  Loss aversion is the definition given to people who prefer to avoid losses rather than generate gains.[2]  Can you change your cues or triggers during a market correction?   During a market drop investors want to know what’s wrong?   Rather than focusing on the drop or loss of value change your narrative and start looking for stocks or funds to purchase.

The best way to get rich in the stock market and create generational wealth is to buy when everybody else is selling.   When the market is going down investors sell great companies at disastrous prices giving you the opportunity to add to your holdings at rock bottom prices.

It takes time to change the narrative in your mind.   You must give up control and let the long-term forces of the stock market take over.

Let it go! ~ Elsa

The mind of man plans his way, But the Lord directs his steps. ~ Proverbs 16:9

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

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

[1] http://www.fa-mag.com/news/the-difficulty-and-costs-of-timing-the-market-22128.html, by Chris Meyer, June 15, 2015.

[2] http://loss-aversion.behaviouralfinance.net/, website accessed 1/17/17.

Wax On. Wax Off.

The Karate Kid appeared on the big screen in 1984, and is still a classic.  Daniel and his family moved from New Jersey to the shores of California, a surfer’s paradise.  Daniel had a rough time acclimating to the culture.  Mr. Miyagi rescued Daniel and began teaching him to defend himself.  Mr. Miyagi is a wise teacher and taught Daniel son many life lessons in addition to karate.  One lesson was the famous scene of wax on, wax off.   I grew up in Southern California where waxing a car is a rite of passage.  A good wax job takes time and is taxing especially on a large car.  Waxing a car is a two-part job: wax on, wax off.   This lesson, along with many more, will help Daniel defend himself.

The stock market has its own version of wax on, wax off and it’s risk on, risk off.  The risk on, risk off commentary is popular among the T.V. elite.  When the market is climbing the risk on trade is in force.  When the market is falling the risk off trade is preferred.   This is like the all you can eat Brazilian restaurants where servers walk by your table with mounds of meat and will stop to carve you a slice if your food button is green.  If your button is red, the server won’t stop.  Wax on, wax off.  Risk on, risk off.  Food on, food off.  It’s all the same.

How do you know if it’s a risk on, or risk off market?  Unfortunately, it’s a hindsight trade.  In hindsight, a risk on trade should’ve been applied to a rising market while a risk off trade would’ve been better in a falling market.  The risk on, risk off trade isn’t a predictive indicator.

In a risk on trade you’ll want to own stocks and the more aggressive the better.  How can you tell if one stock is more aggressive than another?  The first indicator is the stock’s beta.  A beta greater than 1 is what to look for in a stock.  For example, a stock with a beta of 1.2 should move 20% more than the market.  If the stock market is up 10%, your stock should be up 12%.  Another indicator is the relative strength index or RSI.  A high RSI will indicate momentum in your stock.   An RSI above 60 to 65 will indicate solid momentum.  When RSI goes above 70 it may indicate your stock is overbought.  A stock with a high beta and strong RSI will treat you well in a risk on trade.  A seasoned investor can purchase call options to take advantage of the leverage from stock options.[1]

Of course, the party always ends and then the risk off trade is in vogue.  The best way to profit from a risk off trade is to move your equity holdings to cash or purchase U.S. Treasury investments.  Cash and Treasuries won’t lose value in the short term especially during a market meltdown.  The more adventurous trader can short stocks or purchase put options.[2]  These high-risk strategies will profit in a falling market

Trying to time the stock market and apply the risk on, risk off trade is a risky proposition.  A better investment strategy for most investors is to implement the balance on trade.  In a balance on trade you’re applying a diversified investment strategy using an asset allocation strategy.  Your asset allocation should be balanced between stocks, bonds and cash.  A balanced portfolio will be better!

Lesson not just karate only. Lesson for whole life. Whole life have a balance. Everything be better.” – Mr. Miyagi

 

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

January 8, 2017

 

[1] Options involve risk and are not suitable for all investors.

[2] Options involve risk and are not suitable for all investors.  Short selling is an aggressive investment strategy and is not suitable for all investors.