Parrott Wealth Management Annual Letter
Parrott Wealth Management Annual Letter
Despite political turmoil, Delta, Omicron, rising interest rates, increasing inflation, supply chain issues, and several corrections of 4% or more, the three major US indices produced significant gains last year, led by the S&P 500 as it climbed 27%. Stocks were resilient to the surprise of many astute market observers. Large companies like Microsoft, Alphabet, and Pfizer outperformed small-caps and international stocks by a wide margin. Bonds were negative as interest rates climbed, and most emerging markets fell because of exposure to Chinese securities. Here is a look at how various asset classes performed in 2021.
- Real Estate = 36.59%
- Small-Cap Stocks = 24.60%
- International Stocks = 7.84%
- Emerging Markets = -1.30%
- Bonds = -3.90%
- Gold = -4.15%
- Oil = 49.65%
Though US Stock market valuation metrics are rich and extended, the market can still trade higher. Relative to US companies, international stocks offer tremendous value.
The root of what we do is financial planning. A financial plan helps us manage your account better because it focuses on your hopes, dreams, and fears. It gives us the confidence to make recommendations that benefit you and your family.
We believe in the buy-and-hold strategy of investing. Meaning, we don't make a lot of trades or changes to the portfolios, and we hold our investments through all types of market conditions - good, bad, and ugly because we have not found a better approach for investors to create generational wealth. Timing the market does not work, and it's like teaching a pig to sing. It's a waste of time, and it annoys the pig.
Our managed models performed well last year, producing gains except for our most conservative model, which is 100% bonds, and it dropped 1.29%. Our all-stock model climbed 24.26%. The models are diversified and built with funds managed primarily by Vanguard, Dimensional, and BlackRock and designed to take less risk than the market. For example, our all-stock model is approximately 20% less risky than the S&P 500.
We reduced our Chinese stock allocation significantly because of the actions of the Chinese government towards their publicly traded companies. At this point, we consider China uninvestable. We sold Vanguard's Emerging Markets Fund ETF (VWO) and transferred the money to the iShares MSCI Emerging Markets ex-China ETF (EMXC). The ex-China fund closed the year up 6.6%, while Vanguard's fund fell 1.3%. We will make a similar change with Dimensional's Emerging Markets Fund.
Bonds finished in negative territory as they reacted to rising interest rates and escalating inflation. When interest rates rise, bond prices fall. Our bond exposure remains short-term, with maturities ranging from a few months to a few years, and we will stay short-term until rates rise further. If rates do rise, the impact on our bond portfolios should be minor. We continue to buy bonds for safety and diversification because stocks will fall eventually, and bonds will perform well when they do. Bonds are negatively correlated to stocks and still provide one of the best hedges for tumbling stock prices. We also are buying bonds for accounts with large cash balances since money market rates are near zero; they are the lesser of two evils.
I continue to swing and miss when it comes to Bitcoin. The popular cryptocurrency soared 57% last year despite a year-end sell-off. I've been wrong on cryptocurrencies forever, and this trend likely continues for the foreseeable future because I don't understand it or have a clue about how it works. I don't consider it a currency because it's too volatile, so, by default, it's an asset class like gold or silver. Crypto experts love Bitcoin because it's not correlated to stocks, and it's an inflation hedge. However, lately, it rises when stocks rise and falls when stocks fall, meaning it's correlated to stocks. And since inflation has surged, Bitcoin has dropped. Also, Bitcoin and other cryptocurrencies are only fourteen years old, and the last time we experienced significant inflation was more than forty years ago. Hence, it's too early to tell how it performs in an inflationary environment. According to crypto.com there are 10,586 coins, including Polkadot, Tron, and SafeMoon. As a comparison, there are currently 10,342 US publicly traded securities. And there's nothing to stop you, me, or my dog Cricket from launching a new crypto coin, so how do you pick the best one? I'm not sure it's possible. Historically, wealth created from nothing does not last.
Working From Home Stocks
Last year was a boon for working from home (WFH) stocks, but not this year. As the economy reopened, companies like Peleton, Zoom, Docusign, Stitch Fix, and others fell back to earth. I wrote in last year's letter that "at some point, valuations will matter, and investors will focus on earnings, revenue, cash flow, and profits; until then, tread lightly and be careful with these high-flying investments." This year, DocuSign dropped 31%, Zoom fell 45%, Stitch Fix declined 67%, and Peloton crashed 76%. I'm sure a few WFH stocks recover, but they're still expensive, so my advice from last year still stands.