Written by Nate White, CFA, Paragon’s Chief Investment Officer
The stock markets have rallied since mid March when the credit crisis was in full gear and Bear Stearns was collapsing.
Just when it looked like the financial system was nearing collapse the trusty Fed came to the rescue by lowering rates and bailing out Bear Stearns. The long term implications of the Fed’s actions in bailing out an investment bank remain to be seen.
For the moment it looks as though their actions have calmed the storm as credit spreads have narrowed, market volatility has decreased, and equity markets have moved higher.
Now that the Fed has signaled that it could be finished with interest rate cuts the market has started to focus on inflation and what the Fed will do if it worsens.
I don’t need to tell you what has been happening with energy and commodities as it is a constant media topic and you see it first hand while filling up your vehicle and buying groceries. The Fed hoped to calm the credit crisis by lowering rates to get the economy moving but these actions have weakened the dollar further and sent commodity prices soaring.
If the economy continues to slow down then it could put a damper on the run up in commodities. However, if inflation gets worse it will force the Fed to raise rates at some point, but the odds are against it ahead of the elections.
With the current markets being down year to date, many have wondered what to do for the second half of the year.
Sell in May and go away?
There are prospects for the U.S. market to go higher for the second half of the year. The market has had a tendency to rally after May in an election year. The market also tends to have stronger performance following market lows during economic recessions.
There is also a tendency to rally after the Fed’s last rate cut as Wall Street anticipates better economic performance. Summer is usually a quieter time on Wall Street, but that may not be the case this year — for good or ill.
Here is the performance of U. S. markets this year (5/28):
Written by Dave Young, President of Paragon Wealth Management
For some reason, it has always been easier to lose money than it is to make it and keep it.
According to the Utah Division of Securities, during 2007 alone, they filed enforcement action on 63 cases. Within those cases, 727 investors lost over 77 million dollars.
Managing your own investments can be done successfully, but it is not easy. First, it requires a commitment of time researching and tracking your investments. Second, it requires discipline to stick with your strategy through challenging times. Third, and most difficult, it requires you to remove emotion from your investment process.
Most successful people recognize the need for a relationship with an accou ntant and lawyer. Many haven’t yet discovered the benefits of working with a financial adviser.
Based on the variety of investment options and the myriad of people that call themselves financial advisers, it is easy to understand why. Often figuring out who to work with is so confusing that people give up and opt to manage their money themselves.
Studies have shown that most investors would be better off with the help of a financial adviser. Unfortunately, finding the “right” adviser is much more difficult than most people realize. Most investors hire someone they “trust”. However, “trust” is very intangible and difficult to quantify. Also, contrary to popular belief, the size of the firm or familiarity of the brand name does not indicate the quality of the advice provided.
Part of the problem is that titles for financial sales reps are completely unregulated. This means that brokers, annuity salesmen and insurance agents are free to call themselves advisers, financial consultants, financial planners or whatever else they prefer.
To make sure you don’t get stuck with a salesperson when you are really looking for an adviser, make sure you ask yourself these five questions.
Fiduciary advisers have a legal obligation to put your interests ahead of their own. Sales reps selling insurance, mutual funds or other financial products are most likely not fiduciaries. A minority of all financial advisers actually meet the fiduciary requirement. Registered Investment Advisers and Investment Adviser Representatives are fiduciaries.
How many years have they been managing money? Markets are difficult to navigate and constantly changing. Ideally, your adviser has experience investing in both good and bad markets. In the final analysis, you are paying an adviser for their experience.
Legitimate advisers will be able to show you a clear report of what they’ve done for their clients over the years. Showing you the track record of a mutual fund, a hypothetical model, or anything else that they have recently started selling does not count. They need to show you their own track record, which would be a composite of the results of their previous clients’ investments. Any adviser who refuses to show you at least a five year track record of their performance should be crosses off your list.
—Conflict of Interest?
Many commission based salespeople are honest individuals. However, in the financial services industry, the worse the product the higher the commission. The easiest way to avoid those “bad products” and to eliminate potential conflicts of interest is to avoid salespeople who receive commissions. By working only with advisers who are paid through management fees and not commissions you can make sure their interests are aligned with yours.
If there is a surrender charge then that means there was a commission. If there is a commission then you are not dealing with a fiduciary adviser. You should be free to move your money out of an investment if you are dissatisfied. This means you should never own a product with a surrender charge.
As I mentioned at the beginning…
It has always been easier to lose money than it is to make. Implementing these tips will help you keep your money and find a great adviser.
The financial services industry exists to assist people with investing by facilitating trades, providing advice, and investment management. It is a multi-billion dollar industry.
Unfortunately, much of what the industry does actually hinders investors rather than help them. Here’s how (source: SecondeOpinions.ca):
Conflict of Interest- Most advisors and brokers provide advice to investors and get paid on the basis of selling certain investment products rather than the quality of the advice they provide.
Commissions- Most advisors and brokers are compensated by selling products. Often the riskier a product, the higher the commission.
Fees- High fees can impede investor performance. Many fees are built in or hidden making it difficult to determine the true cost and their effect on performance.
Poor Knowlege- Many advisors and brokers are professional sales people and do not have the necessary understanding of basic principles of investment and risk management.
No Performance Measurement- Most financial advisors have no record of their actual performance for client accounts. Without measurement, it is impossible to compare against alternatives such as other investment managers or a benchmark. Performance measurement determines the quality of the advice.
Lack of Accountability- Most financial advisors and brokers do not accept fiduciary responsibility over their clients. They are not accountable for the quality of advice provided or to the adherence of proper investment management principles.
The stock market is an uncertain and volatile place. Recent market activity has reinforced that view. Due to the uncertainty, many people think that investing in the markets is a no win game and either refrain from investing altogether or place their money in low yielding instruments such as savings accounts, money markets, or CD’s which don’t provide them the return needed to attain their financial goals.
People also tend to refrain from investing or sell their investments during extended down periods in the market — right at the wrong time!
The best defense against a bad market is to hire a good active manager or change to a more conservative allocation that will keep you invested through the difficult times.
Don’t be discouraged by the barriers to investing. If you are aware and understand, you wil overcome them. Those who can successfully navigate them will succeed financially and set themselves apart from the masses!
People often wonder how they can be successful investors and build wealth.
To reach these goals we have outlined seven steps (also known as the Seven Steps to Building Wealth):
1. Start investing now
2. Spend less than you earn
3. Avoid unnecessary debt
4. Hire a competent financial advisor
5. Follow a sound, long-term strategy
6. Avoid large losses
7. Be patient
These steps can help you avoid and overcome the multitude of barriers that prevent people from becoming successful investors. In fact, these barriers are so significant they prevent most people from investing profitable or deter them from investing altogether.
My goal is to help you recognize and understand these barriers in order to beat them.
Consider the following quote attributed to Alexander Graham Bell,
“The most successful men in the end are those whose success is the result of steady accretion. It is the man who carefully advances step by step, with his mind becoming wider and wider — and progressively better able to grasp any theme or situation — preserving in what he knows to be practical, and concentrating his thought upon it, who is bound to succeed in the greatest degree.”
In order to assist you in your investing endeavors, I would like to identify three main barriers to successful investing:
1. Behavioral barriers
2. Industry barriers
3. Market movement
Psychological and behavioral traits affect individuals’ investment decisions. Unrecognized, these behaviors can lead to poor investment performance and/or financial disaster. The following are some behavioral barriers that individuals create (source: SecondOpinions.ca):
Expectations- Many individual investors have unrealistic expectations about returns in the market and long and short term risk.
Emotional- The fear and greed many investors experience often clouds their judgment and leads to poor investment decisions. Many investors sell when or after the market has gone down and only buy after or when it is moving up (Does buy high, sell low sound familiar?).
Overconfidence- Many investors overestimate their ability to outperform the market and thereby take on too much risk.
Lack of Knowledge- Many investors believe the key to successful investing is simply buying and selling the right stock or mutual fund. This demonstrates a lack of basic understanding of investment and risk management techniques.
David Young, President of Paragon Wealth Management, understands how difficult it can be to find a money manager. He started managing his own money in 1986 after he sold his 12 franchise businesses. He wanted to invest the money from the sale, but wasn’t impressed with the brokerage firms available at the time.
Since then, Dave has done research to find ways to get the best returns. Through trial and error, he has been able to build quantitative models to base his investment decisions.
There is no guarantee what the future will bring, but these are Paragon’s flagship portfolio’s returns from its inception on January 1, 1998 through May 2010.
Paragon’s Top Flight Portfolio generated a total return of351.10 percent verses39.22 percent for the S&P 500. Its compound annual return is 12.99 percent, versus 2.72 percent for the S&P 500 (visit Paragon’s website to see Top Flight Portfolio’s updated numbers, complete track record and full disclosures).
An investor’s actual returns may vary due to timing of withdrawls, contributions and other factors. Past performance is no guarantee of future results. Before investing, contact Paragon to discuss your investment objectives, risk tolerance and fees. Investments in securities involve the risk of loss. The S&P Index is a market-value weighted index comprised of 500 stocks selected for market size, liquidity, and industry group representation. It is not possible to directly invest in this index.
The Provo/Orem Chamber of Commerce honored 12 prominent business and community leaders in Provo at the 20th Annual Senator Reed Smoot Outstanding Citizens Awards Banquet.
From left to right: Utah County Commissioner Gary Anderson, Provo Mayor Lewis Billings, Dave Young, Miss Provo Elizabeth Jefferson, Sponsor Kelly Ward with Zions Bank, Mike Mann, Chamber 2008 Chair and Steve Densley, Chamber President
Paragon Wealth Management received a Smoot Award Wednesday night, May 14, from the Provo/Orem Chamber of Commerce. The Chamber presented 12 awards in different categories and honored Paragon with the Small Business of the Year Award. It was the Chamber’s 20th Annual Senator Reed Smoot Outstanding Citizens Awards banquet.
Dave Young, President of Paragon firm
Dennis & Trudy, Nate & Kim, Dave & Cathy, Shannon & Patrick
We are excited to introduce Paragon Wealth Management’s new look.
For the past several months we have been working on a new logo, web site, business cards, letterhead, envelopes, etc. at Paragon Wealth Management.
We finalized our new logo at the beginning of April. Our business cards and letterhead were finalized a couple weeks later.
We have been working with Red Olive Design, a creative and marketing firm in Salt Lake City. They have been great to work with. We have been very impressed with their work.
We are getting close to finishing our new web site and will let you know when it is finished. Our new web site will allow you to see the most current numbers from our portfolios, a link to login at Charles Schwab, news updates and more. It will be updated each month.
It appears as though we have almost talked ourselves into a recession.
Our U.S. President is elected every four years. What most people don’t realize is presidents only have two productive years, and then we suffer through an election from the next two years.
When Bill Clinton first ran for office he discovered he could win if he convinced everyone that the economy was terrible. Ever since then politicians have shouted one basic theme as loud as they could, “Everything is awful, terrible and bad. You need us (the politicians) to save you.” Since the media loves to promote anything negative, the politician’s message has a direct conduit into our homes.
Twelve months ago our economy was very strong and running on all cylinders. Six to eight months ago we started to get our first glimpses of the seriousness of the problems surrounding the sub prime mortgage market. Even though most facets of our economy were still strong as ever, politicians and their messengers in the media did their best to convince us just how bad things “really” were. And they continued day after day with their drumbeat of doom.
I believe that constant message of doom and gloom has a negative effect on consumers. Recent polls show that four in 10 American adults are holding off on major life decisions and purchases because they are worried about the economy.
Since consumers and consumption drive the economy, if consumers become nervous about their future and stop spending, the economy slows.
That is what has happened. It was amazing how fast we went from “everything is great” to “everything is horrible”. Consumer confidence dropped from a rating above 105 last July to 64.5 most recently in March.
In March, consumer expectations, which is just one category in the consumer confidence report, was touted as being the worst in 35 years. While that is true and makes good headlines, the overall consumer confidence index was the worst in five years (not 25). Never the less, all of this fear, much of it unwarranted, caused our economy to go from boom to bust, in a short amount of time.
Because the markets are driven by emotions of fear and greed, they retreat in textbook fashion. We endured the worst first quarter in six years. Other than precious metals and some commodities there have been few places to hide. Regardless of where you were invested during the first quarter, everything went down. The S&P 500 declined -9.5%. According to Lipper, the average mutual fund lost -10.6%. The MSCIEAFE international index lost -15% of its value. Even the average “defensive” health care fund lost -10.8%.
In very difficult market conditions, Paragon’s Managed Income portfolio ended the quarter down only -1.46%.Its first objective is to preserve capital which it did very well. Its second objective is to generate as good of return as is possible within its conservative constraints. In view of what we had to work with during the first quarter we feel good about its performance.
Paragon’s Top Flight portfolio declined -9.06% for the quarter. While we never enjoy losing money, we can live with those numbers. Top Flight tripled the S&P 500 last year. This year we are down slightly less than the S&P 500. Traditional financial theory is that if we tripled it on the upside then we would be expected to triple it on the downside. IN fact, while we tripled the index on the upside we were able to hold down our losses and simply match the S&P 500 index on the downside. This is even more impressive when you realize that Top Flight was primarily invested internationally, where many markets experienced significantly greater losses than the S&P 500.
To be continued on Thursday, May 8. Click here to read the second half of the article.
Investment performance reflects time-weighted geometric composite returns of actual client accounts. Investment returns are net of all management fees and transaction costs, and reflect the reinvestment of all dividends and distributions. The Lehman Bond Index is a benchmark index made up of the Lehman Brothers Government/Corporate Bond. Benchmarks are used for comparative purposes only. The Paragon Managed Income Portfolio is not designed to track the Lehman Aggregate. Past performance is no guarantee of future results. Investments in securities involve the risk of loss.