Written by Dave Young, President of Paragon Wealth Management photo by TicoAs a follow up to the Seeds Of Recovery? as seen in Paragon’s 1st Quarter 2009 Print Newsletter, in which we made the case to take positions into areas that move the best after a bear market bottom, I wanted to show you how this current recovery is unfolding. As we predicted back in March these areas include asset classes such as small and mid cap, sectors including technology, consumer discretionary, industrial and emerging markets such as Brazil and China. Shown here with their actual returns between March 9th and June 15th, are the sectors we slated to have the most potential. Financial – Up 94.1% Industrial – Up 49.9% Materials – Up 48.7% Consumer Discretionary – Up 45.9% Technology – Up 43.3% By comparison, a traditional portfolio would include all sectors, such as those below. As you can see, it does not make a lot of sense to hold those sectors that historically do poorly after a bear market. During the same time period their returns are as follows: Utilities – Up 22.1% Consumer Staples – Up 18.2% Telecom – Up 17% Health Care – Up 13.9% Investing in the sectors that historically perform the best after a bear market has produced exceptional results so far. We believe that this is an opportunity that comes along two or three times in an investor’s lifetime and that there is much further potential out performance to be achieved as this cycle progresses.
Paragon Wealth Management is a provider of managed portfolios for individuals and institutions. Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results.
There is currently a lot of talk about what the implications will be for all of the government involvement in the economy. To help put things into perspective I thought it would be good to take a look at the current condition of the country’s finances. I am not a doom and gloomer, but I think it is always helpful to know the facts in order to put things into perspective.
$56.4 Trillion – Current Liabilities and Unfunded Promises of the Unites States Government
This equates to $483,000 for every American household!
$11 Trillion – Current National Debt
50% held by foreign countries and the other half held by the public
$1.7 Trillion – Projected 2009 Budget Deficit
The largest as a share of GDP since World War II
In order to service all of these liabilities the government will have to take more from the private sector which means slower economic growth than there otherwise would have been.
It does not mean that we wont grow (which is why I’m not a doom and gloomer!) but just that the growth will come at a slower pace on average.
It is constantly proclaimed in the media that we are experiencing the worst economy since the great depression. I agree that the economy is bad and the investment markets have been terrible. However, to compare this downturn with the great depression is like comparing the Vietnam War with World War II. Both were horrible wars, but when you look at the actual statistics, there is no comparison between the two.
In our booklet, Seven Steps for Building Wealth, the fifth step is “Avoid Large Losses”. This post will discuss what that means for investors today, who are investing during this difficult time.
From January 1998 through May 2009 our primary portfolio, “Top Flight”, generated a total return of 276% versus only 15% for the S&P 500. Investors often assume that since our returns are high our portfolios must take more risk than normal. Actually the opposite is true. Much of our excess return has been generated by avoiding large losses.
In the most recent market cycle, From January 1, 2007 to May 31, 2009 the S&P 500 lost 31.6% of its value. Most investors have done even worse because of their allocation and the cost associated with their investments. During that same period of time, our actively managed Top Flight portfolio is down only 14.9%.
We are never happy to have negative returns. Our objective is to minimize losses wherever possible. This bear market has been more difficult for us than any of the previous ones.
To truly compare performance the most important question to ask is “How much of a return is needed by each investment strategy, in order to make back your money and get back to even?”
Calculating percentage returns is different than most investors realize. For example, if you have a 25% loss then you need 33% to get back to even, which is workable. If you lose 50% of your portfolio, you have to make 100% to get back to even, obviously a much more difficult task.
I’ll compare our flagship portfolio, Top Flight, to the S&P 500. For Top Flight to get back to even and recover its 14.9% loss it only needs to earn 17.5%. For the S&P 500 to recover its 31.6% loss, it will need to earn 46.5% to get back to even. As you can see, the size of the loss has an exponential negative effect on an investor’s ability to recover. It will take investors in the broad market (S&P 500) almost three times more effort just to get back to even.
Step number five, Avoid Large Losses, seems pretty straightforward and simple. Actually avoiding losses is much more difficult when investing real money. That is why it is so important that investors follow a disciplined, non-emotional, proven strategy if they hope to succeed over the long term.
Join us for a short, 30 minute, complimentary webinar about how to position your portfolio for recovery.
WHEN: Thursday, June 11
TIME: 12:00-12:30 p.m. MDT COST: There is no cost. It is complimentary WHERE: Online (at your home or office) TOPIC: How you should position your portfolio for recovery R.S.V.P.: Click on this link Paragon Wealth Management to register
CONTACT: Shannon 800-748-4451 if you have questions or need more information
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Investment markets perpetually cause investors to do the wrong things at the wrong time when it comes to wealth management. Most mistakenly follow their emotions and act with their heart rather than their head. Below are examples of conversations I had last week with investors searching for better alternatives.
Comment: “I’m really nervous about my investments. I’ve never really paid much attention to them, but I have decided that I need to do something.”
Response: “Don’t just do something because you feel the need to act. Make sure your actions are strategic, make sense, and will improve your situation over the long-term. Doing something just to do it is usually a mistake, especially when you are investing.
Comment: “This really nice man told me about an annuity that guarantees 7%, but if the stock market goes up, I’ll get the benefit of that also.”
Response: These annuities are popular right now because they provide the illusion of safety, guarantees and market upside. In other words, they provide the best of all worlds. If they really provided the benefits they claim they would be great products.
If you read the prospectus rather than the sales literature, you will find their terms extremely confusing. Their prospectus is full of disclaimers and requirements that must be met in order for them to work. Most lock up your money with surrender charges that force you to stay in them for 7 to 10 years.
Why would anyone want an investment that forces you to stay invested in it for seven to 10 years? Good investments allow you to come and leave when you want. They stand on their own merits.
Comment: “I talked to a financial advisor at Vanguard and they told me that I should put my money in their index funds because they have the lower costs and will participate in the market upside if the market goes up.”
Response: “Unlike the annuities mentioned above, their accounts actually should go up if the market goes up, which is positive. The negative side to it is that over the past 10 years, the S&P 500 and most other broad based index funds haven’t returned anything to investors. To get a return of “zero” for a really low price doesn’t provide much benefit. Look at the investments total net return over time, not just the internal costs.
Comment: “I’m going to put my money into a CD because it is safe.
Response: “Don’t lock your money up at a fixed rate when interest rates are at multi-year lows. There are much better “safe” options available. Only lock your money up at fixed interest rates when the rates are relatively high.