How to Invest with Interest Rates so Low

Posted February 23, 2012 by admin. tags:Tags: , ,
Jars of money

 

 

Written by Dave Young, President of Paragon Wealth Management

Usually it’s stock market investors that feel stressed.  Now, conservative investors are feeling the pinch too.

Life used to be simple.  You took your retirement savings and put it into a savings account, annuity or bank CD.  You didn’t earn much,  but you did get 4% or 5% and that was enough to make your retirement plan work.

Now things are not so easy.  Interest rates are the lowest ever.  Conservative savings options are paying between zero and one percent.  If you want to take a chance and tie your money up for ten years in a U.S. government Treasury Bond –  then you can get a whopping 1.9%!  Soon you may have to pay to put your money in a bank account.

Unfortunately, it doesn’t look like the situation is going to change anytime soon.  Ben Bernanke, Chairman of the Federal Reserve,  said  they will keep interest rates this low until sometime in 2014, three years from now.

So for the foreseeable future, conservative savers will watch their accounts decline in value, even if they don’t spend any of their money.  In 2011 the inflation rate was 3.2%.  If you were lucky and earned 1% interest on your CD –  then you lost 2.2% for the year.  Keep that constant for five years and your $100,000 in savings is worth only $89,000 in real terms.  It’s even worse if you pay taxes on the interest that you earned.  All in all…not a good plan for building wealth.

So, what are the alternatives? 

Option one: Stay ultra conservative and watch your savings go down in value each year.

Option two:  Take on a little more risk but clearly understand the risk you are taking in order to get higher returns.

It doesn’t make any sense to move from very low risk to very high risk.  Unfortunately many investors make this mistake.  If you decide to take more risk then you must be absolutely certain that you fully understand the amount of downside risk you are taking on.

For example, on a one to ten scale, as long as the bank doesn’t go broke, a bank  CD might have a risk level of two.  A bond might be a risk level of four.  A real estate project might have a risk of level of 6.  A gold purchase might be an 8.  An investment in your neighbors business might be a 10.

The point is that you need to clearly understand how much risk you are taking before you invest your money.  Sometimes, when investors become weary of getting 1% they throw in the towel and move over to something very aggressive that promises a 20% return.  Such rash behavior usually results in losing everything.

Not understanding the risk of a potential investment causes some investors to stay stuck in their low interest investments indefinitely.  They are afraid to make any changes because they aren’t sure how much risk they are taking.

On the other hand, not understanding risk properly sometimes causes investors to invest in very risky things that they should never consider.  That is why it is so important to fully understand the risk you are taking.

In order to get a better return an investor might consider moving from a one on the risk scale to a three.  Or maybe from a three to a five.  But it is foolish to move from a one on the risk scale to a seven or ten.

Recommendations

Many investors use our conservative Managed Income portfolio in order to generate income and control risk in this very difficult environment.   This conservative portfolio follows a strategy of moving between various conservative investments depending on market conditions.

It’s primary objective is to preserve principal.  Its secondary objective is to generate returns.

This conservative portfolio has returned an annual return of 6.03% compounded, net of fees, to investors from October 2001 through December 2011.  See www.paragonwealth.com for the full track record and disclosures.

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Watch Paragon’s video most recent video to learn more about how to avoid investment scams.

Disclaimer

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. 

 

2011 Stock Market Recap

Posted February 16, 2012 by admin. tags:Tags: ,
Two rocks stacked


Written by Nathan White, Chief Investment Officer, Paragon Wealth Manage
Taken from Paragon’s 4Qtr 2011 print newsletter

After all was said and done 2011 was indicative of a bifurcated world of governments behaving badly while the private sector continued to grow.  The deflationary effects of winding down the credit bubble continue to be pitted against the inflationary moves of central banks.  Despite calls for a recession the U.S. economy continued to grow and add jobs at a mediocre pace.  The recovery continues but it is the slowest recovery post World War II.

We had a difficult year trying to balance safety and growth and therefore underperformed both of our benchmarks.  The primary reason for our underperformance was the market volatility.  Volatility makes timing the moves in and out of the market very tricky.  The large percentage moves up and down and lack of clear trends create a challenging environment.  The moves that we made to protect against the downside came at the expense of missing the very modest upside made in the equity markets last year. After all was said and done the bottom never completely fell out from under the markets and although hindsight is 20/20 there was no sure way at the time to know for certain that was not to be the case.  We focus on what the market is doing at the present rather than gambling on a future unknown forecast.    I think this was best exemplified by the view of Civil War General U.S. Grant of whom it was said “was not given to intensive speculation on possible future disasters, he preferred to meet them when they came, having long since discovered that few of them ever did.”  Over the long-run this strategy has been the most beneficial for us and we continue to hold to it.

Periods of low volatility (usually associated with positive returns) naturally follow periods of high volatility (usually associated with negative returns).  The recent environment has been highly volatile and people tend to always extrapolate recent events into the future.  Almost every investment outlook I have read for 2012 says that it will be like 2011! I hear a lot of things like “volatility is the new normal, markets will be stuck in a range, etc.  While I understand these views and agree with much of the logic there is no way to know for what will happen in 2012.  In fact, when everyone goes to the same side of the boat you often want to be on the other!

Managed Income  

We eschewed government bonds in 2011 and they ended up being the best performing asset class.  Obviously we were wrong.  However, our view is still the same and we find most government bonds unattractive.  People are trading short-term safety for long-term risk – not a wise move!  We believe that bonds are on their last gasp of good returns (exacerbated by the recent volatility) because as rates across the spectrum near zero there is significantly diminished opportunity for capital gains.  This portends lower future returns for bonds from this point as bond investors could now face the reverse of the past 30 years – capital losses offsetting their yields.  Today’s current rock bottom yields will exacerbate the initial pain as they offer virtually no return to protect against this reversal.  Add in some inflation and the pain gets even deeper.

We attempt to construct our Managed Income Portfolio as an inflation hedged portfolio that provides more conservative investors with the income and modest growth they need to maintain their standard of living over time.  Traditionally, government bonds have been a significant portion of the allocation for these kinds of investors but as I have been pointing out we feel at this point they offer low returns and high risk.  I do not view them as the risk-free asset that much of investment theory espouses.  Within our Managed Income portfolio we currently see the areas of opportunity with preferred stocks and high yield bonds still attractive on a relative basis.  We continue to favor corporate bonds over government bonds with maturities being of short to intermediate duration.  We also like dividend paying stocks as this area offers relatively attractive yields that can grow and are supported by strong corporate balance sheets.  Over time these dividend payers offer probably the best defense against inflation but even though they tend to be less volatile than the rest of the equity market they are not immune to the market’s swings.

Uncertainty cuts both ways  

Uncertainty creates both opportunities and risks and we therefore currently hold 10-15% cash positions to protect against the risks and take advantage of opportunities.  We continue to believe that this flexibility will pay-off but it has contributed to our near-term underperformance.  We are patiently waiting for a high conviction idea that we can really hang our hat on – a good trend (which tend to have the best risk/rewards payoffs).  It has not yet materialized but we are monitoring a few opportunities that look to have good potential.

One are of opportunity we are watching is Emerging Markets.  We have not had a significant exposure to this area for some time but we are seeing signs of opportunity.  Historically, Emerging Market valuations have run at a premium of around 15 to 20 percent above the S&P500 and right now they are at about a 15 to 20 percent discount.  With continuing favorable demographics and economic development we don’t think this condition will last.

To be certain there are still many concerns facing the markets and economy.  The first is still the continuing debt crisis in Europe.  There is still a great degree of uncertainty regarding the true magnitude of the problem and what the actual effects could be and how much is already priced in by the markets.  They seem to constantly be doing just enough to keep kicking the can down the road while they struggle to find a common solution.  It’s an ugly task that just keeps going back and forth.  In the end, self-preservation is a strong emotion and they won’t willingly drive themselves off a cliff.  At home we also still face continuing political uncertainty with the upcoming and election and its accompanying issues such as regulation, taxes, and spending.   However, good corporate profits and strengthening economic growth combined with overall lower valuations diminish the downside risks.  Our models are currently cautiously bullish with equities being the overall best place to be on a risk-adjusted basis.   While downside risks remain, if these pressures ease there is actually significant upside potential that could surprise many.

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Watch Paragon’s newest video in which Dave Young discusses sound strategies to building your retirment savings.

Disclaimer

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.  

Volatility Unleashed (Continued)

Posted February 9, 2012 by admin. tags:Tags: , ,
Bright Light House

February 2012 Stock Market Update

Posted February 2, 2012 by admin. tags:Tags: , ,

Paragon Wealth Management’s investment advisers give their thoughts on what happened in the stock market in January and what they think will happen going forward.

Stay tuned next week for the rest of Dave Young’s article “Volatility Unleashed”.

Disclaimer
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.  

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