Market In Rally Mode (Continued)

Posted April 26, 2012 by admin. tags:Tags: , ,
Stack of 100 dollar bills with a red bow

Written by Dave Young, President of Paragon Wealth Management
Taken from Paragon’s 2Qtr 2012 print newsletter

Secrets to Building Wealth

Building Wealth is difficult.  It’s somewhat like a gauntlet.  According to Sports Illustrated 60% of NBA athletes and 80% of NFL athletes are broke within five years of retiring.  I’ve seen similar stats for beneficiaries of life insurance policies, lottery winners and trust fund recipients.

Even the best managers have a tough time staying ahead of the markets.  The legendary Warren Buffett  only generated a 6.2% for the first quarter versus 12.6% for the S&P 500.  Since the market bottom in March 2009, Buffett is up roughly 44% versus 80% for the S&P 500.

Jim Cramer of Smart Money is one of the most outspoken, well known market guru’s out there. His actual track record is surprisingly dismal. If you had followed his advice religiously over the past ten years you would have only earned 1.68% compounded per year.

A basic rule of investment success is to give yourself a fighting chance by playing in the right sandbox.  In other  words, invest in the right asset class.  Let’s look at the performance of five primary asset classes over the past FIFTY years.

  • Median Home prices have increased at a rate of 4.8% per year since 1962.  Home prices increased fairly steadily until about 2005 when they took a tumble.
  • Treasury Bills gained 5.4% compounded over the fifty years and had the smoothest ride.  Currently they are essentially returning nothing because interest rates are so low.  Until interest rates move higher it seems pointless to own Treasury Bills.
  • Treasury Bonds are in the middle of the pack and have returned 7.5% over last 50 years.  The bond chart shows that bonds trended gently upward for the first 20 years and then moved sharply higher over the last 30 years.  Bonds have performed phenomenally over the past 30 years as interest rates went from about 17% to 3%.  During this time, because interest rates have steadily trended down it has created an illusion that bonds are always safe.  With rates currently pushed to the floor it is highly unlikely that we will see returns approaching their 7.5% long term average any time soon.  It is much more likely that bondholders may see significant losses if interest rates move back up toward their long term averages.
  • Gold returned 8.1% over the past 50 years.  That sounds great on the surface until you realize what you would go through to get that return.  First,  you have to buy the gold without getting fleeced by the super high commission firms who sell it.  Then, for the first 13 years your  gold it went nowhere.  Then the next 10 years, amidst significant volatility,  it went straight up from $35 to $850 an ounce.  Just two years later it cratered back down to $307 an ounce.  It didn’t get back to $850 an ounce until 28 YEARS after it first hit $850. Over the past four years gold has doubled in price.  It is possible to trade gold successfully but it can be very difficult.
  • Stocks had  the best returns over the time period at 9.4% per year.  The first fifteen years, amidst significant volatility, stocks doubled.  The next 24 years the stock market moved steadily up creating one of the easiest environments ever to be a stock market genius.  The last twelve years stocks there have been two huge bear markets with stocks effectively going nowhere.

In my opinion, it currently makes no sense to invest in Treasury Bills, which yield nothing,  until rates move back up. Much worse than T-Bills are bonds or gold which are at all time highs.  Both are owned for safety but ironically carry significant downside risk going forward.  A home makes some sense because values are low but it’s hard to get too excited when a home’s 50 year return is half that of stocks.

I believe that it makes the most sense to follow a proven strategy that invests in stocks.  Even though the last twelve years have been extremely difficult,  stocks still have the best returns.  Even more compelling, stocks are currently the most beat up, out of favor and undervalued of the five asset classes.

Investing in stocks can be a positive or negative experience, depending on whether or not you follow the rules.

Rule one is to determine your risk tolerance so that you are not taking unnecessary risks.

Rule two is to follow a flexible strategy that allows you to protect wealth and capitalize on opportunities when they present themselves.

Rule three is to be very patient.

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.  

Market In Rally Mode

Posted April 19, 2012 by admin. tags:Tags: , ,
The latest headline


Written by Dave Young, President of Paragon Wealth Management
Taken from Paragon’s 2Qtr 2012 print newsletter

Stock markets around the world rallied strongly during the first quarter of 2012. After the extreme volatility last year, many investors abandoned ship and headed for the hills…just in time to miss this entire rally. The irony is that selling to “protect” actually cost them dearly.

This rally has confounded many.  Market experts have called for a selloff ever since last November.  In the face of all their pessimism this market has steadily trended up.  Every attempted selloff has been met with new buyers coming into support the market.

In unusual fashion, surprisingly, the market trended up, even as large amounts of money moved out of stocks and into bonds. Unbelievably, against that backdrop, the broad stock market indexes had their best first quarter performance in 14 years.

Why?

According to the sentiment models that we track, last fall the majority of investors were very negative and believed the market was headed down again. Often, when investor sentiment gets that negative,  everyone who is likely to sell has done so.  At that point, the market is like a powder keg waiting for a spark to set it off.  Once the selling is exhausted and you start to see some positive news , then the market will usually take off.

The good news that ignited the market was that our economy was stronger than expected, Europe didn’t go down in flames after all and corporate earnings continued to be strong.  Market volatility declined and consumer confidence came in the highest it had been since 2007.

What’s Next?

While nobody really knows what will happen next…there is a good case to be made that this market has more room to the upside.  Market indexes are still below where they were twelve years ago while corporate earnings are about three times higher than they were then.

As the market moves up, it has a wealth compounding effect on the economy.  Investors cash out some of their market returns to replace an older car, buy a new house, remodel their home, make other large purchases or go on vacation.  This money from stock gains goes into the economy further benefitting the expansion.

As investors gain more confidence in the economy they will likely become weary of earning virtually nothing on their money markets, bank CD’s and bonds.  The ICI reports that there is currently $2.6 trillion invested in money market mutual funds alone.  Much of that money will likely start to move into equities in search of higher returns if the market keeps moving up.

Housing prices declined for the fifth consecutive year in 2011. This economic recovery has occurred without any help from the housing industry. Industry experts are currently forecasting flat housing prices for 2012. A stabilization in housing prices should have an extremely positive impact on the stock market.

Our models indicate that this current move up potentially still has room to go.  As this is being written, the first week of April, the market seems to be taking a break.  We are getting close to the previous market highs which usually provide significant resistance.

Sentiment has moved down from the extremes high’s of a couple of weeks ago.  Ideally, the market will continue to move sideways or slightly down while sentiment continues to weaken.  That could set up a positive environment for the market to start another leg up.

To be continued next week…

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.  

Investing In REITs

Posted April 5, 2012 by admin. tags:Tags: ,
A stack of 100 dollar bills in a trap

Over the last few years a popular investment has been what are called nontraded or private REITs. These have appealed to investors seeking a stable return in the aftermath of the financial crisis. The reality is that, as with many investments of this type, there can be more that meets the eye.

visit Investment News to view the complete article

Nontraded REITS should be a nonstarter for clients: Green Street

Forget the new breed of nontraded REITs, says Green Street Advisors Inc. Investors are far more likely to be better off with publicly traded REITs, the research firm said in a report released Wednesday.

Regulatory scrutiny has forced sponsors of nontraded REITs to address issues surrounding valuations, illiquidity, high fees, dividend payouts and conflicts, the report said.

One crucial change: the introduction of daily net-asset-value estimates by several sponsors, as better pricing transparency might end the illusion of share-price stability, Green Street said.

“Since the shares don’t trade, the share price investors see on their statements every quarter doesn’t fluctuate,” the company said. That stability has been “one of most bizarre ‘advantages’ touted by nontraded-REIT sponsors.”

In addition, “egregious” upfront costs of 7% to 10% on nontraded REITs should come down to 1% to 3%, the report said, and management fees of around 1% will drop, as well.

Questionable dividend yields of 5% to 10% are likely to fall closer to the 3.3% yield for publicly traded REITs.

Green Street said nontraded REITs have gotten something right, however: low leverage.

“Very few of them were forced into [taking on] expensive debt [or] selling properties on the cheap [or] issuing equity on an NAV-dilutive basis” during the financial crisis, the research firm said.

Nevertheless, “for most investors under most circumstances, publicly traded REITs will represent a superior investment vehicle, compared to even the ‘new breed’ nontraded REITs,” the report said.

Green Street counts approximately 70 public nontraded REITs that own $85 billion in assets.

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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