Written by Dave Young, President & Founder of Paragon Wealth Management
While the stock market made significant advances in 2013 and 2014, last year felt more like a repeat of 2011 when the market went nowhere. In 2015, the S&P 500 experienced its first 10% decline in four years.
There were some winning sectors with technology, health care and consumer stocks posting modest gains. On the other hand, commodity, mining and energy stocks were a train wreck. Large stocks beat smaller companies and U.S. stocks beat out international ones. This year’s gains were focused in a minority of stocks.
No asset class posted double digit gains. In the past 28 years, that has only happened one other time (in 2001).
China and Greece continued to create financial drama. Emerging markets had a terrible year. Generally speaking, most stocks and sectors were in decline. In 2015, if you broke even as an investor, it would be considered a success.
Managed Income portfolio spent its time avoiding trouble. Many of the conservative asset classes it invests in ran into difficulty. Managed Income declined -2.8% for the year. This is its first negative year since 2008.
While we are never happy with a negative year, we were pleased it was able to avoid much of the downside experienced by the underlying asset classes it invests in. It was playing defense all year long.
Managed Income’s return from October 2001 to December 2015 is 5.14% compounded, which equates to a total return of 101.7% net of fees. (Please click here for disclosures.)
Top Flight portfolio had a good year considering positive returns were hard to come by — and those returns were in a relatively narrow group of stocks. Top Flight gained 3.71% for the year versus 1.41% for the S&P 500. Top Flight’s compound annual return from January 1998 through December 2015 is 11.7% versus 6.26% for the S&P 500. Top Flight’s total return for that period is 613.4% versus 194.0% for the S&P 500.
Paragon Private Strategies Fund’s recent audit showed an internal rate of return of 14.3% for the period from March 20, 2013 through Dec. 31, 2014. Our relatively conservative private equity fund has performed well in this difficult environment. We are planning to open a second fund in 2016. Please contact us if you are interested in exploring this investment option and for required investor qualifications.
How Wealth is Created
Making money is difficult. After a difficult year like 2015, it is important to go back to basics, evaluate your situation and make sure you are on the right path.
As financial advisors, we provide a variety of financial services like retirement, estate and business planning. However, our focus has always been on managing investments. Why? At the end of the day, if you aren’t effectively building wealth over time, most aspects of your financial plan won’t matter.
So it begs the question. What is the best way to invest? How can you invest to meet your retirement goals?
Step one. Invest in things that increase in value. Currently, money markets, CDs, bonds and fixed annuities are not likely to gain much value. Interest rates are at historic lows, and those investments are tied directly to those low interest rates. After inflation and taxes, most of these investments are actually taking you backward.
In order to build wealth, you have to invest in things that appreciate over time. With interest rates this low, only stocks, real estate and direct business investments meet the criteria.
Step two. Enhance your return by buying when prices are low and things are cheap. Conversely, you should be reducing exposure when prices are high. Is this easy? Absolutely not. It is completely counterintuitive and requires you to ignore your natural “fight or flight” inclination.
This is why we have been holding so much cash for the past eight months. Our models showed that the upside was limited — there was too much risk for the potential reward.
Let me explain by highlighting a study published last year by DALBAR, one of the nation’s leading financial research firms.
The study found that over a 20-year period ending Dec. 31, 2014, the average equity-stock-fund investor posted an average annual return of 5.19%, which compares unfavorably to the average annual return for the S&P 500 Index of 9.85%.
Going back 30 years, DALBAR paints an even gloomier picture, with the average equity-stock-fund investor earning 3.79% annually versus the S&P 500’s average annual gain of 11.06%.
The reason most investors significantly underperform over time is because they constantly follow their emotions, which consistently puts them in the wrong place at the wrong time.
Rather than buying low and selling high, they do the opposite.
Step three. Reduce investment costs where possible. There is so much “junk” — i.e. prepackaged financial products sold to the retail investor. These products are sold by banks, brokerages and independent financial planners. They’re pitched at really nice dinner seminars. The excessive internal costs of these products make it difficult for the investor to gain the benefit of their underlying investment. With many of these products, it can take years, if ever, to overcome the internal costs.
Step four. Be patient — and this is the most important step. Stocks, real estate and direct business investments take time to play out. If you buy a quality stock or a property today, for a decent price, odds are that 10 years from now it will be worth significantly more than it is today. It will likely be worth much more than if you had invested that same money in a conservative investment.
The downside — and the part that trips up most investors — is that the investments that go up the most typically fluctuate the most. And that instability causes investors to bail out at the worst possible time and lose money.
This is why we recommend diversifying your portfolio with some conservative, albeit relatively unexciting investments. Each of our clients has an investment portfolio built to their specific goals and individual risk comfort level. While this is not necessarily the way to maximize returns, it is the way to maximize your return. We know if we can keep you invested for the long term, we can significantly increase your odds of meeting your goals and building wealth.
The concept is simple; the execution is difficult. But that’s why we’re here. We are committed to helping you reach your goals. Please call if you need help or have any concerns.
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.