Category Archives: Investments

Not What Anyone Expected

Posted January 20, 2018 by paragon. tags:Tags: , ,
Snow Trees_opt

Written by David Young, President and Founder of Paragon Wealth Management

Two-thousand and seventeen was a banner year for stocks. Not just in the U.S., but around the world. Investors with a long-term perspective were rewarded once again.

It was not a good year for the market forecasters. Their primary talent is consistency — and they were consistently wrong.

At the beginning of last year, most Wall Street Strategists forecasted a gain of 4% or less for the upcoming 2017. The actual gains were five times more than those projections. Following their advice would have been disastrous.

Between U.S. tensions with North Korea, the new presidential administration, and the state of politics in America, the forecast was increased market turmoil. Instead, we saw a calm in the markets we had not seen in decades. The VIX, which is a measure of market volatility, unbelievably closed below a level of “10” more times last year than any other year in its history.

In addition, the forecasts regarding global growth and inflation were off base. If you have been a client for a while, you understand why we never invest based on market forecasts.

Successful investors, on the other hand, focused on the upbeat fundamentals. Corporate profit growth was sparked by economic gains at home and abroad. The political push to decrease regulations and effectively free the “free market,” combined with the recently passed tax plan, increased positive expectations even more.

The U.S. economy grew at 3.3% in the third quarter. That was the second quarter in a row the GDP exceeded 3% — a feat that hasn’t occurred in three years. Even more impressive, fourth quarter estimates by the NY Fed expect GDP to come in at almost 4%, which is higher than anyone previously forecast.

The S&P 500 performance reflected the strength of the economy and was positive every single month in 2017. That has not happened since 1970.

PARAGON PORTFOLIOS 

An interesting surprise with this year’s rally is how many individual investors did not benefit from it. Throughout the last nine-year surge, after the devastating market of 2008, individual investors have continuously pulled money out of funds that own U.S. stocks. Nearly $1 Trillion has been pulled out since the start of 2012, according to EPFR Global, a fund tracking firm.

From a trading perspective, this has been a difficult market. Why? When markets consistently go up they don’t require a lot of trading. They require you to be in the right place and hang on.

Additionally, straight up markets, like the one we experienced last year, create false confidence amongst investors. Many people decide they are investment geniuses. And they are … until they aren’t anymore.

Investing based on luck, without a strategy, is impossible to replicate. Since no one knows in advance when the market is going to go up, go down, or run sideways, relying on luck rather than strategy eventually catches up with investors. Just like the temporarily successful gambler, it is just a matter of time before they implode and suffer significant losses. As the saying goes, no one rings a bell at the top when it is time to sell.

And then there were Bitcoin experts this holiday season. They sought me out at seemingly every event I went to. But they had a puzzled look on their face when I asked them to explain exactly “what” it was that they were investing in, or why their Bitcoin fortune would vanish if they lost their account password.

Another axiom we dodged this year was that traditional wisdom of “sell in May and go away.” If we had done that, we would have missed significant gains between May and November. That was another obstacle that could have cut your returns by more than half. Fortunately. our models kept us invested all year.

Overall, we were pleased with our portfolios. All performed well in the context of the risk level they are invested in.

Managed Income acts as the anchor to the portfolios. As long as interest rates stay pushed to the floor, its returns will be relatively low, but still better than bank rates. On a positive note, it looks as though we may see an increase in rates this year, which should help Managed Income. Regardless, its primary purpose is to provide stability for our portfolios.

Top Flight, with all of the changes we made a year ago, performed well. If you would like more detail on the three portfolios — momentum, fundamental and seasonality — that make up Top Flight, give us a call and we will happily walk you through them.

The new Balanced Portfolio and the two Private Funds both had a strong performance this year as well.

GOING FORWARD 

Our Consumer confidence or individual optimism is the highest it has been in 17 years. Investor sentiment is also the most bullish it has been as far back as we are able to track it.

This puts us in a tricky spot. Historically, we know that as investor sentiment moves higher we are approaching a market correction. The theory is that once everyone who is going to invest is invested, there is no one left to push the market higher.

The difficulty with market sentiment as an indicator is timing — you don’t know exactly when such a correction will occur. As a result, we are also watching internal market technicals but with a more skeptical eye than normal. Trend indicators, Advance/Decline lines, Industry Breadth, etc. all still look good.

Last year we updated Top Flight with our best individual stock models. In an effort to match or exceed the returns of the broad markets, we tied Top Flight’s more directly to those broad markets than we had historically. Our belief is it is better for Top Flight to accept more short-term downside volatility so that its returns over the long term will increase.

With this year’s market strength, along with the changes we made to Top Flight last year, it is important to correctly set the amount of volatility you are willing to accept. We can effectively reduce your overall volatility by decreasing your exposure to Top Flight and increasing your exposure to our more conservative portfolios. Getting that right is one of the pillars of investment success.

If you would like to talk about how you are positioned or make any changes, please give us a call. We are always happy to hear from you. Have a great 2018!

Disclaimer: 1. Investment performance reflects time-weighted, size-weighted geometric composite returns of actual client accounts. 2. Investment returns are net of all management fees and transaction costs, and reflect the reinvestment of all dividends and distributions.  3. The S&P Index is a market-value weighted index comprised of 500 stocks selected for market size, liquidity, and industry group representation The Barclays Aggregate Bond Index is a benchmark index made up of the Barclays Government/Corporate Bond Index.  4. Benchmarks are used for comparative purposes only. The Paragon Top Flight Portfolio is not designed to track the S&P Index and will have results different from the benchmark. The Paragon Managed Income Portfolio is not designed to track the Barclays Bond Aggregate Index. 5. Past performance is no guarantee of future results. Investments in securities involve the risk of loss. 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.

Calm Seas?

Posted January 10, 2018 by paragon. tags:Tags: ,
Pier at Sunset_opt

Written by Nathan White, Chief Investment Officer

For the stock market, 2017 was a year of unprecedented smooth sailing. The S&P 500 has risen for 14 months straight, a new record. It also didn’t have a monthly decline, which has never happened before. Volatility was non-existent. The economy continues to move along with no signs of an imminent recession. Moreover, there have been no corrections in sight.

The latest global manufacturing indexes (PMIs) ended with the strongest reading in nearly seven years. Many of our forward-looking economic indicators also point to even faster growth in the coming months. New orders and export orders are at their highest levels since early 2011. The ratio of new orders to inventories matched its strongest level since June 2014. Backlogs are at the highest point since May 2010. On the back of this strong data, job growth looks set to expand further. (Source: NDR – Economics, Global Comment, 1/3/2018) 

Price pressures are strong but have not exploded, which means inflation is still modest. In 2018, we will be watching to see if the tax cuts and possible infrastructure spending will push inflation expectations higher. Interest rates are still low overall, but moving up. The bond market could become a problem in the coming year (more on that later). Other risk factors coming from our models are high equity valuations and extremely optimistic investor sentiment. Most of our models are still positive, so it remains a bull market until proven otherwise.

2017 REVIEW 

The best performing areas of the equity market last year were large-cap stocks, growth stocks and the technology sector. Small-cap and value stocks, while still up for the year, lagged the broader market. It will be interesting to see if value stocks make a comeback in 2018.

Top Flight had good performance being up 18.5% for the year. It was up about 11.9% for the last six months of the year, which was about a half percent better than the S&P 500 after fees. As you know, in 2017 we started taking individual stock holdings that comprise about 60-64% of the Top Flight portfolio. We have been pleased with the result. Our stock holdings overall averaged nearly 21.5% for the year. The stock portfolio is broken down into two segments. The first is a fundamental-based approach that focuses on stocks with the least downside risk. These stocks performed well and were up about 25.5% for the year. Considering these stocks have somewhat of a value/quality aspect, this was an impressive showing. The second segment of our stock holdings is a momentum or trend-based approach. This segment was up just shy of 18% for the year. Within this segment, the small-cap names did the best, particularly in the last half of the year. Overall, the best performing individual names were Home Depot, United Health Group, Domtar, Owens Corning, and Northrop Grumman.

Looking ahead for 2018, we like the valuation position of our equity holdings. The forward PE (price/earnings) multiple of our stock holdings is about 16.8 versus 19.8 for the S&P 500. This means our current holdings are about 15% cheaper based upon projected earnings for next year. Not a bad place to be after the significant upward move in equities.

Top Flight also includes two other strategies based on ETFs. One strategy is a seasonality approach that rotates among various sectors and industries. This strategy comprises 20-25% of Top Flight and was up about 11% for 2017. While up for the year, seasonality was our weakest performing strategy last year. However, in the prior three years it was our best performing ETF strategy. Our approach with Top Flight is to diversify by strategy. No strategy will outperform every year, and due to its solid long-term record, we still have confidence with the seasonality method. The second ETF strategy we employ is a single ETF momentum-based strategy. This strategy, which comprises 10% of Top Flight’s allocation, performed well on the year and was up over 25%. Most of this performance came from the PowerShares QQQ, which is heavily weighted in large-cap technology.

On the conservative side, our Managed Income portfolio had a net return of about three percent. Still not ideal, but we are constrained by the environment of low yields. We achieved similar returns to our benchmark, but with a lot less risk to rising interest rates. To get a higher return, we would have had to load up on risky debt, which would have only produced an additional 1-2% return. Not worth it in our estimation. We still do not recommend long-term bonds. The bond market is getting backed into a corner. As interest rates rose last year, it was short-term rates that moved up while the yields on longer maturity bonds didn’t move (or went down slightly). The difference in yield between the two and 10-year Treasury bonds is now only about a half percent. The Federal Reserve is set to raise interest rates another 0.75% to 1% next year. If longer maturity bond yields do not start going up, it won’t take long for short-term bond yields to exceed them. This is called an inverted yield curve and is often a harbinger of recession. If longer maturity bond yields do move up with the Federal Reserve actions, then 10-year Treasury could lose at least 5%, and longer maturities 15% or more. Because of these dynamics in the bond market, we are not as exposed to interest rate risk as most bond portfolios. We don’t hold any maturities longer than 10 years and the Treasuries we do hold are a hedge against any possible stock market correction. Keeping most of our fixed income exposure to shorter-term maturities allows us to increase our yields as interest rates rise without getting hit with significant capital losses.

MAKE HAY WHILE THE SUN SHINES 

The roaring stock market offers investors an opportunity to review their asset allocation. Now is the time to rebalance — not when the inexorable correction comes. Most have the tendency to put money into whatever has been doing well. To keep the proper risk exposure, investors should trim their exposure to stocks as stocks increase. One of my favorite axioms is to take what the markets give you, but unfortunately, investors have short memories. The increase in the stock market has simultaneously increased allocation to stocks. When the correction occurs, those who have not re-allocated will take a bigger hit to their portfolios than they can actually stomach. Please contact us if you would like to re-view your allocation.

We appreciate your trust and business and wish you a prosperous and happy 2018!

Disclaimer: 1. Investment performance reflects time-weighted, size-weighted geometric composite returns of actual client accounts. 2. Investment returns are net of all management fees and transaction costs, and reflect the reinvestment of all dividends and distributions.  3. The S&P Index is a market-value weighted index comprised of 500 stocks selected for market size, liquidity, and industry group representation The Barclays Aggregate Bond Index is a benchmark index made up of the Barclays Government/Corporate Bond Index.  4. Benchmarks are used for comparative purposes only. The Paragon Top Flight Portfolio is not designed to track the S&P Index and will have results different from the benchmark. The Paragon Managed Income Portfolio is not designed to track the Barclays Bond Aggregate Index. 5. Past performance is no guarantee of future results. Investments in securities involve the risk of loss. 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.

Put The Odds In Your Favor

Posted November 4, 2015 by paragon. tags:Tags: , ,
Stock Market Graph

Written by Nate White, Chief Investment Officer of Paragon Wealth Management

This article is from Paragon’s Third Quarter Newsletter. If you are interested in receiving a free printed copy of Paragon’s Quarterly Newsletter, please click here.

Investing encompasses two of the most powerful human emotions — fear and greed. In light of the recent market volatility, your biggest fear, without a doubt, is losing money. No one likes to see account values go down. So how much should you worry about losing money with your investments? And how valid is that fear when viewed through a historical lens?

We all know investing is a long-term process. I would take that one step further and propose that the main risk is not being invested. And history proves it.

Fear of the downside prevents people from investing correctly. When markets become volatile or economic fear increases, the apprehension is over values dropping in the present moment. Often the fear is that the values will drop and never come back. No one ever wants to see their accounts drop by 20 or 50 percent — and then never recover. But when in the history of the markets have they ever not come back? Never. Even still, it is amazing to hear this irrational concern over and over and over again.

When markets drop, many people sell out or change to a more conservative allocation, thereby effectively locking in their losses. When someone sells out as the market is going down, they rarely get back in at a lower price. If you sell out when the market is down 5 or 10 percent, when do you intend to get back in? When the market is down 15 to 20 percent? Usually the fears that cause someone to sell do not subside before the market rebounds (and it often become worse). By the time the waters have calmed and the investor’s confidence has returned, the market has moved higher than the point from which they sold.

In fact, if someone doesn’t recover from a market downturn, it is usually because their allocation was overly risky going into the downturn or they changed to a conservative allocation during the slide. It’s not because the markets didn’t recover. For example, if you were overloaded on tech stocks or financials before their respective crashes in the previous decade, you probably had a hard time recovering. People tend to load up on the “hot” things during boom times only to get sorely disappointed when those assets come back down to earth.

Now back to my claim that the real risk is in not being invested. Long-term risks are always harder to confront rationally because they are not immediate concerns. In order to help overcome the fear of the market’s downside, please consider the accompanying table. It displays the historical probabilities of a profit in various timeframes for stocks (S&P 500), 10-year Treasury bonds and a mix of 20% stocks and 80% bonds from 1928 through 2014. The stock market’s chances of being up in a single year have been over 70% — and it only gets better the longer you hold. There has never been a 20-year (and nearly a 15-year) period where stocks have been down. Most people entering retirement today have more than 20 years of “investable” time. Now, I’m not recommending a 100% stocks portfolio for retirees, but the principle remains strong.

For those who are more risk averse or require a more stable portfolio, look at the figures in the 20/80 mix of stocks and bonds. It is better than even a portfolio of pure Treasury bonds in that it has had a better average annual return (6.3% vs. 5.0%) for the same amount of downside risk. This portfolio had only two negative three-year periods out of 85 occurrences and has never had a negative five-year period. Talk about putting the odds in your favor!

Not one of us has control over the market, but we do have control over letting time work in our favor. This table shows that negative periods are in such an impressive minority that they should be looked upon as opportunities — or at least ignored from an investing standpoint. Not many people wanted to invest during the 2008-2009 financial crisis — and I get it. The headlines were scary and it seemed as though the economy might collapse. But in hindsight, it was a great buying opportunity very few took advantage of.

There will always be things to worry about — and today is no exception. Consider that the period covered in the above review included the worst World War ever, a Great Depression and 12 recessions, the Cold War, numerous other wars and conflicts, oil shocks, inflation shocks, strong and weak dollar periods, debt bubbles, fiscal crises, various housing booms and busts, technology booms and busts, and both Republicans and Democrats. Despite all these hazards, the markets have moved up, reflecting the virtues of a free market and providing an effective method for investors to build their wealth. Don’t be left out!

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.

 

Should I Invest Now?

Posted August 19, 2014 by admin. tags:Tags: , , , ,
Financial advisor talking with clients

Written by, Dave Young, President & Founder of Paragon Wealth Management

We are regularly asked this question. Investors don’t know what to do. They are concerned. Many seem to always be in the wrong place at the wrong time. They missed out on the gains of the past five years and are now concerned they may be investing at the top of the market.

It seems like the risk pendulum swings from one extreme to another. In the 1990’s investors did not take enough risk and missed out on amazing returns. By 2000 and 2008 investors finally began to believe that markets only go up. They became aggressive just in time to be devastated by 50% losses and years of bad returns. By 2009, many investors had thrown in the towel. Those investors then missed out on the big gains of the past five years.

In order to build wealth you must invest for the long term. Stocks and real estate are the two most reliable investments for most investors to build wealth over time. Over the long term they appreciate in value much more than bonds or bank savings options.

In the short term stocks and real estate fluctuate in value and scare many investors away. Putting money into stocks or real estate for less than five years does not usually work out.

I believe there are four principles that must be followed to build significant wealth over time. Sound investing is not a single decision. It is a process.

1st – You must invest using an investment strategy that has been proven to work over time.

2nd – Your strategy should provide you with exposure to the stock and real estate markets.

3rd – Your risk tolerance (investment comfort level) should be set properly so that you are not forced out of your investments at the wrong time.

4th – You must invest for the long term thereby giving yourself the ability benefit from the ups and downs of market cycles.

Please call us if you have any questions or would like to make any changes to your accounts.

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.

Buyer Beware

Posted August 7, 2014 by admin. tags:Tags: , , , , , , , , , ,
Buyer Trap

Written by Nathan White, Chief Investment Officer of Paragon Wealth Management. 

The artificially low interest rates and asset purchases engineered by the Federal Reserve are causing a misallocation of private investment.  Investors and savers have been clamoring for anything with yield and it is prompting many people to put their money in horrible investments.  This is one of the unintended consequences of Fed’s extraordinary accommodative actions that have been in place for years now.  Investors are taking on a lot of risk and illiquidity to generate what are often very low returns.  They are sacrificing the returns and liquidity that are so crucially needed for the long-term.

There are a lot of bad financial products being sold to investors today that take advantage of investors’ desires to avoid risk and get a “safe” return.  Financial companies are always happy to create a product that sells the best in the current environment.  The angst from the financial crisis and the desire for yield in this low rate environment are helping many salespeople aggressively push the following bad investments:

Structured Products – Structured products are unsecured debt securities of banks and offer payouts that depend on the value of an underlying security.  The most common types pay out a fixed coupon as long the stock or underlying index stays above a buffer price.  If the price drops below the buffer price then the coupon is not paid and you could be issued the stock or participate in the downside below the buffer price.  The reason these products attract investors is the relatively higher coupon than is generally available from fixed income and the downside protection offered by the limited buffer.  I liken these structured products to buying a bond but having the downside risk of a stock.  The upside return is capped while only part of the downside exposure is protected.  Why sell away upside?  The end result is a lower return than could have been achieved with a simple combination of stocks and bonds.

Equity Indexed Annuities (EIA’s) – Equity Indexed Annuities offer a combination of participation in the market’s upside and a minimum guaranteed fixed return. The sales pitch goes along the lines of, “you get the upside of the stock market without any of the downside”!  Who wouldn’t want that!  Utopia! However, the old adage of “if it sounds too good to be true then it isn’t” certainly applies in this case.  EIA’s returns are tied to an index such as the S&P 500 of which the buyer gets a certain percentage of the increase but is also capped on the upside.  For example, an annuity with a participation rate of 70 percent and a cap of 8 percent would be credited with 7 percent of the index was up 10 percent.  If the index was up 30 percent the annuity would cap you at 8 percent.  If the market returns is negative or lower than then the credited index return there is a minimum guaranteed return of say 3 or 4 percent that is credited.  In addition, the calculations used to determine the index return are less than optimal and omit dividends. The insurance company also has the right to change the terms during the life of the contract.  Commissions are typically between 5 to 10 percent and surrender charges can be 10 percent or higher.  The annual fees and expenses are often 2 percent or higher which reduce the aforementioned possible returns even further.  The statements you get are very confusing and difficult to determine how much the annuity is really worth.  Complexity disguises the costs.  In a November 2011 Reuters article by Marla Brill, Eric Thomes, senior vice-president of Allianz (the largest issuer of EIA’s) said that the average annual returns of these products have been around 4 to 6 percent after expenses but not surrender charges.  He was quoted as saying, “These are for someone who’s looking for safety and is happy with the potential to get a slightly higher return than a fixed annuity or a bank CD”.  Here is an insurance executive’s own admission of what these products really are. The salespeople certainly don’t pitch them this way!

EIA’s have primarily been the domain of insurance agents but are now being peddled by brokers as well.  After brokers started selling these, FINRA (their regulatory arm), had to issue a warning to investors alerting them of the risks and characteristics of EIAs.  Not very many investment products ever get their own warning!  So, if you like limited upside, limited access to your money, high commissions and fees, complex formulas and changing terms, these annuities are for you.  The bottom line with these subpar products is they are an expensive way to get a low return.

Non-traded REITs – These are Real Estate Investment Trusts that are registered with the SEC but don’t trade on an exchange and have become very popular the last few years.  However, they are very expensive, highly illiquid, rife with conflicts of interest, can be very risky, resulting in returns lower than promised.  Front-end fees range from 12% to 15% with the typical commission of 7% going to the broker.  InvestmentNews reported that almost $20 billion of non-traded REITs were sold last year translating into about $1.4 billion in commissions.  The NAV or price of the REIT is often reported the same quarter after quarter and when combined with the income element produces a nice steady upward trending graph on sales literature that is pleasing to the eye.  They are positioned as low volatility investments but because they don’t trade the volatility can’t be measured.  In order to produce the illusion of a high payout they often use leverage and/or the dividend paid often includes a return of capital.   If investors saw how much had been taken out of their value in fees in their first statements they would be shocked.  In April of this year, the research firm Securities Litigation & Consulting Group produced a study that after fees and expenses, non-traded REITs had an average annual return of 5.2% from 1990 to 2013.  Now that the real estate market has largely recovered so have prices and that means you should be very careful about what type of real estate investments you buy.  Low interest rates are making many subpar or questionable projects seem good.  When interest rates inevitably rise it will expose these faulty investments.

All three of the above products share similar characteristics of high commissions and fees, illiquidity, and limited or low returns.  Because illiquid portfolios do not report their prices in a continuous manner they can create the illusion of stability or low risk.  The reward for illiquidity should be higher.  The perceived safety is expensive and usually not worth the cost.  There must be a price paid to avoid volatility.  One can often replicate the same strategies these products employ on the open market – that’s what the issuers are doing!  The true risk with many of these products is missing out on the upside returns that are crucial to investing.

So what’s the best way to reduce risk and get a decent return?  A diversified portfolio can be best “hedge” long-term.   A simple portfolio using stocks and bonds can generate income and help one stay ahead of inflation while providing access to funds if needed.  Historically, a portfolio with 60 to 70 percent bonds, 20 to 30 percent stocks and about 10 percent cash is close to the “sweet” spot for minimizing volatility.   From 1950 to 2013, a 30/60/10 mix of Stocks/Bonds/Cash has had an average return of about 7.7 percent with a maximum one year loss of 5.4 percent with over 84 percent of the years producing positive returns (Source: NDR Asset Allocation – Risk & Reward, based on S&P 500, Barclays Long-Term Treasury Index & T-Bills).

If you or anyone you know is being pitched on any of these products please contact us.  We can offer a lower cost liquid alternative.

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 Trends

Posted September 12, 2013 by admin. tags:Tags: , , , , ,
Scary market trends

Over the past three years the markets have been very correlated.  Not all, but many of the sectors have moved up or down in lockstep fashion.  The stocks in the S&P 500 have been the most popular making that index very difficult to beat.

Those correlations seem to have started to change, ever since August 1st, or about the time interest rates started moving up.  Increasing interest rates have historically disrupted many of the standard market correlations.  It will be interesting to see if the S&P 500 will be able to continue its dominance going forward.

Since August 1st:

  • The S&P 500 is down 0.3%
  • Small Cap stocks are up 1.2%
  • Cyclical stocks are up 2.9%
  • Consumer stocks are down 2.9%
  • Utilities (supposedly conservative) are down 6.8%
  • Real Estate (also conservative) is down 4.0%
  • Telecom is down 4.9%

Bottom line, sector correlations are more dispersed than they have been.  Conservative sectors are getting beat up.

At Paragon, we like to see less correlation between the sectors.   Uncorrelated markets give our models much more to work with.  It will be interesting to see if these trends continue.  Keep posted.

Written by Dave Young, President and Founder of Paragon Wealth Management

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.

 

Is The Stock Market Still Safe At These Levels?

Posted April 17, 2013 by admin. tags:
Mountain Poppyseed Flowers


Written by Dave Young, President & Founder of Paragon Wealth Management

With the market hitting new highs, this is another question that is regularly asked.  When you look at the market over the long term it provides a different perspective.  Currently, the broad stock market is back to where it was almost 13 years ago.  In August of 2000 the S&P 500 hit a level of 1517.  Then after seven years of ups and downs, in October 2007, the S&P 500 finally hit 1549. Then five and a half years after that, the S&P 500 hit 1514 again.  The bottom line is that it has taken almost 13 years for the S&P 500 to get back to the level it was at in August 2000!

Stock prices are driven by their earnings. Earnings have increased over 300% since 2000 while stock prices haven’t moved much.  In my opinion, it appears that stocks are still a good value even though we are hitting new highs.

Managing Money is Difficult

Managing money is difficult.  When you try to protect against downside exposure, often it hurts your upside return. Likewise, if you are too aggressive, then your account can be decimated in an extreme bear markets like we experienced in 2002 and 2008.

By way of example, some of the brightest and most talented money managers are hired by the large University Endowment Funds.  The endowment funds for Harvard, Yale, Princeton, Stanford, Columbia and Notre Dame manage about 100 Billion Dollars.

Many of the high profile University endowment funds incurred significant losses in 2008.  It is human nature to be more defensive after getting beat up.   So how did these top managers adjust to their investments 2012 as the stock market hit new highs?

In 2012, the combined average return for these six endowments was only 2.63%.

The bottom line is that even for these top tier managers, with every resource and option imaginable, managing money is difficult.

Paragon Investment Portfolios

We have recently added some new portfolios to our menu of investments.  Below is a brief description of each.  Our investment process is to help you determine your risk comfort level then allocate your funds to an appropriate mix of the portfolios.

Conservative
Portfolios:

  • Managed Bond Portfolio:  This is a custom bond portfolio.  Treasury, Corporate or Municipal Bonds can be managed.  At this time we do not recommend this portfolio because the amount of risk taken in most bonds versus the potential reward is not prudent.
  • Managed Income:  This is our flagship, active, conservative portfolio created in 2001.  It can invest in all types of bonds, convertible stocks, preferred stocks, utilities, real estate, alternative funds and cash.  This portfolio has performed well in this difficult low rate environment because of its flexibility to move between and avoid various conservative asset classes.
  • Paragon Private Strategies:  This new diversified portfolio invests in private equity.  It takes a conservative approach and provides consistent income by investing in income producing assets.  It is only available to accredited investors.

Growth
Portfolios:

  • Core Portfolio:  This concentrated portfolio
    focuses on two or three market areas that are at the top of our model rankings.  This portfolio can be adjusted to any risk
    comfort level and is a relatively low cost alternative.
  • Index Portfolio:  This passive index portfolio
    is invested across a diversified mix of small cap, mid cap, large cap, value and growth strategies within the U.S. market.
    It is designed to be a low cost alternative that will track the U.S. market but provides no downside protection.
  • Top Flight:  This is our flagship active
    diversified growth portfolio and has been actively traded since 1998. It combines several of Paragon’s best quantitative models.  Those models include core, seasonality, relative strength and allocation models. This portfolio seeks to generate superior long term risk adjusted returns.

As always, we appreciate your trust in us and the opportunity to be your advisor.  Please contact us if you have any questions or need assistance.

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.

2013 Opportunities and Focus

Posted January 24, 2013 by admin. tags:
A Compass and Map


Written by Nathan White, Chief Investment Officer of Paragon Wealth Management

Overall, we currently see a positive year in 2013 for equity
markets.  The negative effects of higher
taxes and somewhat lower government spending will be offset by improved
corporate spending and economic growth as the year goes on.  Companies and consumers have been cautious
now for years and that could finally reverse in 2013 resulting in better
economic growth.  This could help the
market’s current low to medium valuation multiple to expand thereby benefitting
stocks overall for the year.  The Fed
should stay in continued easing mode as they try to boost inflation.  Government policy wants you to spend not save.  We remain cautious on bonds and are still
avoiding Treasuries and long-dated maturities.
The risk for reward is still very unattractive in this area.  There will be the usual ups and downs
throughout the year and the now seemingly ever present uncertainty caused by
government action and policy will continue to be over the market’s shoulder.

Starting to Look Abroad

It’s has been awhile since we have had a significant
position in foreign markets.  We have
been waiting patiently since the financial crisis for the emerging markets to
reassert themselves and it looks like the time has finally arrived – or at
least started to.  The reason this
excites us is because the inherent growth story associated with emerging market
countries is now coupled with attractive valuations.  The past few years have seen the U.S. market
outperform on a relative basis.  In fact,
the S&P 500 has returned about 18 percent for the last two years while the
MSCI Emerging Markets Index was down over 3 percent.

We are seeing signs that the tide is starting to shift.  Over the last three to six months the
emerging markets area has outperformed the S&P 500 on a relative
basis.  The deceleration in growth rates
for many emerging market economies appears to be stabilizing.  Chinese manufacturing PMI improved for the
fourth month in a row in November to the highest figure in seven months.  This adds to the evidence that the Chinese
economy is on the mend and starting to recover.
By the way, when I say recover, I mean returning to an 8% growth
rate.  Due to their stronger fiscal
situations, many emerging market countries have more flexibility in enacting
economic stimulus measures.  Recent moves
by many countries indicate that they are starting to move more aggressively on
this front.  Brazilian policy makers
recently cut reserve requirements for lenders to stimulate investment in Latin
America’s largest economy.  The recent
leadership change in China has heightened speculation that more measures will
be introduced to boost consumption.

Growth Potential

The main reason why emerging markets matter is because of
their growth potential. Stronger economic growth turns into strong earnings
growth over the long term and that is what ultimately drives stock prices
higher.   Over 80% of the world’s population lives in
emerging markets and their workforces are young and increasingly educated.  These economies experience a structural change
as middle classes emerge with individuals achieving rising levels of
wealth.  They are often rich in resources
and labor.  Their gross national incomes
and per capita incomes are small compared with developed economies.  As these countries open their economies and
enact policy reform there is dramatic potential for their incomes to
climb.

Compared with developed markets, emerging markets have
historically had greater return and volatility.  The volatility rises from the ever present
risks inherent with emerging markets:
political uncertainty, regulatory and corporate governance issues, and
the dominance of state owned firms.  Because
of these factors, investors demand greater return to compensate for the
heightened risks.  The higher volatility
normally associated with emerging markets will still be a factor going
forward.  In addition, the currencies of
many emerging market countries could strengthen on a relative basis due to
their stronger fiscal situations offsetting some of the possible advantage.

Normally, stocks or sectors with higher growth rates command
higher valuations.  Emerging markets
currently have higher growth rates and lower valuations.  This spells opportunity.  The current price to earnings multiple for
emerging markets is about 11 compared to 14 for the S&P 500.  This is about a 27% difference and indicates
some of the relative value that we believe exists in this area.  These low valuations could help to cushion any
downside if markets fall and provide more upside if markets rally.  The main reason that valuations in emerging
markets have come down is because their growth rates have come down from the
lofty levels usually experienced when growth first kicks in. Part of the reason
for the slowdown has been from the effects of the worldwide recession which
emerging markets are not immune from.
However, part of the slowdown comes as these economies start to develop
more domestic demand and transition from relying primarily on exports.   For
example, China and India had growth rates of 14% and 10% respectively in 2007.  Those rates have now come down to 8% for
China and about 5.5% for India.  By
comparison, U.S. GDP growth estimates are currently around 2.5%.  On the whole, we believe the better growth and cheaper valuations of emerging markets offer a
compelling opportunity compared to the risks.

Other Areas of Focus

Closer to home, the U.S. sectors we like are healthcare and
some of its sub-industries such as healthcare providers and
pharmaceuticals.  The financial sector
looks favorable as it has gone through years of cutting costs and employees and
is no longer burdened by toxic assets.
This could set the area up for better profitability going forward.  We see other intermittent opportunities in
technology, homebuilders and energy throughout the year.   As U.S. fiscal contentions could last all
year with no quick fixes it might be time to look outside the U.S. for the best
relative opportunities.  U.S. valuations are
reasonable at current levels considering artificial low interest rates.  Retail investors are still woefully
underinvested as they continue to fight the specter of 2008.  This bodes well for equity markets overall
and emerging markets in our opinion could be one the best areas of the
market.

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.

GARP?

Posted January 11, 2013 by admin. tags:
World Globe

Written by Nathan White, Chief
Investment Officer of Paragon Wealth Management

Growth at a reasonable price,
or GARP as it’s known in the investment world, is practically the holy grail of
investing.  Whether you’re a value or growth disciple (or any other type
of investor for that matter) in the end everyone wants the same thing – their
investment to go up.  Short sellers excluded of course.  GARP is
theoretically the best of both the value and growth worlds.  Who wouldn’t
want a stock that is cheap and has good growth? 

The risk with value investing
is that the stock is cheap not because it is undervalued but because its
fundamentals are deteriorating and offer little prospect of reversing.
It’s the classic value trap that many fall for.  The risk on the growth
side is that stocks with higher growth rates tend to be expensive and priced
for perfection.  Any disappointment can bring the stock down in a hurry.

In actuality, most GARP stocks
fall somewhere on a continuum of relative growth to value and an investor or
manager decides what their threshold is.  Because I view investments in a
relative manner I have always like the idea comparing growth to value as a way
of finding good investments.  For example, right now one of my favorite
investment ideas is in the emerging markets.  The MSCI emerging markets
index trades at a PE of 11 compared to 14 for the S&P.  That is about
a 30% difference.   In the past emerging markets have traded at
premiums to developed markets to compensate for their growth and risk.
While growth rates in emerging markets have come down from the lofty levels of
the past, they are still much higher than in developed countries (e.g., 2.5%
for U.S. vs. 8% for China, 5.3% for India).  I believe this is a great
GARP opportunity as emerging markets have cheaper valuations and better growth
than many developed markets.

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.

Walking the Tightrope

Posted September 24, 2012 by admin. tags:Tags: ,
The Fall hills of Utah

Written by Dave Young, President of Paragon Wealth Management

Investing has always been difficult.  I’ve managed money long enough that I’ve
experienced and survived the Crash of 1987, the Asian Crisis in 1996, the Tech
Wreck from 2000 to 2003 and more recently the Crash of 2008.  One of my fundamental biases has always been
a mistrust of the markets mixed in with slight paranoia.  I believe that mindset is one reason why
Paragon is still managing money after 26 years.

What has been different for the past couple of years is the
length of the cycles that we track.
Historically, markets and sectors trend consistently for six to eighteen
months – or longer.  Much of our
historical outperformance has come from our ability to lock onto those trends
and generate excess performance in our client accounts.

Since 2010, those trends have been much shorter with much
more back and forth motion.  In addition
to the usual factors that effect the markets positively and negatively there
has been a new elephant in the room.

That elephant is Government.
There have been issues created by government actions at home and in
Europe.  Then you add in the effect of hundreds
of new government regulations on the economy, a government spending trillions
of dollars more than it has and a federal reserve stimulating the economy,  i.e. QE1, QE2 and QE3.

I won’t even go into the effects of market uncertainty
created by the upcoming presidential election.
That election will determine whether we move toward an even bigger
government and more regulation or we let
the free market control our economy.
Not to mention the effects of the fiscal cliff we are facing after the
election regardless of who is elected.

Because the government factor is more difficult to measure
and more random, I believe that it has contributed significantly to the shorter
term, back and forth trends.   This
uncertainty has added additional inputs to the way that we manage money and has
at least temporarily, forced us to be more conservative than we would like.

Even when our models are completely bullish we still have to
hold back some cash because of the increased level of uncertainty created by
the government.  It is frustrating to
hold extra cash,  but it does allow us more
flexibility to deal with unknowns that may occur.

There is an old saying that bulls make money, bears make
money but hogs get slaughtered.  Right
now you could call us moderately bullish but definitely not hoggish.

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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