Category Archives: Investments

Market Forecasting – Investors Beware (continued)

Posted June 21, 2012 by admin. tags:Tags: ,
Rolling the dice

Written by Dave Young, President of Paragon Wealth Management

Market professionals are not alone in their inability to forecast market behavior. Economists do just as poorly. Every six months the Wall Street Journal prints the results of a survey of leading economists who predict the level and direction of interest rates for the coming six months. 55 high profile economists currently participate in this semiannual forecast. You’d think such prestigious economists in such a high profile newspaper would know what they’re talking about , right? Nope.

The record shows that from 1982 through the beginning of 2003 (43 periods), 71% of the time the consensus of economists could not even forecast the direction of rates, either up or down, for six months forward. If they’d just blindly guessed they’d have a 50/50 chance, but their actual educated predictions turn out to be much worse. And these are the best the industry has to offer!

So if forecasts are a waste of time then what does work? After 20 years of managing money, I am convinced that investors will only succeed when they are able to remove emotion from the investment process. Gut feelings are not a reliable investment strategy-even the gut feelings of so-called experts.

Oftentimes, successful investing requires you to act in a way that is contrary to what you “feel” is right. For example, several of our models measure the overall optimism or pessimism in the investing public. When optimism is high we know that there’s a lot of risk in the market and it’s likely that the market will decline. Likewise, when optimism is low and most investors think that things are really bad, that is usually a great time to invest. This pattern has repeated itself for years.

We take great care to ensure that all of our investment decisions are based on solid, proven models, not hunches. Our portfolio allocation models tell us how much we should be invested based on measured risk in the market. We run the models daily to determine the most effective percentages of investments and cash holdings.

Once we’re in the market, our portfolio focus models tell us where we should be invested. We constantly track all areas of the equity markets on both a macro scale (small cap, mild cap, large cap, value, growth, international and emerging markets) and a micro scale (individual industries, sectors and countries).

The bottom line for Paragon Wealth Management’s clients is that they can be confident that their portfolio isn’t being managed by some celebrity market fortuneteller. Our quantitative models enable us to impartially measure what is actually happening in the market and how much risk there is at any point in time. We constantly evaluate the models to determine how effectively they are working. In my opinion, this is one of the best ways to invest for long term success.

Click here to read the first half of the article.

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.

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. 

 

Are we in a Recession?

Posted December 8, 2011 by admin. tags:Tags: , ,

 

Some people say we are currently in a recession. Others say we aren't… 

Watch this short video to learn Paragon's wealth managers thoughts on being in a recession. 

What do you think? We'd like to hear your feedback. 

This video was filmed on Nov. 30, 2011.

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.

The Probability Of A Recession

Posted October 21, 2011 by admin. tags:Tags: ,
Rolling the dice

Written by Dave Young, President of Paragon Wealth Management

So are we going to have a recession or not?  Every time the market drops a thousand points it seems as though stocks are priced as if there is going to be a severe recession. Listening to the commentators you would think the world was going to end any day.

As we have mentioned repeatedly over the past few months, the indicators that we track haven’t shown a high probability of recession. We don’t discount the fact that we may end up in another recession but up to now the high level of pessimism is not consistent with what our indicators are showing. This is in contrast to the endless interviews of advisors proclaiming that the next recession is just around the corner.

In the update we received today from Ned Davis Research much of the data they present doesn’t indicate an imminent recession either. As a matter of fact, some of the data looks more promising than it has since the sell off started last summer. Below are some of the statistics they sent us in our update.

The Philly Fed’s general business index surprised economists with a big positive jump of 26.2 points to 8.7. It was the biggest increase in 31 years and the 4th largest on record. Optimism about the future also improved.  The future activity index rose to its best level in six months.

The conference board’s Leading Economic Index (LEI) rose 0.2%, up for the fifth straight month.  The CEI rose 0.1%, as all four of its components picked up.  According to the Conference Board, all composite indexes suggest “the expansion in economic activity should continue, but at a modest pace in the near term.” Overall the Board sees about 50% chance of recession in the next six months.

The Ned Davis Research Economic Timing Model rose to +16 from +12, which is historically consistent with moderate growth. Overall, the indexes were mixed but the positive news on the Philly Fed’s General Business Activity Index was very interesting.

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.

Whither the Europeans…

Posted August 19, 2011 by admin. tags:Tags: , , , , ,
6a00e54fa07ce28833015390d4bb37970b-800wi


photo by lyng883

Written by Nathan White, Paragon’s Chief Investment Officer

During the financial crisis of 2008 to 2009, there were many Europeans who scoffed at our troubles and blamed us for dragging them down. How irresponsible we Americans were was the general tone. Oh the irony.

How’s that Greek investment feeling right now?

It felt good to get that off my chest…

With the markets continuing its record moves and volatility and testing the recent lows, what is next? In the short-term, the market is extremely oversold and sentiment is extremely negative. It can be very hazardous to sell into this condition. The bad news is that Europe is reeling and their banking system is under extreme strain. Their recent futile efforts such as banning all short selling and the proposal of financial transactions tax are extremely counterproductive. Their fractured political system makes it hard to organize a bailout like the U.S. engineered three years ago. At some point they will organize a bailout, but the questions is a matter of timing. Will it come after bank failures occur or before?

In the meantime the uncertainty is hammering the market and affecting the real economy.

It is normal at this stage of the economic cycle for growth to slow down after business catch up to a more “normal” level. The slowing economic data was exacerbated to the downside by the Japanese earthquake ramifications and then unfortunately coincided with the debt-deal circus in Washington. Now the great debate is whether all these developments are going to cause to a double-dip recession. Some leading indicators are telling as much and indeed the effects of the current events are going to have an economic impacts as they are somewhat self-fulfilling. However, whether we have another recession or not is a moot point with regards to the market as much of it has been priced in.

Washington is still MIA and the Fed seems to be out of bullets.

However, don’t count the Fed out as Bernake is not called “Helicopter Ben” for nothing and they could pull out new versions of QE3. Bailouts always help in the short-term, but retard the upside. If the Fed keeps expanding its balance sheet at some point in time it will have to be reversed and that is the risk I fear in the future. I wish the Fed would have been selling all their bonds into this recent rally for a tremendous profit!

In the background of all this is that corporate profits have been tremendous supporting a low valuation argument and corporate balance sheets are generally strong and flush with cash. If a recession ensues they are much better prepared than three years ago (including the banks).

No one stopped buying iPhones during the last recession.

Survival is a powerful instinct and as we enter an election year, policy makers could come to their senses and realize they need some “real” policies that encourage economic activity or they are history (note to President Obama – extending unemployment is not one of them).

In the short-term, and until we get some kind of clarity/resolution regarding the European debacle, it is going to be a tough and volatile environment. The up side risk is that if at any time we get some resolution of the Euro situation stocks are extremely undervalued and could rebound so fast that sellers would be left holding the bag.

In this environment, we are cautiously looking at the areas such as energy and materials that get beat up the most and then offer the best upside while at the same time holding some cash for a bit of protection and future opportunities. In both of our portfolios, we have raised just shy of 20 percent cash and as a precautionary move. We have moved out of all traditional money markets into U.S. Government money funds (or FDIC Bank- sweep features) in order to avoid the negative effects should the European banking system freeze up.

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.

Understanding the Risks of “Safe” Investments

Posted April 21, 2011 by admin. tags:Tags: , , , ,
Risk Time


photo by fayj

Written by Nathan White, Paragon’s Chief Investment Officer
Taken from Paragon’s 1st Quarter 2011 Print Newsletter
(continued from last week)

What are some of the risks of investments typically held in a more conservative allocation?

Many like the safety of cash-like instruments such as savings deposits and money market funds. These are very short-term and liquid investments and hence offer about the lowest return available at any given time. Bank deposits are usually FDIC insured up to $250,000 per bank.

Short-term investments are usually very safe and liquid, but you are exposed to the credit risk of the institution (i.e. the financial ability of those to whom you give your money to pay you back). During a financial panic, such as 2008, the weakness of these types of instruments can be exposed in the form of a liquidity crunch. This occurs because everyone wants their money at the same time and assets are unable to be sold fast enough to cover the demands. While the probability of this occurring is low, it could be devastating nonetheless.

Certificates of Deposit or CD’s are one step up the risk ladder and offer higher yields than cash in return for locking your money up for a specific period of time.

They are often FDIC insured as well, but are subject to the credit risk of the issuer. You also run the risk of locking in low rates that don’t provide a sufficient return or keep pace with inflation.

Government, corporate and municipal bonds are subject to interest rate risk, inflation and credit risk. Before the financial and European debt crisis, the latter seemed to be a remote possibility for government bonds. However, the growing debt burdens of governments across the globe have called into question their ability to sustain and ultimately service that debt. Ask the holders of Greek, Irish, and Portuguese bonds how their “safe” government bonds have fared. Even municipal bonds have had trouble lately due to the debt burdens of states and municipalities. There would never be enough money to bail everyone out at the same time.

Paragon’s Approach

At Paragon, we believe in creating a balanced approach by obtaining income from a variety of different sources rather than just bonds in general. That way we don’t get crushed if one area runs into a problem. We look at the yield or return of a particular investment in relation to the risks involved. Currently in our Managed Income portfolio we are invested in preferred stocks, REITs, high-yield bonds, and dividend paying stocks in addition to bonds. We are keeping the maturities on most of our bond holdings on the shorter side to protect against rising rates.

Over the long-run, we believe that investing in a diverse source of conservative asset classes and over-weighting the areas we feel have the best return for the risk is an effective strategy.

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.

Risks of “Safe” Investments

Posted April 14, 2011 by admin. tags:Tags: , , ,
Caution Tape

photo by Henrique Vicente

Written by Nathan White, Paragon’s Chief Investment Officer
Taken from Paragon’s 1st Quarter 2011 Print Newsletter

Throughout my years in the investment management business, I have witnesses how both fear and greed affect investors’ decision making.

As markets approach the pre-financial crash levels, it is probably an appropriate time to asses how emotions impact investing. Investing is basically a set of trade-offs. I believe that many investing mistakes occur in the attempt to ignore this reality.

Life is full of consequences, and most of our troubles come from ignoring this fact before we make decisions. I see so many people searching for the ever elusive holy grail of investing – a good return with no risk. Deep down I think everyone knows that if something sounds too good to be true then it probably is. You cannot get something for nothing, and applying this to investing means that you cannot get a return without some type of risk.

Greed influences us to go after short-term benefits at the expense of the long-term. We want our investments to pay off now, not 20 years down the road. We chase things like performance rather than developing a balanced strategy. Investing is the quintessential act of delaying gratification. Fear on the other hand causes us to shirk away from opportunities that could be essential to our progress. Both fear and green can cause us to miscalculate opportunities and risk.

Risk of “Safe” Investments

Almost everyone acknowledges that investing in the equity markets carries risk. The performance of the stock markets over the past decade has certainly heightened this awareness with many banning stocks altogether. I have met many who no longer desire to have any fluctuation at all in their investments. For now most of these people indicate that they will be satisfied with the low returns of their newly found conservative strategies. We will see how that plays out over time.

Many have been so scared off by the volatile markets that they are seeking safety in bonds or other conservative type investments. I believe that bonds and other conservative investments are essential components of a balanced investment strategy, but they are not without their inherent risks as well. They may for the most part be less volatile in their price movements, and it is this volatility that most people define as risk.

It is first probably good to look at the risks of a conservative allocation in general.

The main risk is that the return realized is less than what is needed to reach a goal, support a lifestyle or maintain the portfolio’s real value after the effects of inflation.

Quite simply low risk equals low return. Inflation is a particularly pernicious risk and probably the bondholder’s worst enemy. Due to the unprecedented government actions and deficits, the risk of inflation getting out of control is very real. With inflation running at three percent, which is close to the historical average, it only takes five years for your purchasing power to decline by 14 percent. you can imagine the damage if inflation ran even higher. To fight inflation governments must tighten the money supply, which is usually done through increasing interest rates. Since the prices of bonds move inversely to interest rates, bondholders could be faced with losses on what they thought were “safe” investments. The risk is exaggerated with interest rates still near historic lows.

The problem that many investors have is that they want equity type returns with a conservative portfolio’s risk, thereby setting themselves up for inevitable disappointment.

I also see a lot of conservative investors that are yield hunters. These are people who just look at the stated yield of a particular investment, usually without regard to how it is calculated, which is a critical factor, and buy whatever is the highest. Yield hunters say they don’t care about the fluctuation of the principal because they just want the juicy dividend or interest. As long as they get it everything is OK. Reality is hard to face when they realize that the yield they purchased is in reality unsustainable and now face possible capital losses.

To be continued…

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.

Are you ready for your retirement?

Posted February 25, 2011 by admin. tags:Tags: , , ,
Beautiful Beach and Sunset


photo by David Saunders Photography

Written by Dave Young, President of Paragon Wealth Management

At the start of a new year, we begin to think about our goals. We might think about getting back in shape, spending more time with our families, eating better, reading more, etc.

Another goal you might have is getting your finances in order to help you prepare for your retirement. Do you know if you are on track to retire at the age you’d like? How is your portfolio positioned? Is your portfolio set properly for your investment risk tolerance? If you have retired, are you on the right track? We’d like to help you answer these questions and more.

We are introducing a new service that we are only offering to our blog readers for the next month. It is a complimentary retirement analysis. We will focus on your investments, give you a second opinion on how they are positioned, make sure your plan is aligned with your goals, and answer any questions you may have.

Call 800-748-4451 to schedule your appointment.

This is one of the most important goals you should evaluate. If you don’t know where you are going, it is difficult to get there.

We will help you answer these questions:

– How much money do you need to save each year to meet your retirement goals?
– What rate of return does your portfolio need to generate?
– What is the probability you will reach your objective – at a different rate of return?
– Is your portfolio properly positioned for where we are in the market cycle?
– Are you taking too little or too much risk?

Paragon began in 1986. Since then we have talked to thousands of investors about their porfolios. These are some of the investment mistakes we’ve seen repeatedly.

Mistakes Investors Make

RISK TOLERANCE
Investors don’t often know how much risk they need to take in order to reach their goals. In addition, they haven’t defined how much market volatility they can comfortably live with. Most of the time they don’t know how much risk they are actually taking because they haven’t defined their risk tolerance. As a result, next time the market goes down they will likely endure sleepness nights as they hope the market recovers. Their odds for success are low.

DIVERSIFICATION 
Investors own many mutual funds and think they are diversified. We regularly see accounts that are holding 40+ funds. What they often don’t realize is that many of their funds hold the same stocks. In reality, they are not diversified at all. They usually take more risk than they realize.

BONDS 
Investors hold bonds for safety and stability. Bonds provided safety over the past 30 years because interest rates declined from 18 percent down to 2.5 percent. Most bonds do not provide safety when interest rates move up. To the contrary, bondholders may see significant losses going forward as rates increase from the all time lows.

HIGH EXPENSES
Many portfolios are filled with expensive mutual funds. Investors are paying management fees, transaction costs and 12b1 fees. They can often achieve the same market exposure through ETF’s at a fraction of the cost.

KNOW WHEN TO SELL 
Buying a stock or fund is the easy part. Knowing when to sell is the hard part. Investors should never own a position they wouldn’t be willing to buy today. We see portfolios full of investments that should have been sold long ago.

Are you ready for your retirement? Is your retirement going well if you’ve retired already? Call us at 800-748-4451 from now until April 1 to schedule your complimentary retirement analysis.

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions. Any information presented is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Investments in securities involve the risk of loss. Past performance is no guarantee of future results. All opinions and estimates constitute the judgement as of the dates indicated and are subject to change without notice. Do not rely upon this information to predict future investment performance or market conditions. This information is not a substitute for consultation with a competent financial, legal, or tax adviser and should only be used in conjunction with his/her advice.

 

Seven Reasons Why Investing is so Tough

Posted February 17, 2011 by admin. tags:Tags: , , ,
American Stock Exchange photo


Written by Dave Young, President of Paragon Wealth Management

Successful investing is tough. Over the long term, it may be one of the toughest tasks you take on. It’s not about your physical toughness. According to a story in USA Today, 60 percent of retired NBA players are broke within five years. The NFL is worse — 78 percent of retired players are in the poorhouse just two years after retirement.

Athletes aren’t the only ones with money issues. The problem seems to show up anytime people come into large sums of money without prior investment experience.

Studies show that the majority of widows who receive life insurance proceed to lose the money within three years. Lottery winners carry the same characteristic with most losing their winnings within a few years. Because of difficult markets and poor investment strategies, over the last 10 years, many retirees have lost more than half of their retirement savings.

Why is investing so tough? Here are seven reasons:

IT REALLY IS THAT DIFFICULT
Certain types of investing can be almost impossible. Regardless of what the infomercials promise, a small percentage of options, futures or currency traders actually succeed. While the potential is there, the odds of success are totally stacked against you.

SCAMS
Invest in real estate, business or stock scams and you will have no chance of getting your money back. They seem like a great idea at the time, but without experience, scams are difficult to identify.

IT’S OUT OF YOUR CONTROL
Legitimate real estate or business projects can go sour because of a bad market, poor management, competitive factors or other issues beyond your control.

DIFFICULT MARKETS
If you invested at the peak of a stock or real estate bubble, like 1999 or 2007, you are still waiting for your account to get back to even. Unfortunately, markets are always difficult. No one rings a bell when to buy or sell. Human nature drives most investors to buy when prices re high and sell when they are low.

LOW-PAYING GUARANTEED PRODUCTS
Bank CDs, savings accounts and annuities induce buyers by promises of safety and security. The only real guarantee is that your returns will be so low you’re guaranteed your earnings will not keep up with inflation and taxes, ultimately destroying your purchasing power.

BAD ADVICE
Unfortunately, many “advisers” know little more than the people they are advising.

BAD PRODUCTS
A lot of investment products sold by salespeople are not good for investors. Many are expensive and full of hidden costs. Some even limit your upside. Often, they are structured to benefit the company selling them.

So what should an investor do? First, embrace the fact that investing is difficult. Take is seriously. Recognize little is taught about investing in our educational system. Be realistic about your level of investment proficiency. Understand taking it lightly can be hazardous to your financial future.

Second, educate yourself about investing. Learn the basics. This does take time. Realize many investment theories contradict each other. The more you read, the more you realize how much more there is to know.

Third, find an adviser you can really trust. If you really don’t have time, resources or expertise to manage your own money, then work with an exceptional adviser. At a minimum, you want someone who is a fiduciary, who has at least 10 years of experience and who can show you their actual 10-year track record.

On our website, paragonwealth.com, we provide a free, educational download titled, “How to Select a Financial Adviser.” I highly recommend you download and use it as a reference.

The bottom line is successful investing really is tough. It is competitive. To succeed requires knowledge, experience, mental toughness and discipline.

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions. Any information presented is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Investments in securities involve the risk of loss. Past performance is no guarantee of future results. All opinions and estimates constitute the judgement as of the dates indicated and are subject to change without notice. Do not rely upon this information to predict future investment performance or market conditions. This information is not a substitute for consultation with a competent financial, legal, or tax adviser and should only be used in conjunction with his/her advice.

A Seesaw Market?

Posted October 14, 2010 by admin. tags:Tags: , , , , , ,
Seesaw stock market

 

Photo by Hoyasmeg
 

Written by Dave Young, President of Paragon Wealth Management
As seen in Paragon’s 3Qtr 2010 Print Newsletter

September is known as the worst month to be in the stock market.
At the end of August, many media outlets and TV talking heads ran stories about how bad this September would likely be. Investors moved money into bonds and gold and avoided stocks. Some of our clients called and asked to be taken out of the market purely because it was September.

What did the market do? Of course, it did what it had to do in order to cause the most grief to the majority. Since everyone expected it to go down… it went up. In short, we just had the strongest September since 1939. The S&P 500 gained nine percent for the month. Unfortunately, because of outflows into bonds and gold, many investors did not participate in the stock rally.

Overall, it was a seesaw quarter.

The markets were up sharply in July, down sharply in August and then up even harder in September. The back and forth movement has been more difficult than usual this year with the S&P 500 either gaining or losing at least four percent in each of the last five months.

Those extreme up and down swings make our life much more complicated. When the markets are weakening, we make adjustments to protect ourselves. When they are strengthening, we make adjustments to prepare for upside movement. We have been stuck in this back and forth no man’s land since April.

We prefer trending markets. Either trend up or trend down, but just be consistent.

When the market is trending, it allows us to capitalize on the trend and ride it as long as it lasts. When it is whipsawing back and forth, we are forced to make constant adjustments, but it is difficult to make progress.  Effectively capitalizing on the trend is how we have significantly beaten the S&P 500 historically.

So far, this year’s market action reminds me of 1994. The good news is that markets never swing back and forth like this forever. Eventually, they break out and move in one direction.

MANAGED INCOME AND TOP FLIGHT PERFORMANCE

Our conservative portfolio, Managed Income, has done well for the first three quarters of this year with a 4.8 percent return, net of fees. This has been a very challenging year for our conservative portfolio. With interest rates at extreme lows, it has been difficult to generate safe returns and still avoid the potential danger posed by increasing interest rates.

You might be wondering why potentially increasing interest rates are such a problem. If interest rates go up one percent, then a 10 year maturity bond will lose about 10 percent of its value. Likewise, an increase of two percent would create about a 20 percent loss and an increase of three percent would create about a 30 percent loss.

With interest rates at all time lows, many supposedly safe bonds are really ticking time bombs.

Investors have been piling into bonds in a big way. Since the start of 2009 investors have put a net $620 billion into bond funds while they have withdrawn $100 billion from stock funds. When rates do eventually go up, investors who ran to bonds for safety will be surprised to find themselves saddled with big losses they thought they were immune to.

Most conservative funds simply buy and hold bonds. Those types of funds will likely get hurt when rates go up. In contrast, Managed Income attempts to own bonds when they have favorable risk/reward characteristics and avoid them when they are unfavorable. That is why this has been a challenging environment for Managed Income. We have been forced to pull returns from other conservative areas while avoiding the majority of corporate and treasury bonds. Managed Income has performed well year-to-date.

Our growth portfolio, Top Flight, has had challenges as well. It is at a virtual breakeven for the year, with a -0.4 percent return year-to-date. Its benchmark, the S&P 500, is up 3.9 percent year-to-date. Most of that lag in performance can be attributed to difficulty in two months, January and July. If you break it down further, it is the back and forth whipsaw characteristic of this year’s market that has made it difficult.

We have spent a lot of the year adjusting and changing direction, right before the market reverses direction.

 As I mentioned earlier, at some point the choppiness usually ends and the trending begins. Unfortunately, we aren’t notified in advance when that will be. That is why we are forced to constantly adjust so that we will be in position to capitalize on the change in trend when it occurs.

Even though Top Flight has slightly underperformed through the third quarter,  we are not terribly concerned. Looking at the big picture, Top Flight has beaten the S&P 500 over the past three, five, seven, 10 and 12 year time frames (see complete track record and disclosures on Paragon’s website, www.paragonwealth.com).

To be continued next week…

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions. Although the information included in this report has been obtained from other sources Paragon believes this 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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