What to do while we’re between a stock and a hard place.
Written by Dave Young, President of Paragon Wealth Management
At Paragon, during the 1980’s and1990’s, our primary focus was on growth. Our objective was to grow our accounts as much as possible. We controlled risk by monitoring the business cycle and the strength of individual companies and industries.
Since the economic meltdown of 2008 the challenges and number of risks to investors has multiplied. Significant new risks are the result of the 14 Trillion Dollar Debt that our government has created. Government debt has always been a concern. Recently it has moved past the “concern” stage and into the “critical” stage. I believe we are approaching a tipping point.
In 2010 the U.S. budget deficit was about $1.3 Trillion. To put that in perspective, $1.3 Trillion is close to the total amount of debt our politicians accumulated from 1776 to 1984. In one year, 2010, they added as much to the debt as they added over an entire 208 year period.
Current government projections show that from 2011 to 2019 they will add $900 Billion to the debt –each year. If their projection is accurate then the debt will double by 2020, just nine years from now. A debt of that magnitude could potentially cause economic chaos. It would likely cause taxes to rise, benefits to fall and interest rates to go up.
Even now, our investment decisions are directly affected by the debt on a regular basis. Historically, political issues had little effect on our investments. Currently, they are the primary driver effecting the markets. For example, in July the political drama over the budget and our treasury bond rating pushed the global markets down. Recently, our trading has been driven by the political debt drama in Europe.
For savers, those that invest in savings accounts, CD’s, and annuities, life has gotten very difficult. There is not a saving option that is safe and pays a decent interest rate. It does not exist.
Those “safe” accounts pay between 0% and 2% and provide about the same benefit as putting the money under a mattress. With inflation running at 3.5% savers are losing money on their investments. Each year, they watch their net worth lose value. If you consider the effect of taxes then it is even worse.
If you to move to bonds for safety, then your situation is potentially even worse. Bondholders have had a great ride for the past 30 years. Owning bonds as rates dropped from 17% to 2% worked extremely well and lulled bondholders into a false sense of security.
When interest rates start to increase, bondholders will see the value of their bonds decrease accordingly. For example, the owner of a ten year treasury bond yielding 2% will see their bond lose 10% of its value when interest rates go up only one percent. If rates go up two percent then they lose 20%. If rates go up three percent, then they lose 30%, and so on.
Investing in the stock market is much more difficult as well. It’s likely that only certain areas of the market will benefit depending on which economic and interest rate scenario plays out. Being in the wrong areas of the market will be costly.
So what should an investor do? Hiding the money in a bank isn’t the solution because of the effect of inflation. Moving to the safety of bonds doesn’t really provide safety at all. For stock market investors, following the typical “buy and hold” advice that you hear from the big institutions is full of potential obstacles. Buying into gold which is priced for perfection, at the highest prices ever, doesn’t seem to make a lot of sense either.
Investing in the right place at the right time is more important than ever. Building wealth is first about preserving wealth and capitalizing on opportunities when they present themselves. I believe that in this environment that you must have a strategy in place that allows you to increase and reduce your market exposure as needed. You need to be able to move between market sectors when market conditions change. You must be flexible and able to adapt to the current market environment.
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.