Written by Dave Young, President & Founder of Paragon Wealth Management
While the stock market made significant advances in 2013 and 2014, last year felt more like a repeat of 2011 when the market went nowhere. In 2015, the S&P 500 experienced its first 10% decline in four years.
There were some winning sectors with technology, health care and consumer stocks posting modest gains. On the other hand, commodity, mining and energy stocks were a train wreck. Large stocks beat smaller companies and U.S. stocks beat out international ones. This year’s gains were focused in a minority of stocks.
No asset class posted double digit gains. In the past 28 years, that has only happened one other time (in 2001).
China and Greece continued to create financial drama. Emerging markets had a terrible year. Generally speaking, most stocks and sectors were in decline. In 2015, if you broke even as an investor, it would be considered a success.
Managed Income portfolio spent its time avoiding trouble. Many of the conservative asset classes it invests in ran into difficulty. Managed Income declined -2.8% for the year. This is its first negative year since 2008.
While we are never happy with a negative year, we were pleased it was able to avoid much of the downside experienced by the underlying asset classes it invests in. It was playing defense all year long.
Managed Income’s return from October 2001 to December 2015 is 5.14% compounded, which equates to a total return of 101.7% net of fees. (Please click here for disclosures.)
Top Flight portfolio had a good year considering positive returns were hard to come by — and those returns were in a relatively narrow group of stocks. Top Flight gained 3.71% for the year versus 1.41% for the S&P 500. Top Flight’s compound annual return from January 1998 through December 2015 is 11.7% versus 6.26% for the S&P 500. Top Flight’s total return for that period is 613.4% versus 194.0% for the S&P 500.
Paragon Private Strategies Fund’s recent audit showed an internal rate of return of 14.3% for the period from March 20, 2013 through Dec. 31, 2014. Our relatively conservative private equity fund has performed well in this difficult environment. We are planning to open a second fund in 2016. Please contact us if you are interested in exploring this investment option and for required investor qualifications.
How Wealth is Created
Making money is difficult. After a difficult year like 2015, it is important to go back to basics, evaluate your situation and make sure you are on the right path.
As financial advisors, we provide a variety of financial services like retirement, estate and business planning. However, our focus has always been on managing investments. Why? At the end of the day, if you aren’t effectively building wealth over time, most aspects of your financial plan won’t matter.
So it begs the question. What is the best way to invest? How can you invest to meet your retirement goals?
Step one. Invest in things that increase in value. Currently, money markets, CDs, bonds and fixed annuities are not likely to gain much value. Interest rates are at historic lows, and those investments are tied directly to those low interest rates. After inflation and taxes, most of these investments are actually taking you backward.
In order to build wealth, you have to invest in things that appreciate over time. With interest rates this low, only stocks, real estate and direct business investments meet the criteria.
Step two. Enhance your return by buying when prices are low and things are cheap. Conversely, you should be reducing exposure when prices are high. Is this easy? Absolutely not. It is completely counterintuitive and requires you to ignore your natural “fight or flight” inclination.
This is why we have been holding so much cash for the past eight months. Our models showed that the upside was limited — there was too much risk for the potential reward.
Let me explain by highlighting a study published last year by DALBAR, one of the nation’s leading financial research firms.
The study found that over a 20-year period ending Dec. 31, 2014, the average equity-stock-fund investor posted an average annual return of 5.19%, which compares unfavorably to the average annual return for the S&P 500 Index of 9.85%.
Going back 30 years, DALBAR paints an even gloomier picture, with the average equity-stock-fund investor earning 3.79% annually versus the S&P 500’s average annual gain of 11.06%.
The reason most investors significantly underperform over time is because they constantly follow their emotions, which consistently puts them in the wrong place at the wrong time.
Rather than buying low and selling high, they do the opposite.
Step three. Reduce investment costs where possible. There is so much “junk” — i.e. prepackaged financial products sold to the retail investor. These products are sold by banks, brokerages and independent financial planners. They’re pitched at really nice dinner seminars. The excessive internal costs of these products make it difficult for the investor to gain the benefit of their underlying investment. With many of these products, it can take years, if ever, to overcome the internal costs.
Step four. Be patient — and this is the most important step. Stocks, real estate and direct business investments take time to play out. If you buy a quality stock or a property today, for a decent price, odds are that 10 years from now it will be worth significantly more than it is today. It will likely be worth much more than if you had invested that same money in a conservative investment.
The downside — and the part that trips up most investors — is that the investments that go up the most typically fluctuate the most. And that instability causes investors to bail out at the worst possible time and lose money.
This is why we recommend diversifying your portfolio with some conservative, albeit relatively unexciting investments. Each of our clients has an investment portfolio built to their specific goals and individual risk comfort level. While this is not necessarily the way to maximize returns, it is the way to maximize your return. We know if we can keep you invested for the long term, we can significantly increase your odds of meeting your goals and building wealth.
The concept is simple; the execution is difficult. But that’s why we’re here. We are committed to helping you reach your goals. Please call if you need help or have any concerns.
Disclaimer Paragon Wealth Management is a provider of managed portfolios for individuals and institutions. Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results.
Written by Dave Young, President of Paragon Wealth Management
Taken from Paragon’s 2Qtr 2012 print newsletter
Secrets to Building Wealth
Building Wealth is difficult. It’s somewhat like a gauntlet. According to Sports Illustrated 60% of NBA athletes and 80% of NFL athletes are broke within five years of retiring. I’ve seen similar stats for beneficiaries of life insurance policies, lottery winners and trust fund recipients.
Even the best managers have a tough time staying ahead of the markets. The legendary Warren Buffett only generated a 6.2% for the first quarter versus 12.6% for the S&P 500. Since the market bottom in March 2009, Buffett is up roughly 44% versus 80% for the S&P 500.
Jim Cramer of Smart Money is one of the most outspoken, well known market guru’s out there. His actual track record is surprisingly dismal. If you had followed his advice religiously over the past ten years you would have only earned 1.68% compounded per year.
A basic rule of investment success is to give yourself a fighting chance by playing in the right sandbox. In other words, invest in the right asset class. Let’s look at the performance of five primary asset classes over the past FIFTY years.
- Median Home prices have increased at a rate of 4.8% per year since 1962. Home prices increased fairly steadily until about 2005 when they took a tumble.
- Treasury Bills gained 5.4% compounded over the fifty years and had the smoothest ride. Currently they are essentially returning nothing because interest rates are so low. Until interest rates move higher it seems pointless to own Treasury Bills.
- Treasury Bonds are in the middle of the pack and have returned 7.5% over last 50 years. The bond chart shows that bonds trended gently upward for the first 20 years and then moved sharply higher over the last 30 years. Bonds have performed phenomenally over the past 30 years as interest rates went from about 17% to 3%. During this time, because interest rates have steadily trended down it has created an illusion that bonds are always safe. With rates currently pushed to the floor it is highly unlikely that we will see returns approaching their 7.5% long term average any time soon. It is much more likely that bondholders may see significant losses if interest rates move back up toward their long term averages.
- Gold returned 8.1% over the past 50 years. That sounds great on the surface until you realize what you would go through to get that return. First, you have to buy the gold without getting fleeced by the super high commission firms who sell it. Then, for the first 13 years your gold it went nowhere. Then the next 10 years, amidst significant volatility, it went straight up from $35 to $850 an ounce. Just two years later it cratered back down to $307 an ounce. It didn’t get back to $850 an ounce until 28 YEARS after it first hit $850. Over the past four years gold has doubled in price. It is possible to trade gold successfully but it can be very difficult.
- Stocks had the best returns over the time period at 9.4% per year. The first fifteen years, amidst significant volatility, stocks doubled. The next 24 years the stock market moved steadily up creating one of the easiest environments ever to be a stock market genius. The last twelve years stocks there have been two huge bear markets with stocks effectively going nowhere.
In my opinion, it currently makes no sense to invest in Treasury Bills, which yield nothing, until rates move back up. Much worse than T-Bills are bonds or gold which are at all time highs. Both are owned for safety but ironically carry significant downside risk going forward. A home makes some sense because values are low but it’s hard to get too excited when a home’s 50 year return is half that of stocks.
I believe that it makes the most sense to follow a proven strategy that invests in stocks. Even though the last twelve years have been extremely difficult, stocks still have the best returns. Even more compelling, stocks are currently the most beat up, out of favor and undervalued of the five asset classes.
Investing in stocks can be a positive or negative experience, depending on whether or not you follow the rules.
Rule one is to determine your risk tolerance so that you are not taking unnecessary risks.
Rule two is to follow a flexible strategy that allows you to protect wealth and capitalize on opportunities when they present themselves.
Rule three is to be very patient.
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.
Written by Dave Young, President
Step #4: Avoid Unnecessary Debt
Debt can be useful if used properly. On a recent trip to Africa, I noticed that there were half built buildings everywhere. Projects were at different levels of completion and then abandoned. When I asked my guide why the structures were halfway done, he responded, there is no banking system. There is no way for the common man to borrow money. People can only complete part of the building because they lack the funds to pay for building supplies right away. So they build what they can pay for now, and then come back and build more next year when they have more money.
If debt is used sparingly, for assets that appreciate or allow you to make more money, then debt makes sense. For example, a house, a car, or an education all make sense.
Using debts for consumables or things that go down in value, makes no sense. Most credit card debt is for things that hurt rather than help your financial situation.
My definition of a credit card is, “A means of buying something unneeded, at a price you can’t afford, with funds you don’t have.”
Set a goal to live debt free. With 1.5 billion credit cards in circulation, an average household credit card balance of $8,562 and an average interest rate of 19%, it’s no wonder that one out of every 50 households filed for bankruptcy in 2005. In the United States the household debt-to-income ratio reached an all time high.
Accumulating debt is the exact opposite of accumulating wealth. If you are paying debts, you are helping someone else accumulate wealth. With the few exceptions mentioned above, avoid debt like the plague.
Written by Dave Young, President
Step #2- Spend Less Than you Earn
This seems like obvious advice, but it is often ignored.
According to a recent article in Smart Money, Americans collectively spent more than they earned after taxes for the past two years in a row. This bad habit afflicts people at all income levels – those with less may feel as if the extra expenses are a necessary evil, while those with more may assume their high income protects them from any future financial trouble. This mentality must be changed in order to build wealth.
I’ve personally met individuals who earn $40,000 a year but save $5,000 of that for the future. Although it may seem like a small annual amount, that money adds up to future wealth and security. In contrast, I have met others who earn $200,000 a year and spend $220,000. This is a quick way to destroy a fortune.
While it may sound simplistic, in order to build wealth, you must spend less than you earn.
To be continued…
Written by Dave Young, President of Paragon
Many people believe that accumulating wealth is a random event. Or it is pure luck that determines who is wealthy and who isn’t.
It is true that occasionally someone wins the lottery or receives an inheritance and becomes wealthy, but usually immediate wealth is temporary. Studies have shown repeatedly that most widows who receive a life insurance death settlement either spend, loan out or lose the money they receive within three years of receiving it.
In order to build wealth, you must follow certain rules. In order to keep wealth, you must follow those same rules. If you never learn the rules or don’t have the discipline to follow them, you will not build or keep wealth.
I’d like to offer you seven sound steps for building wealth.
Step #1—Start Now
Albert Einstein said, “The most powerful force in the universe is compound interest.” For compound interest to be truly powerful, it must have the benefit of time. The more time the better.
For example, compare two investors who each put away $2,000 a year and earn 10% annually. The first investor starts at age 19 and puts away $2,000 per year for eight years in a row and then holds it there. The second investor waits eight years before investing $2,000 per year for 38 years. At the end of the 38 years, the first investor’s account will have grown to $941,054. The second investor’s account will be at $800,896. The first investor invested $60,000 less but ended up with $140,158 more.
The other factor affecting compound interest is the rate of return. Everyone knows that a higher rate is better than a lower rate. What most people don’t realize is that the benefit is exponential. A 15% rate of return is not merely three times more than a 5% rate of return. It can actually be anywhere from seven times to seventy times more depending on how long you’re investing it for. Small increases in rates of return make an enormous difference in the long run.
There will always be reasons to begin saving later, but as you can see, holding out for the perfect circumstances can be very costly. The sooner you start, the greater the effect of compound interest.
To be continued…
Written by Dave Young, President
Once an investor has accumulated capital and implemented a good investment strategy, then the final and most important piece of the puzzle is patience.
In 2006, Top Flight had an off year versus the S&P 500. Historically Managed Income and Top Flight haven’t underperformed very often. However, when they have, that hasn’t been a good time to change strategies. For example:
* In 1999 Top Flight earned 3% less than the S&P 500, but then the following year it gained 71% more than the S&P 500.
* In 2002 Top Flight had its worst year ever, losing 13.6%, and the next year it gained 50.3%.
* In 2002 Managed Income underperformed its benchmark, the Lehman Bond Index. The following year it gained 25.4% more than the Lehman Bond Index.
* In 2006 Top Flight had an off year earning 5.9% versus 15.8% for the S&P 500. The following year (2007) Top Flight earned 16.9% tripling the S&P 500 (see our track record for full disclosures).
Past performance is not a guarantee of future results, and there are no guarantees in this business. According to our track record, every time we have underperformed, our performance has exceeded the benchmark the following year, quite significantly in most cases.
Copyright 2008 Paragon Wealth Management
Written by: Dave Young, President
Once I was asked in an interview with Smart Money magazine about the single most important factor effecting investment success. I told the reporter that committing to and following a sound, long-term investment strategy is the key to success. Sounds simple, right? Yet most investors can’t describe their strategy because they simply don’t have one. Far too many people invest a little here and a little there based on what they’ve read or who they’ve talked to recently. They often bail out of the stock market after it has tanked. Or they buy real estate after they’ve had a great run. Or they invest in the latest hot product being promoted by brokers and financial planners.
Then, of course, there’s the recent “follow the newsletter” trend. Every year, Hulbert Financial Digest ranks the performance of investment newsletters. According to Hulbert, many investors have started basing their investments on the advice found in last year’s top-ranked newsletter. On the surface, it seems like a good idea. You’re following the advice of a proven winner, right? And it feels good to follow a winner.
The only problem is that like most “feel good” decisions in the investment world, it doesn’t work. At all. If you had taken $1,000,000 in 1985 and followed this brilliant strategy every year for the next 21 years, you would have a whopping grand total of $365 today. That’s an average loss of 31.4% per year. The moral of this story should be fairly clear: Twelve-month track records are an absolutely horrible guide to which advisors will perform well over the long term.
So what are the keys to a sound strategy for building wealth? Any successful investment strategy must:
- Work over different time frames
- Provide effective diversification—not just diversification for diversification’s sake
- Work in both bull and bear markets
- Be disciplined yet flexible and evolving
- Reduce risk and provide downside protection
- Have a good long term track record
After you develop a strategy that meets these criteria, it’s all about patience, self control, patience, and more patience.