Tag Archives: investments

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.

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.

Stuck in the Middle

Posted June 2, 2011 by admin. tags:Tags: , , ,

 photo by Alan Vernon

Written by Dave Young, President of Paragon Wealth Management

The markets had a rough day yesterday with the Dow Industrials down 279 points or -2.22 percent.

Other major indexes followed and were down about the same percentage. That was the biggest drop in almost a year.

In a weird way I guess that is good news.

The fact that a 279 point drop was the worst in almost a year. Looking back at 2008 and 2009, it felt like we had those kinds of drops on a weekly basis. So it appears that we have made progress from those dire days.

The markets seem to be stuck in the middle of a trading range since February. We hit 12,000 on February 4. Then, we hit 12,873 on May 2. Now we are back to 12, 269 today.

About 85 percent of our models are still positive.

The market is relatively oversold and investors are more pessimistic than they have been, both which are positive for the market. Corporate earnings are still good and expected to grow at about 16 percent. Also, market breadth is still decent. Our cyclical forecasts make a case for upward market momentum to last through August.

On the downsides, the ISM came in below consensus at 53.5 vs. expectations for 57.5. Other economic reports are coming in weaker than expected. The question is whether the decline in momentum is temporary or the beginning of a downward trend. Also, overseas, as they continue to try and figure out who is going to pay whose debts. Greece is actually threatening to default on theirs – which will put a scare into the markets if it occurs.

So what does this all add up to? Obviously, no one knows for sure.

If I had to make a guess it would be that we would continue to be stuck in this range for a while longer.

If we do see a correction, I would expect it to be relatively mild, in the five to 10 percent range.

However, it is a good thing that we don’t get paid to guess. We will continue to follow our models and invest accordingly.

Have a good weekend.

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.

Friday Market Update

Posted May 13, 2011 by admin. tags:Tags: , , , ,
Wall Street Street Sign

Written By Nathan White, Paragon’s Chief Investment Officer
The markets have been down for the first two weeks of May. This was led by weakness in commodities, which had been on a tear over the last six to nine months. The materials and energy sectors have been hit the worst. We have been using the ups and down to lighten exposure in the materials area because it looks like it has seen its best days on a risk adjusted basis. We also pared back some energy exposure, but might look to re-enter at lower prices if given the opportunity.This is a seasonally tougher time of year for the market. The market is looking tired after the good run we saw and the uncertainty of the impact of QE2 ending. The majority of our models are still bullish, but not with a same degree of conviction as we saw over the last two years. We have built up a cash position in our growth portfolio, Top Flight, to hedge and take advantage of any dips.

Hopefully the market is just entering a consolidation phase wherein any corrections would not become severe as the fundamentals still supporting the cyclical bull market remain intact.

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.


An Update on Bonds

Posted December 13, 2010 by admin. tags:Tags: , , , ,

Investors often go to bonds for safety. Over the past few months, Paragon's advisors have been discussing some of the risks involved in investing in long-term and some intermediate bonds. Due to recent market activity, some of those dynamics have changed.

Watch this short video to learn what has changed and Paragon's thoughts.


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 advisor and should only be used in conjunction with his/her advice.

Advice on Investing in Long-term Bonds

Posted November 11, 2010 by admin. tags:Tags: , , , , ,
Climbing a mountain

photo by Shutterstock

Although bonds have become popular the past two years, our wealth managers advise investors not to put their money into long-term bonds because we believe investors could be hurt significantly if rates increase.

“It is our opinion that bond investors will be the next group of investors to get hurt,” said Dave Young, President and founder of Paragon. “In the 2000 bear market, stock investors got crushed. Then, many of those same investors moved to real estate for protection and got beaten up again in 2008. Treasury bonds performed well the entire time. As a result, since the beginning of 2009, investors have put a net $620 billion into bond funds while they have withdrawn $100 billion from stock funds. This has pushed rates to all time lows.”

Our portfolio managers claim that the current quantitative easing by the Fed may temporarily slow down increasing rates, but it won’t stop them.

“Many bonds do not have near enough return to compensate for their downside risk,” said Nathan White, Paragon’s Chief Investment Officer. “With interest rates so low, we believe that investors will not find the safety or the returns they seek in most bonds.”

Nathan said bonds have been in a 30-year bull market, which lulled investors into a false sense of security.

“Going forward, the returns that people will likely see in bonds will be very low at best or sharply negative at worst,” said Nathan. “Unfortunately for bond investors, we believe it could be the negative scenario.”

We advise investors to be aware of the maturities and quality of their bond holdings. We encourage investors to consider shortening the maturity of their bonds and adding high quality dividend stocks as an alternative.

About Paragon Wealth Management
Paragon Wealth Management is a wealth managementfirm that actively manages all types of traditional and retirement accounts such as IRA and 401(K) rollovers, and pensions and trusts. Paragon is a registered investment advisor and has fiduciary responsibility. Paragon received the Best of State Award in Financial Services in 2008, was listed on Wealth Manager Magazine’s Top Wealth Managers List in the U.S. in 2008, received the Small Business of the Year Award in 2008, and was listed on WealthManagerWeb’s Top Wealth Manager’s list in 2010.
Paragon cannot guarantee the accuracy of information from other sources. Opinions are as of the dates indicated only. This report is not a solicitation for any security. Past performance is not a guarantee of future results. Investments in securities involve the risk of loss. 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 advisor and should only be used in conjuction with his/her advice.

Wealth Management Tips

Posted June 4, 2009 by admin. tags:Tags: , , ,
Utah National Park

Written by Dave Young, President of Paragon Wealth Management

photo by mandj98

Investment markets perpetually cause investors to do the wrong things at the wrong time when it comes to wealth management. Most mistakenly follow their emotions and act with their heart rather than their head. Below are examples of conversations I had last week with investors searching for better alternatives.

Comment:  “I’m really nervous about my investments. I’ve never really paid much attention to them, but I have decided that I need to do something.”

Response:  “Don’t just do something because you feel the need to act. Make sure your actions are strategic, make sense, and will improve your situation over the long-term. Doing something just to do it is usually a mistake, especially when you are investing.

Comment:  “This really nice man told me about an annuity that guarantees 7%, but if the stock market goes up, I’ll get the benefit of that also.”

Response:  These annuities are popular right now because they provide the illusion of safety, guarantees and market upside. In other words, they provide the best of all worlds. If they really provided the benefits they claim they would be great products.

If you read the prospectus rather than the sales literature, you will find their terms extremely confusing. Their prospectus is full of disclaimers and requirements that must be met in order for them to work. Most lock up your money with surrender charges that force you to stay in them for 7 to 10 years.

Why would anyone want an investment that forces you to stay invested in it for seven to 10 years? Good investments allow you to come and leave when you want. They stand on their own merits.

Comment:  “I talked to a financial advisor at Vanguard and they told me that I should put my money in their index funds because they have the lower costs and will participate in the market upside if the market goes up.”

Response:  “Unlike the annuities mentioned above, their accounts actually should go up if the market goes up, which is positive. The negative side to it is that over the past 10 years, the S&P 500 and most other broad based index funds haven’t returned anything to investors. To get a return of “zero” for a really low price doesn’t provide much benefit. Look at the investments total net return over time, not just the internal costs.

Comment:  “I’m going to put my money into a CD because it is safe.

Response:  “Don’t lock your money up at a fixed rate when interest rates are at multi-year lows. There are much better “safe” options available. Only lock your money up at fixed interest rates when the rates are relatively high.

Bottom line… Always follow a long-term, disciplined investment strategy when you invest.

Don’t Blink…

Posted May 7, 2009 by admin. tags:Tags: , , ,
Looking to the horizon

Written by Nathan White, Chief Investment Officer

photo from iStockphoto

I have always been amazed at how fast markets can move.

If your pieces are not in place before a move occurs you often miss out on the best part of the move.

The hard part about getting your pieces in place before a move is that you must act early and you must pay the price of being wrong for a while. This is the trade-off, and there is no way around it.

Look at the way so many are now scrambling to get in the market now that the sun has appeared through the clouds and the world has not ended. The opposite is just as true after as people clamor to get out of the market after it drops.

If the clouds have parted, how should your investments be positioned?

At Paragon Wealth Management, we favor sectors and asset classes that perform the best after market bottoms. These include areas such as emerging markets, which can benefit from a snap back in demand not only from the U.S. but from domestic demand as well.

In prior periods, many of these markets were wholly dependant upon the U.S. However, with emerging middle-classes in countries such as Brazil and China the potential for growth is amplified. Sectors that get beat up the most in sell-offs often have the most “snap back” potential.

The Material and Financial sectors really took it on the chin during the last six months and have been roaring back with a vengeance after being severely over-sold. Other areas that perform well during recovery periods are Technology and Small-Cap.

It can be very difficult from a psychological standpoint to get back into the market after a low has been established.

People are so shell-shocked by the bear market that no one believes the rally when it first starts. Many (professional and individuals) wait for a re-test or pull-back to get back in only to have the market steadily clime away from them.

Does this sound familiar?

What Stimulus?

Posted February 19, 2009 by admin. tags:Tags: , , ,
Word Collage

Written by Dave Young
President of Paragon Wealth Management

photo by abraaten  

Investment markets represent psychology in motion.

In an effort to stay on the right side of that motion we are constantly evaluating all of the factors that affect investors. Those factors are many and varied but in include good and bad “news”, media spin, company announcements, economic data and most recently the “political” impact.

For the past six months we have had more political impact on the markets than any time I can remember.

I try to look at all political news objectively and evaluate it only on its market impact. Unfortunately, I think that both political parties often act in their own best interest rather than the people they represent.

The stock market sold off initially, through September, as a result of the credit, banking and real estate crisis. It was a fairly normal bear market at that point. Then, as the negative political rhetoric intensified and the media amplified it we saw extreme fears enter into the financial markets. As it became clear that Barack Obama was going to win the election, the markets sold off further in anticipation of the uncertainty created by a change of leadership. That market sell-off followed the pattern of previous election years when the incumbent party loses.

After the election, the market stabilized and there was an expectation that Obama would move from the left to the center. Also, there was an expectation that the media would begin to spin more positive news once their candidate of choice was in. Those would be positives for the market.

Unfortunately, the “stimulus” package that was recently passed changed those expectations. Prior to its passage Obama and company pledged CHANGE.

They promised transparency and bipartisanship. They promised a stimulus package to “jump start” the economy. This was advertised as “change we could believe in.”

With no time allowed to read or review the bill, it was jammed through congress for approval.

It’s hard for anyone to take a promise of transparency seriously when the bill is pushed through so quickly that it is not even allowed to be read.

Its passage re-defined the word “bi-partisan” when only three of the republicans (out of a total 219) voted in favor of the bill. The bi-partisanship promised was ignored and taken even more extreme and negative levels than the previous administration.

Based on its contents, the “stimulus” appears to be no more than an excuse to pass an extreme government entitlement spending package.

Unfortunately, only about 20% of this bill can be characterized as stimulative. Most taxpayers wouldn’t spend a dollar to get 20 cents of value. The market voiced its opinion with a drop in the Dow industrials of over 400 points since the stimulus bill passed.

The good news is that the market will recover eventually. In the past 100 years we’ve been through 34 bear markets, which were followed by bull markets.

The stock market and economy have always recovered in spite of… not because of the actions of politicians.

Don’t Hang Yourself… Look to the future and re-allocate your portfolio accordingly

Posted December 10, 2008 by admin. tags:Tags: , , ,
Financial Magazine Covers

Written by Dave Young, president

Last week I was look through various stock market charts when my 14-year-old son walked into the room. He asked me what I was looking at.

I thought I would have a teaching moment and began to explain how markets move up and down in cycles. After silently looking at the charts he responded,“If that was my money, I would hang myself!” and walked out of the room.

While I thought his response was a little harsh, I do understand that most investors are very discouraged after such a difficult year.

So how bad has this market been? Consider the following:

Warren Buffet, considered an icon of wise investing, lost almost half the market value of his accounts between the middle of September and the middle of November.

Bill Miller, one of the only managers to beat the S&P 500 for the past 15 consecutive calendar years through 2006, is down almost 60 percent year to date through December 3rd.

Dan Fuss of Loomis Sayles is a renowned bond manager. Bonds are traditionally very conservative and are used to stabilize portfolios. His highly regarded bond fund is down an incredible 28 percent through December 5th. He said this is a “once in a 50-year” buying opportunity.

Icon Funds, a value-based mutual fund manager, put out a report stating that stocks are 60 percent undervalued.

High Yield bonds actual default rates are currently at 3.1 percent. However these bonds are currently priced as if the default rate was 17 percent.

Not to understate the obvious, but investment markets are difficult. They do whatever is necessary to cause the most grief to the largest number of people.

The market continuously trains investors to be in the wrong place at the wrong time.

When markets are strong and moving up everyone wants in and is aggressively buying. That is often the wrong time to be putting money into the market.

Conversely, when markets are bad and going down, everyone is selling and no one wants in. That is usually a good time to invest.

Occasionally, you get market conditions that are horrible (like now) and investors are acting irrationally in extreme panic. At this point in the cycle, investors begin to sell at any price. This is the stage when investors begin effectively “giving away” their investment in order to get out of them.

Historically, this has been a phenomenal time to invest and buy new positions. Moving up from extreme lows is when fortunes have been made after previous bear markets.

I believe investors are positioning themselves in the wrong place at the wrong time once again. As evidence, simply look at the record amount of money that has been moving out of stocks and into cash, money markets, bank Cd’s, and fixed annuities. At a time when 30-year treasury bonds are paying a record low 3 percent yield, in a quest for safety, investors are running as fast as they can to lock in those low yields… at just the wrong time.

Looking forward over the next three to five years investors have a choice:

–Invest in money market funds; bank Cd’s, fixed annuities or treasury bonds. These will guarantee returns in the 2 to 4 percent range. Your money is locked up at historically low interest rates for 3 to 7 years with significant surrender charges if you change your mind.

–Invest in a well diversified, strategic portfolio made up of beaten down bonds, stocks and real estate. Our portfolios are currently positioned to capitalize on areas of the market that historically recover the fastest (visit our website www.paragonwealth.com to see examples of recommended portfolios).

This panic has pushed stocks down to the same levels they were 11 years ago. We won’t know until after the bear market has ended that it is over, but we do know that returns after previous bear markets have been exceptional.

Looking backwards or following a “rear view mirror investing” strategy, usually causes an investor to invest in the wrong place at the wrong time.

Our portfolios are currently reallocated based on opportunities going forward. When the market finally turns positive we will continue to adjust our portfolios based on which areas are showing the most strength.

History Repeats?

Posted November 21, 2008 by admin. tags:Tags: , , ,
S&P 500 Index and Daily Volatility

Written by Nathan White, CFA
Stock market chart, originally uploaded by shannongolladay.

There are certain events that happen in your lifetime that you always remember, such as getting married, the birth of a child, etc. Experiencing the worst market decline ever is probably not an event you want to have on your list.

These are definitely historic times.

I thought it would be interesting to post this chart to illustrate the current circumstances in the stock market.

This chart shows how the current market volatility compares with other tumultuous times going back to 1957. You can see that volatility spikes above 2.5 coincide with major market sell-offs and bottoms. In hindsight, these were great buying opportunities as evidenced by the significant rallies that occurred after each spike.

That brings us to the current situation which as you can see is literally off the charts!

Theoretically, a 6 percent standard deviation event is expected to have a 0.0000001973% chance of occurring! Of course that is based upon the theory that markets follow a normal distribution or in my words in a “normal world.”

The problem is that real life is often anything but normal. So now we find ourselves in the present “historic” situation where the market decides to destroy all investments and all of the accompanying strategies and models no matter how successful they have been.

I’m a big believer that history repeats itself, but never in quite the same form.

If you are looking for a silver lining to all of this craziness just look at what happens after the volatility spikes and remember that during the spikes people become convinced that the bad times will never end and bad news permeates everything.

Sound familiar?

Blog Role