Tag Archives: low interest rates

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.

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.


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.


Watch Paragon’s video most recent video to learn more about how to avoid investment scams.


Paragon Wealth Management is a provider of managed portfolios for individuals and institutions. Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results. 


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