photo by ewen and donabel
Written by Dave Young, President and founder of Paragon
At this time of year, many people eagerly ask, “What’s next for the stock market?” To understand where it might be going, let’s look at where it’s been.
In October 2007, the Dow Industrials hit a high of 14,164. From that high we saw one of the worst bear markets in history with the Dow plunging to 6,547 in March 2009. Then, as many proclaimed the world was ending, we saw the Dow rally from that 6,547 low up to 11,205 by April 2010. Since April, we’ve spent the past six months going back and forth, only to recently hit a new high of 11,444 on Nov. 5.
So what’s next? If you follow what the media has said, you might think the markets will never recover. Actually, it’s amazing how many people don’t realize the Dow has already rallied 75 percent off of the March lows. But some still believe the world is ending.
While there are many reasons to be concerned about the future, there are many more reasons to be optimistic:
1. The Fed wants the stock market up and interest rates low. It is taking its most aggressive action in history by buying $600 billion in Treasury bonds. A basic rule of investing is, “Don’t fight the Fed.”
2. Based on the results of the last election, politicians should be much more friendly to business than they have been. This should be good for the economy.
3. From a cyclical standpoint, the third year of a presidential term has almost always been the best year of the term for stocks. It’s known as the “sweet spot.”
4. Every time the market has lost ground over a 10-year period, like it has recently, performance the following decade has been positive.
TWO INVESTMENT RULES
I often receive subscription invitations to various investment services. Usually I ignore them, but this one was from a highly regarded firm. Its pitch was compelling. They offered eight “exclusive” stock picking services priced at $3,000 per year, per service. I told them I wanted to “look under the hood” — to see if the performance matched the hype.
I was shocked to discover that the historical performance of six of the strategies was terrible, and the other two mediocre. Surprisingly, most of the services were sold out.
What did I learn from this? Why would anyone pay $3,000 a year for a stock picking system that doesn’t add value? Apparently, many investors act on the “hype” but don’t investigate the numbers.
Rule No. 1: Always thoroughly evaluate the numbers. Don’t rely on what sounds good. You would think a big, national firm with unlimited resources could put together a successful trading strategy. You could be wrong.
Rule No. 2: Investing is very difficult, whether the firm is big or small. Don’t assume that the big firms have the advantage when it comes to investing. Because of their bureaucratic structure and large size, it can be harder to be nimble and creative.
Because investing is difficult, many investors become convinced that no one can beat the market. They give up trying and simply buy and hold some mutual funds hoping to at least match the performance of the broad market.
At Paragon, we believe there is a better way to invest. Our performance tells our story. From January 1, 1998 through October 31, 2010, our Top Flight growth portfolio has generated a net compound annual return of 13 percent versus 3.4 percent for the S&P 500 Index.
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.
Written by Dave Young, President of Paragon Wealth Management
photo by somegeekintn
Since the March 9th low, the market has been in rally mode. Amidst a backdrop of naysayers, from March through the end of July, the S&P 500 gained 46% and has pulled positive with a year-to-date return of 10.95% through July31st.
The rally has been global in scope, with almost all sectors and countries participating. Global stock markets had their best quarter in over 20 years. For the most part, last year’s worst performers were this year’s best.
Both of our portfolios outperformed their benchmarks.
Our conservative portfolio, Managed Income, is up 7.13%%. Our growth portfolio, Top Flight, is up 17.21% year-to-date, versus 10.95% for the S&P 500. Since its inception in January 1998 through June 2009, Top Flight extended its gains to 301% versus 24% for the S& 500. (That is not a typo).
Last quarter, as the media proclaimed the world was ending, we said investors should position themselves in the areas of the market that historically perform the best after a bear market.
We also strongly recommended that investors avoid treasury bonds. Last year’s treasury bonds were the only decent performing asset class. As a result they became very popular, just at the wrong time. So far this year, treasury bonds have moved from first to worst and are one of the worst performing asset classes, with the Barclays Long Term Treasury Bonds Index down -12.25% year-to-date.
Once again undisciplined investors moved to the “safety” of treasuries after getting beat up in stocks, just in time to get beat up again.
On the other hand, the areas of the market that usually do well after a bear market have performed exceptionally, just as we expected.
From the March 9th lows through June 15th, the sectors we recommended performed as follows: Financials +94%, Industrials +50%, Material +49%, Consumer Discretionary +46%, Technology +43%. On a macro basis, growth outperformed value and emerging markets beat developed markets. Our focus on Brazil and China significantly benefited our growth portfolios.
BENEFITS OF RISK MANAGEMENT
As I mentioned, our growth portfolio, Top Flight, generated a total return of 301% versus only 24% for the S&P 500 from January 1998 through July 2009. Investors often assume our portfolios take more risk because our returns are high. Actually, the opposite is true. Avoiding large losses has generated much of our excess return.
For example, in the recent market cycle, January 2007 through July 2009 the S&P 500 lost 26.3% of its value. Many investors have done even worse. During that same period, our actively managed Top Flight Portfolio was down only 9.3%.
To accurately compare performance the most important question to ask is, “How much of a return is needed by each investment strategy in order to get back to even?”
Calculating percentage returns is different than most investors realize. For example, if you have a 25% loss, you need 33% to get back to even, which is workable. If you lose 50% of your portfolio, you need to make 100% to get back to even, which is obviously a much more difficult task.
For example, let’s compare Top Flight to the S&P 500. For Top Flight to recover its 9.3% loss it only needs to earn 10%. For the S&P 500 to recover its 26.3% loss, it will need to earn 36%. As you can see, the size of the loss has an exponential negative effect on an investor’s ability to recover. It will take investors in the broad market (S&P 500) three times as much effort just to get back to even versus Top Flight.
Avoiding large losses is critical to long-term success. Investors must follow a disciplined, non-emotional, long-term, proven investment strategy if they want to succeed.
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.