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.