Chance to buy at these prices only comes around every 50 years
By Dave Young
Paragon Wealth Management
Last week I was looking through various stock market charts when my 14-year-old son walked in the room and asked what I was looking at.
I thought I would create a teaching moment, so I 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 he walked out of the room.
While I thought that was a little harsh, I do understand that most investors are very discouraged after such a difficult year. Exactly how difficult has this market been?
• 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 15 consecutive calendar years through 2006, is down almost 60 percent year-to-date through Dec. 3.
• 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 Dec. 5. He says this is a “once-in-50-years” buying opportunity.
• Icon Funds, a value-based mutual fund manager, put out a report stating that stocks are 60 percent undervalued.
• The actual default rates on high yield bonds are currently at 3.1 percent. However, those bonds are priced as if the default rate was 17 percent.
Smart investors position themselves
Not to understate the obvious, but investment markets are difficult. The market trains investors to be in the wrong place at the wrong time.
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 CDs and fixed annuities. At a time when 30-year treasury bonds are paying a record low 3 percent yield, investors are running as fast as they can to lock in those low yields — at just 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 nobody wants in. That is usually a good time to invest. Occasionally, you get market conditions that are horrible (like now), and panicked investors act irrationally. At this point in the cycle investors begin to sell at any price. This is the stage when investors begin effectively “giving away” their investments 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.
Looking forward to the next three to five years, investors have a choice:
• Invest in money markets funds; bank CDs, fixed annuities or treasury bonds. These will guarantee returns in the 2 percent to 4 percent range. Your money is locked up at historically low interest rates for three to seven 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. This portfolio should be positioned to capitalize on areas of the market that historically recover the fastest. (See examples of recommended portfolios at www.paragonwealth.com) This panic has pushed stocks down to the same levels they were 11 years ago. We won’t know the bear market has ended until after it is over, but we do know that returns after previous bear markets have been exceptional.
Investors should reallocate their portfolios based on opportunities going forward. Looking backwards or following a “rear view mirror investing” strategy usually causes an investor to invest in the wrong place at the wrong time.
About the Author
After graduating from BYU, Dave Young started 12 businesses in the early 1980s. In 1986, he sold his businesses but was unable to find an investment company that met his needs. Later that year he began managing his own portfolios. He invested his life savings and started Paragon Wealth Management. Over 20 years later, Young continues to invest and research ways he can better serve his clients. He has been interviewed by BusinessWeek, CNBC, the Wall Street Journal, Deseret News and others. Wealth Manager magazine added Paragon to their Top Wealth Managers list. In 2008 Paragon was named Small Business of the Year from the Provo/Orem Chamber. They also received the Best of State Award in Financial Services. Visit www.paragonwealth.com or call (801) 375-2500 to learn more.