Written by Dave Young, president of Paragon

photo by zoonabar

It has been a difficult year in the stock market for investors to say the least. Some investors have lost up to 60 percent of their portfolios or more. This bear market has been unlike all the others we’ve seen throughout history.

Below is a list of some of the most well-known investors. Consider their situation this year:

–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.

Usually when the markets are strong and moving up, everyone decides to get in and buy. This is not the best time to jump into the market unlike what people may think.

On the other hand, when markets are bad and going down, everyone sells and doesn’t want to go in. It is the opposite of what you would think, but 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, Paragon Wealth Management, 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.

Feel free to leave comments or call us at 801-375-2500.