If you watched television or listened to the radio six months ago in early March, it felt like the world might be coming to an end.  As we expected, the March lows were the market bottom.  Since then, the economy has moved back from the precipice and has gained 50%, retracing a good portion of the losses since last fall.

The following article from Yahoo! FINANCE outlines critical factors to keep in mind for post-recession investing.

Rules for Post-Recession Investing

by Rob Gordon and Jason Whitby

Despite the pundits’ pronouncements of green-shoots or signs that the economy is on the mend, many investors remain scared and understandably sensitive to the previously unimagined threats to capital market stability. In many cases, not only have they reduced their equity exposure to levels that will not help them beat inflation, many have pulled out of the publicly-traded markets entirely, and remain on the sidelines.

Return to Investing
If you are planning to retire on the assets you have accumulated or are accumulating, you need to get exposure to the equities markets and you need to do that sooner rather than later. Global equities markets work and you deserve your share of the positive long-term returns generated by them.

Generally, market declines cause panic, to quote a study by DALBAR - a leading developer of measurement systems for intangibles, such as customer behaviors, in the financial services industry. A 2003 study by DALBAR found “motivated by fear and greed, investors pour money into equity funds on market upswings and are quick to sell on downturns.” The report goes on to say that in the past 19 years, the average equity investor has earned 2.57% annually compared to 12.22% for the S&P 500 Index. This study clearly illustrates the “reactive” nature of today’s investors and just how much it costs them in return. It’s important to recognize how much emotions influence investing decisions most often to investors’ detriment.

Keys to Excellent Returns
As investors slowly emerge from their fear-induced stupor, it is important to review important principles which have provided excellent risk and inflation-adjusted returns over the last 50 or more years. With these foundational principles in place, the investor will be ready to participate in the global capital markets.

• Don’t Forget About Your Risk Tolerance
  Return statistics are perhaps the most quoted numbers in personal finance and investing. Quantitative measures of risk or volatility are undoubtedly the least quoted. When you look at your risk tolerance, consider three factors: capacity to take investment risk, need to take investment risk and desire to take investment risk. There are many questionnaires and other tools online that attempt to help investors measure these variables. Use them as a sanity check for your own measures given your previous investment experiences.
• Draft and Sign an Investment Policy Statement (IPS)
  Institutional investors, like pension funds and university endowments, have a document which defines the types of investments allowed in their portfolios. Good fiduciary investment managers have an IPS for each of their clients. An IPS takes all the relevant inputs and creates your own personal investment plan and diversified asset allocation. Essentially, the IPS helps you stick to the plan and tells you what to do when in doubt.
• Keep The Investment Decisions Simple
  With an IPS in hand, you now have specific marching orders to populate your portfolio with actual securities. Index mutual funds and exchange-traded funds (ETFs) reduce costs and provide broad exposure to specific asset classes.

These are foundational steps in the construction of your portfolio. The next question is, “How should you get back in?” This question essentially refers to the two primary options: put it all in at once or stage the money in over time. Which is best?

All at Once
For investors who have just experienced one of history’s most challenging economic periods, this option must seem the least interesting. However, in a world where market timing does not add additional return and where the expected returns are positive, it makes the most sense. Any averaging-in strategy will keep money out of a rising market. Nevertheless, averaging techniques remain very popular in the financial press and in practice. The reason for this is primarily because it feels good.

Averaging Into the Market Over Time
If you accept that you need exposure to the equity markets, there is a high probability that you will consider averaging into the market versus making a lump sum investment. Given that likelihood, what is the best way to average into the market? Quite simply, it depends on larger financial planning concerns like your need for cash and outstanding obligations. Beyond that, the options are innumerable: contribute a set amount; a set percentage of the remaining balance; a fixed dollar amount; a variable amount based on fluctuations in the market; a variable amount on a random schedule and on, and on. Here are a few important considerations as you consider your strategy:

• Formalize the plan by writing it down.
• Be careful of executing too many trades thereby incurring very high transaction costs. The research overwhelmingly states that the benefits are marginal at best and most likely are negative, so don’t erase the emotional benefit by piling on hundred or thousands of dollars of trading fees. No-transaction fee mutual funds can be beneficial in this area.
• Be careful of dollar-cost averaging up. If the market is rising, you will be buying higher and higher levels. Remember, the market has had, and we expect that it will continue to have, a positive bias as global economies continue to rise. If you divide your investment into too many pieces, you will end up investing the money over an ever longer period of time and therefore increasing the probability of dollar-cost averaging up.
• Try to divide the investments among the least correlated assets. For example if you are going to invest $10,000 into five different investments, try to pick U.S. large cap, international large cap, commodities, real estate and maybe fixed income.

Conclusion
No one really knows when it is “safe” to get back into the markets, or whether the market is experiencing a dead cat bounce, sucker rally, V-shaped recovery or W-shaped recovery. You will not receive an email, phone call or other advance notice saying, “Now is the time!” More than likely, when the news is rosy and you start feeling safe about getting back in, you will have done irreparable damage to your ability to keep pace with the market. Do your best to keep emotions out of your investments and jump in.

photo by businesspictures

photo by adam.dras

Over the past year investors have been affected by what some describe as “the perfect storm“.  On Wall Street the S&P was at 666 at its low, now it has rallied 58% from that point. For those that have weathered the storm it’s time to assess what lessons can be learned.

Below are excerpts from an article on CNNMoney.com by Penelope Wang.

The worst financial meltdown since the 1930s began, you’ll recall, with a bang. Early September 2008 the housing crash led to the federal government’s takeover of mortgage giants Fannie Mae and Freddie Mac — whose dividend-paying stocks were a cornerstone of many retirement portfolios.

The five following lessons from the Crash of ‘08 will help you strengthen your finances going forward — and should limit the damage in the next crisis, wherever and whenever it may come.

Lesson 1: Asset allocation still works — just don’t expect a guarantee.

In the wake of the crash, you may have concluded that asset allocation — the traditional strategy of diversifying among stocks, fixed income, and cash — is a bust. After all, your U.S. and foreign equities and all sorts of bonds lost money last year.

“The basic principles of asset allocation need to be revised,” says MIT finance professor Andrew Lo. He and other experts argue that since market volatility is rising, you must now own other assets — such as hedge-fund-like investments — in addition to stocks and bonds to manage risk. And you must be prepared to shift your mix tactically from time to time. “You need to be proactive and adjust as the market changes,” he says.

And if you look at the numbers, you’ll see that proper diversification did you considerable good in this meltdown.

Lesson 2: The world is riskier — and will stay that way.

Remember the Great Moderation? The phrase describes the recent quarter-century period when economic growth looked limitless and the long-term risk in stocks seemed to be disappearing. Between 2003 and 2007, for example, the Chicago Board Options Exchange Volatility Index (VIX) — a well-known gauge of how risky investors think the market is — hovered in the 10-15 range. That was down considerably from the index’s historical average of about 20.

Risk, of course, returned with a vengeance. Last October, at the height of the banking crisis, the VIX hit an all-time high of 80. Today the VIX has fallen back to around 25. The question is, should you brace yourself for more nerve-jangling spikes? Yes, according to many investment pros, including Yale finance Professor Roger Ibbotson, founder of Ibbotson Associates.

Revisit your investment mix to make sure you’re taking on an appropriate amount of risk in light of your financial goals and your tolerance for more market shocks.

Lesson 3: Real diversification is harder to achieve than it looks.

The best way to avoid too much exposure to any industry or asset — especially frothy ones — is to drill down in your portfolio to see what you actually own. Another idea: Stick to index funds. As noted, an S&P 500 or total stock market fund can’t keep you from getting caught up in the market’s momentum. But it’s always clear what index funds own, because they mirror well-known benchmarks for which information is readily available.

Of course, owning different stock funds — be they actively or passively managed — won’t adequately diversify you, since most equities are positively correlated. Translation: They tend to move in the same direction. And correlations among assets have been growing, as global markets are now intertwined.

Lesson 4: Recognizing a bubble is hard. Hedging against one is harder.

“To spot a bubble in advance requires a judgment that hundreds of thousands of informed investors have it all wrong,” said then-Federal Reserve chairman Alan Greenspan in 1999. He should know how hard that is: He failed to detect two of history’s frothiest markets — in tech stocks and in housing.

The one sure hedge: a healthy dose of cash, an asset all but forgotten during the boom. Don’t ignore it now.

Lesson 5: You can’t time the market, but you can time yourself.

Every year that passes is another year you get closer to retirement. Over time this will require you to dial back the percentage of your nest egg that you hold in equities.

Then there are circumstances specific to you and your family. Sure, your allocation may have been right when you last rebalanced your portfolio. But what if your employer has run into financial problems recently and you fear losing your job? What if your spouse is coping with a medical emergency, or you’re now financially responsible for an aging parent?

If you’re dealing with these kinds of situations, it’s more important to preserve your principal and build up some additional cash reserves than to earn the highest possible returns. In that case there’s nothing wrong with shifting some of your equities into safer, more liquid investments.

This is not a repudiation of asset allocation, but a recognition that your life has changed. And it’s that kind of timing that will guide your portfolio safely through good times and bad.

For the past several months, the media seems to think we are getting close to a depression. The question is, are we really?

The answer is no, we aren’t even close to a depression. Look at the facts below.

                                                   Today     vs.   Great Depression

Unemployment                      8.1%                          25%                   

Industrial Production              -9%                         -54%

Bank Defaults                            42                          9000 

GDP                                       -6.25%                       -45%

What do you think? Feel free to leave comments.

photo by cliff1066

Today I read an article in BusinessWeek called, “What’s Selling? The Great Depression.” This is an interesting headline. The media and politicians have talked about us going into a “depression” for so long, it is becoming popular. Here is a clip from the article.

“With pundit after pundit predicting the worst downturn “since the 1930’s,” perhaps it was inevitable:  The Great Depression is making a cultural comeback, resurrected at social gatherings, on fashion runways, and, perhaps, in the future marketing plans of some companies.

In New York City, twentysomethings are throwing Depression parties, where the clothes are ’30s vintage and the playlists favor Big Band numbers and Dust Bowl ballads. Evite, the online party-invitation service, says such bashes are on the rise nationwide (table)…”

photo by Iabnol

How will the presidential election affect you?

2008 has been a rough year for investors.

Whether you have been invested in real estate or the stock market, both have gone down more than up. The credit crisis and high energy prices have been blamed for most of the damage.

Talking to investors, I get the sense that many are worried about the election.

The data that we track from Intrade, a futures based election trading system, show Obama with a clear 64% to 37% lead over McCain. Unless Obama makes some unbelievably bad mistakes over the next couple of months it is likely he will be our next president. Historically, this tracking service has been much more accurate than traditional polling.

Investors are justifiably concerned because many of Obama’s policies are potentially damaging to our economy.

Under the premise that the government knows how to better spend your money than you do, Obama wants to raise taxes significantly. And any economist will tell you that raising taxes is not the way to help a weak economy.

Obama’s platform proposes major tax increases.

He is focused on raising more taxes from those taxpayers who already pay 90% of the U.S. tax bill. The bottom line with his program is that if you already pay a lot of taxes then you will pay significantly more. If you don’t pay very much in taxes then you shouldn’t see much change, you may even pay less. According to a recent Wall Street Journal editorial, Obama would raise the top tax rates from their current 40% to over 60%, including the state and federal taxes.

This is a calculated political bet that there is a majority of Americans that want the more affluent minority to pay all of America’s bills. Throw in some anti war rhetoric and a promise of undefined “change” and you have a recipe for a successful presidential campaign.

There is really no benefit to arguing the merits of Obama’s platform. We can’t control the outcome of the election. But we can control the investment strategies we follow in these uncertain times.

Historically, when democrats take the white house, the market usually does better than under republications. That is no typo. It’s a little confusing though.

Usually going into an election, if a democrat is winning, Wall Street expects the worst, and the market sells off in advance. After the democrat gets in office, then Wall Street realizes they aren’t going to do what they promised, breathes a sigh of relief and then the market rallies.

On the other hand, if a republican is winning, the market has positive expectations and rallies in anticipation. But then after the republican gets in, and doesn’t keep their promises, then the market sells off in disappointment.

So far this year the market has followed a pattern similar to previous election years when the incumbent party has lost.

If McCain is able to miraculously turn things around then we will likely see a significant rally into the end of the year. If Obama keeps his lead then the market will likely be flat to only slightly up between now and the end of the year, but then next year the market should perform better.

While market forecasts make interesting conversation, I don’t put a lot of stock in them, including my own. At Paragon Wealth Management, our investment decisions are all based on quantitative models. We process market data on a daily basis and make our decisions accordingly. Human emotion is removed from the decision process.

Paragon’s investment models measure what is actually happening in the market, day by day.

They are designed to react to what the markets are actually doing rather than what we think will happen in the future. For example, whether a democrat or republican wins will affect how health care stocks, energy stocks, tech stocks, financial stocks, defense stocks, etc. all react.

The bottom line is that this election WILL affect the market.

Certain markets and sectors will perform much better than others, depending on the election outcome. It is important to have an investment strategy in place that will adapt to whatever changes take place. In the stock market, change is the only constant that you can plan on.

Visit our website for more information at www.paragonwealth.com.