Don't Hang Yourself... Look to the future and re-allocate your portfolio accordingly

Written by Dave Young, president

Last week I was look through various stock market charts when my 14-year-old son walked into the room. He asked me what I was looking at.

I thought I would have a teaching moment and 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 walked out of the room.

While I thought his response was a little harsh, I do understand that most investors are very discouraged after such a difficult year.

So how bad has this market been? Consider the following:

--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.

The market continuously trains investors to be in the wrong place at 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 no one wants in. 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 www.paragonwealth.com 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.

Looking backwards or following a "rear view mirror investing" strategy, usually causes an investor to invest in the wrong place at the wrong time.

Our portfolios are currently reallocated based on opportunities going forward. When the market finally turns positive we will continue to adjust our portfolios based on which areas are showing the most strength.