Tuesday, January 12, 2016

Happy(??) New Year! - 2016

The Markets-2015
Well, 2015 is in the rear view mirror; and what a year it was from an investing perspective. Let’s look back at the financial markets over the year. The S&P 500 was down .73% for 2015; the Dow Jones Industrial Average was down 2.23%; the Barclay’s Aggregate Bond Index was down 1.84%; and interest rates on the 10 year US Treasury rose from 2.09% in January to 2.27% in December (with a corresponding decrease in bond values). This means that a blended portfolio of 50% stock in an S&P index fund and 50% bonds in an aggregate bond index fund would have returned negative 1.29% for the year.
But that’s not the whole story. When we look at the components of the S&P (the sectors that comprise the index), we find an entirely different story. There was significant difference in the sector performance—as follows:
Sector                                                   2015 Return                        Weight in Index

Consumer Discretionary                           +8.4%                                    12.8%

Healthcare                                                 +5.2%                                    15.2

Information Technology                           +4.3%                                    20.5

Consumer Staples                                     +3.8%                                    10.2

Telecommunications                                 -1.7%                                     2.5

Financials                                                  -3.5%                                     16.5

Industrials                                                  -4.7%                                     10.0

Utilities                                                     -8.4%                                      3.1

Materials                                                   -10.4%                                    2.7

Energy                                                       -23.6%                                   6.4
In addition, there was significant volatility in stock prices in 2015. The S&P 500 index crossed over its flat line beginning value 26 times (positive to negative and vice versa) during the year. Looking at the consumer discretionary sector (up 8.4% for the year), had volatility of monthly changes during the year ranging from +9.0% to -6.6%.
What does this tell us? First, while there is empirical evidence giving credence to passive index investing, such a strategy would not have worked well in 2015. Second, the variation in sector returns implies the opportunity for positive returns exists through active investment management. But what form does that active investment take?

Looking Ahead
One can read all the tea leaves from the past and discuss what has happened historically in similar circumstances e.g. market performance in election years, market performance post interest rate increases, etc. But, if one is pursuing an active management strategy, looking at the current state of affairs should assist in the active management tactics to take going forward. Some macro-economic items to be considered (by no means a comprehensive list) are listed below:

  1. Interest Rates—The Federal Reserve has begun its policy of “normalization” with its first rate increase in December, 2015 (up 0.25%). The Fed’s policy statement from December, and Chairwoman Yellen’s press conference, has been focused on inflation as the primary driver of future rate increases. The Fed’s 2% target inflation has not been forthcoming and has driven speculation of another 1% rise in rates in 2016. However, economic indices offer different (and sometimes conflicting) information that may affect this rise in rates.
  2. Oil Prices—As we begin 2016, oil is currently in the sub $40/bbl. range. This is a boom to some parts of the economy (the general consumer) but a bust to others (oil related industries). There is significant turmoil in the Middle East but the need for oil revenues should continue as many countries are so dependent on oil revenues that reduced production does not appear to be a factor.
  3. Strong US Dollar—The US $ has been strengthen over the last two years, making US exports more expensive to foreign markets and multi-national overseas corporate earnings worth less if repatriated to the US. While this strengthening may slow down, it is doubtful that there will be a significant decline.
  4. US Gross Domestic Product (GDP)—Current projections for economic growth in the US are in the 2-2.5% range; by no means robust but significantly better than the global outlook. The tax cut-spending package passed by Congress in December will add a stimulus to GDP but with a corresponding deficit that will likely increase in 2016 by 1% of GDP. The debt-to-GDP ratio (already at troubling levels) will begin to rise again. (Note: This excessive debt is a subject worthy of its own discussion and more than we can include here!)
  5. Global growth is slowing; especially China which appears to be transitioning from manufacturing and construction into services.
So what does the astute investor do? Economic indicators are giving conflicting advice.

  • Rising interest rates imply decreases in bond values.
  • Unemployment rates are coming down (don’t ignore the calculation methodologies of this number), but the percent of the labor force employed remains at historic lows.
  • The Institute for Supply Management (ISM) December, 2015 manufacturing data showed a contraction for the second month. Overall manufacturing is slowing, but new orders and production increased over November. The ISM manufacturing index for December was 48.2; anything above 50 indicates economic expansion and anything below 50 indicates contraction.
  • Credit spreads (the difference between “high yield” or “junk” bond yields and high quality bond yields) are increasing; this implies a greater risk in the junk bond market.
  • There is a widening gap between corporate earnings and sales results. In the third quarter of 2015, 60% of reporting companies exceeded their earnings per share (EPS) estimate; however, 59% of the reporting companies missed their sales estimates. How did this happen (expense reduction??)? In addition, there is a widening gap between the normal accounting EPS and the “adjusted” EPS being reported by some companies. Adjusted EPS eliminates some “extraordinary” or “non-recurring” expenses which results in a higher EPS. The gap between normal and adjusted EPS has been approximately 30% (normally about 10%) with adjusted being the higher.

What to Do?

Given the above, what’s an astute investor supposed to do?

First of all, consider your goals and objectives. Position your portfolio according to those goals and your risk tolerance. Attaining your goals with a risk level that makes you sleep well at night is more important than “chasing return.” For example, some investors have been increasingly pursuing risker assets in their search for maximum return. But if your goals are funded by a more moderate approach to returns, why take the extra risk. This shift basically involves an “asset-liability” matching strategy (matching your needs from the portfolio against your asset allocation) vs. a “maximum return” strategy.

Second, use these periods of market volatility (a normal part of market activity) to reposition diversified portfolios to your target levels.

Third, continue to maintain a diversified portfolio consistent with your goals and objectives. It is important to note here that diversification may be taking on a new meaning. The traditional “stocks, bonds, cash, commodities” portfolio allocation may require a different perspective; a perspective that provides more flexibility and a wider opportunity set of choices. There other markets available which may provide suitable investments (infrastructure, re-insurance, emerging markets, frontier markets, etc.). Alternative investments and hedge fund techniques (real estate, long-short investing, merger/acquisition, distressed security investing) may be beneficial in a portfolio. However, these investments/techniques have peculiar characteristics (possible lack of liquidity, extremely long time horizons, etc.) which require due diligence before investing.

We, at Paragon Financial Advisors, assist our clients in reaching their desired financial goals with an appropriate risk level. Please feel free to contact us.  Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas. We offer financial planning and investment management.

NOTE: All investing involves some degree of risk and possible loss of principle. Stock offer greater long term growth potential but may have wider and more price fluctuation while yielding lower current income. Bonds may involve credit/default risk resulting in loss of principle; they historically have provided consistent income. Alternative investing and techniques are specialized situations and should be used only when one understands the risks and restrictions involved. Nothing in this discussion should be construed as a general investment recommendation; appropriateness is dependent on the investor and his/her particular circumstances.

Wednesday, December 16, 2015

Beware of Financial Advisors?

Scott Burns is a syndicated columnist who writes a column on financial affairs.  His article on “Beware pitfalls of financial ‘advisors’” which appeared in the Sunday November 29, 2015, business section (p B4) of The Eagle had information which should be of interest to all investors.  The column, which can be read in its entirety at www.theeagle.com in the 11/29/15 e-Edition, made some points which we think bear repeating.  We quote some of the below (all items in quotations are directly from this article): 

Mr. Burns was waiting for an international flight to Paris and engaged a couple, also waiting for the flight, in conversation.  The wife was a financial advisor who had won the trip (an 8 day Viking cruise, Paris to Normandy, airfare included) as a sales inventive from the company for which she works.  Mr. Burns wrote the following:

“The company she worked for also provided generous commissions, as most insurance companies do.  And every dime of that money eventually comes out of the savings on the people they counsel on making ‘good plans for retirement.’”

“According to the Bureau of Labor Statistics, there were some 443,400 people working as insurance sales agents in 2012, all of whom might like a trip to Paris enough to sell you the product that will get them there fast.”

“There 2014 Annual report from the financial Industry Regulatory Authority (FINRA) notes that it oversees 636,707 stock brokers.  They may also be influenced by sales incentives.”

“…saves face an army of more than 1 million people who call themselves ‘advisors’ but are primarily motivated by commissions, perks, and sales incentives.”

“Both groups operate under the vague ‘suitability’ principle-that they will sell investments that are ‘suitable’ for their clients.  And they have fought being required to act as fiduciaries year after year after year.  Why?... A fiduciary swears to act in the best interest of the client and to put the client’s interests before their own.”

“The number of Registered Investment Advisor firms-those regulated by the SEC to perform to a fiduciary standard-is about 11,000.”

“There are about 100 people who live by commissions and sales incentives for every person who has sworn to live to the fiduciary standard.  Those aren’t good odds.”

“The trouble is that both the brokerage and insurance industries have business models that require sticking the consumer with high costs.”

“And the Tart is about 2 percent-from your money.”

Paragon Financial Advisors is a Registered Investment Advisory (RIA) firm which operates under the fiduciary principle.  Please call us if you need assistance with your financial planning or investment management needs.  Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas. We offer financial planning and investment management.

Thursday, October 22, 2015

The Student Debt "Bubble"?

About 25 years ago, federal government policies were implemented to encourage students to get a higher education—including borrowing the funds for that education if necessary. It was assumed that college graduates could afford the debt because they would be earning more from better paying jobs. However, the law of unintended consequences reared its ugly head. College expenses have been increasing much faster than the general rate of inflation. In addition, especially since the 2008 recession, jobs created have not been ones that paid exceptionally well.
An Associated Press article, written by Josh Boah in early October of 2015, gave some statistics about the student debt incurred for a higher education—and how it can have a multi-generational affect. Student debt in America now totals approximately $1.2 trillion. An Associated Press analysis of that data provided the following statistics:

  1. Americans over age 40 account for approximately 35% of the education debt. Extended loan repayment schedules, mid-career changes, and signing for children’s educational borrowing have driven the increase from its 25% proportion in 2004.
  2. Adults in the age 35-50 year old bracket owe about the same amount (an average of $20,000) as those students in the age 34 and younger bracket.
  3. Parents who still have college debt and teenage children have more difficulties in providing education assistance for their children. Such parents have an average of $4,000 for children’s education savings vs. the $20,000 average for children whose parents have no student debt.
  4. Student debt repayments are surpassing the cost of food for the average college educated head of household under age 40 (who has student debt outstanding)--$404 for debt repayment vs. what the family spends per month at the grocery store.
Student debt levels are causing potential problems in an already weak economy. Older graduates are delaying or foregoing some spending which would benefit the economy (such as housing and related purchases). Some graduates are accepting employment (usually at lower paying jobs) which would qualify them for student loan forgiveness.  Second generation student debtors will be looking at greater debt levels to continue their education.

There are some planning opportunities for pre-college students on how to handle the costs of continuing education. We, at Paragon Financial Advisors, can assist parents (and grandparents) in the best way to proceed on college funding. However, stay tuned—we haven’t heard the last of the student debt “bubble."  Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas. We offer financial planning and investment management.

Thursday, October 1, 2015

Interesting Times

There is an old curse: “May you live in interesting times.” The stock market has definitely had those “interesting times” in the last few months. Triple digit moves in the index (both positive and negative) have had investors hanging onto their hats for a wild ride. Pundits on the financial news channels have mentioned that the third quarter of 2015 was the worst quarter in the last four years. For 2015 (January 1 through September 30), major financial indices have been as follows:
  • Dow Jones Industrial Average: -8.8%
  • S&P 500: -6.7%
  • Russell 2000 (Small Caps): -8.8%
  • Barclays Aggregate Bond Index: -0.6%
  • High Yield Corporate Bond Index: -7.8%

In this quarter's newsletter I discussed  a “white paper” from the Vanguard Group that I found quite interesting. As you probably know, the Vanguard Group manages significant amounts of money in their mutual funds and exchange traded funds (ETFs). A major area of emphasis for them has been indexing markets and market segments. The article, “The added value of financial advisors,” provides some interesting research insights from a company that was founded for individual investors. One of advisor benefits cited is “…helping you get through tough markets.” There are strategies which can potentially reduce the market downturns. We hope you find the information worthwhile, and urge you to call us to discuss those downturn strategies.

For a complete copy of this Quarter's Newsletter with the "white paper" article discussed please email info@paragon-adv.com and request to be added to the mailing list.

Thursday, July 23, 2015

Ready to Retire?

The June 1, 2015 Wall Street Journal (pg. R5) quoted information from the 2015 Retirement Confidence Survey by the Employee Benefit Research Institute. The survey, released in April, 2015, provided some interesting information about how Americans felt about retirement. Some items discussed include the following (based on responses from individuals age 55 or older):


The percentages below show how many of the individuals polled:

  1. Have a written or documented financial plan- 21%
  2. Consulted a professional financial advisor- 43%
  3. Estimated health care costs in retirement- 36%
  4. Estimated their income needs in retirement- 58%
  5. Estimated how much they will need in savings as they begin retirement- 58%
Retirement Savings

The retirement savings issue warrants further discussion. More than half of the survey respondents believe they will need at least $250,000 in savings when they retire: only 25% have attained that level of savings. As a result, 67% expect to work in retirement. Only 23% of current retirees are working for pay.

Current savings levels prior to retirement showed some concerning results:

 Current Savings                                          Percent
Less than $1000                                           21
$1000-$9999                                                11
$10,000-$24,999                                          11
$25,000-$49,999                                          9
$50,000-$99,999                                          9

Current Savings                                           Percent
$100,000-$249,999                                     14
$250,000 or more                                        25

Note: These results are based on an Employee Benefit Research Institute telephone survey of 295 workers age 55 or older conducted in Jan-Feb 2015. The values exclude the value of a primary residence and assets in a pension (defined benefit) plan.

How does your retirement planning compare? We, at Paragon Financial Advisors, assist our clients in answering that question. Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas. We offer financial planning and investment management.


Wednesday, July 8, 2015

Back to the Basics: Dust off your Budget

I read a great article recently about the St. Louis Rams football team. Before they allow any of their new draft picks to sign contracts (many containing huge signing bonuses) they have to attend a mandatory “Financial Planning 101” class.  If the story is true, one of the coaches walked into the room with a briefcase and dumped out one million dollars in cash onto the table. Hopefully that got their attention [it would have gotten mine!]; because the next thing he did was physically remove a third of the pile…for taxes. He then took away several other stacks representing the player’s management fee and declared what was left was theirs to keep… BUT they had to make it last for the rest of the year.  

Not all of our employers are able to put our entire annual salary on the table in front of us in cash and challenge us to be good stewards of money, but what if they could? Would it change how you manage your money right now?

Our coach in this story is teaching his players a very valuable life skill and lesson on the importance of wisely controlling how you spend money. In the financial world we call this a “Spending Plan” or a “Budget”; a great tool that when used properly can help prevent you from overspending on your lifestyle and falling into debt. 

If you’re new to budgeting and making a spending plan, regardless of your age, don’t sweat it. No one gets their budget perfect the first, or even after several tries.  What is crucial during this timeframe is that you compare the projections you made to what you actually spent that month.

If you need a place to start or a format to follow; email us today at info@paragon-adv.com to request a free copy of our Household Budget Template.

The key to budgeting is to plan for your expenses ahead of time. By knowing your spending habits and accounting for your wants and needs it’s possible to take out the guesswork and quit wondering where all your money went.  If you’re married, being able to sit down and discuss your budget with your spouse will allow you to be on the same page and prevent future money disagreements; which can be a huge stress reliever. 

What if I have a surplus or a deficit?

If you find yourself having too much month left at the end of your money then it’s time to be honest with yourself. If you have a deficit by spending too much or your expenses are greater than your income, one of two things should happen 1) Decrease your Expenses and/or 2) Increase your Income. If you’ve dug yourself into a hole the best thing to do is stop digging! Put a plan in place to alter your habits so that destructive financial behavior will not create further problems.  In the words of Ben Franklin: “Beware of little expenses; a small leak will sink a great ship.”

What if you review your budget and make more money than your expenses? Congratulations, that is a great problem to have! When you reach the point where your expenses are under control is a perfect time to maximize your contributions to retirement accounts, children’s college funds, as well as save and invest for major purchases and financial goals.

We, at Paragon Financial Advisors, assist our clients in identifying their cash flow needs in order to maximize their savings and lifestyle. We offer Financial Planning and Investment Management. Paragon Financial Advisors is a fee-only registered investment advisor located in College Station, Texas.

Tuesday, June 30, 2015

Paragon Perspectives

The first thing every investor should know and accept is that there is no such thing as a sure thing when it comes to investments.  Risk is a part of the investing process; we need some risk in order to generate profits.  There is always the possibility that your investment won’t be profitable.  Or worse, you can lose some or even all of what you have invested. In this quarter’s newsletter we will examine how you can manage total portfolio risk by reducing systemic risk though asset allocation and by reducing non-systematic risk with portfolio diversification.

At first glance, dividends and income-producing securities may seem like an attractive way to generate income in retirement.  But investing exclusively with income distributions may end up being riskier than you thought.  Income producing securities can leave retirees susceptible to the current interest-rate environment and the possibility of a decrease in revenue.  We will also discuss how a diversified portfolio may be a more stable way to generate revue in retirement.

In order to avoid unnecessary risk and account for living expenses in retirement you should adjust your portfolio accordingly. Even if you are comfortable with a decent amount of risk, the closer you get to retirement, the more conservative your investment portfolio may need to become. 

At Paragon Financial Advisors, we try to assist our clients in doing a thorough risk analysis to determine their risk tolerance.  We also design portfolios with diversification and asset allocations that suit the client’s current investing and income needs.   Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas. We offer financial planning and investment management.

If you are not on our email list for our quarterly newsletter and would like to be added please email info@paragon-adv.com to request a copy of Paragon Perspectives.

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