PARAGON Wealth Strategies Newsletter: PARAGON Perspectives

Recently, I have been contemplating hiring a personal trainer to help with my fitness goals. As I imagine working with a personal trainer, I think that at first I would be very motivated to be a star pupil - working hard to push myself to do what the trainer tells me to do to the best of my ability. If the trainer tells me to modify my diet, for example, I'd do it. But I suspect that somewhere around week four or five, things might begin to get a little tougher. By that point my body will likely have become very sore from the hard workouts and I would be tired. And, since my biggest goal out of the physical training would be to lose five pounds or so, which of course requires that I be burning more calories than I'd be taking in - I'd be hungry all the time. This, at some point, may make me grumpy. I suspect that over time my motivation might wane a little bit. At that point the trainer's real job would begin. Sure, the trainer would have been helping me to design more effective workout plans and meal plans, and would have mentored me through training sessions, but the REAL work would to push me when I wouldn't have the motivation to push myself. Why is this the real work? Because it's the part I haven't been able to push myself to do; its the part where I need help. Ultimately, this is the real reason I'd hire a personal trainer.

Much in the same way, many of our clients need help with these aspects in their investment management too. Certainly we are hired to build portfolios suitable to a client's goals, life situation, risk tolerance, and economic environment. We also work on financial planning issues which, much like diet is to exercise, can be separate issues but are often directly related to the long-term effects on the portfolio. But in many cases, the most valuable role that we play is to help the investor help themselves when investing gets tough - when economic circumstances cause the average person's emotions to escalate, sometimes even to the point where they cannot push themselves any longer, or maybe want to give up and surrender.

Nine out of the last nine recessions as declared by the National Bureau of Economic Research resulted in the six months following the low point of that recession producing double-digit returns in the stock market. We're not just talking ten or eleven percent returns, either. Instead, the average return from recession low to six month point afterward has been a whopping 36%! (footnote 1) Institutions, such as foundations and endowments, corporate pension plans, and public pension plans, know this fact and are required to invest with a written investment policy statement, and must follow those guidelines at all times. Because institutions are forced to follow a disciplined investment strategy, the average institutional investor has experienced average annual returns of around 8.1%, while the average individual investor has averaged only 5.7%. (footnote 2) Why is this? Usually, it has been because the average investor allowed emotion to dictate their actions, causing them to jump off of the investing treadmill right before the real forward progress occured.

You've likely heard those statistics before. You've nodded your head in agreement of understanding when you implemented your own investment strategy. Yet economic times like those of late sometimes make it difficult to remember that there's a plan in place.

If you are nearing or in retirement, it is critically important to remember that your time horizon for your goals is probably not just two years, or five, or even ten. Your time horizon is more likely twenty, thirty or maybe even forty years, and in order to sustain your needs through ever-rising costs due in part to inflation, your portfolio must be able to take advantage of some of those large market years. Negative economic effects have already been built into the planning assumptions that have been made. We work to mitigate them as much as possible, but we must remain exposed to some of the pain in order to get the significant progress that has historically come after the market downturns. No Pain, No Gain.

Some people have said, "This time is different." I say without a doubt, they are correct. Every time is different in some regards, and yet some aspects are similar. Back to my physical trainer example - the physical trainer has never worked with me before. Surely there are things about me - my physique, my personal history, my emotional makeup that make me different from the average client. But I would be naive to think that everything about me was different, that the trainer had never come across anyone quite like me before. Does the trainer have a guarantee that the techniques applied will cause me to achieve my goals? Of course not. But based on science and history the trainer probably has the expectation that proven techniques have a good probability of success.

Occasionally someone will say, "Why can't I just go to cash until we see things getting better, then get back in?" Unfortunately, historically, the best time to get back into the market didn't FEEL like the best time - or even a good time. In most cases, the country was still deep in recession and the media was very pessimistic about the economy, the government, and the stock market in general. It typicially felt as if everything was terrible, bad news was bad news everywhere, unemployment and inflation was high, and the average person would say you were crazy to get back in the market. But quietly, and in many cases quite quickly, the stock market established a strong uptrend and made significant gains.

It would be as if I broke my ankle, and my trainer told me to keep going with my diet and workouts. Perhaps I tell my trainer I'll just wait to heal up and then try again. The trainer knows that if I continue my diet and some modified form of exercise, that I'll still make progress. I may not make as much progress as I would if I hadn't hurt my ankle, but I am still likely to move forward towards my goals.

During this time of market and economic turbulence, it is important to remember the bigger picture, and your longer term plan. As advisors and coaches we are here to talk through your particular questions, thoughts, and circumstances to determine if we remain on the right track towards your goals, or if some modifications are necessary. But one thing is for sure: we will attempt not to let you let your emotions get the best of your investing. Why? Because in most cases, it's part of why you hired us.

1 "An Historical Look at Recessions and Stock Market Returns", 5/1/2008, JennisonDryden. Provided courtesy of Prudential Investment Management Services, LLC, a Prudential Financial company. JennisonDryden, Prudential Financial, and the Rock Prudential logo are registered service marks of The Prudential Insurance Company of America, Newark, NJ, and its affiliates.

2 Curian Capital "Process vs. Performance", 06/08, citing Mellon Analytical Solutions, median returns as cited in Mercer's "Summary Performance of US Plan Sponsor Funds," December 31, 2007, and DALBAR, Inc. "Quantitative Analysis of Investor Behavior (QAIB) 2008." Results shown are gross of fees. Fees and expenses related to each group shown will differ depending on the investment objectives and strategy, the size of an account, extent of services rendered, risk, restrictions, tax considerations, etc. This information has been provided by outside sources that we believe are reliable. However, no further verification or adjustments have been made on our part to the data. "Foundations and endowments" is a broad foundation/endowment fund universe comprised of 82 plans of various sizes. "Corporate pension plans" is a broad corporate fund universe comprised of 141 corporate pension plans of various sizes. "Public pension plans" is a broad public fund universe comprised of 43 public pension plans of various sizes. "Average equity investor" refers to the universe of all domestic equity mutual fund investors whose actions and financial results are restated to represent a single investor. None of these results include performance in the Curian Program, which launched in March 2003. Past performance is no guarantee of future results.