Investing in the wrong place at the wrong time … again?

When people find out I’m in the investment business, they usually ask me where to invest. They ask if it’s better to be in stocks, bonds or real estate. They want hot tips like, are U.S. stocks better than international stocks? What about China and Brazil? Etcetera, etcetera.

Next, they tell me their horrible investment experiences. Typically, they’re convinced that anything they invest is destined for doom. This leads me to ask, “Why do the majority of investors have bad experiences?”
It doesn’t help that for the past 10 years, the stock and real estate markets haven’t gone anywhere. After mostly going up during the ’80s and ’90s, the markets went down hard between 2000 and 2002. From 2003 through 2007, they did great. But what came in 2008 to early 2009 was one of the worst bear markets in history, after which the markets rallied once again.

It’s understandable investors have had it tough. However, studies have shown that the average investor did poorly during the good times, too. Historically, retail investors have underperformed when markets are good and performed horribly when markets are bad. No wonder investors are frustrated and disillusioned.

So, are people hard wired to invest in the wrong place at the wrong time? Yes. And I’ll tell you why: emotions. Most investors invest based on emotions, driven by a constant tug-of-war between fear and greed.
Will Rogers said investing is simple: All you do is buy low and sell high. The problem is when prices are low, everyone is consumed with FEAR. And that is precisely when they should invest.

The other side of the cycle is when markets have gone up. Investors tell their friends about the 20 percent return they got last year, and all of a sudden the 1.5 percent they got in their CD doesn’t look so great. So then they, along with millions of other investors, come piling into the market consumed with GREED.
This cycle of fear and greed repeats itself over and over. Consider where the masses invested the past 10 years. Back in 2000, record numbers flooded the stock market right before a horrible three-year bear market hit. Investors in the NASDAQ watched their accounts lose 80 percent of their value.

Many of those investors said they would never invest in stocks again. So they piled into real estate to be safe. As we saw in 2008, it wasn’t safe after all. Depending on which part of the country they were in, they experienced losses anywhere between 30 and 80 percent. Some leveraged real estate investors lost everything.
For the past year, we’ve seen investors piling into bonds. Bonds have been pushed to the lowest yields I’ve seen — simply because everyone is buying them “to be safe.” The bond bubble looks a lot like the previous stock and real estate bubbles. Odds are that investors who buy bonds for safety are about to get crushed.
At Paragon Wealth Management, we avoid emotional investing by following our quantitative models. We do not care what the media is saying or what we hope or how we feel. Our models process the market data and we invest accordingly. We are constantly adjust our portfolios to what the market is actually doing.

Paragon cannot guarantee the accuracy of information from other sources. Opinions are as of the dates indicated only. This report is not a solicitation for any security. Past performance is not a guarantee of future results. Investment performance reflects time and size-weighted geometric composite returns of actual client accounts. Investment returns are net of all fees and costs. The S&P Index is a diversified, size weighted index of 500 stocks.

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