photo by nicholas_T

Written by Scott Morrison, Dow Jones 

SAN FRANCISCO (Dow Jones)–Dave Young readily admits his investment philosophy is squarely at odds with mainstream practice.

Rather than buy a security and hold it in expectation it will rise in value, Young times the market. His firm, Paragon Wealth Management, jumps in and out of exchange-traded funds, trying to catch market swings at just the right moments. He trades so frequently that Paragon’s flagship Top Flight growth fund routinely turns over its entire portfolio every year.

“I just don’t trust buying and holding and hoping it works out,” says Young.

A former magician who once owned a llama farm, Young began managing his own money in 1986 as part of an effort to scale back his life. His friends saw he had a knack for it and quickly asked if he would manage their money too. In 1992, he set up Provo, Utah-based Paragon as a full-fledged money-management operation.

Paragon remains a small firm with just $90 million under management. Young says that small size is an advantage, allowing him to be nimble in a way that Wall Street titans can’t be. Young, who holds a bachelor’s degree in business management from Brigham Young University, invests his own money alongside the assets entrusted to him by institutional and individual clients.

Young’s $35 million Top Flight Portfolio focuses on the best-performing sectors within global stock markets. He moves in and out of a range of ETFs, which typically track market indices, using two groups of proprietary quantitative models as his guides.

The first group of models crunch sentiment and momentum indicators, value ratios, volume measurements and other data to identify the best-performing industries, currencies and country markets.

These models typically pick up trends that are only three or four months old. That lets Paragon lock on to the trends while they are still active. Young says he doesn’t set target prices, but reacts after a monthly review examines whether trends are breaking down.

Paragon also uses a second set of risk models that helps the firm decide how much of the portfolio should be invested in stocks at any given time.

So far, the models appear to be working well. According to Young, Top Flight has averaged a 15.75% return over its 10-year history, compared with a 4.37% average return for the S&P 500. The fund generated a 17% return in 2007 and is down 9% through the end of August this year. That compares with a 5.5% gain in the S&P 500 in 2007 and an 11% decline this year.

Top Flight Portfolio is a not a mutual fund product and so it isn’t tracked by Morningstar Inc. Investors must rely on Paragon’s self-reported results.

Until last year, Top Flight traded mutual funds and used contra funds, funds that focus on contrarian views to prevailing market sentiment, to hedge positions. But Young shifted to ETFs after mutual fund managers began to discourage frequent trading.

 

   ‘Dialing In’ On Asset Classes

ETFs also enable Paragon to “dial in” on a specific asset class. Top Flight typically holds on average of 13 ETFs at any one time and as a rule won’t invest more than 9% of total assets in any single ETF.

“We can get exposure anywhere we want it and we are completely liquid,” Young says, adding that Flight typically holds positions for between three and 18 months.

The downside of Top Flight’s active trading: a turnover rate that typically tops 100% a year, which causes higher tax liabilities for investors.

Nathan White, Paragon’s chief investment officer, says trading gains almost always offset any tax obligations. “I’ve never seen that be an issue for any of our clients,” he says.

Paragon’s technique has helped the firm identify opportunities that might have been missed by funds that use a more fundamentals-based approach to investing. Last year, Paragon’s models pointed out increasing momentum in the Brazilian stock market, which soared on the back of rising prices for minerals, agricultural commodities and oil. In April 2007, Top Flight bought shares of the iShares MSCI Brazil Index ETF (EWZ), a stake it sold this August when its models told Young Brazilian stocks were losing steam. Paragon reported a 43% gain from EWZ, which has subsequently fallen by about 23%.

Paragon similarly took advantage of momentum in South Korea last year by investing in iShares MSCI South Korea Index Fund ETF (EWY), which mirrors the performance of publicly traded securities in that Asian market. Paragon bought on a dip in mid-August last year and sold less than three months later, posting a 26% return. Paragon’s timing was prescient: EWY has subsequently plunged about 40% as rising fuel costs, weaker exports and record household debt squeezed South Korean economic growth.

But Paragon doesn’t just pick rising indices. The firm’s mean reversion models prompted the Paragon team in July to invest 4.5% of Top Flight’s assets in the SPDR KBW Regional Banking ETF (KRE), which tracks regional banking institutions listed on U.S. markets. White says the models indicated that regional bank stocks had fallen so dramatically that they were poised to rebound. The ETF has since gained more than 32%.

Despite such bets, Young acknowledges that Top Flight has not significantly outperformed the S&P so far this year, but he says that’s because the market has not fallen far enough to trigger Paragon’s risk models and take the firm’s assets out of the market.

But however the financial turmoil unfolds, Young insists that Paragon is nimble enough to move quickly once the market begins to rebound.

“There are huge bargains, such as financials,” he says.

(Scott Morrison covers technology, focusing on the Internet, for Dow Jones Newswires. He can be reached at 415-765-6118 or by email at scott.morrison@dowjones.com.)

(TALK BACK: We invite readers to send us comments on this or other financial news topics. Please email us at TalkbackAmericas@dowjones.com. Readers should include their full names, work or home addresses and telephone numbers for verification purposes. We reserve the right to edit and publish your comments along with your name; we reserve the right not to publish reader comments.)

Copyright (c) 2008 Dow Jones & Company, Inc.

photo by Bob Jagendorf

Articles like the one from the Deseret News below are everywhere in the media today. Dave Young, President of Paragon, commented about the situation.

Yesterday was an ugly day in the market. It was the worst day in seven years for the Dow Jones Industrial Average. The bankruptcy of Lehman Brothers combined with the sale of Merrill Lynch combined to put the market in a very bad mood. Waiting in the wings with more potential negative dramas are AIG and Washington Mutual.

Based on historical numbers, this bear market is probably in the late stages.

Since last October the Dow Jones Industrial Average has dropped by -23%. It has taken a painfully long 342 days to grind its way down this far. We hit market lows back in July and now we are back just below those lows.

Historical median numbers for the 33 bear markets since 1900 are a -26.9% loss over 363 days. The last five bear market bottoms have occurred between August 31st and October 19th.

Our quantitative models are mixed right now.

While they aren’t flashing that we are at a bottom yet, they do indicate that we are close. Our advice at this point is that it is too late to sell, but also too early to buy. In other words, in our opinion it doesn’t make a lot of sense to sell at this stage of the market downturn.

Likewise, we may not have hit the absolute bottom yet, so we wouldn’t recommend taking new positions until a solid bottom is put in place and our indicators start recommending buying.

Our advice at this point is to simply hold your current positions.

No one knows what a reshaped Wall Street landscape will look like, but experience tells us that those who remain calm and make rational decisions with an eye on the long term are those who will most likely weather the current uncertainty.

If you are one of our clients, then your investment plan was put together with the long-term in mind. If you believe your circumstances have changed, please call our office and we will arrange a review and reassessment. In the meantime, do not let short-term market difficulties undermine your long-term rational planning.

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions. Although the information included in this article has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy. All opinions and estimates included in this article constitute the judgment as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.

Financial meltdown — Dow’s plunge is worst since 9/11

NEW YORK — Mighty investment banks were laid low. Stocks put in their worst performance in seven years. About $700 billion was washed away on Wall Street.

The crisis set in motion more than a year ago by a series of bad mortgage bets produced its most devastating day yet Monday, leaving investors to wonder whether anywhere was safe for their money.

Capping a tumultuous 24 hours that redrew the American financial system, Lehman Brothers filed the largest bankruptcy in American history, and a second storied bank, Merrill Lynch, fled into the arms of Bank of America.

The Dow Jones industrial average lost more than 500 points, more than 4 percent, its steepest point drop since the day the stock market reopened after the Sept. 11, 2001, attacks.

About $700 billion evaporated from retirement plans, government pension funds and other investment portfolios.

It was by far the most stomach-churning single day since a financial crisis began to bubble up from billions of dollars in rotten mortgage loans that have crippled the balance sheets of one bank after another and landed mortgage giants Fannie Mae and Freddie Mac under the control of the federal government.

“We are in the middle of a deep, dark recession, and it won’t end soon. Here it is, and it is pretty nasty,” said Barry Ritholtz, who writes the popular financial blog The Big Picture and is CEO of research firm FusionIQ.

And the fallout was far from over. American International Group, the world’s largest insurer, was fighting for its very survival: New York Gov. David Paterson moved to allow the company to tap one of its subsidiaries for an emergency loan.

“AIG still remains financially sound,” Paterson said, even as the company’s stock tumbled almost 60 percent. Almost $20 billion was wiped off AIG’s balance sheet on Monday.

In Washington, Treasury Secretary Henry Paulson, who refused to toss a financial lifeline to Lehman, was unapologetic as the Bush administration signaled strongly that Wall Street shouldn’t expect more rescues from Washington.

The American people should remain confident in the “soundness and resilience in the American financial system,” Paulson told reporters at the White House.

Six months ago, Paulson moved to prevent the collapse of Bear Stearns, brokering a deal for JP Morgan Chase & Co. to buy the firm at a fire-sale price with Federal Reserve backing. Earlier this month, he stepped in to help the government seize Fannie and Freddie in hopes of reversing the housing and credit crises.

But Monday, Paulson said he “never once” considered it appropriate to put taxpayer money at risk to resolve the problems at Lehman Brothers, which was saddled with $60 billion worth of soured real estate holdings.

President Bush also tried to calm jitters. “Adjustments in the financial markets can be painful, both for people concerned about their investments and for the employees of the affected firms,” the president said. “But in the long run I am confident that our capital markets are flexible and resilient and can deal with these adjustments.”

Paulson, making a rare appearance before reporters in the White House briefing room, also sounded notes of optimism.

“What we are going through in the short term doesn’t make anything easier,” he said. “But in the longer term, it’s going to make things better, because we’ve got excesses we need to work through.”

Paulson said he is taking Monday’s stock tumble as a good sign — because the fall was less-severe than expected and occurred in a relatively orderly way.

The Dow industrials dropped 504.48 points to close at 10,917.51, the first time since July they have finished under 11,000. It was the sixth-largest point drop ever and the worst since Sept. 17, 2001.

In percentage terms, the fall for the Dow on Monday was its worst since the summer of 2002. The index has shed nearly a quarter of its value since its record high last October.

Broader stock indicators also fell. The Standard & Poor’s 500 index lost more than 4 1/2 percent, and the Nasdaq composite index lost more than 3 1/2 percent.

Financial stocks fell as investors worried about the strength of banks’ balance sheets. Washington Mutual Inc. 27 percent to $2 a share, while Wachovia Corp. fell 25 percent to $10.71, its biggest decline since July 1980.

While Lehman Brothers was filing for Chapter 11 and AIG was scurrying to find financing to stay afloat, Merrill Lynch was avoiding a similar fate with a $50 billion transaction to become part of Bank of…

Visit www.desnews.com to read more…

---

Contributing: Jeannine Aversa, Ieva M. Augstums, Rachel Beck, Tim Paradis, Ellen Simon, Vinnee Tong, Stephen Bernard, Emma Vandore and David Pitt, Associated Press; Joseph Fineman, Bloomberg News

Below is an article from CNNMoney.com about this problem.

Retirement wake-up call
Survey finds that Americans are having doubts about how to pay for their golden years.

By Ben Rooney, CNNMoney.com staff writer
April 9, 2008

NEW YORK (CNNMoney.com)- Americans are becoming increasingly worried about saving for their retirement as the nation’s economic outlook continues to darken, according to a new survey of workers and retirees released Wednesday.

Only 18% of workers polled were confident about saving enough money for a comfortable retirement, according to Employee Benefit Research Institute’s 2008 Retirement Confidence Survey. That’s the steepest annual decline in the survey’s 18-year history, and down sharply from 27% in the previous year.

While confidence levels among all respondents declined, the survey found younger (ages 25-34) and lower income (under $35,000 annually) workers were the most dispirited about their ability to save for a comfortable retirement.

There are many factors that contribute to savings planning but the “economy and heath costs are major concerns,” said Dallas Salisbury, president of the EBRI, in a statement.

Health care woes. More than half of workers who retired earlier than planned, did so because of health problems or disability, according to the survey.

At the same time, nearly half of the retirees polled said their health care costs were higher than they expected and more than half say they are more worried about their financial future now than they were right after entering retirement.

Retirees aren’t the only ones worried about health care costs. The survey showed that only 34% of workers expect to collect employer-paid health insurance after they stop working, down from 42% last year, as more employers eliminate health care for future retirees.

A rising awareness about the diminishing availability of employer-paid health care coverage in retirement may actually turn out to be a blessing in disguise, according to Salisbury.

“If there is a silver lining, it’s that Americans finally may be waking up to the realities of being able to afford retirement,” he said. And that reality may lead to more prudent savings plans.

Modest savings. Overall, the amount of money that workers are socking away for retirement is modest at best according to the EBRI.

Nearly half of all workers have less than $25,000 set aside. And a full 22% of workers and 28% of retirees say they have no savings of any kind.

As a general rule, retirement savings - including social security benefits and pension - should be large enough to provide about 80% of pre-retirement income.

Unrealistic expectations. Workers may also be basing their retirement plans on “unrealistically low” estimates about how much they will spend after leaving the work force, according to the EBRI.

The survey found that 58% of workers think they will spend less money in retirement than they do while working.

However, only 46% of retirees said that was the case and 54% said they were more concerned about money now than they were at the beginning of their retirement.

Do the math. Completing a retirement savings calculation is one of the best ways to encourage good saving habits.

After calculating a goal amount for retirement, 44% of respondents said they modified their savings plans, with 59% increasing the amount they put away.

Other respondents changed their investment mix, reduced or spending, or enrolled in a retirement savings plan at work.

photo by pedrosimoes7

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.