At Paragon Wealth Management we believe that active management strategies can be significantly more effective than passive strategies. The following video summarizes Paragon’s views on the benefits of active wealth management. We invite you to compare our track record to the S&P 500 which is one of the most common passive management strategies used by other financial advisors.

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions.  Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy.  All opinions and estimates included in this report 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.  Past performance is not a guarantee of future results.

The past few months we have been working on some new videos about Paragon Wealth Management to help investors understand who we are and what we are all about. This short video is an introduction our company. It also shares our views on active money management vs. buy and hold. This video was created for our website. If you would like to see steps 1, 2, and 3 mentioned at the end of the video, visit www.paragonwealth.com

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions.  Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy.  All opinions and estimates included in this report 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.  Past performance is not a guarantee of future results.

photo by dyyanae

The following is the definition, rationale, and implementation of passive management or the buy & hold investment strategy from Wikipedia. 

Passive management (also called passive investing) is a financial strategy in which a fund manager makes as few portfolio decisions as possible, in order to minimize transaction costs, including the incidence of capital gains tax. One popular method is to mimic the performance of an externally specified index-called ‘index funds’. The ethos of an index fund is aptly summed up in the injunction to an index fund manager: “Don’t just do something, sit there!”

Passive management is most common on the equity market, where index funds track a stock market index, but it is becoming more common in other investment types, including bonds, commodities and hedge funds. Today, there is a plethora of market indexes in the world, and thousands of different index funds tracking many of them.

Rationale

The concept of passive management is counterintuitive to many investors. The rationale behind indexing stems from five concepts of financial economics:

1. In the long term, the average investor will have an average before-costs performance equal to the market average. Therefore the average investor will benefit more from reducing investment costs than from trying to beat the average.
2. The efficient market hypothesis, which postulates that equilibrium market prices fully reflect all available information. It is widely interpreted as suggesting that it is impossible to systematically “beat the market” through active management, although this is not a correct interpretation of the hypothesis in its weak form. Stronger forms of the hypothesis are extremely controversial, and there is some debatable evidence against it in its weak form too. For further information see behavioural finance
3. The principal-agent problem: an investor (the principal) who allocates money to a portfolio manager (the agent) must properly give incentives to the manager to run the portfolio in accordance with the investor’s risk/return appetite, and must monitor the manager’s performance.
4. The local elasticity of the market, while usually theorized not to be conducive to any particular investment strategy, can in fact be favorable in many cases to a stable strategy, setting passive management apart from its more change-prone counterparts.
5. The capital asset pricing model (CAPM) and related portfolio separation theorems, which imply that, in equilibrium, all investors will hold a mixture of the market portfolio and a riskless asset. That is, under suitable conditions, a fund indexed to “the market” is the only fund investors need.

The bull market of the 1990s helped spur the phenomenal growth in indexing observed over that decade. Investors were able to achieve desired absolute returns simply by investing in portfolios benchmarked to broad-based market indices such as the S&P 500, Russell 3000, and Wilshire 5000.

In the United States, indexed funds have outperformed the majority of active managers, especially as the fees they charge are very much lower than active managers. They are also able to have significantly greater after-tax returns.

Some active managers may beat the index in particular years, or even consistently over a series of years. Nevertheless the retail investor still has the problem of discerning how much of the outperformance was due to skill rather than luck, and which managers will do well in the future.

Implementation

At the simplest, an index fund is implemented by purchasing securities in the same proportion as in the stock market index. It can also be achieved by sampling (e.g. buying stocks of each kind and sector in the index but not necessarily some of each individual stock), and there are sophisticated versions of sampling (e.g. those that seek to buy those particular shares that have the best chance of good performance).

Investment funds run by Investment managers who closely mirror the index in their managed portfolios and offer little “added value” as managers whilst charging fees for active management are called ‘closet trackers’; that is they do not in truth actively manage the fund but furtively mirror the index.

Collective investment schemes that employ passive investment strategies to track the performance of a stock market index, are known as index funds. Exchange-traded funds are never actively managed and often track a specific market or commodity indices.

Globally diversified portfolios of index funds are used by investment advisors who invest passively for their clients.

Visit Wikipedia to view the complete article.

What Does Paragon Think?

We share the definition above to describe the rationale that most of our competitors use to justify their passive management strategies. At Paragon Wealth Management, we believe that active management is a better approach to investing. We invite you to compare our track record to the S&P 500 which is one of the most common passive management strategies used by other advisors.

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions.  Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy.  All opinions and estimates included in this report 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.  Past performance is not a guarantee of future results.

photo by uruandimi

How It Works/Example:

Active management is the opposite of passive management (also known as buy-and-hold investing). Instead of dismissing short-term trends and focusing on long-term profits, active managers believe short-term price movements are important and often predictable. In this vein, active managers often refer to statistical anomalies, recurring patterns, and other data that supports a correlation between certain information and stock prices.

For any given investment, the passive manager is likely to rely more on the fundamental analysis of the company behind the security, such as the company’s long-term strategy, the quality of its products, or the company’s relationships with management when deciding whether to buy or sell. This type of analysis is largely intended to evaluate the investment’s long-term potential, which is the passive investor’s typical investment horizon.

The active manager, however, seeks to detect and exploit short-term trends in a security. This often involves quantitative and technical analyses, including ratio analysis, stock chart analysis, and other mathematical measures that have less to do with the nature of the company and more to do with trading patterns, news, and other market factors. An active manager’s investment horizon can be months, days, or even hours or minutes.

Active managers are more likely to use leverage than passive managers because they are as concerned with mitigating short-term risk as they are about exploiting short-term gains. This in turn introduces more risk into an active portfolio but may also provide higher returns.

Why It Matters:

In general, the constant analysis associated with active management involves more trading activity than passive management. Active trading thus also generally requires more time and education than passive management, and it is important to note that the higher trading commissions and capital gains taxes may translate to higher management fees and return requirements.

The idea of active management is not immune from controversy. Passive managers note that active managers frequently fail to match or beat their benchmarks, and they question the reliability of active managers’ methods for recognizing and predicting trends. But the most notable areas of disagreement between active and passive managers are theoretical rather than mechanical.

Many passive managers espouse the efficient market hypothesis, which says that stock prices are random and already reflect all available information. A cousin of this hypothesis, the random walk theory, also claims it is impossible to consistently outperform the market, particularly in the short term, because it is impossible to predict stock prices. 

Regardless, active management enjoys a large and loyal following among investors, and many active managers have posted returns well above market benchmarks. However, consistently providing above-average returns remains a big challenge.

No matter where they rest on the issue, most analysts encourage even the most passive investor to learn about and understand active management methods, stay current on their investments, and know how to read stock charts.

photo by sky seeker

Determine  your risk tolerance to enjoy a low stress investment experience.

Written by Dave Young, President of Paragon Wealth Management

Recently, my wife and I returned from a vacation to Maui. Each day we sat on the beach, listened to our ipods, and watched the waves roll in over and over again. We saw children playing in the sand, people strolling along the beach, sunbathers soaking in the sun and palm trees blowing in the breeze. It was relaxation at its best.

This stress free picture describes what an ideal investment program would be like. It would be a low stress, methodical strategy that allows you to reach your long-term goals. Is it possible to have this type of experience?

Over the past 10 years many investors’ experiences have been more like riding a roller coaster in the dark with no brakes, which is completely opposite of low stress.

While it is impossible to have a completely stress free experience, it is possible to reduce stress significantly by building a portfolio that is aligned with your specific risk tolerance. Your risk tolerance determines how aggressive or conservative you are invested. Your particular mix might be 20 percent conservative and 80 percent growth, 50/50, 70/30 or some other combination. It is different for each person. It depends on your individual goals and objectives, and what you can handle.

Every investor has an amount of risk they are comfortable to take. If your risk level is set too high, you will most likely have a hard time every time your account value declines. If your risk level is set too low, your returns may be inadequate, and you will never reach your goals. Basically, when it is not set right, you will worry every time the market drops, and become euphoric every time it goes up.

Why is this so important? Because many investors do not consider how much risk they are signing up for when they initially invest. It might be invested in a way that you will lose everything when something goes wrong. For long-term success, it is critical that you have a very good idea of exactly how much risk you are exposed to. Otherwise,  your chances of success are slim.

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions.  Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy.  All opinions and estimates included in this report 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.  Past performance is not a guarantee of future results.