With the market continuing its record moves and volatility, and testing the recent lows, an investor may wonder what will happen next. In the short-term, the market is extremely oversold and sentiment is extremely negative. It can be very hazardous to sell into this condition. The following article provides pointers to protect your investments during the current market conditions.

How to React to Stock Market Panic

by Wojciech Kulicki on August 9, 2011

visit Fiscal Fizzle to view the original article

Unless you religiously avoid the news, you’ve no doubt heard that the stock market took an absolute beating in the last 2 weeks, and the road is shaky going forward.

The Dow Jones (a good measure of the market’s largest players) closed at 12,724 on July 21st, and finished at 10,813 as of Monday, representing a drop of more than 15% in a little less than 3 weeks.

In dollar terms, if you had $100,000 in your 401(k) and were fully invested in the general market, you could expect to have about $85,000 in the account today. That’s a painful reality to face for anyone, even long-term investors.

The reasons for the most recent drop are many:

• The fight in Washington, D.C. over raising the U.S. debt ceiling.
• S&P’s downgrade of U.S. debt for the first time in history.
• Traders taking profits.
• Fear.

I’ve broken my own rule (don’t pay attention to the markets) and have followed the story with some interest, though I have not executed any trades. I’m staying put because that’s the plan I’ve committed to. My advice for riding out this rough patch remains steady and simple:

Understand your portfolio. What kinds of instruments are you invested in? If you’re holding cash, money market, treasuries, bonds, and even some types of stocks, a market crash will affect you very differently than a person who owns only stocks. In fact, if the majority of your money is in “low-risk” investments, your panic is probably unnecessary.

Maintain perspective. This is a chart showing the Dow Jones from roughly 2005 through today (from Google Finance):

Although this month’s drop is eerily reminiscent of the plummeting markets in 2008, it’s important to understand how far we’ve come since the lows of 2009. If you want a larger perspective, look at the Dow from 1980 to today.

Exit carefully. If you’re planning your escape from the markets, be wary-most of your losses may already be on paper, and getting out could spell missing out on a short-term recovery. Researchers have long understood that a down market is more painful to the investor than an up market is pleasurable, but working through the emotions is what will set you apart.

But do cut your losses. If you have a stop price you’ve pre-determined before the crash and that price is reached, don’t think twice about cutting investments loose. The important thing is to follow the strategy you’ve outlined for yourself and not get caught up in the moment.

Enter aggressively. If you have cash on the sidelines, downward spikes may be the best opportunity you’ll have to get into stocks at cheap price. If most of your portfolio is in liquid assets, seriously consider this as the time to buy, and use the rebound to give your portfolio a lift.

All of this should work, unless of course, it turns out that we’ve barely scratched the surface on this crash and the worst is yet to come. Let’s hope not…

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 Nadeeshyama

There are many lessons you can take from the market conditions of 2008 to help protect your investments in the current market environment.

Protecting investments from steep stock slides

by Jeff Brown

Visit Personal Finance on msnbc.com to view the complete article

One day the stock market’s on a roll, the next it’s in a tailspin. If only there were a way to buy insurance against the downturns — then you could watch your wealth ratchet up on the good days and laugh off the bad ones.

In fact, there are ways to minimize losses in a downturn. You can even profit from one. But each technique, from stop-loss orders to short sales to “put” options, has drawbacks as well as benefits. In clumsy hands they can make investing more nerve-wracking instead of less so.

While most of the basic techniques have been used by professional money managers for ages, the recent proliferation of exchange-traded funds has made it easier for small investors to do the same. ETFs own baskets of stocks the way mutual funds do. But instead of buying or redeeming shares with the fund company, you trade ETFs on the stock market, just like any other stock. This means ETFs can be used for loss-prevention strategies like stop-loss orders, short sales or options trading. You can’t do that with mutual funds.

All loss-prevention techniques involve some market timing, and even professionals have a devilish time forecasting the market’s peaks and valleys. But with that caution on the table, here’s a quick rundown on ways to safeguard an individual stock or an entire portfolio.

Stop-loss orders
The name says it: The investor places an order to automatically sell a block of shares in XYZ Corp. if the price falls to a pre-set level. If shares fall from $50 to $30 and you used a stop-loss order to sell at $45, you lose only $5 a share instead of $20.

The nice thing is you don’t have to be watching the market minute by minute to react to a downturn, since execution is automatic and the order can be put in hours, days or weeks in advance. Generally, the only expense is the commission you’d pay on any sale — plus taxes if you sell for more than you’d originally paid.

But there’s no guarantee you’ll get $45. If overnight news drove the price to $30 when the market opened in the morning, for example, you might get only $30, or even less.

To avoid this, you can place a stop-loss limit order, requiring that the sale be done only at the price you specify — $45. Unfortunately, you can’t be sure of finding a buyer at that price, so you might be stuck with the shares after all.

Short sales
This takes the rule “buy low, sell high” and simply reverses the order. You borrow shares from your broker, sell them at today’s price and hope to replace them with ones bought at a lower price later. By selling high and buying low you profit when prices fall. To do this you need a margin account with your broker.

Keep in mind that the strategy can backfire badly if prices go up instead of down. Imagine that you borrowed shares at $20 each, figuring they’d drop to $15 to give you a $5-a-share profit. Suppose the price instead soared to $30. You’d have to pay $30 to replace each share you’d borrowed and sold for $20 — you’d lose $10 a share.

With short sales you’re bucking the stock market’s long-term upward trend. Your potential loss is theoretically infinite, because there’s no telling how high the share price might go. That’s different from an ordinary “long” investment — when you buy shares and hold them. In that case your potential loss is limited to what you paid for the shares, since the price cannot fall below zero.

A put option gives its owner the right to sell a block of shares at a set price any time during the days, weeks or months before the option expires. The buyer pays a “premium” to acquire this right. On the other side of the deal is a trader who, in exchange for the premium payment, takes on the obligation of buying your shares at the price specified if you choose to “exercise” the option.

Obviously, the problem with puts is that it would cost too much to fully insure an entire portfolio all the time. But you could use inexpensive puts for partial insurance, limiting losses in a market meltdown. If the shares were trading at $10, a put allowing you to sell at $8 would be much cheaper than one allowing you to sell at $10.

E-minis
These are futures contracts designed to match the behavior of underlying stock-market indexes such as the Standard & Poor’s 500 or Nasdaq 100. They were introduced a few years ago to serve small investors who could not afford the full-sized index futures contracts that professionals use for portfolio hedging and speculation. They are traded on the Chicago Mercantile Exchange.

A single S&P 500 e-mini contract could be used to hedge, or offset, losses in a diversified portfolio worth about $75,000. Every one-point change in the S&P 500 index causes the contract to gain or lose $50. And you don’t have to spend $75,000 to buy a contract — just a few thousand dollars in a margin account with your brokerage will do.

Diversification
This means spreading your eggs among many baskets by, for example, owning a variety of stocks and bonds. When some fall in price, others may rise.

The easiest way to diversify is to invest in mutual funds or broad-based exchange-traded funds. A given fund may own dozens of stocks — sometimes hundreds of them. And there are all sorts of funds, from “sector” funds that invest in certain industries, to ones specializing in foreign stocks, to “index” funds that try to match the performance of the entire market, or certain portions of it.

Do nothing
I’m not joking. If you’re diversified and have a long-term time horizon for your investments, time is on your side. Over most five-year periods in the past century, stock returns beat those of bonds and cash, such as bank savings. The longer the period, the more certain it is that a diversified portfolio of stocks will beat bonds and cash.

By simply hanging on through the downturns you can expect to do well — and you’ll avoid all the expense, hassle and worry that comes with so many of those fancier loss-prevention tricks.

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 from Wall Street Journal online

 The following article was taken from the Wall Street Journal online article on August 16, 2011. This article discusses some investing strategies that are used by one of the richest families in America: The Walton’s.

 Smart investing tips from Sam Walton

To view full article, please visit Wall Street Journal online.

After the stock market lost 20% of its value in October 1987, Sam Walton, then one of America’s richest men, was unfazed.

In less than a week, the value of his Wal-Mart stores stock had dropped almost $3 billion, reducing his wealth to a mere $4.8 billion. It’s paper anyway,” he told the Associated Press. “It was paper when we started and it’s paper afterward.”

Given the wrenching swings of the past two weeks, many of us may wish we could be so sanguine about our own losses. But even without a few extra billion dollars in the bank, there are useful lessons to be gleaned from the way the Waltons and other ultrarich families cope with investments and market volatility.

Just like us, the rich want to maintain their lifestyle, preserve wealth and hyave money for their heirs or philanthropy. And when it comes to investing, there are several ways the rest of us should take a cue from them:

The very wealthy have a plan. Sam Walton’s plan started in the early 1950s, when, on the advice of his father-in-law, he set up a family partnership, made up of him, his wife, Helen, and their four children, to own his two variety stores. By doing that, he began planning his estate and building family wealth years before he opened the first Wal-Mart in 1962.

Nowadays, most very wealthy people have a team of advisers and an investing strategy in place that should work even when the worst imaginary case becomes real. Small investors, too, should have a comfortable investment process that works in good times and bad.

A financial adviser can be invaluable in helping you with this, but so can a trusted family member or friend who will help you stick to your plan when you start to doubt it.

The very wealthy live below their means. Walton, who died in 1992, was famously frugal, driving an old pickup truck and flying coach. Many very wealthy people spend much more extravagantly, but even so, “most of our ultrawealthy clients have a lifestyle that is well below their means,” says Craig Rawlins, president of Harris myCFO Investment Advisory Services, which serves wealthy families.

When you don’t spend everything, he says, “you have a better opportunity to weather this volatility because you know there’s a cushion there.”

The very wealthy focus on risk, not return. Larry Palmer, managing director, private wealth management, at Morgan Stanley Smith Barney, said he has never had a client says, “My objective is to have my family wealth beat the S&P 500.” Rather, he says, clients focus on what kinds of risks they are taking with their portfolio.

The Walton family weatlh long has been tied to its Wal-Mart stock, now valued at $83.6 billion. But Sam also bought the tiny Bank of Bentonville in 1961, and it is now part of the family-owned Arvest Bank, an $11.5 billion banking company. Walton Enterprises also owns a chain of small newspapers that, along with other interests, offer diversification and push the family’s estimated combined wealth close to $100 billion.

Small investors need to similarly manage their portfolios, making sure that their holdings of stock and other volatile investments aren’t so great that they are putting more at risk than they intended to.

The very wealthy hang on. The super-rich don’t sell because they are fearful-though some may be selling right now for investment reasons, such as cutting the tax bite on holdings with big gains. The Walton family ownerships of Wal-Mart stock hasn’t changed since late 2002, when some shares were transferred to charitable funds.

In that sense, Sam was spot on. Though the Walton family’s Wal-Mart shares have dropped by more than $10 billion since mid-May, until the stock is actually sold, the losses really are nothing more than paper.

 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.

Several of our clients at Paragon have been asking us how we got into the debt ceiling mess. This Wall Street Journal article gives a good summarty of what has brought us to this point.

A short history of the entitlement state.

Taken from the Wall Street Journal online

Even without a debt default, it looks increasingly possible that the world’s credit rating agencies will soon downgrade the U.S. debt from the AAA standing it has enjoyed for decades.

A downgrade isn’t catastrophic because global financial markets decide the creditworthiness of U.S. securities, not Moody’s and Standard & Poor’s. The good news is that investors still regard Treasury bonds, which carry the full faith and credit of the U.S. government, as a near zero-risk investment. But a downgrade will raise the cost of credit, especially for states and institutions whose debt is pegged to Treasurys. Above all a downgrade is a symbol of fiscal mismanagement and an omen of worse to come if we continue the same habits.

President Obama will deserve much of the blame for the spending blowout of his first two years (see the nearby chart). But the origins of this downgrade go back degades, and so this is a good time to review the policies that brought us to this sad chapter and 14.3 trillion of debt.

 FDR began the entitlement era with the New Deal and Social Security, but for decades it remained relatively limited. Spending fell dramatically after the end of World War II and the U.S. debt burden fell rapidly from 100% of the GDP. That changed in the mid-1960s with LBJ’s Great Society and the dawn of the health-care state. Medicare and Medicaid were launched in 1965 with fairy tale estimates of future costs.

Medicare, the program for the elderly, was supposed to cost $12 billion by 1990 but instead spent $110 billion. The costs of Medicaid, the program for the poor, have exploded as politicians like California Democrat Henry Waxman expanded eligibility and coverage. In inflation-adjusted dollars, Medicaid cost $4 billion in 1966, $41 billion in 1986 and $243 billion last year. Rather than bending the cost curve down, the government as third-party payer led to a medical price spiral.

LBJ lauched other welfare programs- public housing, food stamps and many more- that have also grown over time. Last year, the panoply of welfare programs spent about $20,000 for every man, woman, and child in poverty, according to Robert Rector of the Heritage Foundation.

Social Security’s fiscal trouble began in earnest in 1972 with bills that increased benefits immediately by 20%, added an annual cost of living adjustment, and created a benefit escalator requiring payments to rise with wages, not inflation. This and other tweaks by Democrat Wilbur Mills added trillions of dollars to the program’s unfunded liabilities. Believe it or not, these 1972 amendments were added to a debt-ceiling bill.

 None of these benefit expansions were subject to annual budget review and thus they grew by automatic pilot. They are sometimes called “mandatory spending” because Congress is required by law to make payments to those who meet eligibility standards, regardless of other spending needs or tax revenues.

According to the most recent government data, today some 50.5 million Americans are on Medicaid, 46.5 million are on Medicare, 52 million on Social Security, five million on SSI, 7.5 million on unemployment insurance, and 44.6 million on food stamps and other nutrition programs. Some 24 million get the earned-income tax credit, a cash income supplement.

By 2010 such payments to individuals were 66% of the federal budget, up from 28% in 1965. (See the second chart.) We now spend 2.1 trillion a year on these redistribution programs, and the 75 million baby boomers are only starting to retire.

We suspect that in the 1960s as now-with ObamaCare-liberals knew they had created fiscal time-bombs. They simply assumed that taxes would keep rising to pay for it all, as they have in Europe.

On Monday night Mr. Obama blamed President George W. Bush’s “two wars” for the debt buildup. But national defense spending was 7.4% of GDP and 42.8% of outlays in 1965, and only 4.8% of GDP and 20.1% of federal outlays in 2010. Defense has not caused the debt crisis.

Many on the left still blame Ronald Reagan, but the debt increase in the 1980s financed a robust economic expansion and victory in the Cold War. Debt held by the public at the end of the Reagan years was much lower as a share of GDP (41% in 1988 and still only 40.3% in 2008) compared to the estimated 72% in fiscal 2011. That Cold War victory made possible the peace dividend that allowed Bill Clinton to balance the budget in the 1990s by cutting defense spending to 3% of GDP from nearly 6% in 1988.

Mr. Bush and Republicans did prove after 9/11 that the Washington urge to spend and borrow is bipartisan. Republicans launched a Medicare drug benefit, record outlays on eduacation, the most expensive transportation bill in history, and home ownership aid that contributed to the housing bubble. The GOP’s blunder was refusing to cut domestic spending to finance the war on terrorism. Guns and butter blowouts never last.

Then came Mr. Obama, arguably the most spendthrift president in history. He inherited a recession and responded by blowing up the U.S. balance sheet. Spending as a share of GDP in the last three years in higher than at any time since 1946. In three years the debt has increased by more than $4 trillion thanks to stimulus, cash for clunkers, mortgage modification programs, 99 weeks of jobless benefits, record expansions in Medicaid, and more.

The forecast is for $8 trillion to $10 trillion more in red ink through 2021. Mr. Obama hinted in a press conference earlier this month that if it weren’t for Republicans, he’d want another stimulus. Scary thought: None of this includes the ObamaCare entitlement that will place 30 million more Americans on government health rolls.

This is the road to fiscal perdition. The looming debt downgrade only confirms what everyone knows: Congress has made so many promises to so many Americans that there is no conceivable way those promises can be kept. Tax rates might have to rise to 60%, 70%, even 80% to raise the revenues to finance these promises, but that would be economically ruinous.

Yet Mr. Obama and most Democrats still oppose any serious reform of Medicare, Medicaid and Social Security. This insistence on no reform reinforces the notion that our entitlement state to afford but also too big to change politically. This is how a AAA country becomes AA, the first step on the march to Greece.

Images:

1. Associated Press: With former President Truman at his side, LBJ signs the Medicare bill into law, July 30, 1965.

2. The Obama-Pelosi Blowout: *2011 estimate. Source: Office of Management and Budget.

3. Entitlement Nation: Source- Office of Mangement and Budget.

Disclaimer

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions. Although the information included in this report has be 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.

Many people have a difficult time selecting a financial adviser or firm to manage their hard-earned money. It can be a very confusing and long process. In the following video, David Young, founder and owner of Paragon Wealth Management, discusses the advantages and benefits of investing with a smaller investment firm rather than a larger investment firm.

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.