It can be difficult to navigate the waters of selecting an advisor.  Understanding the importance of a track record is a good place to start.

Does Your Investment Advisor Have a Track Record?

by Howard Aschwald
visit Wealth Management Exchange to view the complete article

With the recent market turmoil, investors are looking for more credibility and transparency from their investment advisors. Many investors have become disappointed with the investment results achieved by their advisors. Their performance doesn’t look like anything they were shown in the presentation made by the advisor when they signed up. Perhaps it’s because the track records shown to them in the presentation were not actually achieved by the advisor directly.

According to a survey of 4000 investors conducted by the Paladin Registry, 91.4% of investors want their advisor to have a track record of their investment performance. Paladin Registry concluded that track records were not typically available from advisors. Most advisors have not found it necessary to have their own track record, since many investors still find it acceptable to just let the advisor choose investments for them.

These advisors are similar to professional buyers that shop on behalf of the investor to scout out investment opportunities. The investment managers for the major endowments (the ultimate professional buyers with just one client) are credited (or debited) with a track record. It is only a matter of time until individual investors, with 91.4% preference for real track records, begin to demand the same from their advisors.

Track Record: Reflection of Advisor’s Investment Judgment

It is perfectly understandable why investors want to see a record from an advisor that has management control (discretion) of their investment accounts. A track record is a reflection of the advisor’s investment judgment and decision making that is independent of an advisor’s presentation skills. If an investor is going to turn over control of the buy and sell decision to an advisor, then it would be prudent to see how that advisor has handled other decisions in the past.

Even if advisors are simply selecting mutual funds or choosing separate account managers on behalf of their investors, they should have a record of their past choices that would closely match how they intend to invest client funds. It’s not enough (and fairly misleading) to site the record of a mutual fund or separate manager unless that record coincided with the actual results achieved by the advisor’s clients in the past.

Investors should be careful when an advisor claims to pick only “the best” manager(s) or fund(s). They may say that they have a due diligence process for screening managers and it could look very impressive, but how can an investor know if that process truly worked without the advisor’s record to go with it.

Psychologically, the advisor is transferring the success of someone else’s track record and using that in their sales/consulting presentation. Under those circumstances, an investor should heed the maxim that “past performance is no indicator of future results”. As a side benefit of using an advisor with a track record, a client can be sure that the advisor/manager will be extra diligent in his management process since the client’s results will be included in the manager’s future performance record.

CFA’s Global Investment Performance Standards (GIPS)

Fortunately, there are global standards on how track records are to be calculated and presented. The CFA Institute’s Global Investment Performance Standards (GIPS) are the criteria that institutional investors require of their investment managers. These standards allow clients to evaluate track records from any firm in the world that adheres to them.

In much the same way that public corporations have to present accounting data in accordance with Generally Accepted Accounting Principals (GAAP) in the U.S., investment managers have to present their track records in compliance with GIPS. In this way, it is possible to make consistent comparisons across managers. Furthermore, the records of mutual funds, which are GIPS compliant and audited, can be compared directly to the records of separate account managers.

Calculating Performance Uniformly

Any advisor who has investment control (discretion to make buy and sell decisions) over accounts can adopt GIPS. The requirements are not difficult to implement and manage. The standards require managers to calculate performance in a uniform way and present their results into meaningful composite reports. There is broad leeway to include and exclude performance results from each composite, but the standards greatly diminish the potential for “gaming” track records by including only the best performing accounts or showing a potentially misleading “representative” account.

While managers can legally show records that are not GIPS compliant (with enough fine print to protect them from regulators), most institutional clients will not accept them. In addition, most institutional clients expect managers to not only have GIPS compliant records, but have their results audited by an independent third party as well.

Investors are looking for their advisors to be more responsible and accountable for the results of the advice and management they are providing. At the very least, individual investors should expect their advisors to provide them with separate account investment managers who have audited and GIPS compliant track records.

Not Asking For Too Much

Individual investors should be very leery of any advisor who shows a track record of a separate account manager or mutual fund and then implies that would have been his choice five years earlier. Finally, if the advisor has the responsibility to manage the client’s investment assets, asking the advisor for an audited written track record, is not asking for too much.

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.

How To Retire Early and Wealthy

by Todd R. Tresidder
visit Financial Mentor to view the complete article

Retirement Planning Tip #5: Put Your Wealth Building On Auto-Pilot

The easiest, least painful way to save your way to wealth is automatically. Arrange you finances so that every month certain actions take place that automatically grow your assets without any decisions or extra effort on your part. This creates an enforced discipline to keep you on track. Below are a few examples:

1. Own Your Home
2. Rental Real Estate
3. Tax Deferred Retirement Plans: Maximize your contributions to your tax deferred retirement plans so that the money comes out of your paycheck automatically before you ever see it.
4. Automatic Savings Plans
5. Join An Investment Club: the social support, regular learning, and forced savings will assist putting your wealth building and financial intelligence on auto-pilot.
6. Subscribe to Educational Investment Newsletters

You can either choose to arrange your life so that growing your wealth and financial intelligence is an automatic habit, or you can let time slip away and allow procrastination to win the day.

Retirement Planning Tip #6: Responsibility For All Your Investment Result

Unless you are a trust fund baby or win the lottery, the way you will become wealthy is by owning full responsibility for every aspect of your wealth. This causes you to get into action and correct and adjust your plans until you reach your goal. You must build your wealth like an entrepreneur builds a business. “If it’s got to be, then it is up to me.”

You are solely responsible for organizing your life so that wealth accumulation is a habit. Nobody else will do it for you. You are the one that determines the priority of your spending habits and whether your lifestyle lags your income or not. You are the one who determines whether you start today or procrastinate until tomorrow. When you take the right actions with consistency it will get you the desired result. Early retirement and financial security becomes a question of “when” - not “if”.

Your financial bottom line is you make the decisions: you are responsible. You own the results. That is the only way to achieve true financial security.

Retirement Planning Tip #7: Commit What Is Necessary To Succeed

Successful retirement planning requires you to provide the necessary resources to reach the goal. Don’t set yourself up for failure by under-committing.

In short, you must set yourself up to win by designing your retirement plan consistent with the time, money, and energy required for success, and you must be willing to commit those resources to the process. Every person’s situation is different and successful retirement planning must reflect that. One size does not fit all.

Is your wealth plan uniquely fitted to you?

Retirement Planning Tip #8: Make Your Money Hard To Reach

A pile of savings that is easy and pain free to reach is an easy solution to life’s troubles. Your car breaks and you use your savings to buy a new one. You get laid off and use your savings to carry you through until the perfect job arrives. Life throws you curve balls and savings without barriers to protect them are an easy target for solution.

That is why I love the government sponsored retirement plans with all the difficult rules and penalties you must overcome to access your money prior to retiring. These obstacles provide a measure of discipline for those who inherently lack this life skill. Even if you have the discipline of a celibate monk the rules and penalties provide a formidable barrier for your inevitable moments of human weakness.

The rule is simple: when you build a nest egg, don’t raid it.

Retirement Planning Tip #9: Risk Management Is Essential

The mathematics of compounding wealth prove that avoiding large losses is equally as important to the growth of your wealth as pursuing large gains. They are mathematical flip-sides to the same coin - growing money. For that reason smart investment strategy manages risk of loss and volatility risk using a variety of tools including diversification, careful asset selection, valuation, and a sell discipline to create a defensive investment plan.

While it is essential to practice defensive investing through risk management it does not mean you should avoid risk altogether by hiding out in Treasury Bills or other so-called “safe assets”. You must have an aggressive, offensive investment strategy to build wealth because your objective is to grow your assets faster than inflation erodes them so that you increase purchasing power. Hiding out in safe investments won’t achieve that goal

Retirement Planning Tip #10: Use Your Common Sense

Investing is really about business. You can avoid most of the speculative manias and frauds that can rob your retirement plan of valuable principle by following this simple rule: the price you pay for any investment must make economic sense consistent with the earning capacity of the underlying business that you invest in. In other words, valuation matters - it is a primary risk management tool.

It is just business common sense to only pay for investment services that put more money in your pocket than they take out. They must be value added. For example, a broker or money manager’s fees can only be justified when his insights and services add more profit than they cost when compared to a passive index investment strategy that could be easily implemented on your own. Again, it is just business common sense. You need to get what you pay for.

Retirement Planning Tip #11: Basic Estate Planning

It is irresponsible to leave a burden for those you leave behind. The fact is you will die with 100% certainty. Your loved ones will be distraught over your passing, busy with their own lives, and will not want to clean up a messy financial legacy.

Get your affairs in order and make all the decisions about who gets what now. Depending on your particular circumstances this might include:

• Powers of Attorney
• Will
• Living Trust
• Life insurance
• Much more depending on your circumstances and desires

Retirement Planning Tip #12: Get A Life

There’s more to retirement planning than just money. What about relationships? What about your health? What activities engage your interest?

Money is just a lubricant to life, but it is not life. Happy retirees have fulfilling lives with the health and money to enjoy them. Make sure you have plenty to live for when your work no longer fills your days, and make sure you take care of your health so that you have the energy and vitality to pursue whatever brings you joy.

Protect and enhance your health by investing daily in proper nutrition, regular exercise, and preventative health care to reduce the risk of catastrophic illness. Get adequate sleep, avoid stress, and counteract the stress you do incur with proper exercise and recreation. We never realize the value of our health until we lose it.

In Summary:

Financial planning for retirement is simple to understand and hard to live. That is why so few succeed at it. It all boils down to prudent, routine management of your investments and personal finances - not exactly rocket science. The principles are not complex.

The only question now is “are you walking the talk?” You may know most or even all of these principles, but how many are you actually living right now? That is the key question.

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.

Building wealth for retirement requires a disciplined yet simple strategy.  The following article outlines 12 tips to build your portfolio and be able to retire early.

How To Retire Early and Wealthy

by Todd R. Tresidder
visit Financial Mentor to view the complete article

Believe it or not, building wealth for a secure, early retirement is actually very simple - in theory. The equation for financial success is a function of just three easy-to-understand principles:

1: The amount of money you invest.

2: The growth rate of your money.

3: The amount of time it has to grow.

Unfortunately, few people succeed in building wealth because it has little to do with understanding simple principles - and everything to do with taking effective action. The challenge is not in knowledge, but in translating that knowledge into meaningful results. Why? Building wealth requires you to overcome the following two hurdles:

First, you must translate the wealth building principles into actionable rules that will take you to your goal.

Second, you must actually live according to those rules.

You probably already know the three principles for compounding and building wealth. Most people do; yet, few people actually live according to them. To know and not do is to not know at all. This is critical. Most people fail to succeed financially because the rules are easy to understand but surprisingly hard to live by. Living them is the key - and also the problem.

As you read this article ask yourself, “Are my daily retirement planning practices honoring each and every one of these financial truths?’ Judging by results will tell you what you really know, and an honest assessment should be a little uncomfortable for most readers.

Retirement Planning Tip #1: Have A Plan

The first mistake most people make is they have no written plan to build financial security. You can’t put the formula for financial success to work for you if you have no plan to accomplish it. It may be a simple process, but it won’t happen randomly. You must make it happen by taking action. A written plan with goals provides the road map and is a necessary first step.

Financial success is a choice. It results from the many small decisions you make each and every day. Without a plan and goals to achieve wealth your life is like a sailboat without a rudder: it just spins in circles without definite direction. Plans and goals provide the necessary context to focus each and every decision in your life with purpose.

Retirement Planning Tip #2: Lifestyle Lags Income

Most people prefer the trappings and illusion of wealth over the freedom of actual wealth. They want to look wealthy rather than be wealthy. If you aren’t certain of this truth then just look around you at how many people are in debt compared to how many people are wealthy. Most people choose lifestyle over financial freedom and violate the first principle in the wealth building equation - accumulate assets. They spend instead.

The problem is you will never become rich by spending money. You must control your spending so that your lifestyle lags your income because this will create available capital for your investment activities.

Whether you own your business or work as an employee, you must think of each dollar as a little soldier on the battlefield of your wealth. Every time you spend that dollar on consumption instead of investment the soldier dies. However, when the soldier is invested he produces new soldiers and creates an ever growing army working for your financial security. The bigger your army the greater your financial security.

The rule is simple for principle #1 in our wealth building formula - save money and build assets. The sooner you begin and the more you save each month the sooner you will retire early and wealthy.

Every day you are making choices between lifestyle now and wealth accumulation for tomorrow. You can either invest those soldiers for freedom tomorrow or slaughter them for goodies today. This rule is simple to understand, but hard to live. Are you walking the talk?

Retirement Planning Tip #3: Invest In Your Financial Education

The second principle in wealth accumulation is the rate at which your capital grows. This is largely a function of your financial intelligence. You must learn before you can earn. It is possible to profit from any market condition if you know what you are doing (although, admittedly, some market environments are easier than others).

Every investment in your financial intelligence will pay dividends for a lifetime. I recommend that clients regularly contribute to their financial intelligence by taking courses, reading and research so that their financial intelligence grows faster than their wealth.

There is nothing more financially dangerous than an investor making a million dollars worth of decisions with a thousand dollars worth of financial intelligence. When it comes to investing, a little knowledge can be a dangerous thing, and a lot of knowledge can be a profitable thing. Get a lot of knowledge.

Retirement Planning Tip #4: Don’t Procrastinate - Start Today

The third variable in the wealth accumulation equation is the amount of time your wealth compounds and grows. If you wait just six years to get started and your assets grow at 12% annually you will have half as much money when you retire compared to starting today (assuming equal contributions over working lifetime). If you wait just twelve years you will have only a quarter as much. That’s a dramatic change in wealth for just a little procrastination.  Just getting this one idea into your bones early enough in life can change your financial future. It is that important.

The power of compounding is an invaluable wealth building tool because money grows geometrically instead of arithmetically - but only when you give it time to work. Procrastination kills time, and as a result it kills more plans for retirement security than all other culprits combined. It is wealth suicide on the installment plan. Every day you delay is another day where opportunity is thrown away.

Intermission

Up to this point we have summarized the tried and proven wealth building formula for most self-made millionaires as follows:

(1) Spend less than you earn and save the difference.

(2) Build your financial intelligence while building your wealth so that you can make wiser, more profitable decisions to grow your assets.

(3) Start early because time is the most important factor in compounding wealth.

To be continued…

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.

Written by Dave Young, President of Paragon Wealth Management 

Many people believe that accumulating wealth is a random event. Or it is pure luck that determines who is wealthy and who isn’t. 

It is true that occasionally someone wins the lottery or receives an inheritance and becomes wealthy. Usually immediate wealth is temporary however. Studies have shown repeatedly that most widows who receive a life insurance death settlement either spend, loan out, or lose the money they received within three years of receiving it.

In order to build wealth you must follow certain rules. In order to keep wealth you must follow those same rules. If you never learn the rules or don’t have the discipline to follow them, you will not build or keep wealth. 

I’d like to offer you seven sound steps for building wealth:

• Step 1- Start Now
• Step 2- Spend Less than you Earn
• Step 3- Hire a Competent Financial Adviser
• Step 4- Avoid Unnecessary Debt
• Step 5- Avoid Large Losses
• Step 6- Follow a Sound, Long-Term Strategy
• Step 7- Be Patient

Step 1 - Start Now 

Albert Einstein said, “The most powerful force in the universe is compound interest.”

For compound interest to be truly powerful, it must have the benefit of time. The more time the better.

For example, compare two investors who each put away $2,000 a year and earn 10% annually. The first investor starts at age 19 and puts away $2,000 per year for eight years in a row and then holds it there. The second investor waits eight years before investing $2,000 per year for 38 years. At the end of the 38 years, the first investor’s account will have grown to $941,054. The second investor’s account will be at $800,896. The first investor invested $60,000 less but ended up with $140,158 more. 

The other factor affecting compound interest is the rate of return. Everyone knows that a higher rate is better than a lower rate. What most people don’t realize is that the benefit is exponential. A 15 percent rate of return is not merely three times more than a 5 percent rate of return. It can actually be anywhere from seven times to 70 times more depending on how long you’re investing it for. Small increases in rates of return make an enormous difference in the long run.

Unfortunately, there are always plenty of reasons not to begin saving.  When you are young, you don’t have much money and don’t really ever really believe that you will reach retirement.  In the next phase of life, you are finishing college or newlywed, with lots of expenses and limited extra income to put away in savings.  That period of life is followed by young children and all of their expenses.  Finally, comes the time that you have to pay to put those kids through college and before you know it you are heading into retirement.  There is never a “good” time to start saving.

Saving requires discipline.  You must “pay yourself first” by putting aside at least ten percent of your income.  After you are “paid” then pay the rest of your bills. The sooner you implement this habit in your life the sooner you will see your savings become a reality.  Otherwise it will likely just be a great idea that never becomes a reality. The sooner you start, the greater the effect of compound interest.

Step 2 - Spend Less Than You Earn

This seems like obvious advice, but it is often ignored. According to a recent article in Smart Money, Americans collectively spent more than they earned after taxes for the past two years in row. This bad habit afflicts people at all income levels-those with less may feel as if the extra expenses are a necessary evil, while those with more may assume their high income protects them from any future financial trouble. This mentality must be changed in order to build wealth.

I’ve known individuals who earn $40,000 a year but have the discipline to save $5,000 of that for the future. Although it may seem like a small annual amount, that money, over time, adds up to future wealth and security.

In contrast, I have met others who earn $200,000 a year and spend $220,000. This lack of discipline is a quick way to be constantly broke, even though you have a very good income.  Often, people assume that because someone drives an expensive car and lives in a luxury neighborhood that they must be financially well off.  My experience is that this assumption is only accurate about half the time.  In the other half of cases, there is no savings and the individual’s net worth is actually negative.  This group is spending their money faster than it is being earned; appear to be successful, before ultimately crashing.  

On the extreme side, I have known people that earned about $4,000,000 a year but still regularly spent more than that.  Over the years they destroyed their net worth.  This further makes the point that a successful saving plan isn’t the result of earning more money.  It is about having the discipline to spend less than you earn.  Like the previous step, the critical element is “having the  discipline” to spend less than you earn, regardless of how much you earn.

While it may sound simplistic, in order to build wealth you must spend less than you earn.

Step 3 - Hire A Competent Financial Adviser

For some reason, it has always been easier to lose money than it is to make it and keep it.  According to the Utah Division of Securities, during 2007 alone, they filed enforcement action on 63 cases. Within those cases, 727 investors lost over $77 million dollars. 

Managing your own investments can be done successfully, but it is not easy.  First, it requires a commitment of time researching and tracking your investments. Second, it requires discipline to stick with your strategy through challenging times. Third, and most difficult, it requires you to remove emotion from your investment process. 

Most successful people recognize the need for a relationship with an accountant and lawyer. Many haven’t yet discovered the benefits of working with a financial adviser. Based on the variety of investment options and the myriad of people that call themselves financial advisers, it is easy to understand why. Often figuring out who to work with is so confusing that people give up and opt to manage their money themselves.

Studies have shown that most investors would be better off with the help of a financial adviser. Unfortunately, finding the “right” adviser is much more difficult than most people realize. Most investors hire someone they “trust”. However, “trust” is very intangible and difficult to quantify. Also, contrary to popular belief, the size of the firm or familiarity of the brand name does not indicate the quality of the advice provided.

Part of the problem is that titles for financial sales reps are completely unregulated. This means that brokers, annuity salesmen and insurance agents are all free to call themselves advisors, financial consultants, financial planners or whatever else they prefer.

To make sure you don’t get stuck with a salesperson when you are really looking for an advisor, make sure you ask these five questions:

• Fiduciary? Fiduciary advisers have a legal obligation to put your interests ahead of their own. Sales reps selling insurance, mutual funds or other financial products are most likely not fiduciaries. A minority of all financial advisers actually meet the fiduciary requirement. Registered Investment Advisors and Investment Advisor Representatives are fiduciaries.
• Experience? How many years have they been managing money? Markets are difficult to navigate and constantly changing. Ideally, your adviser has experience investing in both good markets and bad markets. In the final analysis, you are paying an adviser for their experience.
• Track record? Legitimate advisers will be able to show you a clear report of what they’ve done for their clients over the years. Showing you the track record of a mutual fund, a hypothetical model, or anything else that they have recently started selling does not count. They need to show you their own track record which would be a composite of the results of their previous clients’ investments. Any adviser who refuses to show you at least a five year track record of their performance should be crossed off your list.
• Conflict of interest? Many commission based salespeople are honest individuals. However, in the financial services industry, the worse the product the higher the commission. The easiest way to avoid those “bad products” and to eliminate potential conflicts of interest is to avoid salespeople who receive commissions. By working only with advisers who are paid through management fees and not commissions you can make sure their interests are aligned with yours.
• Surrender charge? If there is a surrender charge then that means there was a commission. If there is a commission then you are not dealing with a fiduciary adviser. You should be free to move your money out of an investment if you are dissatisfied. This means you should never own a product with a surrender charge.

As I mentioned at the beginning… It has always been easier to lose money than it is to make. Implementing these tips will help you keep your money and find a great adviser.

To be continued…

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.

 

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.

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.

The following article discusses when a non-deductible IRA contribution makes sense for investors depending on their individual situations and goals.

Does a Non-Deductible IRA Make Sense For Your Situation?

To view full article, visit Figuide

If you find yourself in the position of having too high of an income to make a deductible contribution to your IRA for the year ($110,000 for joint filers in 2011, $66,000 for Single and Head of Household), you may be wondering if it’s a good idea to make a non-deductible contribution to your IRA.

There are two opposing camps on this issue, and the deciding factor is how you’re intending to use the funds in the near term.

When It’s a Good Idea

If you’re intending to convert your IRA to a Roth and your income is too high to just make the contribution directly to the Roth account, the non-deductible IRA may be the right choice for you. This way you’re effectively working around the income limitations of the Roth contribution ($179,000 for joint filers in 2011 or $122,000 for single or head of household filers).

You also have more funds available in your IRA account, which provides you with the ability to take advantage of economies of scale - certain mutual funds have higher minimum purchase amounts, for example. Since the money is in an IRA you don’t have to track holding periods, non-qualified dividends versus qualified dividends, and your paperwork is reduced.

In addition, depending upon your state laws your money may be protected against creditors since it’s part of an IRA.

When It’s a Bad Idea

If you’re not planning to convert this IRA to Roth, you’re effectively increasing the tax cost of your investment gains (under today’s law). Since withdrawals of investment gains from your IRA are taxed at ordinary income tax rates (up to 35% under today’s rates), you’re effectively giving yourself a tax increase over the capital gains rate which is 15% maximum these days.

Instead of making a non-deductible contribution to your IRA, you could just make your investment in a taxable account. Then within this account you could make investments geared toward long-term gains rather than income or dividends, therefore deferring tax until you sell the investment. And when you do sell the investment it will be taxed at the currently much lower capital gains rate versus the ordinary income tax rate (which would be applied if you made your contribution in the IRA).

Conclusion

So- depending on what you’re planning to do with the account, a non-deductible contribution could be a good idea or a bad idea. You will have to make that call. Hopefully the information above will help you with your decision.

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 following article discusses what a custodial IRA is and how it can be beneficial in helping your children learn about investing. The knowing what a custodial IRA is, your can help your children start a nest-egg of their own for retirement.

The Benefits of Custodial IRAs for Your Children

To view full article, please visit Military Money.

Would you like to help your children accumulate more than $1 million in tax-free retirement assets with a relatively small investment?

You can do exactly that with a highly effective but often overlooked financial strategy: Open a Roth IRA for your child!

The Rules

A child can open an IRA (traditional or Roth) only if he or she has legitimate “earned income” through self-employment or W-2 wages. This money can come from typical jobs such as cutting grass, delivering newspapers, bagging groceries or working at a fast-food restaurant.  A child that performs real work or duties in a family business- data entry, filing, cleaning the office-also qualifies. (It is a good idea to pay any children working for the family business periodically- say, monthly- by check and to keep a time sheet.)

A child, regardless of age, can use this income to fund an IRA subject to the lesser of $5,000 or 100 percent of earned income. As with all IRAs, you have until April 15 of the following year to put the money into the account.

Some children may be reluctant to turn over their hard-earned babysitting or life guarding money to mom and dad to fund an investment they won’t be able to use for many years. Fortunately, parents and grandparents can give kids some or all of the IRA funding money as gifts, allowing the children to keep and/or spend what they make. Any money gifted in this manner must be aggregated with any other gifts and are subject to the $11,000 annual gift exclusion.

If the child is a minor, the account must be set up as a “custodial IRA” with the child’s social security number on the account but an adult parent or guardian shown as the custodian. Once the child turns 18, the custodial feature may be removed.

The Benefits

How powerful is this savings tool? Let’s look at two examples:

Example #1: Johnny, age 13, has a part-time paper route and earns $1,400 per year. His parents open a custodial Roth IRA for Johnny and fund it through gifts limited to the amount of his earned income each year. If Johnny keeps the paper route until age 18 (five years of funding), continues to earn $1,400 per year and never puts another dime into the Roth IRA, it will grow to $305,787 by the time he turns age 65(assuming an eight percent annual rate of return). Not bad for a total investment amount of only $7,000!

Example #2: Sarah, age 15, works for her mother, a real estate agent. She helps her mother with data entry and promotional fliers. Her mother can pay her what she would reasonably pay an outside employee for the same duties (say, $15 per hour). Sarah works 300 hours each year until age 18, earning $4,500 per year. Sarah contributes $2,000 to a custodial Roth IRA and her mother matches that with a $2,000 gift for the total of $4,000 per year. In four years, she will accumulate $18,024 in her Roth IRA (assuming an annual eight percent average annual rate of return). If Sarah continues to work for her mother through college (an additional four years) and make additional contributions, the account will grow to $42,546. If she stopes and lets the money grow tax-free until age 65, she will have amassed $1,164,341. If she continues to contribute $4,000 per year after college until age 65, she will have a whopping $2,482,673-all available tax-free!

The Caveats

First, remember that the money must come from legitimate earned income, so it will be difficult for a very young child to qualify unless he or she is a child actor or model.

Second, some financial institutions are unfamiliar with these rules and may be hesistant to open a custodial IRA or ask for verifiable W-2 income. If the bank, brokerage house or mutual fund company seems reluctant, as to speak with a manager to resolve the issue. If they still refuse, take your business to another institution, since there are plenty that will help you.

Third, since the time frame is so long on this investment, use a growth-oriented stock mutual funds for maximum long-term appreciation.

Roth IRAs for working children are an immensely powerful wealth-building tool and an excellent way to teach kids about money and investing. If your situation qualifies, open one today!

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.