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?

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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

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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.

The following article discusses what a Roth IRA is and how it can be your best option for your retirement savings account.

What is a Roth IRA?

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Saving for retirement is something most people don’t want to think about when they are in their twenty’s but that is the perfect time to begin the process. The more money an individual can save for retirement, the more financially secure the golden years will be. There are mechanisms in place to help plan and save for retirement and the Roth IRA is one of them.

A Roth IRA account is an Individual Retirement Arrangement allowed under the United States tax law and named for its legislative sponsor Senator William Roth, late of Delaware. The Roth IRA has existed since 1998. A Roth IRA is subject to the same rules as a traditional IRA but with some exceptions.

A Roth IRA account can simply be a savings and/or investment account or an annuity and it must be designated as a Roth IRA when it is opened. Contributions to a Roth IRA account must be made from money earned through employment efforts. The effort can be self employment or employment through a legal business. The income can be wages, tips, salaries, bonuses, and professional fees. The Roth account holder will be required to pay taxes on contributions. The benefit is no taxes are required to be paid on earnings or on the principal that is withdrawn from the account at any time. Investments in a Roth IRA can be used for a variety of investments such as stocks, bonds or certificates of deposit. The investor must not exceed established income requirements to contribute to a Roth IRA account, the fund owner must not exceed maximum income criteria. The limits change year to year. A Roth IRA account holder can contribute up to a specified amount between 02 January and the tax deadline of 15 April of the following year. For 2011, the maximum contribution is $5,000. The contribution limit changes with inflation and account holders age 50 or older have the ability of making additional catch up contributions. For 2011, that is $1,000. You will not be able to contribute to a Roth IRA if your income exceeds the income limit. You will be able to continue contributions when your income decreases or the limit is raised.

If one spouse has a Roth IRA account, the other can contribute to the account provided the couple files a joint tax return. Anyone at any age can open a Roth IRA account. Minors can establish and contribute to a Roth IRA provided the minor has verifiable income.

Contributions can be made to a Roth IRA account as well as a 401(k) or 402(b) plan without any contribution effect on either account. A traditional IRA converted to a Roth IRA account can still reveive the current contributions during the year of conversion.

A Roth IRA account can be opened with any Roth IRA providers and they might be a bank, mutual fund companies, brokerage firms or insurance companies. Be sure to compare fee’s providers charge before choosing a Roth IRA account provider.

Facts about IRAs

The following article discusses what IRAs are and the difference between the different types of IRA accounts that are available to investors.

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Individual retirement accounts (IRAs) were established by the federal government and given special tax treatment primarily to encourage people to save for retirement. With an IRA, you can set aside a certain amount of money every year in a special account managed by a bank or other financial institution, or by a mutual fund, life insurance company or stockbroker. IRA accounts can be invested according to your choice of investment options. Your money grows tax-deferred, and in some cases, even tax-free. While this article explains some of the different types of IRAs, you should consult with your own tax or financial adviser to see if a particular type of IRA is right for you.

Traditional IRAs

A traditional IRA is a personal savings account that gives you tax advantages for saving for retirement. Contributions to a traditional IRA may be tax-deductible, either in whole or in part, depending on your modified adjusted gross income — a figure used by the Internal Revenue Service (IRS) that’s arrived at by first deducting some adjustments from your total income and then adding certain items back.

You can contribute to a traditional IRA for each year you receive compensation and have not reached age 70½. For any year in which you do not work, contributions cannot be made to your IRA unless you receive alimony or file a joint return with a spouse who has compensation.

There is a limit to how much you can contribute each year. For tax years 2005 through 2007, you can make contributions to a traditional IRA of up to whichever amount is smaller: (a) your taxable compensation for the year or (b) $4,000. In 2008, the $4,000 limit will be raised to $5,000. In addition, if you are 50 or over at the end of a tax year, you may contribute an extra catch-up amount — an additional $1,000 in 2006 and beyond.

You are not required to make a contribution to only one type of IRA during the year. If you qualify, you can divide your permissible contributions between a traditional IRA and Roth IRA.

There is no upper limit on how much you can earn and still contribute to a traditional IRA. But there are some rules that limit how much you can deduct. Information regarding employer retirement plans and other rules for IRAs can be found in IRS Publication 590, “Individual Retirement Arrangements (IRAs).”

The investment earnings in your IRA account won’t be taxed until you withdraw them. In most cases, IRA account holders withdraw their money upon or after retirement, when they are in a lower tax bracket than at the time the money was invested.

You can withdraw or use your traditional IRA assets at any time, but those withdrawals will be treated as income for tax purposes. Moreover, you may be subject to an additional 10 percent penalty tax if you make withdrawals prior to age 59½ unless there are special circumstances, such as death, a disability, certain higher education expenses or a qualifying first-time home purchase.

With a traditional IRA, you must start withdrawing money from your IRA by April 1 of the year following the year in which you reach age 70½, and each year you must withdraw a required minimum distribution or face a penalty. The IRS provides formulas for figuring out this required amount based on varying circumstances.

One of the benefits of IRAs is that it is easy to move retirement savings from one account to another without tax penalties. IRA funds can be moved in the following ways:

• Rollovers: With a rollover, you receive assets from your IRA (or other qualified retirement plan) and then deposit those assets in another IRA (or other qualified retirement plan). If you receive a lump sum payout from a company pension plan, perhaps because you are leaving that company, you can avoid paying taxes on the lump sum by rolling it over into an IRA — but you must do so within 60 days of receiving the funds unless you receive a waiver. A qualified employer-sponsored retirement plan may, at your request, make a “direct rollover” by distributing your plan assets directly into another plan in which you participate or another IRA you’ve set up. You may make only one rollover from any single traditional IRA to another traditional IRA in any 12-month period, but there’s no limit on your ability to roll over amounts from or to other traditional IRAs in any given time period.
• Conversions: You can move (”convert”) amounts from a traditional IRA into a Roth IRA, depending on your tax filing status and modified adjusted gross income for the year. This is discussed further under Roth IRAs below.
• Transfer from One Custodian to Another: You can transfer your IRA to another institution, perhaps to take advantage of a better deal or a promising mutual fund. To switch institutions, simply request a direct IRA-to-IRA transfer from one institution to the other. A transfer is not the same as a rollover. With a rollover, you take receipt of your funds before depositing them in another account. With a transfer, you never receive money; instead, the money goes directly from one IRA account into another. So the 60-day period doesn’t apply. Also, because this is not a rollover, it’s not subject to the 12-month waiting period required between rollovers.
• Transfers Related to a Divorce: An interest in a traditional IRA may be transferred as part of a divorce settlement. This type of transfer is generally tax-free.

Roth IRAs

A Roth IRA operates differently from a traditional IRA. Key differences include:

• Contributions to a Roth IRA Are Not Tax-Deductible: The distributions (including earnings on your contributions) are not included in income and are potentially tax-free. Because your contributions to a Roth IRA are not deductible and have already been taxed as income, you can withdraw your contributions, tax-free, at any time within certain limits — just as you can withdraw money from your bank account without paying taxes on it. The earnings on your contributions, however, are treated a little differently. Withdrawals of earnings from a Roth IRA can generally be made anytime, free of tax or penalty, if it has been five taxable years since you first opened the Roth IRA and if the withdrawals are made: After age 59½, on account of death or disability or for a qualified first-time home purchase up to $10,000 (lifetime maximum). If a withdrawal does not meet these requirements, it may be taxable and may also be subject to a 10 percent penalty if made before age 59½.
• Withdrawals Are Not Required: Unlike the traditional IRA, you may leave assets in a Roth IRA for as long as you live. You may allow your assets to continue to accumulate tax-free and/or be passed to heirs tax-free. Contributions can be made to a Roth IRA as long as you are earning income, even after you reach age 70½.

Here is more information about Roth IRAs:

A Roth IRA is generally available only if your adjusted gross income is less than $160,000 for joint filers or $110,000 for single filers. Check with your financial or tax adviser to see if you are eligible.

In general, if you contribute only to a Roth IRA, your contribution limits are the same as for a traditional IRA. This includes “catch-up” contributions for those 50 or older. However, if your modified adjusted gross income is above a certain amount, your contribution limit is gradually reduced. The amount you can contribute each year to a Roth IRA may also be limited if you contribute to both a Roth IRA and a traditional IRA.

A traditional IRA or other retirement account can, under most circumstances, be converted, partially or entirely, to a Roth IRA, if your modified adjusted gross income is less than $100,000 in the year of conversion. If you are married, you may convert to a Roth IRA only if you file taxes jointly. The converted amount (excluding nondeductible contributions) is subject to income tax in the year of the Roth IRA conversion. You can also roll over a Roth IRA into another Roth IRA.

Choosing Between a Traditional and Roth IRA

If you are eligible for both traditional and Roth IRAs, how do you choose between the two options? Or how do you decide how to apportion your retirement savings between the two? Here are some questions to consider:

• How long do you expect to keep earning money? If you’ll be working beyond age 70½, you will have to begin withdrawing from a traditional IRA and paying tax on those withdrawals while still paying income tax on your compensation.
• What tax bracket do you expect to be in when you start withdrawing money? If you expect to be in a lower tax bracket than you are now, a traditional IRA enables you to save money up front by deducting your contributions and put off paying some taxes until later.
• Do you plan to use up your IRA assets during your lifetime or leave them to your heirs? A Roth IRA can be used for estate planning, to build up assets for those who will inherit. While a traditional IRA can be inherited, your heirs and beneficiaries would probably gain more from a Roth IRA. Without mandatory withdrawals, your account can keep accumulating income, tax-free, until your death, when it will pass to the person you’ve designated.

IRA contributions may normally be invested in mutual funds, annuities, CDs, stocks or bonds. Which investment selection is most appropriate for you depends on your personal objectives and the amount of risk you wish to take. But one certainty applies to all types of investments: The sooner you invest, the larger your IRA will grow and the sooner you’ll be on your way to a comfortable retirement. Talk with your tax or financial adviser about choosing the plan that’s right for you.

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 taken from Wall Street Journal Online

Fiduciary responsibility, in simple terms, is the legal responsibility to put your clients’ needs ahead of your own. Some estimates claim that only 15 percent of investment advisers have this responsibility. Paragon Wealth Management has fiduciary responsibility, and we recommend that you only work with advisers who do.

Below are excerpts from an article taken from the Wall Street Journal Online. In the past investment advisers were the only ones to have fiduciary responsibility, but Wall Street has agreed to put its brokers under the same criterion.

Fiduciary Duty Hits the Street- Sort of
August 31, 2009

Written by Jane J. Kim

For years, most investment advisers have been deemed fiduciaries under the Investment Advisers Act of 1940.

Investor groups say the existing fiduciary standard has been defined and upheld by over four decades of legal precedence, including a 1963 U.S. Supreme Court case, Securities and Exchange Commission v. Capital Gains Research Bureau.

“If you have a precise definition of fiduciary duty, what that does is exclude a number of features of fiduciary,” said Rex Staples, general counsel at the North American Securities Administrators Association Inc., which represents state securities regulators.

Trying to define what constitutes a fiduciary duty is like trying to define the duty not to commit fraud – any application of it depends on the client’s particular facts and circumstances, say adviser groups. Proponents say a fiduciary standard can’t be defined given the complexity and changing nature of the business.

“For years, they’ve opposed the fiduciary duty,” said Barbara Roper, director of investor protection at the Consumer Federation of America, a consumer-advocacy group. “Now they’ve embraced it in order to gut it.”

Still, Wall Street’s support of a fiduciary standard boosts the odds that it will eventually apply to brokers. Now, the fight is over the standard itself.

Investment advisers want to extend the current standard under the Investment Advisers Act to all financial professionals who give investment advice, while the brokerage industry wants a new, federal standard to apply to any broker-dealer or investment adviser that provides personalized investment advice to clients.

Under the Treasury’s proposed Investor Protection Act of 2009, the SEC would have the authority to “promulgate rules” establishing a fiduciary duty. SEC Chairman Mary Schapiro said she favors a fiduciary standard that would that would be applied uniformly to all financial professionals.

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 the fiduciary responsibilities that financial advisers have to their clients.

When Are You an Investment Fiduciary?

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Under what circumstances is the financial planner a fiduciary? As Trone puts it in his position paper, “At the risk of oversimplifying a complex subject, an investment fiduciary generally is defined as a person who has the responsibility of managing someone else’s assets. If one accepts the premise that a large majority of financial planners provide investment advice, then when might a financial planner be considered an investment fiduciary?”

In attempting to answer that question, Trone says, we should first qualify and refine the previously stated general definition of an investment fiduciary to make it industry specific. A financial planner may be considered an investment fiduciary under these circumstances: (1) when the financial planner is registered with the Securities and Exchange Commission or (2) when by actions the financial planner provides comprehensive and continuous advice.

The advantages of this industry-specific definition are that it is applicable whether the financial planner is (1) a registered representative or a registered investment adviser; (2) commission or fee-based, or (3) operating with or without client discretion.

But as simple and as straightforward as this definition might appear, the determination of fiduciary status is still difficult and is ultimately decided by the courts or arbitration boards who review the facts and circumstances of each situation. A financial planner may be deemed an investment fiduciary with one client, but not with another. To illustrate this difficulty, consider these two examples drawn from Trone’s paper.

Example 1. A client has several different brokers and money managers, as well as a portfolio of stocks and bonds that the client has managed on her own. The client asks the financial planner to review her existing portfolio of stocks and bonds, and to make recommendations as to which securities are no longer appropriate and should be sold. The financial planner uses several different rating agencies to evaluate the portfolio and make several “sell” recommendations, which the client accepts.

Question: Is it likely the financial planner will be considered an investment fiduciary in this example?

Answer: Probably not. The financial planner did not develop a comprehensive investment strategy that reviewed and included all of the client’s investment holdings (the services were not comprehensive). It is also implied that the investment review was a one-time or occasional request, and was not an ongoing service provided by the planner (the investment advice was not continuous).

Example 2. A client sells his business for a sizable fortune and, for the first time, has considerable investable assets to manage. He turns to his financial planner for assistance. The financial planner develops an asset allocation study, prepares an investment policy statement, implements the investment strategy with appropriate money managers and mutual funds, and on a periodic basis provides performance reports showing how the client is progressing toward meeting his goals.

Question: Is it likely that the financial planner will be considered an investment fiduciary in this example?

Answer: Very likely. The investment advice is comprehensive and continuous.

The specific industry challenge is to clearly identify the demarcation between executing a brokered transaction and giving investment advice. The compliance regulations and suitability standards of the National Association of Securities Dealers and various market exchanges adequately address the practices associated with the selling of an investment product and the execution of a brokered transaction. But when the investor is provided comprehensive and continuous investment advice, a higher standard of care is justified and warranted-specifically a fiduciary standard of care.

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 who is considered a fiduciary and what some of the investment fiduciary responsibilities include.

Meeting Your Fiduciary Responsibility

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So you volunteered to serve on the board of your local charity or other organization and you consider yourself especially lucky to have secured a seat on the investment committee. Perhaps you initially had reservations about your new appointment - but if you have a keen interest in the financial world, some investments of your own, you’re a business person, you watch CNBC and you read the Wall Street Journal, you may feel that you’re qualified. However, while this may be a great way to attend investment committee meetings and receive the latest investment research from the charity’s advisor, this job shouldn’t be taken lightly.

Being a fiduciary comes with a certain level of responsibility. An investment fiduciary is any person who has the legal responsibility for managing somebody else’s money. What this really means is that you have been placed in a position of trust and there may be consequences for betrayal of that trust. In this article, we’ll discuss who is considered a fiduciary and what a fiduciary’s responsibilities entail.

Who is considered a fiduciary?
As a member of the investment committee, you may share some of the responsibility with the committee’s investment advisor. If your advisor is a Registered Investment Advisor, he or she does share fiduciary responsibility with the investment committee. A broker, on the other hand, may not. Some brokerage firms don’t want or allow their brokers to be fiduciaries. This uncertainty makes it important to ask the advisor. Ultimately, it is the advisor’s actions that determine whether he or she is a fiduciary. Giving continuous, comprehensive advice is considered acting in a fiduciary role, while simply selling products is not. 

Engaging an advisor who is willing to accept fiduciary responsibility is desirable because investment committee members reduce their liability by delegating some of their responsibilities to an expert. However, hiring an expert does not relieve the committee members of all of their duties. They still have an obligation to prudently select and monitor the activities of the expert; therefore, committee members still must understand what constitutes a fiduciary investment process.

A Fiduciary’s Responsibilities
A fiduciary’s main responsibility is to manage a prudent investment process. A prudent process is not as nebulous as it may sound. A fiduciary demonstrates prudence by the process through which investment decisions are managed. This means fiduciaries must have a basic outline for how they go about their responsibilities. In response to the need for guidance for fiduciaries, the nonprofit Foundation for Fiduciary Studies was established to define the following prudent investment practices:

Step 1: Organize
The process begins with fiduciaries educating themselves on the laws and rules that will apply to their situations. For example, fiduciaries of retirement plans need to understand that the Employees Retirement and Income Security Act (ERISA) is the primary legislation that governs their actions. Once fiduciaries identify their governing rules, they then need to define the roles and responsibilities of all parties involved in the process. If investment service providers are used, then any service agreements should be in writing.

Step 2: Formalize
Formalizing the investment process starts by creating the investment program’s goals and objectives. Fiduciaries should identify factors such as investment horizon, an acceptable level of risk and expected return. By identifying these factors, fiduciaries create the framework for evaluating investment options.

Fiduciaries then need to select appropriate asset classes that will enable them to create a diversified portfolio through some justifiable methodology. Most fiduciaries go about this by employing modern portfolio theory (MPT) because MPT is one of the most accepted methods for creating investment portfolios that target a desired risk/return profile.

Finally, the fiduciary should formalize these steps by creating an investment policy statement, which provides the necessary detail to implement a specific investment strategy. Now the fiduciary is ready to proceed with the implementation of the investment program as identified in the first two steps.

Step 3: Implement
The implementation phase is where specific investments or investment managers are selected to fulfill the requirements detailed in the investment policy statement. A due diligence process must be designed to evaluate potential investments. The due diligence process should identify criteria used to evaluate and filter through the pool of potential investment options. The implementation phase is usually performed with the assistance of an investment advisor because many fiduciaries lack the skill and/or resources to perform this step. When an advisor is used to assist in the implementation phase, fiduciaries and advisors must communicate to ensure that an agreed upon due diligence process is being used in the selection of investments or managers.

Step 4: Monitor
The final step can be the most time consuming and also the most neglected part of the process. Some fiduciaries do not sense the urgency for monitoring if they got the first three steps correct. Fiduciaries should not neglect any of their responsibilities, because they could be equally liable for negligence in each step.

In order to properly monitor the investment process, fiduciaries must periodically review reports that compare their investments’ performance against the appropriate index, peer group and whether the investment policy statement objectives are being met. Simply monitoring performance statistics is not enough. Fiduciaries must also monitor qualitative data, such as changes in the organizational structure of investment managers used in the portfolio. If the investment decision makers in an organization have left, or if their level of authority has changed, then investors must consider how this information may impact future performance. In addition to performance reviews, fiduciaries must review expenses incurred in the implementation of the process. Fiduciaries are not only responsible for how funds are invested, but they are also responsible for how funds are spent. Investment fees have a direct impact on performance and fiduciaries must ensure that fees paid for investment management are fair and reasonable. 

Conclusion
Through proper execution of the prudent investment process outlined in these four steps, trustees and investment committee members can reduce their liability by being confident that they are fulfilling their fiduciary responsibilities. Fiduciaries should embrace their responsibilities and understand that they will not be judged on the returns of their portfolio, but on the prudence employed in the creation of the returns. If fiduciaries get the process right, they should be able to achieve admirable returns for their organizations. In the end, it’s not whether you win or lose, it’s how you play the game.

The following article gives a brief explanation of the different types of investment strategies and the general philosophy behind them. 

Defense is the Best Offense: Basic Investing Strategies

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There are times when investing looks like such a sure thing that limiting your rewards with any sort of defensive strategy seems foolish. But venturing into the markets fully exposed is like giving up your health insurance policy to pay for a family hiking trip — one slip, and you’re done for.

As we discussed in Time vs. Risk, the longer you have to invest, the more the clock will make up for the inevitable short-term losses. But these three classic defensive strategies are still crucial if you want to maximize your gains while limiting your risk.

Diversification
The single best way to protect yourself from a meltdown in one stock or industry is to spread your risk across several different investments. The more diversified your portfolio is, the less any one stock can hurt you by blowing up.

If you’ve got the time and energy, you can create your own diversified portfolio. But it will mean keeping track of at least 20 different stocks or bonds at once — a daunting task, to say the least. A much easier solution is to buy a range of mutual funds and leave the diversification worries up to professional management. As we discuss in depth in our Mutual Fund section, by purchasing a fund that invests in large, blue-chip companies, another that looks for smaller growth companies and yet another that invests overseas, you can easily spread your money across hundreds of separate stocks. You’ll pay a little in fees, but the savings in time and aggravation are probably worth it.

Dollar-Cost Averaging
Dollar-cost averaging is another form of diversification — only instead of spreading your money over a bunch of different stocks or bonds, it diversifies your investments over time. The natural human tendency is to buy lots of stock when prices are rising and to stop buying them altogether when prices are on the downswing. Dollar-cost averaging forces you to do the opposite — you end up buying the most stock when prices are low.

Here’s how it works: Suppose you decide to put $300 a month into a mutual fund that invests in the stocks of large companies. Your broker or fund company can set up an account for you and the money is pulled straight from your paycheck on the same day each month. After a while, you hardly know it’s gone.

If a share of the fund costs $50 in October, your $300 will buy six shares. If the price rises to $75 in November, you buy four shares. If the price drops to $25 in December you buy 12 shares. The idea is that your money buys more shares when the price is cheap and fewer when the price is high. That lowers your total cost and, assuming the fund’s overall trendline is upward, you capture more of the upside.

That’s not to say dollar-cost averaging protects you from a falling market. If the fund’s value crashes, so does your overall investment. But the strategy does ensure that you invest new money when prices are low so that you can enjoy the runup when the market recovers — as it always does with time.

A lot of people also use dollar-cost averaging when they want to move a big chunk of money into the market — an inheritance, say, or a year-end bonus. The idea here is to protect yourself from putting all your money in at once and having the market crash days or weeks later. It’s true that if the market moves sharply higher, you’ve missed an opportunity. But in volatile times, that risk is worth it.

Of course, if you’re moving money from one stock account to another — as many people do when they change jobs and roll over their 401(k) accounts — dollar-cost averaging doesn’t make much sense. If your money is already in stocks, you’re not assuming any more risk if you simply transfer it into a new account.

Asset Allocation
Asset allocation is yet another way to diversify. It takes advantage of the fact that when it comes to risk and reward, financial categories like stocks, bonds and money-market accounts all behave quite differently.

Stocks, for instance, offer the highest returns among those three “asset classes,” but they also carry the highest risk of losses. Bonds aren’t so lucrative, but they offer a lot more stability than stocks. Money-market returns are puny, but you’ll never lose your initial investment. An asset-allocation strategy looks at your particular goals and circumstances and determines what asset mix gives you the optimal blend of risk and reward.

Here’s an example. Say your goal is retirement. When you’re young — in your 20s or 30s — and have time to make up for short-term market losses, an asset-allocation scheme would put you heavily into stocks, maybe 100% of your savings. You might even spice it up with a mix of large-company stocks, small-company stocks and international stocks to diversify your exposure within the category.

As you moved into your late 30s and early 40s, however, you’d probably want to add some bonds to give your portfolio some stability and income. Maybe you’d shift to a 75/25 blend — still favoring growth, but not overdoing it. The closer you got to retirement age, the more you would ratchet up the bonds and taper off the stocks. And in your last few years, when you simply could not afford big market losses, your portfolio would be heavy on short-term bonds or money-market funds — the least risky of all investments.

If you’re serious about it, allocation models also help you buy low and sell high. Say, for instance, small-company stocks are on fire one year, but large-company stocks are merely standing still. If the stock portion of your allocation model called for a 50/50 mix between the two, this sudden surge in small-company values would upset the balance. To make things right again, you’d have to sell some expensive small-company stock and buy some cheaper large companies. If you “rebalanced” this way each year, you’d always be trading expensive assets for those with more growth potential.

There are many factors in addition to your risk tolerance to take into consideration when it comes to developing your personal investment philosophy. The following bullet points are based on Paragon Wealth Management’s experience actively managing accounts for more than 20 years. 

• To succeed over the long term in dynamic markets that are constantly changing and evolving, the investment approach must be both disciplined and flexible.
• Stock market forecasts are entertaining and make nice headlines, but they are not useful for making money.
• Making investment decisions based purely on fundamental analysis is a mistake. Even if your analysis is completely correct, nothing happens until investors begin to buy or sell. At Paragon, quantitative models drive our investment process, followed by technical and fundamental analysis.
• Application of behavioral finance investment theory is useful in determining portfolio allocation. Crowd sentiment is an important factor that must be constantly measured.
• Traditional methods of fund selection focus on long-term track records, even though research has repeatedly shown that such data in not indicative of future performance. We focus on what the sector is doing now, not what it has done over the past three to five years.
• Spreading a portfolio across all major market segments in the name of diversification is a cop-out. Why invest in sectors that are going nowhere?
• Most low turnover managers are overpaid for what they do. How difficult is it to buy some stocks and watch them go up and down forever?
• Portfolio turnover, in and of itself, is not a bad thing. Also, simply focusing on fund expenses, rather than what an investor earns, is a big mistake.
• Matching the performance of the S&P 500 is not particularly impressive. If that is the objective, investors may as well purchase an index fund.

Simply put, your investment risk tolerance is the amount of stress you experience when your account declines. In other words, how do you feel if your account declines five percent? How about ten percent? What about 20 percent?

If you invest too aggressively for your risk tolerance, then at some level of decline you may reach a breaking point. When that point is hit, many investors feel the need to sell their investments in order to protect themselves. As a result, they make the classic mistake of selling out right at the market bottom just before the market rebounds. This causes them to lock in their losses and miss out on future gains.

Investors have no problem watching their portfolio go up. Most mistakes are made when the markets go down. Setting your risk tolerance before you invest helps you to avoid those costly mistakes.

If your risk tolerance is set too low, you won’t generate the returns you should. If it is set too high, should market conditions become difficult, you will feel pressure to sell your investments, which could cause you to miss out on superior long-term returns.

Risk Tolerance needs to be set at the right level for each individual investor. Couples should each take the test individually, and then combine the results, in order to identify what both individuals will be comfortable with.

Determining your risk tolerance can be difficult. Setting a proper objective risk tolerance level will help you avoid making emotional decisions during difficult markets. We have put together a 10-question survey that will help identify yours. Click on the link below to complete this short, but effective survey.

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.