Written by Dave Young, President of Paragon Wealth Management 

Step 4 - Avoid Unnecessary Debt

Debt can be useful if used properly. A few years ago I went to Africa. While I was on the trip I noticed buildings that were half built everywhere. Projects were at different levels of completion and then abandoned. When I asked my guide why the structures were halfway done, he responded, there is no banking system. There is no way for the common man to borrow money. People can only complete part of the building because they lack the funds to pay for building supplies right away. They build what they can pay for now, and then come back and build more next year when they have more money. 

If debt is used sparingly, for assets that appreciate or allow you to make more money, then debt makes sense. For example, a house, a car, or an education all make sense.

Using debts for consumables or things that go down in value makes no sense. Impulse buying or buying on emotion are a recipe for financial disaster. Before you make any major purchase, it is important to decide whether it is a “need” or a “want”. It is amazing how few purchases actually fall into the “need” category. If it is a “want” then a conscious decision should be made as to whether or not you can afford it. Generally, there is no reason to go into debt for “wants”.    

For example, most credit card debt is for things that hurt rather than help your financial situation. My definition of a credit card is, “A means of buying something unneeded, at a price you can’t afford, with funds you don’t have.”

Set a goal to live debt free. Put a plan in place to reduce and then eliminate your debts.  With 1.5 billion credit cards in circulation, an average household credit card balance of $8,562 and an average interest rate of 19%, it’s no wonder that one out of every 50 households filed for bankruptcy in 2005.

Accumulating debt is the exact opposite of accumulating wealth. If you are paying debts, you are helping someone else accumulate wealth. With the few exceptions mentioned above, avoid debt like the plague.

Step 5 - Follow a Sound, Long-Term Strategy 

Research has shown that most investors do not follow a strategy.  In other words, they do not have a disciplined, systematic process they follow to make investments.  Their portfolio of investments often represents a patchwork of uncorrelated ideas that were sold to them by various salesmen over their lifetime.

The first step to an effective strategy is to properly select your risk tolerance.  This means that you identify in advance how much risk or volatility you are willing to subject your account to.  For some investors that means taking no risk at all and being willing to accept low returns in exchange for zero volatility.  For others, it means to attempt to generate returns in excess of twenty percent and be willing to endure the necessary roller coaster ride to get them.  Most investors end up somewhere in between those two extremes. 

Identifying your individual risk tolerance is the single most important step to achieving long term investment success.  If it 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 likely change strategies at just the wrong time and miss out on superior long-term returns.

Once your risk tolerance is set then you must follow a proven investment strategy that doesn’t simply involve “gut feelings.” Emotional investing is a recipe for failure.

What makes investing so difficult is that it is counter-intuitive. Usually, doing what “feels good”, doesn’t work.  This is why you must have a systematic investment process that you follow.

At Paragon, we follow an investment discipline that is designed to remove emotion from the investment process.  For example, one of the models that we use is based on investor sentiment.  This model measures how what percentage of investors are optimistic versus pessimistic at any point in time. Interestingly, when most investors are optimistic and think the market is going to go up….it goes down. Likewise, when most investors think the market is going to go down… it goes up. We measure this statistically and the model is extremely accurate.  The market usually does the opposite of what most investors hope, think or feel that it is going to do.  I have always said that once you begin to “hope” an investment will move in your favor, you are usually in trouble.

Our strategies are driven by quantitative models that seek to proactively position our accounts for the most benefit in ever-changing market environments.  For the past twenty years, we have developed and relied on rigid models to point us to the areas of the market to invest in.  These models identify the sectors of the market that rank in the top twenty percent over the past three, six, nine and twelve months.  Our portfolios are constantly adjusted as positions move in or out of the top twenty percent. 

We use five other models to determine how conservative or aggressive we should be positioned at any point in time. These models measure an array of fundamental and technical data that constantly compare what is happening in the market today to what has happened historically.  Following these systems and processes does not guarantee that we will always be positioned perfectly.  Historically, we expect to be wrong 20% to 30% of the time.  Even still, following this methodology has enabled us to significantly reduce risk and generate excess returns for our clients.  (See our ten year track record at www.paragonwealth.com )

When comparing investment alternatives we believe that you should measure whether or not the strategy you are considering meets the following, time tested criteria.  Your strategy should:

• ¨ Work over different time frames
• ¨ Provide effective rather than traditional diversification
• ¨ Work in both bull and bear markets
• ¨ Be disciplined yet flexible and evolving
• ¨ Reduce risk and provide downside protection
• ¨ Generate better returns than traditional stock indexes
• ¨ Have a proven long-term track record

Step 6 - Avoid Large Losses

Unfortunately, it has always been much easier to lose money than to make it.  In my business, I am constantly presented opportunities to invest in.  For every twenty proposals I see, I may invest in one.  Even with complete due diligence, some of the investments are losers.  My experience is that there are ten ways to lose money for each way there is to make it.  Money is slippery and hard to hold on to.

It’s not uncommon for money to come in large lump sums-in the form of a retirement plan distribution, an inheritance or a life insurance settlement.  People are expected to manage these large chunks of cash wisely, but there is no real training available on how to manage or invest large sums of money. To make matters worse, most people simply don’t have the time, resources, expertise or desire to manage their assets, and there are plenty of incompetent advisors, relatives requesting loans and scam artists ready to step in and take advantage. It’s no surprise, then, that most recipients of life insurance settlements in the United States completely lose their money within three years. 

Some investment losses are unavoidable. They come with the territory. The key is to minimize large losses that can quickly reverse the benefits of compound interest. Even though it can be time consuming, you should research thoroughly before turning over your money to someone else. This will increase your odds of avoiding investment scams and subpar money managers. 

For example, if you lose 25% of your account, you need to make 33% to get back to even, which is workable. If you lose 50% of your portfolio, you have to make 100% to get back to even, obviously a much more difficult task. A loss of 90% of your portfolio requires a gain of 900% to get back to even. Forget about it. A much better scenario is to follow a sound investment strategy that seeks to avoid those big, dramatic losses in the first place.

Step 7 - Be Patient

“A man watches his pear tree day after day, impatient for the ripening of the fruit. Let him attempt to force the process, and he may spoil both the fruit and the tree. But let him patiently wait, and the ripe fruit at length falls into his lap.” -Abraham Lincoln

It has been said that patience is the greatest of all the virtues.  We live in a world where it seems that patience has been forgotten.  In our instant everything world people want it all and they want it now.  They don’t think in terms of paying the price or investing for the long term.  They act on a whim rather than follow a long term plan.

Mountain View High School has a very successful track team with several runners being nationally ranked.  I asked their coach why his runners are so successful.  He told me that much of their success comes because they are taught to have the patience to pace themselves and wait for the right time to make their move to win the race.  Even with runners, exercising patience is one of the keys to success.    

In the fall I spend some of my spare time hunting for big game.  I focus my efforts on finding animals that have record book potential.  In order to locate them I have to backpack into places that rarely traveled and often I come back empty handed.  In my quest to find trophies I have traveled to some very dangerous parts of the world.  In order to succeed I have had to hunt in ways that differ from the traditional.  While there are several factors that contribute to my success, I believe that extreme patience has been the most significant.         

Patience is a key attribute for successful investors, but it can only work if you adopt the kind of smart investment strategy that we previously discussed.  Without the right strategy, all the patience in the world is essentially worthless. As soon as you put a solid strategy in place, it’s all about patience, self-control, patience and of course more patience.   

This is one of the most difficult steps for most investors, and it’s an issue we have to constantly reinforce with our clients. Patience goes against human nature, and a lack of patience has ruined many sound investment plans.  

We are constantly positioning our funds to take advantage of whatever the markets will give us. We never know in advance when we’re going to be rewarded. Sometimes, we spend months waiting. But we do know that following this process in the past has yielded tremendous rewards.  

The portfolios we manage, Managed Income and Top Flight, have both tested our patience during periods of underperformance. By exercising patience and staying invested, Managed Income has met its conservative objectives since its inception in 2001. Paragon’s growth portfolio, Top Flight has also generated outstanding returns and met its performance objectives since its inception in 1998. (See www.paragonwealth.com for more details regarding our performance). 

Clients who exercised patience during periods when our portfolios returns went flat or negative still received outstanding returns over time. It seems like the market does its best to make investors give up at the worst possible time.  For example, when you review our track record you see that our best returns almost always follow the years we have lackluster performance. Unfortunately, the investors that did not exercise patience and stay invested missed out on those returns, even though the overall strategy was good. As you can see, patience keeps you focused on the long term.  Patience is critical to long term investment success.

These seven rules apply whether you have a large or small amount of money. Building wealth is possible-if you follow the rules.

About the Author

Dave Young started his career as an entrepreneur. He successfully started 12 businesses in the early 1980s. In 1986, he decided to sell his businesses and invest the proceeds, but he was unable to find an investment company that met his needs. As a result, later that year he began managing his own portfolios.

Dave continued to research to find the best methods to invest that would produce most profitable returns. He believed in his methods so much that he invested his life savings and started Paragon Wealth Management. Over 20 years later, Dave continues to invest and research ways he can improve his business to serve his clients better. His methods have attracted national and local attention. He has been interviewed by BusinessWeek, CNBC, the Wall Street Journal, the Deseret Morning News and other national and local media. Visit www.paragonwealth.com to learn more about Dave Young and Paragon.

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.

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.

photo by ADoseofShipBoy

No matter what stage of life you are in, or where you are at in planning your retirement,  you are about to welcome in a New Year and new resolutions.  The following article provides 10 main concepts to keep in mind when it comes to making financial resolutions for the New Year.

10 Financial Resolutions for the New Year

By Joshua Kennon, About.com Guide

Financial Resolution 1: Know What You Want

Have a clear, concise financial goal for the year. It isn’t good enough to say, “I want to have my credit card paid down and more money in the bank”. Instead, you should say, “I have the balance on my credit card paid down to $0, over $5,000 in my savings account, and a fully funded IRA.”

Financial Resolution 2: Prioritize Your Debts

Not all debt is created equal. Make a list of your liabilities and organize them by the annual interest rate. Those with the highest rates (most likely your credit card debt) should be paid off immediately. It does no good to invest money while you are paying 19%+ each year. In a lot of cases, the wisest course of action is to sell any certificate of deposits, savings bonds or other cash holdings and use them to pay the balance.

Financial Resolution 3: Open an IRA

If you haven’t done so already, open an individual retirement account (or IRA for short). Your financial planner or accountant should be able to tell you whether a Traditional or Roth IRA is better for you. Both offer important tax advantages that can add up to a significant amount money by retirement.

Financial Resolution 4: Enroll in an Automatic Savings Plan

Automatic savings plans are now offered for everything from brokerage accounts to government bonds. Simply call your broker and tell them you want a certain amount of money withdrawn from your checking or savings account each month, on a certain date, and deposited into your investment account. This way, you are forced to save because the cash is drawn directly from your bank before you can get your hands on it.

Financial Resolution 5: Close Unnecessary Accounts

Banks and financial institutions charge fees for everything under the sun. Is it really necessary to have several credit or checking accounts? Although there are exceptions, in the vast majority of cases the answer is a firm no! To put things into perspective: imagine your bank charges you $8 each month for your checking account. In thirty years, that $8 will have added up to more than $8,500 after taxes!

Financial Resolution 6: Make Money Doing What You Love

Most people can name at least one thing they are truly passionate about. One of the ways to enjoy your work is to only do the things you enjoy. Find a way to turn your passions and hobbies into profit. The world is full of amazing jobs such as full-time ice cream tasters and video game testers!

Financial Resolution 7: Collect Your Change

Any time you make purchases with cash, only spend whole dollar amounts. If you go to the grocery store and your ticket comes to $67.39, pay $70 in cash and pocket the change. The first thing you should do when you go home is throw the money in a large container (empty water jugs are perfect.) If you adhere to this policy and don’t spend any of the change, you are likely to save several thousand dollars over the course of a year.

Financial Resolution 8: Give Money

One of the most effective ways to realize the value of money is to give it. It is a powerful and effective way to change other people’s lives for the better while giving you a better sense of freedom financially. Suddenly, you realize just how much promise $20 contains.

Financial Resolution 9: Begin Using Personal Finance Software

Knowledge is power. If I asked ten people on the street how much they spent last year on books or movie tickets, nine of them probably couldn’t answer. With a few keystrokes, however, someone using personal finance software such as Microsoft Money or Quicken can find out.

Financial Resolution 10: Read a Financial Book Each Month

If you want to learn to cook, you read cookbooks. If you want to learn to fix an engine, you ask someone to show you. The printed word is amazing in that it allows you to communicate directly with the most brilliant financial minds of the past century. Consistently applying yourself to learn as much as you can about the financial markets, the nature of money and investments in general is absolutely essential to creating long-term wealth^.

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