Written by Dave Young, President
Most people think that returns are the most important thing when it comes to investing. Returns are very important, but it is also good to avoid large losses.
Some investments are unavoidable. They come with the territory. They key is to do your best ot minimize large losses. Large losses can quickly reverse the benefits of compound interest.
You should research thoroughly before turning over your money to someone else. That will increase your odds of avoiding investment scams and sub par 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.
The numbers are broken out below.
Mathematics of Declines and Advantages
Decline Amount Advance Required to Breakeven
A much better scenario is to follow a sound investing strategy and avoid the loss in the first place.
Written by Dave Young, President
Most investors assume that high risk (and the additional stress that goes with it) inevitably accompanies the potential for high returns.
Steve Shellans, the editor of MoniResearch, decided to test this theory by using a statistical formula to accurately measure the amount of stress various investment strategies typically inflict on investors.
He decided to use the Ulcer Index, and according to Nelson Freeburg, the respected editor of Formula Research, the Ulcer Index is “perhaps the most fully realized statistical portrait of risk there is.”
The Ulcer Index is different from other risk measurement indexes, such as standard deviation, beta, and the Sharpe ratio, because it does much more than simply measure portfolio volatility. Traditional risk indexes falsely assume that all volatility is bad. The reality is that investors welcome upside volatility—but deplore downside volatility.
The Ulcer Index accounts for this basic psychological fact by ignoring upside volatility and penalizing downside volatility.
In addition, it increases the penalty based on the depth and the duration of the drawdown. At a more technical level, the Ulcer Index calculates the difference between each day’s equity and the most recent equity peak. The formula then squares these numbers, averages them, and uses the square root of the average as the Ulcer Index. The smaller the number, the lower the risk.
Paragon’s Top Flight Portfolio certainly delivers the kinds of returns that are typically associated with high-risk funds.
But does it carry the same risk—and the same potential to cause ulcers—as other aggressive, high-return funds? According to the Ulcer Index, the answer is a definitive no.
How does Top Flight maintain such high returns with such a low Ulcer Index rating?
Paragon’s models and systems are based on a quantitative and technical approach to money management. Generally, fundamental analysis is not used. Using this very innovative and creative approach to money management has allowed Paragon Wealth Management to create portfolios such as Top Flight that have generated exceptional returns while taking on lower levels of risk than its benchmark, the S&P 500.
Written by Dave Young, President
When clients and prospective clients see our performance numbers, they usually want to know how we were able to generate such returns.
I’ll use a hunting analogy to best describe what we do.
After a hunting trip to the Book Cliffs in Northeastern Utah, a friend asked me how I was able to consistently find and harvest trophy animals. Among North American animals, trophy quality mule deer are among the most difficult trophies to harvest. To fully appreciate the magnitude of a trophy mule deer, some hunting trivia will help.
The majority of deer (85%) taken on the Utah deer hunt are yearlings and are called two points because of their small rack. The trophy quality deer are much more elusive, and are rarely harvested by hunters.
To become a trophy, a mature buck has to dodge hunters, mountain lions, bears, coyotes, automobiles, illegal poachers, decreasing winter range and hard winters. Fe deer make it past these obstacles. The few that do survive and possibly live up to nine years old are rare animals. These animals are extremely cagey and clever; they are true trophies.
Occasionally hunters stumble across trophy animals and use a hunting technique know as “pure luck”. To consistently harvest such amazing animals, the hunter must be willing to do that which other hunters aren’t. He must work harder and smarter than the norm.
For example, a successful hunter is in the mountains before daylight preparing while other hunters are still in their sleeping bags. He uses topographical maps to determine where the roads and trails are– this way he know where the pressure from other hunters will originate. He knows if he hikes a mile beyond the pressure, he will possibly find trophy animals.
The hunter who consistently harvests trophies uses top quality binoculars and a spotting scope which enables him to visually scan and slice an entire mountain.
He does research by talking to game biologists, ranchers and sheepherders. He knows where all the creeks, springs, and ponds are located and he hunts in areas that have the genetics to produces quality animals.
On my recent hunt, two hunters approached me as I was looking for deer. At the time, I was observing a trophy deer in my spotting scope. I put the scope aside not informing them that I was watching a trophy buck.
We had a casual conversation in which these hunters described how they had covered several hundred miles and saw nothing except a few small deer. They continued complaining about how the unit had deteriorated, the hunting was dismal and how the good ol’ days had come and gone (the conventional wisdom in this area is that there are no decent deer). While we were having this conversation, these hunters probably drove another 100 miles carrying with them the same beliefs of all hunters who only bring home small deer each year. I never told the hunters about the trophy deer and over the course of the week, I was able to locate three other trophy quality deer.
So, exactly how does hunting trophies relate to our portfolio performance?
In essence, the successful trophy hunter and the successful portfolio manager have to sidestep conventional wisdom, and work harder and smarter than everyone else including the game he is pursuing.
Consistently generating higher returns than the market requires a similar discipline and skill set as the at of the trophy hunter. A successful money manager must not believe the mindset of the masses. By the time the masses believe an idea, (i.e. the economy is failing or the economy is rebounding, etc.), it is too late to make money from that knowledge. Information found in trade publications and the general media usually touts partial truths, but just enough to lead an investor to believe and get himself in trouble. Generally, this investor finds himself following a path of guaranteed mediocrity and under performance.
Similar to the hunter who must hike beyond the pressure from other hunters, a successful manager must follow trading models and systems that direct him where the masses are headed and arrive before they do. He must go above and beyond the norm. To be successful, he must have an edge.
The models and systems we’ve developed for our Managed Income and Top Flight Portfolio are our edge. The bear market from 2000 to 2003 enabled us to refine these models to their most advanced level since Paragon’s inception. After years of research and testing, the efficacy of our models is evident in recent performance.
Written by Dave Young, President
Everyday we have 24 hours in a day to do whatever we want with our time and money. No matter what we do, the clock keeps ticking.
In order to make the best decisions with our time and money, we need to make goals and have a plan.
In order to build a reserve of money for the future, I suggest making these four goals.
1- Manage & Reduce Debt
Debt can get out of control and we need to make sure we manage our current debt. Make sure you know exactly how much debt you have and take steps to reduce it.
2- Get out of Debt
It will take time to get out of debt, but it is possible. Take small steps to reach your overall goal.
3- Build a three month reserve
You never know what will happen. I suggest building a three month reserve. Don’t live pay check to pay check. Put money aside so that you could live for three months if something were to happen.
4- Invest for the future
Start investing for the future today. Open a savings account, add to your retirement plan through your work, open an IRA, etc.
Budgets may not seem exciting or even interesting, but they are the key to making your finances work.
A good example is when you make a goal to stay in shape. You can’t get anywhere unless you start with a goal to know where you are going. Then, you must have structure in your eating and exercise. You can’t just do whatever you want and hope you will get in better shape. Finally, you must exercise a lot of patience and persistence.
Do you realize how much money will go through your hands over the next 40 years?
$20,000 a year= $800,000 (save 10% and invest at 10% return, you will have $885,000 saved)
$40,000 a year= $1,600,000 (save 10% and invest at 10% return, you will have $1,770,000 saved)
$60,000 a year= $2,400,000 (save 10% and invest at 10% return, you will have $2,656,000 saved)
Those numbers are hard to believe when we only see the numbers on our pay checks every two weeks. Over time what seems like a little, adds up to a huge amount.
It is important to take notice of where our money is going on a regular basis. Is it going to provide for our wants or our needs?
Teeter Totter Example
If you put your income on one side of a teeter totter and your needs (groceries, utility bills, mortgage, etc.) and wants (dining out, entertainment, new clothes, etc.) would the teeter totter be balanced? If not, it’s time to reevaluate.
Money doesn’t make you happy, but it sure helps your situation if you stay within your means and don’t go into excessive debt. People are happy at all levels of income. If a person makes $40,000 a year and saves $5,000 they are probably happier than a person that makes $250,000 and spends $300,000. It is all relative.
The level of control over the resources (or money) that a person has does have a direct impact on happiness. The key to that control is developing and following a budget. This will help you build wealth over time.
Written by Nate White, CFA
The equity markets ended higher today after opening lower.
Following on the coattails of the Asian and European markets which closed lower, the Dow, S&P 500, and Nasdaq all opened lower and went South immediately.
Just as things were looking very bleak, a report from S&P stating that the bulk of the writedowns for subprime debt are near an end turned the markets around and they were able to hold onto the gains until market close. Nine of the 10 secotrs gained with Materials, Energy, and Consumer Staples leading the way.
The 10-year Treasury bond yield increased 10 basis points to 3.52%. Crude oil set another high as it touched $111 a barrel and then retreated to close slightly lower. Gold also set another record high closing at $998.10 after hitting the $1,000 mark earlier. CPI is out tomorrow which promises more volatility for the markets.
Written by Nate White, CFA
At Paragon, we’re always looking for ways to improve your investment experience.
An effective portfolio is one that you’ll feel comfortable sticking with through market ups and downs. That means your portfolio needs to be efficient and tailored toward your personal financial goals and investment style.
Until now we’ve provided this service with our two main model portfolios, Top Flight and Managed Income.
These tactical portfolios are actively managed, meaning that we move them in and out of the market, sectors, and various assets classes according to our models and where we see emerging opportunities. These tactical portfolios are actively managed, meaning that we move them in and out of the market, sectors, and various assets classes according to our models and where we see emerging opportunities. Our “flagship” portfolios continue to be our main focus.
Active management isn’t for everyone.
However, we realize that active management isn’t for everyone. You may be one of many investors who prefer a more passive investment approach, and for good reason. Passive index investing has received a lot of good press in the last few years. Investors are realizing that many active managers do nothing more than attempt to mimic a certain index anyway, so when their fees are taken into consideration they never even match their benchmark index’s performance. What a waste.
Passive index investors need to be aware that some similar challenges exist with passive investing as with active investing.
First, you must create a good initial plan and second, you must stick with it by rebalancing on a regular basis. My experience is that most independent investors and many advisors fail at the second half of the investing process. They create a nice looking initial portfolio and then forget all about it. The result is dismal investment performance because one of the most significant advantages an investor possesses is squandered-time. You can correct many things with your investments but you can never recoup lost time.
I recently heard the indefatigable Jim Cramer recommend that investors spend at least one hour per week researching each stock that they own!
How many people do you think actually do that?
One of the hobbies I enjoy is yardwork and landscaping. Yes, I know that many of you might question the sanity of anyone who actually enjoys working in the yard, but for me there’s nothing nicer than a brand new beautiful yard done right.
Everyone’s approach to their yard is different, just like everyone’s approach to investing is different. Whether you do the initial work yourself or hire a professional landscaper depends on your gardening expertise, your willingness and ability to work, and the time you have available.
Even if you choose to go with a landscaper for the initial design, you know that keeping your yard beautiful requires regular maintenance. If you never cut the lawn, weed, or trim the bushes and trees you end up with a disaster that looks nothing like the original design.
The same thing goes for the creation of an investment portfolio. It may look great at the beginning and feel very satisfying, but if you don’t take the time necessary to keep it aligned with your original intent it will soon get overgrown in some areas and shriveled in others. Getting it back on track requires more effort than the regular upkeep would have.
Passive investing doesn’t mean do-nothing investing!
If you’re ready to dig in to the passive investment landscape, you’ll be happy to learn that we’ve created four new Paragon Strategic Portfolios for you to consider. These portfolios truly ease the maintenance effort on your part because we’ve made sure that they are low cost, simple and tax efficient. The new strategic portfolios differ from our main portfolios in that they include combinations of fewer macro-based exchange traded funds (ETFs), and in some cases contain an ultra-short term bond fund.
The Paragon Strategic Portfolios track the following five asset classes and corresponding indexes:
- Large U.S. stocks represented by the S&P 500 Index
- Small U.S. stocks represented by the Russell 2000 Index
- International stocks represented by the Morgan Stanley EAFE Index
- Intermediate Government Bonds represented by the Lehman Brothers Intermediate Government Bond Index
- 90-day U.S. Treasury Bills.
Each asset class is ranked. The portfolios are then created by assigning different weights to the rankings based upon volatility.
The portfolios are rebalanced only once per year, which avoids any short-term capital gains. To further keep your costs low, the Paragon Strategic Portfolios include only ETFs with very low expense ratios ranging from 0.10% to 0.35%. The Paragon management fee is no higher than 0.95% a year (refer to Paragon’s Advisory Agreement for full details).
The following is a breakdown of the new Strategic Portfolios (All figures are back tested results before management fees and represent the return of an index. Click here to see the enclosure for full disclosure of the risk and return data.):
Aggressive Growth – Seeks to maximize capital appreciation by allocating a higher percentage of the portfolio to the highest ranked asset classes. Since 1982, this profile has generated and annualized return of 15.30% and volatility of 13.68%, compared to 12.63% and 13.90% respectively from its comparison benchmark.
Growth – Primarily emphasizes long-term capital appreciation. Since 1982, it has an annualized average return of 14.21% and volatility of 11.93%.
Balanced – Seeks long-term capital appreciation and an allocation for current income. Since 1982, it has generated an annualized average return of 12.13% and volatility of 8.98%, compared with 11.46% and 9.81% respectively from its comparison benchmark.
Conservative – Focuses on current income bust also seek to provide capital appreciation to maintain the relative to inflation. Since 1982, it has an annualized average return of 9.96% and volatility of 6.12%.
Written by Nate White, CFA
What’s an investor to do in the current market environment?
Everyday seems to bring more and more bad news about the state of the economy. The mainstream media seems relentless with its negative prognostications. The mood on Wall Street is very sour, and it is nearly impossible to find anyone willing to give a positive forecast!
I just saw a Bulls and Bears segment on one of the financial networks and eve the Bull was bearish! The doom and gloom forecasts seem to be everywhere and as usual are very compelling.
The list of downside risks seems endless: stagflation, falling dollar, $100+ oil, skyrocketing commodities, real estate collapse, possible bank failures, etc.
If you believe all of these downside risks (and the resulting collapse of society as we know it) then you would be inclined to sell and wait on the sidelines (or hide in your cellar).
As we can see, the downside risks to the market are front and center and the media seems relentless in its search for any possible downside risk. But, could they be missing something?
Could there be another significant risk that they fail to see?
It is often the unseen risk, the risk that no one can really account for or hedge against that affects the markets. No one was talking about a coming credit crisis a year ago and Wall Street thought that it was well protected against the effects should such a crisis occur.
Well, you say what could this unseen risk be? It is the risk of an upside move. What if none of the current negative events actually occur or that the effects of these event really aren’t as bad a feared? Before you know it, the market has rallied and you missed out on the move and now have to buy in at a higher price.
Does that sound familiar?
Again, I’m not saying that the downside risks are not valid or that I don’t agree with them. The bottom line is how much of this downside risk is already priced into the market. I’m just trying to help people consider risks that are not being widely discussed.
Are you prepared for the “risk” of an upside move?
Written by Dave Young, President
DEBT IS NOT ALL BAD. It does have a purpose. I realized this when I went to Tanzania recently.
As we road through the small villages, I noticed several unfinished houses. One had a completed foundation, another had a completed foundation with framing, another had a completed foundation, framing and sheetrock, etc. Each home was unfinished at a different stage and didn’t look like it would be finished any time soon.
I was surprised to see so many unfinished homes. I asked our guide why they were like this. He explained that they didn’t have an effective banking system for the common man, which meant they couldn’t borrow any money. When a person wanted to build a home they had to save up for each part of the home and pay in full before they could continue. Each home took years sometimes to build because they couldn’t borrow money.
Without debt, a society cannot progress.
In order to work effectively, debt must be used responsibly. Irresponsible debt can be devastating to your financial future.
To succeed financially, you must AVOID irresponsible debt like the plague. Remember that there are people who receive interest, and there are people that pay interest. Usually, the payers work for the receivers. My goal is to help you understand principles that will make you a receiver.
Debt is effectively compound interest in reverse.
Look at this situation for an example. A person puts away $100 a month for 30 years.
At 5% interest…………………………………………………………………..$81,886
At 10% interest………………………………………………………………..$208,084
At 15% interest………………………………………………………………..$564,082
At 20% interest………………………………………………………………$1,567,624
Over a 30 year period, the amount accumulated at 15% is more than seven times greater than the amount accumulated at 5%!
If you are paying the interest rather than receiving it, the higher the interest rate you are paying, the more devastating the consequences.
A credit card has been defined as:
“A means of buying something unneeded, at a price you can’t afford, with funds you don’t have.”
Let’s look at some examples of how debt works.
Two families have the same income, three children, education expenses to plan for that will cost approximately $33,500.
Chose to meet this obligation by saving $50 per month over a 20 year period and earning 9% interest.
Their total out-of-pocket cost…………………………………………………$12,000
Chose to meet this obligation by borrowing the $33,500 on their home equity line of credit. Their interest rate was 12%. Their payments were $368.40 for 20 years.
Their total out-of-pocket cost…………………………………………………$88,416
A person decides to purchase a new car. They purchased it new for $25,000. They paid $2,500 down and financed $22,500 over five years at 9% interest.
VALUE AFTER 5 YEARS…………………………………………………………..$9,000
Return on investment……………………………………………………………..-71%
A person buys a condo and borrowed $250,000 at 6 1/2 percent interest over:
Years Payments Total Amount
15 $2,177 $391,998
30 1580 568,861
100 1356 1,627,490
500 1354 8,125,000
A 15-year mortgage is optimal. Any longer than 15 pays unnecessary interest.
When is debt okay?
If it is used to purchase an appreciating asset such as a home, an education, a business, a car (to provide transportation to work), etc.
When is debt NOT okay?
When spent for any depreciating asset. This includes just about everything except what is listed above. Any time you are going into debt for something you don’t need and don’t have money for, it is NOT okay.
The key to staying in balance is the issue of NEEDS versus WANTS. Everyones needs and wants are different depending on your financial situation. Only you can determine specifically what your needs and wants are and your flexibility.
Four Steps to Help you Stay out of Debt
Put together your personal budget with serious attention to identifying your needs versus your wants.
After your bills are paid and a portion of your income is put into savings, determine what you have left to spend. This is called your discretionary income.
Make a list of wants or things you would like to purchase.
Prioritize your list of wants and then only purchase those things that you actually have cash to use. Do not go into debt by spending money you don’t have.
Never spend money you don’t have. It sounds simple. It is simple, but it takes discipline. Mastering the proper use of debt is one of the seven steps to building wealth (we will discuss those steps in another article).