Do you know your Investment Risk Tolerance?

Posted January 28, 2010 by admin. tags:Tags: , ,
Risk

Playing the game of Risk

photo by Fayj

Written by Dave Young, President of Paragon

A 20-year study by Dalbar concluded that between 1987 and 2007 the average investor only earned 4.5%. During that same period of time the S&P 500 returned 11.8%. We all know it is tough to make money during bad markets. But why, even during the best of times, do the majority of investors suffer from poor performance?

One of the reasons is that they don’t stick with their investment strategy during difficult markets. When markets go up, investors are attracted to the market and stay invested easily. When the market starts to go down, most investors still stay invested. It’s usually after the market has fallen significantly that panic sets in and investors bail out. They usually bail out close to the bottom right before the market starts to rebound. This pattern repeats itself over and over with the result being that most investors are constantly buying high and selling low.

If your investment risk tolerance is set too low, you won’t generate the returns you should. If it is set too high, when market conditions become difficult, you will likely sell your investments and miss out on superior long-term returns. Setting your risk tolerance and then aligning your portfolio with it allows you to reduce your portfolio volatility to a level that you can live with.

Before you invest, you need to ask yourself how you will react if your portfolio drops five percent. What about 10 percent? What about 20 or 30 percent? At what point would you want to sell out of your investments and run for the hills?

Once you answer that question, then your portfolio should be invested so you never hit the point that will force you to sell at the market lows. That will allow you to follow your investment strategy over the long-term and be invested when the best opportunities present themselves. It will also allow you to generate the best possible returns over the long-term.

Over my 23 years of wealth management experience, I believe that determining your risk tolerance is one of the most important steps an investor should take.

If you are married, both you and your companion should take the questionnaire and compare the results. Since identifying your tolerance can be difficult, Paragon Wealth Management created a short risk tolerance questionnaire to simplify the process.

Click on the link below to complete a short questionnaire to help you identify your investment risk tolerance.

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.

Politics are Affecting the Market Again

Posted January 22, 2010 by admin. tags:Tags: , , , , , ,
American Presidents


photo by Beverly & Pack

Written by Dave Young, President

During the second half of 2008 and the first three months of 2009, politics had more of a negative impact on investors than I have seen in 23 years of wealth management. Over the last nine months that negative impact seemed to diminish, and we saw a serious rally in the market.

As we move into earnings announcements, the market looks pretty good.

So far, about 65% of companies are beating their estimate, which is exceptional. Normally, you would expect the market to continue gaining ground. That is usually how it works, solid earnings translate into a happy stock market.

Instead, this week politics trumped earnings.

Tuesday, we saw the Dow Industrials rally 115 points in anticipation of Scott Brown, a republican, winning a Massachusetts senate seat. That was perceived as positive by investors because it broke the democratic majority in the Senate and indicated a more bipartisan approach to government going forward.

Wednesday, politicians in China decided that their economy was growing too fast. (In the big picture, that seems like a good problem.) They announced some steps they were going to take to slow down their economy. That caused world markets to sell off, with the Dow losing 122 points.

Thursday, the Dow dropped 213 points after Obama announced they were going to regulate the size of banks and impose a 100 billion dollar tax on them.

This was viewed as a populist response by the administration. The market did not like the tax because it was largely viewed as unfair. Fannie Mae, Freddie Mac and the automakers who were  all large contributors to the economic mess of the last two years, were exempt from the tax. Meanwhile, many of the banks that did not want government money and/or have since paid it back are going to be taxed punitively. Markets did not see that as a good idea and sold off significantly.

Today, Friday, word leaked out that both Republicans and Democrats are potentially blocking Fed chief, Ben Bernanke’s confirmation to a second term. Most investors believe that Bernanke, not perfect, is the best choice to lead the Fed in this environment. Politicians need someone to throw under the bus and blame for their economic mess so Bernanke seems to be the likely candidate. Investors, once again, see this as another bad decision and sell their stocks with the Dow losing another 216 points.

All in all it was a rough week for the market. Will politicians ever get it right?

Regardless, we’ll continue to follow our models and adjust our investment portfolios accordingly.

What do you think? Feel free to leave comments.

 

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.

Thoughts on Market Forecasts

Posted January 14, 2010 by admin. tags:Tags: , , , ,
Marble


photo by bratha

Written by Dave Young, President of Paragon

Clients who have been with us for years know we are not big fans of
market forecasts, whether they are made by us or anyone else.

Let me
tell you why I believe so strongly.

There’s no shortage of self-proclaimed market prophets. You can find
them in investment magazines, newspapers or CNBC. Although they can
be entertaining, they provide no real investment value. They do not
help anyone make money. In fact, investors who follow them are more
likely to lose money than to gain it.

The way the forecasting game works is that the market guru, seer,
pundit or executive continually makes forecasts in an attempt to gain
public attention. By sheer luck maybe half of these predictions are
proven right-meaning at least half of them are wrong. On the
occasions when the forecast turns out to be correct, the forecaster
plays it up. The numerous forecasts that do not pan out (and those many
investors who are financially hurt by them) are never spoken of again.

In truth, you’re much more likely to get an accurate prediction of the
future by listening to the weather forecasters. At least they inflict
less damage when they’re wrong.

So if forecasts are a waste of time, what does work? After 23
years of managing money, I am convinced that investors will only
succeed when they are able to remove emotion from the investment
process. Gut feelings are not a reliable investment strategy-even the
gut feelings of so-called experts.

 

Oftentimes, successful investing requires you to act in a way that
is contrary to what you “feel” is right. For example, several of our
models measure the overall optimism or pessimism in the investing
public. When optimism is high we know there is a lot of risk in the
market and it’s likely that the market will decline. Likewise, when
optimism is low and most investors think things are really bad,
that is usually a great time to invest. This pattern has repeated
itself for years.

All of our investment decisions at Paragon
are based on solid, proven models, not hunches. Our portfolio
allocation models tell us how much we should be invested based on
measured risk in the market. We run the models daily to determine the
most effective percentages of investments and cash holdings.

Once we are in the market, our portfolio focus models tell us where
we should be invested. We constantly track all areas of the equity
markets on both a macro scale (small cap, mild cap, large cap, value,
growth, international and emerging markets) and a micro scale
(individual industries, sectors and countries).

The bottom line for Paragon Wealth Management’s
clients is that they can be confident that their portfolio isn’t being
managed by some celebrity market fortuneteller. Our quantitative models
enable us to impartially measure what is actually happening in the
market and how much risk there is at any point in time. We constantly
evaluate the models to determine how effectively they are working. In
my opinion, this is one of the best ways to invest for long-term
success.

The moral of the story is that forecasts make interesting conversation and trivia. Just don’t use them to try to make money.

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.

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