There will always be turmoil, uncertainty and volatility within the investment markets. The only way to eliminate those factors would be to move to another planet.
While building wealth is not easy – it is possible. To build wealth we cannot worry about the things which we cannot control.
We have no control over what the FED is going to do next, whether or not Europe is going to send our economy into a recession or if politicians are ever going to do anything worthwhile. Most of what we see on the nightly news or read online or in the newspaper falls into the “uncontrollable” category. The media provides us with plenty to worry about but nothing of value to help guide our investment decisions.
Successful investors focus on what they can control. They control their spending patterns and make sure they spend less than they earn. They avoid unnecessary debt. They structure their investments so they will not incur overwhelming losses. They follow a sound, long term strategy and stick with it. Ultimately they are very, very patient.
Investors are effectively making a calculated bet on the future. They don’t know if their investments will be higher or lower next week, next month or even next year. However, what they do know is that if they stick with our strategy over the next five, ten or twenty years – their investments will be higher, likely significantly, than they are today.
Step One is to define your goals and objectives. Decide what you want to accomplish. What does success look like over the next ten to twenty years?
Step Two is to define how much risk you are comfortable with. You must decide in advance how much you are willing to potentially lose over the short term in order to accomplish your long term goals.
Step Three is to select the strategy you are going to follow. Emotional investing is a recipe for failure. Investing is difficult because it is counter-intuitive.
Usually, doing what “feels good” doesn’t work. That is why you must have a defined strategy and systematic investment process.
Some people believe that buying and holding an index such as the S&P 500 is a good strategy. It’s advocates say that it is simple and inexpensive – which it is. However most investors cannot stand losing 50% of the value of their account like S&P 500 investors did during 2002 and 2009. When they incur a devastating 50% loss most investors sell out and lock in their losses because they can no longer stand the pain. Most investors don’t realize that if they have a 50% loss they have to earn 100% just to get back to even.
Buy and hold is purely and offensive strategy. It completely ignores the defensive, protective elements of risk management that are critical to long term success. It is only one half of a complete investment strategy. It is missing a defense. The defensive part of an investing strategy is what allows investors to “stay invested” over the long term. Staying invested is what allows investors to actually reap the long term rewards of investing.
At Paragon, we have developed a number of different strategies. They range from conservative to aggressive. They invest in public or private markets, depending on the strategy. All have good track records. Some are newer strategies that we have recently implemented but have solid historical back testing in place.
Others, such as Managed Income and Top Flight have twelve and sixteen year real time track records. Over their lifetimes and in historical testing all strategies significantly beat the S&P 500. Most importantly, they all employ sophisticated strategies to reduce risk.
Written by Dave Young, President & Founder of Paragon Wealth Management