Times, They're A-Changin'

Dave Young

Investing is difficult. You need to generate returns that will allow your account to grow and stay ahead of inflation … but you don’t like it when your account goes down in value. You need good returns … but you don’t like the uncertainty.

Whether it’s a tsunami, a drilling rig disaster, a financial meltdown or unrest in the Middle East, the world is a scary place. Something is always going wrong somewhere. So how do you invest and still sleep at night?

Set Your Risk Tolerance
The way to deal with uncertainty and manage the impact of unforeseen events is to build strict risk controls into your investment portfolio. While the risk of one-time incidents can’t be eliminated, through diversification and risk management we hope to limit the damage when negative events occur.

Considering this, it might be useful to provide an overview of our approach to risk management and portfolio construction. The first step toward controlling risk is to make sure your individual risk tolerance is set properly.

Your risk tolerance can depend on many factors, such as how close you are to retirement, your goals or your lifestyle needs. It is determined by the returns you need to generate in order to meet your objectives and by identifying how much risk you are comfortable with. 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.

Once your risk level is set, it helps to identify the mix of stocks, bonds and cash that you should hold in your portfolio. It determines how conservative or how aggressive your portfolio should be. The allocation put together based on your risk tolerance strongly determines how much volatility you will have to endure when unexpected events occur.

Use Models to Reduce Risk
The second step to reduce risk is the actual process we follow to manage the portfolios. We seek to manage risk by using two unique groups of quantitative models. The first group of models is proactive in nature and determines which areas to invest in. The second group of models is protective in nature and determines how aggressively the portfolio will be invested at any point in time.

The proactive set of Paragon models are designed to identify trends and measure velocity within the universe of available market styles, sectors and industries. When trends are identified, the portfolio stays invested in those market areas until certain exit criteria is met. When that occurs, the funds are rotated into other areas that currently meet the model’s recommendations. This rotation is ongoing, and the models are constantly adapting to current market conditions.

The protective set of models is designed to reduce risk when possible. These models determine how aggressively the portfolio will be invested at any point in time. The models adjust market exposure up or down depending on how much risk is in the market.

Expect the unexpected
We’ve always had unexpected events and always will. And despite these unforeseen events, economies have grown, companies have prospered and stock markets have generated positive returns. The key to benefiting from this long-term growth is to structure your portfolio so that no single event can create permanent damage to your portfolio.

If you would like to determine your personal risk tolerance, go to www.paragonwealth.com and take the complimentary risk tolerance survey.