1. It really is that difficult
Certain types of investing can be almost impossible. Regardless of what the infomercials promise, a small percentage of options, futures or currency traders actually succeed. While the potential is there, the odds of success are totally stacked against you.

2. Scams
Invest in real estate, business or stock scams and you will have no chance of getting your money back. They seem like a great idea at the time, but without experience, scams are difficult to identify.

3. It’s out of your control
Legitimate real estate or business projects can go sour because of a bad market, poor management, competitive factors or other issues beyond your control.

4. Difficult markets
If you invested at the peak of a stock or real estate bubble, like 1999 or 2007, you are still waiting for your account to get back to even. Unfortunately, markets are always difficult. No one rings a bell when to buy or sell. Human nature drives most investors to buy when prices are high and sell when they are low.

5. Low–paying guaranteed products
Bank CDs, savings accounts and annuities induce buyers by promises of safety and security. The only real guarantee is that your returns will be so low you’re guaranteed your earnings will not keep up with inflation and taxes, ultimately destroying your purchasing power.
6. Bad advice
Unfortunately, many “advisers” know little more than the people they are advising.

7. Bad products
A lot of investment products sold by salespeople are not good for investors. Many are expensive and full of hidden costs. Some even limit your upside. Often, they are structured to benefit the company selling them.

So what should an investor do? First, embrace the fact that investing is difficult. Take it seriously. Recognize little is taught about investing in our educational system. Be realistic about your level of investment proficiency. Understand taking it lightly can be hazardous to your financial future.
Second, educate yourself about investing. Learn the basics. This does take time. Realize many investment theories contradict each other. The more you read, the more you realize how much more there is to know.
Third, find an adviser you can really trust. If you really don’t have the time, resources or expertise to manage your own money, then work with an exceptional adviser. At a minimum, you want someone who is a fiduciary, who has at least 10 years of experience and who can show you their actual 10-year track record.
On www.paragonwealth.com, we provide a free, educational download titled, “How to Select a Financial Adviser.” I highly recommend you download and use it as a reference.
The bottom line is successful investing really is tough. It is competitive. To succeed requires knowledge, experience, mental toughness and discipline.

During this unpredictable financial market, Paragon Wealth Management is offering a complimentary portfolio review for investors who have $200,000 or more in their investment portfolio(s). One of Paragon’s advisers will meet personally with you to give you a second opinion on
how your account is allocated to help you make the best investment decisions and enjoy your retirement. Call (801) 375-2500 to schedule your review.

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Finalize 2009 IRA contributions
If you act before April 15, you can still make contributions to your IRA and may be able to deduct it on your 2009 tax return (if you are eligible). Contributing to an individual IRA may give the benefit of a tax deduction in the short-term and increased retirement savings for the long-term. If possible, make the maximum allowable contribution to your IRA each year.

Consider Roth IRA options effective in 2010
For the first time, beginning in January 2010, taxpayers with adjusted gross incomes of more than $100,000 will be allowed to convert a traditional IRA to a Roth IRA1. Roth IRAs allow non-deductible contributions to grow and be distributed tax free if certain requirements are met. An advantage to converting in 2010 is that you have the choice of either reporting the taxable income in 2010 or delaying the tax payment and reporting the taxable income equally in 2011 and 2012. Converting to a Roth IRA may be advantageous to you, but there are many factors to consider. As with all tax-related decisions, consult with your tax adviser to see if a Roth IRA makes sense for you.

Roll over 401(k) dollars
If you left a job in 2009 or have 401(k) dollars in a past-employer’s plan, consider incorporating the funds into your overall financial plan and combining it with your other investments. A direct rollover into an IRA may help you avoid the mandatory 20 percent withholding, in addition to other taxes and penalties, and keep your retirement planning on track. If you cash out of a 401(k) retirement plan before age 59 1/2, you will pay a 10 percent penalty and income tax on those dollars in addition to reducing the balance in your retirement fund.

Adjust monthly retirement savings
Review your retirement goals and confirm that your monthly 401(k) or IRA contributions are on track to reach those goals. Employer-sponsored 401(k) accounts, especially those with matching funds, are a great way to save consistently and grow your assets. Update your calculations on what you need for retirement and increase your retirement savings where possible. The annual review with your financial representative is a good time to discuss how best to invest the funds for long-term gain.

Confirm beneficiary designations
As circumstances change with time, it is important to update the beneficiary designations of your 401(k), IRA and other investments. Unfortunately, most IRA holders give this issue little thought after initially opening their accounts. Many life events could prompt a change in beneficiaries, such as a death, birth of a child, a marriage or a divorce.

Plan mandatory IRA distributions
People age 70 1/2 or older who own traditional IRAs are required by law to take minimum withdrawals from these accounts and pay resulting income taxes. (Although the government temporarily suspended required minimum distributions in 2009, unless future legislation is passed, they will resume in 2010.) These rules also apply to simplified employee pension (SEP) accounts and Simple IRAs, while Roth IRA owners are exempt from the minimum withdrawal rules. Create a gameplan for these financial distributions, in consultation with your tax adviser and financial representative, and be aware of the income and tax implications for the year ahead.

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  Money is slippery. It is difficult to build wealth and even more difficult to keep it. The stock market is up 50 percent from the lows it hit earlier this year. If you are serious about your investments, it is time to evaluate your investment adviser and review your strategy.
  Most people have little experience when it comes to investing large ($200,000-plus) amounts of money. In some cases, the money is a lump sum payment from their 401(k) when they retire. In others, it’s the proceeds from a life insurance settlement or an inheritance.
  Either way, the money shows up in a big block. This creates a difficult situation most individuals have never dealt with. For better or worse, the decisions they make with these new funds will have a significant impact on their future quality of life.
  Another group with investable assets is successful individuals that are able to put away significant savings from their business. They are successful because they focus on their business, which is the highest and best use of their time. Because their business takes up all of their energy and effort, they don’t usually have the time or expertise to invest effectively. However, in the final analysis, it is their investment decisions that will determine whether or not the hard work was worth it.
  Investing properly is not an issue of intelligence. Lots of smart people lose lots of money. The issue is whether or not you have the time, resources and expertise to effectively compete in a highly competitive investment world. It’s about being disciplined and following a process that removes emotion from your investment decisions.
  Selecting a financial adviser is an obvious “first step” for anyone who has acquired significant assets. The complicating factor is that all financial advisers are not the same. This article will highlight the qualifications that any serious investor should demand from their financial adviser.

Fiduciary?
  Fiduciary advisers have a legal obligation to put your interests ahead of their own. This means if your adviser does not act in your best interest, you have the right to take legal action. Most investors mistakenly believe that all advisers are fiduciaries. Unfortunately, only about 15 percent of advisers actually are. Sales reps selling insurance, mutual funds or other financial products are most likely NOT FIDUCIARIES. Registered Investment Advisers and their representatives ARE FIDUCIARIES. Only working with fiduciaries will narrow your search considerably and get you pointed in the right direction.

Experience?
  Look for financial advisers or money managers that have at least 10 years of experience. Markets change constantly and are notoriously difficult to navigate. Ideally, your financial adviser should have 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 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 personal performance must 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. Never buy a product with a surrender charge.

  Following these simple steps will put your investment strategy on a firm foundation. If you would like a more in-depth discussion of how to select a financial adviser, simply go to www.paragonwealth.com and download the complimentary report.

The views in this column are the opinions of Dave Young. They are not intended as a forecast or a guarantee of future results.

CLICK HERE TO VIEW THE MAGAZINE ONLINE ]]> http://blog.uvmag.com/money-is-slippery/feed/ 0 http://blog.uvmag.com/is-the-recession-over/ http://blog.uvmag.com/is-the-recession-over/#comments Tue, 01 Sep 2009 22:09:19 +0000 contributor http://blog.uvmag.com/?p=1230

  Those of you who have read this column or our blog (www.moneymanagerslive.com) will remember that from March forward we have been encouraging readers to become fully invested in the stock market. We likened the stock market to the sale of the century. At a time when most investors were selling all of their investments, we told readers to move back to a fully invested position. We recommended readers take advantage of this rare, but scary, situation by investing in those areas of the market that have historically performed “best” after a market meltdown. We didn’t just give the typical — but useless — “cautiously optimistic” outlook. We named specific areas of the market you should be invested in.

  Since the March 9 low through July 31, the S&P 500 has gained 46 percent. It has made back its losses from January through mid-March and is now up 10.9 percent year-to-date through July 31.

  During that same time, our growth portfolio, Top Flight, is up 17.2 percent year-to-date. The reason we are up substantially more than the market is because we invested in those areas that perform best after a severe market decline — just like we recommended.

  If you followed our advice, you were rewarded. But going forward, the question is how should an investor be invested? Our indicators and the models we follow indicate there is a high probability the recession ended in June — although this hasn’t shown up in the press and is not yet mainstream knowledge.

  The first and sharpest stage of market recovery usually occurs right after the initial market plunge and takes about three to four months. We believe stage one occurred between March 9 and June 30. The second stage of recovery occurs after the recession ends, which we believe was around the end of June.

  If it is true the recession ended in June, then we now want to be invested in those areas of the market that do best during the second stage, or after a recession ends. The second stage lasts for about six months. Following the last 11 recessions, the data clearly shows that certain areas of the market consistently perform best during stage two.

  Typically, bonds perform poorly after recessions and should be avoided. Interest rates get pushed down during the recession, and then, as the economy starts to expand, demand for money increases and interest rates go back up. When interest rates go up, most bonds get hammered and lose money. Bonds are one of the worst places to be as an economy emerges from a recession. Unfortunately, many misguided investors have been running to bonds for the past six months, hoping to find safety. If history repeats, they will find the opposite of what they seek.

  From a big picture perspective, small cap, growth, commodities and emerging market stocks have performed the best for the six months following the end of the recession. On a sector basis, energy, materials, tech and consumer discretionary stocks performed the best.

  On the other hand, in addition to bonds, other sectors that usually perform poorly after a recession ends — and should be avoided — include consumer staples, health care and telecommunication stocks.

  This difficult market highlights why “active” investment management is so important. If market dynamics always stayed the same, then a simple buy-and-hold approach would most likely work well for investors. Because market dynamics are constantly changing and evolving, we believe the best investment approach is one that actively adjusts, moves and changes based on market conditions.

The views in this column are the opinions of Dave Young. They are not intended as a forecast or a guarantee of future results.

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The key to recovering your portfolio is ‘avoiding large losses’

  It is constantly proclaimed in the media that we are experiencing the worst economy since the Great Depression. I agree the economy is bad and the investment markets have been terrible. However, to compare this downturn with the Great Depression is like comparing the Vietnam War with World War II. Both were horrible wars, but when you look at the actual statistics, there is no comparison between the two.

  In our booklet, Seven Steps for Building Wealth, the fifth step is “Avoid Large Losses.” This month we will discuss what that means for investors as they invest during this difficult time.

  From January 1998 through May 2009, our primary portfolio, “Top Flight,” generated a total return of 276 percent, versus only 15 percent for the S&P 500. Investors often assume that since our returns are high, our portfolios must take more risk than normal. Actually, the opposite is true. Much of our excess return has been generated by avoiding large losses.

  We often get asked how we are doing in this current “depression” environment. Even though our long-term track record is exceptional, have our active allocation and risk management strategies paid off recently? Or would an investor be better off investing using the traditional approach of diversify first, then buy, hold, hope and pray? According to most advisers, this is simply the way markets are, and there is nothing else that can be done to reduce risk or improve returns.

  In the most recent market cycle from Jan. 1, 2007 to May 31, 2009, the S&P 500 lost 31.6 percent of its value. Most investors have done even worse because of their allocation and the cost associated with their investments. During that same period of time, our actively managed Top Flight portfolio is down only 14.9 percent.
  We are never happy to have negative returns. Our objective is to minimize losses wherever possible. This bear market has been more difficult for us than any of the previous ones. Almost all asset classes declined together. In the 1987, 1998 and 2000-2002 bear markets, we performed much better.

  To truly compare performance, the most important question to ask is, “How much of a return is needed by each investment strategy in order to make back your money and get back to even?”
  Calculating percentage returns is different than most investors realize. For example, if you have a 25 percent loss then you need 33 percent to get back to even — which is workable. If you lose 50 percent of your portfolio, you have to make 100 percent to get back to even — obviously a much more difficult task. A loss of 90 percent of your portfolio requires a gain of 900 percent to get back to even — forget about it.

  I’ll compare our flagship portfolio, Top Flight, to the S&P 500. Most investors working with a traditional adviser will have a portfolio whose returns at best are similar to the S&P 500.
For Top Flight to get back to even and recover its 14.9 percent loss, it only needs to earn 17.5 percent. For the S&P 500 to recover its 31.6 percent loss, it will need to earn 46.5 percent to get back to even. As you can see, the size of the loss has an exponential negative effect on an investor’s ability to recover. It will take investors in the broad market (S&P 500) almost three times more effort just to get back to even.

  Step number five, Avoid Large Losses, seems pretty straightforward and simple. Actually avoiding losses is much more difficult when investing real money, which is why it is imperative for investors to follow a disciplined, non-emotional, proven strategy if they hope to succeed over the long term. UV

The views in this column are the opinions of Dave Young. They are not intended as a forecast or a guarantee of future results.

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  In February, I predicted that once we got to a point where President Obama could speak on television concerning the economy — and the market would go sideways or up — it would be a sign that the market had hit rock bottom. Once you hit a certain point you run out of sellers, and there is nothing left to bring the market down any further.

  After witnessing a politically perpetuated 25 percent drop in the Dow Industrials this year alone, it appears we may have hit the market low on March 9.
  The market was so low at that point — down 54 percent from its peak — it appeared as though everything negative had been factored in, maybe several times over. With confidence completely destroyed, high-yield bond default rates are projected at double what they were during the great depression. Another metric shows consumer spending at the same level it would be if unemployment were at 30 percent.

For the record, it’s currently 8.5 percent.

  Imagine you’ve been asleep the past 18 months and just woke up. Looking forward, not backward, things actually look pretty promising.
• Six of our eight “bull watch” indicators support the case for a new bull market.
• Six of the 10 leading economic indicators were up in February.
• Housing is more affordable and mortgage rates are substantially lower than they’ve been in recent years.
• Energy is more affordable for consumers and businesses.
• Credit is loosening and interest rates are extremely low.
• There will be a massive global government stimulus forthcoming.
• Abundant amounts of investor cash is on the sidelines.
• This has been called the sale of the century. In inflation-adjusted terms, the Dow Industrials are at that same level they were 43 years ago. In 1966 there were no PCs or the Internet, and our workforce was half the size of what it is today.
• Four-fifths of top economists in the latest Wall Street Journal survey say now is a good time to buy stocks.
• Investor sentiment has reached the negative extremes and has started to reverse.

Going Forward
Yes, things are looking up. The question now is what can we expect, and where do we go from here?

  In our conservative portfolios, we are holding a significant amount of cash equivalents and are waiting for tape confirmation that this market has turned before becoming fully invested. In our growth portfolios, we are fully invested. We are invested in areas of the market that have historically performed the best after a bear market. After the 2000-2002 bear market, we were able to almost double the return of the market averages by positioning our portfolios in the best places.

  As I’ve mentioned before, this is the 34th bear market in the past 100 years. The future always looks bleak when the bear market is at its worst. People become irrationally pessimistic. That is when the naysayers have their day of fame — the media loves them and they get lauded with press. They always expect things to get worse and they always attract a lot of followers. And they have always been wrong — not wrong once or twice, but the past 34 times.

  Our economic system is resilient. Our markets and our economy have always recovered from these difficult times. We’ve made it through recessions, world wars, a civil war and a depression. I believe in the free market system and that our market and economy will recover again — in spite of our politicians.

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  For many, a down economy typically translates into a “downer” mentality. The volatile market can be overwhelmingly discouraging, which leads people to sit at their kitchen table with their head in their hands, saying, “Tell me when it’s over.”

  The good news is it doesn’t have to be this way. A less-than-ideal economy can lend itself to a better-than-ever situation. All you have to do is plan for it.

The situation
  There’s no denying the economy is in trouble or that people are seriously struggling. The market has been obliterated over the past few months, coming in at levels it was 11 years ago. The world has been turned upside down.

  The market, essentially, has gone through nature’s equivalent of the “100 year flood.” Meaning, that this downturn was inevitable — it had to happen. And because of that, it’s more important than ever to be alert, active and aggressive. That deer-in-the-headlights mentality isn’t going to do you any favors.

  Stocks have gone down, and they’ll go back up. We just don’t know exactly when. So it’s essential to evaluate your options and look to the future.

The emotion
  The market is often described as psychology in motion. It’s all based on confidence. For example, going into the election, consumer confidence was down. The politicians were telling people how bad things were, and they were scaring everyone to death.

  Then we elected the new president, and consumer confidence went up 11 points — that day. President Obama hadn’t done anything yet, but the perception of what he might do positively impacted the consumer confidence numbers.

  The bottom line, is when confidence leaves the system, everything comes to a standstill. People stop spending because they’re scared — despite the fact that they still have a job and their paycheck hasn’t changed.

  The right move, however, is to do the opposite. Normally, we have to scour for the kind of deals you can find in today’s market. But now the situation is akin to someone pulling up with a dump truck full of bargains and leaving it there for the taking.

The planning
  Taking advantage of the incredible bargains requires strategy and forethought. You can leave it to random luck, or you can strategically position yourself for great returns.

  People will go to an accountant for bookkeeping, an attorney for legal issues and a doctor for health. But when it comes to financial matters, they think they can do it on their own. You can sometimes get away with that in an easy market, but at a time like this, it’s essential to hire a professional.

  Here at Paragon Wealth Management, we offer a free portfolio review and analysis for investors with $200,000 or more in their account. It’s a way to make lemonade out of lemons. Now is the time to position yourself in a way that allows you to capitalize on an opportunity that rarely comes along.

The views in this column are the opinions of Dave Young. They are not intended as a forecast or a guarantee of future results.

Need a hand?
  During this unpredictable financial market, Paragon Wealth Management is offering a free analysis and review of your portfolio. If you have $200,000 or more in your account, Paragon has the know-how to bring confidence and predictability back into your investments. For more information, check out Paragon’s Web site at www.paragonwealth.com.

ABOUT THE AUTHOR
  After graduating from BYU, 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.

Young continued researching methods for investing that would produce the most profitable returns. He believed in his methods so much that he invested his life savings and started Paragon. More than 20 years later, Young continues to invest and research ways he can improve his business to serve clients. He has been interviewed by BusinessWeek, CNBC, the Wall Street Journal, the Deseret Mornings News and other national and local media. Paragon also received the Best of State Award in Financial Services for 2008. Visit www.paragonwealth.com or call (801) 375-2500 to learn more.

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  Last week I was looking through various stock market charts when my 14-year-old son walked in the room and asked what I was looking at.
  I thought I would create a teaching moment, so I began to explain how markets move up and down in cycles. After silently looking at the charts he responded, “If that was my money, I would hang myself,” and he walked out of the room.
While I thought that was a little harsh, I do understand that most investors are very discouraged after such a difficult year. Exactly how difficult has this market been?

Market woes
• Warren Buffet, considered an icon of wise investing, lost almost half the market value of his accounts between the middle of September and the middle of November.
• Bill Miller, one of the only managers to beat the S&P 500 for 15 consecutive calendar years through 2006, is down almost 60 percent year-to-date through Dec. 3.
• Dan Fuss of Loomis Sayles is a renowned bond manager. (Bonds are traditionally very conservative and are used to stabilize portfolios.) His highly regarded bond fund is down an incredible 28 percent through Dec. 5. He says this is a “once-in-50-years” buying opportunity.
• Icon Funds, a value-based mutual fund manager, put out a report stating that stocks are 60 percent undervalued.
• The actual default rates on high yield bonds are currently at 3.1 percent. However, those bonds are priced as if the default rate was 17 percent.

Smart investors position themselves
  Not to understate the obvious, but investment markets are difficult. The market trains investors to be in the wrong place at the wrong time.
  I believe investors are positioning themselves in the wrong place at the wrong time once again. As evidence, simply look at the record amount of money that has been moving out of stocks and into cash, money markets, bank CDs and fixed annuities. At a time when 30-year treasury bonds are paying a record low 3 percent yield, investors are running as fast as they can to lock in those low yields — at just the wrong time.
  When markets are strong and moving up, everyone wants in and is aggressively buying. That is often the wrong time to be putting money into the market. Conversely, when markets are bad and going down, everyone is selling and nobody wants in. That is usually a good time to invest. Occasionally, you get market conditions that are horrible (like now), and panicked investors act irrationally. At this point in the cycle investors begin to sell at any price. This is the stage when investors begin effectively “giving away” their investments in order to get out of them. Historically, this has been a phenomenal time to invest and buy new positions. Moving up from extreme lows is when fortunes have been made after previous bear markets.
  Looking forward to the next three to five years, investors have a choice:
• Invest in money markets funds; bank CDs, fixed annuities or treasury bonds. These will guarantee returns in the 2 percent to 4 percent range. Your money is locked up at historically low interest rates for three to seven years with significant surrender charges if you change your mind.
• Invest in a well diversified, strategic portfolio made up of beaten down bonds, stocks and real estate. This portfolio should be positioned to capitalize on areas of the market that historically recover the fastest. (See examples of recommended portfolios at www.paragonwealth.com) This panic has pushed stocks down to the same levels they were 11 years ago. We won’t know the bear market has ended until after it is over, but we do know that returns after previous bear markets have been exceptional.
  Investors should reallocate their portfolios based on opportunities going forward. Looking backwards or following a “rear view mirror investing” strategy usually causes an investor to invest in the wrong place at the wrong time.

ABOUT THE AUTHOR
After graduating from BYU, Dave Young started 12 businesses in the early 1980s. In 1986, he sold his businesses but was unable to find an investment company that met his needs. Later that year he began managing his own portfolios. He invested his life savings and started Paragon Wealth Management. Over 20 years later, Young continues to invest and research ways he can better serve his clients. He has been interviewed by BusinessWeek, CNBC, the Wall Street Journal, Deseret News and others. Wealth Manager magazine added Paragon to their Top Wealth Managers list. In 2008 Paragon was named Small Business of the Year from the Provo/Orem Chamber. They also received the Best of State Award in Financial Services. Visit www.paragonwealth.com or call (801) 375-2500 to learn more.

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Step #6 — Avoid large losses
  In 2007, the Utah Division of Securities filed enforcement action on 63 cases. Together, they resulted in losses of more than $77 million for 727 investors.
  Unfortunately, it has always been much easier to lose money than to make it. Money is slippery and hard to hold on to. It’s not uncommon for money to come in large lump sums — 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 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 take advantage. It’s no surprise then that most recipients of life insurance settlements 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.
  For example, if you lose 25 percent of your account, you need to make 33 percent to get back to even, which is workable. If you lose 50 percent of your portfolio, you have to make 100 percent to get back to even, obviously a much more difficult task. A loss of 90 percent of your portfolio requires a gain of 900 percent to get back to even. Forget about it. A much better scenario is to follow a sound investment strategy that avoids those big, dramatic losses in the first place.

Step #7 — Be patient
  Patience is a key attribute for successful investors, but it can only work if you adopt the kind of smart investment strategy we discussed in previous segments. Without that strategy, all the patience in the world is worthless. As soon as you put the right 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 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 generated a compound annual return of 8 percent since its inception in 2001, vs. 5.01 percent for the Lehman Aggregate Bond Index. Paragon’s Top Flight portfolio has generated a compound annual return of 15.75 percent since its inception in 1998, versus 4.37 percent for the S&P 500. (See our track record at www.paragonwealth.com for detail and disclosures regarding our performance).
  Clients who exercised patience during periods when Top Flight’s returns went flat or negative still received those outstanding returns over time. Unfortunately, those who did not exercise patience missed out on those returns, even though the overall strategy was good. As you can see, 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.
  This is the final installment of our “Seven Steps to Building Wealth” series. If you would like a complete and more detailed complimentary copy of these articles, we invite you to download them from our Web site at www.paragonwealth.com.

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Step #4: Avoid unnecessary debt
  Debt can be useful if used properly. A few years ago I went to Africa, and I noticed half-built buildings everywhere. Projects were at different levels of completion and then abandoned. When I asked my guide why, he responded that 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 funds to pay for building supplies right away. They build what they can pay for, and then come back and build more when they have more money.   How unfortunate that these people are held back from making financial progress because they can’t borrow money to create assets.
  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 reap financial rewards and offer opportunities.
  Using debt 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 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 percent, it’s no wonder one out of every 50 households filed for bankruptcy in 2005. In the United States the household debt-to-income ratio recently reached an all-time high.
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 previously, avoid debt like the financial plague.

Step #5: Follow a sound long-term strategy
  To systematically grow your assets, you must follow a proven investment strategy that doesn’t simply involve “gut feelings.” Emotional investing is a recipe for failure.
  At Paragon, one of the models we use is based on investor sentiment. This model measures what percentage of investors are optimistic vs. 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 it is going to do.
  Successful investing is counter-intuitive. Usually, doing what “feels good” doesn’t work. This is why you must have a systematic long-term strategy. A good strategy should significantly increase your returns over time.
  Rather than simply sell you a random collection of financial products, your adviser should provide you with a strategy that does the following seven things:
• Works over different time frames
• Provides effective diversification rather than traditional diversification
• Works in both bull and bear markets
• Is disciplined yet flexible and evolving
• Reduces risk and provides downside protection
• Generates better returns than traditional stock indexes
• Has a proven long-term track record

About the Author
Dave Young, president of Paragon Wealth Management, has been managing money since 1986. He was his first client after he sold his 12 franchise businesses and couldn’t find a traditional brokerage firm to meet his needs. From his personal investment experience, he knew there was a better option to managing money. Later that year, he started his own money management firm and has been managing money ever since.
In 2008 he was awarded the Small Business of the Year Award from the Provo-Orem Chamber of Commerce. He also received the Best of State Award in Financial Services. He is originally from New Mexico. He enjoys spending time with his family, the outdoors, hunting, fishing, camping, sports and exercising.

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