Keep Calm and Carry On

While reading an article about the Nobel Prize award to two American economists, I spotted a headline to the right.  It featured a link to a story CNN wrote in honor of International Day of the Girl.  Titled “To my 15-Year Old Self:  Things I Wish I’d Known,” the writer posed that question to notable women in a variety of fields.  The link showed a picture of Oprah, because you always have to ask her those sorts of questions.

I find her rather annoying, so, naturally, I clicked the link.  The problem I have with her is she seems out of touch.  It is easy to talk about “living your truth” and “risking everything to pursue your passion” when you are a multi-billionaire for whom the risks brought great reward.  Do you think the person who just lost everything when his/her business collapsed feels happy and fulfilled because they “followed their dream?”  Doubtful.

Anyway, as I read the quotes from these highly successful ladies, it occurred to me that living in the past can be a dangerous thing.  Sure, it is good to look back and say, “Oh, I really wish I had not done that.”  On the other hand, you can become so paralyzed by fear of making the same mistake that you take no action at all.  The key is to learn from the mistake and get on with your life.

We can do that in our portfolios too.  There was a time when I was reluctant to invest excess cash in my portfolio because of current market conditions.  As a result, I missed out on some of the upticks in the market.  The lesson I learned is emotion has no place in investing. 

You may have similar feelings now with the upcoming election.  What happens if Obama is re-elected?  What would Romney do if he becomes President?  Will this country fall into a Great Depression or have a huge economic boom?  No one knows.  However, I would bet that, if you looked at previous elections, similar comments were said about the president and candidate then.  It happens with every election.  Work the crowd into a frenzy so they will watch the news.

We cannot change the past.  We cannot predict the future.  Let’s focus on what we can control (our behavior), keep calm, and carry on.

Cristy Freeman, AAMS
Senior Operations Associate

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Market Update through 10/15/12

 

as of October 15, 2012        
  Total Return
Index 12 months YTD QTD MTD
Stocks        
Russell 3000 19.82% 16.09% -0.03% -0.03%
S&P 500 20.25% 16.52% 0.06% 0.06%
DJ Industrial Average 18.45% 12.18% -0.01% -0.01%
Nasdaq Composite 16.31% 18.76% -1.63% -1.63%
Russell 2000 17.94% 13.02% -1.06% -1.06%
EAFE Index* 3.56% 7.31% 0.34% 0.34%
*EAFE index does not include dividends.        
         
Bonds        
Barclays US Aggregate 6.17% 4.16% n/a 0.16%
Barclays Intermediate US Gov/Credit 5.10% 3.70% n/a 0.17%
Barclays Municipal  9.69% 6.29% n/a 0.22%
         
    Current   Prior
Commodity/Currency   Level   Level
         
Crude Oil    $92.02    $92.19
Natural Gas    $3.44    $3.32
Gold    $1,744.70    $1,771.10
Euro    $1.30    $1.28

Mark A. Lewis

Director of Operations

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The Fiscal Cliff, Taxes and Investment Decisions

This morning CNBC had a headline “Fending off the Fiscal Cliff”.  I turned off the TV.  You have to beware of headlines that create a sense of urgency to do something in your portfolio.

This sort of reporting promotes what I call the “I’ve got a feeling” trade.  This is when you take some action in your portfolio based on the mood of the day. Currently, there is a lot of focus on the Presidential election.  If you are concerned about the other candidate winning, keep in mind that someone is equally concerned about your candidate winning.  Don’t make investment decisions based on emotion.

Taxes can be a factor, but should not be the sole driver of an investment decision.  Tax planning for this year is particularly difficult due to the uncertainty of future tax rates.  The Bush tax cuts are set to expire on 12/31, which would cause the tax rate on qualified dividends to increase from a current maximum of 15% to as high as 39.6%, depending on your tax bracket.  We likely will not know anything on income tax, estate tax, alternative minimum tax, the possible return of the IRA charitable deduction for those over 70.5, etc. until after the election or even later in December.  It’s also possible that these tax rates could be finalized in the first quarter of 2013 and made retroactive to 12/31.

This year is unusual in that some of the usual rules of thumb about capital gains may not apply.  Typically, people want to delay paying taxes whenever possible.  However, you way want to realize some long-term capital gains in 2012 in order to lock in the 15% tax rate which will likely be higher next year.  In addition, capital gains rates are currently 0% for taxpayers who are in the 10% or 15% tax brackets based on their taxable income.  The 0% tax rate for these people also expires on 12/31/2012.

You may not want to realize capital gains early under certain circumstances.  For example, if you have investments that are highly appreciated and you are advanced in age or in poor health.  Depending on the size of your estate and what happens with estate tax law, the beneficiaries of these assets may receive a step-up in basis for all or a portion of the assets upon the taxpayer’s death.   Therefore, it wouldn’t make sense to sell assets and pay taxes on the gain when a step-up might be available in the near future.

We recommend that you avoid making major decisions or changes to your portfolio based on fears or possibilities that may or may not materialize. While some limited amount of portfolio rebalancing may make sense, you should discuss your particular situation with your Parsec advisor if you have questions.

Disclaimer:  we are not licensed CPAs and do not give tax advice.  We offer some general guidance with respect to the mechanics of tax issues, but we encourage you to consult with your CPA or a qualified tax professional before making any decisions or taking action.

Bill Hansen, CFA

Managing Partner

October 12, 2012

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Market Update through 9/30/12

as of September 30, 2012        
  Total Return
Index 12 months YTD QTD Sept
Stocks        
Russell 3000 30.20% 16.13% 6.23% 2.63%
S&P 500 30.21% 16.45% 6.35% 2.58%
DJ Industrial Average 26.52% 12.19% 5.02% 2.75%
Nasdaq Composite 30.64% 20.73% 6.54% 1.70%
Russell 2000 31.91% 14.23% 5.25% 3.28%
EAFE Index* 10.01% 6.95% 6.14% 2.60%
*EAFE index does not include dividends.        
         
Bonds        
Barclays US Aggregate 5.47% 4.23% n/a 0.15%
Barclays Intermediate US Gov/Credit 4.66% 3.73% n/a 0.25%
Barclays Municipal  9.33% 6.78% n/a 0.67%
         
    Current   Prior
Commodity/Currency   Level   Level
         
Crude Oil    $92.19    $99.20
Natural Gas    $3.32    $2.88
Gold    $1,771.10    $1,769.40
Euro    $1.28    $1.31

Mark A. Lewis

Director of Operations

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Maximizing Your Spouse’s Social Security Survivor’s Benefit

In our 3rd quarter newsletter, fellow advisor Harli Palme wrote about Social Security and Medicare, explaining some of the basic features of both social insurance programs.  Those nearing Social Security eligibility age have many options to consider.  Making the right choice on when to start taking benefits is crucial, especially for married couples.

Full retirement age is the age at which you are eligible to receive your full Social Security benefit.   The current schedule is as follows:

1943 – 1954         66

1955                       66 + 2 months

1956                       66 + 4 months

1957                       66 + 6 months

1958                       66 + 8 months

1959                       66 + 10 months

1960+                     67

 

As is typical with the government, Social Security offers both sticks and carrots.  For example, you may take your benefit as early as age 62; however, for each year prior to your FRA, your benefit is permanently reduced (ergo, the stick).  If, for example, your FRA benefit would be $1500, your benefit at age 62 would be only $1125.

The administration offers those who can wait a pretty tasty carrot: for each year you delay taking Social Security, your benefit increases by approximately 8% per year.  Using the previous example, your benefit at FRA ($1,500) would increase to $1,930 – a 32% increase if you delay benefits until age 70.

There are numerous options available that are neither well known nor understood.  I am going to focus on one strategy that is a great way to ensure a surviving spouse receives the greatest benefit:  File and Suspend.  This strategy is most appropriate where one spouse worked and the other did not.

In order to qualify for File and Suspend, the covered (i.e. working) spouse must reach FRA.  At that time he/she applies for Social Security benefits and then immediately suspends them.  This allows the non-working spouse to apply for spousal benefits, equivalent to ½ of the covered spouse’s full-retirement benefit.  The covered spouse then allows his/her benefit to increase until age 70.

The File and Suspend strategy is an extremely useful option to help ensure the economic security of widows.  As we all know, men tend to earn more and die younger.  By delaying the claiming of Social Security, a husband will receive a higher benefit which will in turn provide his surviving spouse a higher Survivor’s Benefit on his death.

There are numerous articles that attempt to cover all of your options with Social Security.  However, we recommend that you consult with your financial advisor to discuss your circumstances and review your options to help you determine what is best for you.

 

Tracy H. Allen, CFP®

Financial Advisor

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Market Update through 9/15/12

as of September 15, 2012        
  Total Return
Index 12 months YTD QTD MTD
Stocks        
Russell 3000 25.42% 18.39% 8.30% 4.63%
S&P 500 26.11% 18.40% 8.14% 4.31%
DJ Industrial Average 24.20% 13.46% 6.21% 3.92%
Nasdaq Composite 23.64% 23.29% 8.80% 3.86%
Russell 2000 22.97% 17.84% 8.58% 6.55%
EAFE Index* 10.15% 11.14% 10.30% 6.61%
*EAFE index does not include dividends.        
         
Bonds        
Barclays US Aggregate 4.47% 3.17% n/a -0.66%
Barclays Intermediate US Gov/Credit 3.50% 2.95% n/a -0.33%
Barclays Municipal  7.31% 4.89% n/a -0.51%
         
    Current   Prior
Commodity/Currency   Level   Level
         
Crude Oil    $99.20    $95.43
Natural Gas    $2.88    $2.87
Gold    $1,769.40    $1,693.40
Euro    $1.31    $1.25

Mark A. Lewis

Director of Operations

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Don’t Blame Me, I Voted for Kodos

“It makes no difference which one of us you vote for. Either way your planet is doomed, DOOMED!!”

This is one of my favorite quotes, from The Simpsons Treehouse of Horror VII – Citizen Kang episode. In it, news anchor Kent Brockman is interviewing presidential candidate Bob Dole, who is actually the alien Kang in disguise. Kodos, the other alien, is disguised as Bill Clinton. When their true identities are revealed, Kodos says, “It’s true, we are aliens! But what are you going to do about it? It’s a two-party system – you have to vote for one of us!”

I was reminded of this episode (well, I’m often reminded of this episode during election years, but most recently) when I came across an article from Knowledge@Wharton, entitled, “Back to the Future: What’s at Stake for the Economy in the Obama-Romney Contest.” In it, three Wharton faculty members say that, while we’re not exactly doomed, the future isn’t likely to look too different from the present, regardless of who wins in November. Basically, the problems facing the economy are too vast to be resolved quickly, and a divided government will keep either party from fully enacting its policies.

As depressing as that sounds, it was a relief to me when I read it, if only because it validated my own feelings about the current situation. Mainly, that a recovery will take time and that there are no quick fixes. The Federal Open Market Committee seems to agree that the recovery has a long way to go. Calling high unemployment a “grave concern,” Ben Bernanke and the Fed extended the bond-buying program with a third round of quantitative easing. They are now expecting to hold the federal funds rate near zero through mid-2015 (after previously saying it would remain low through late 2014). On the positive side, the committee increased its estimate for GDP growth to 2.5-3% in 2013 and 3-3.8% in 2014. The market, of course, loves the announcement of continued stimulus, with the S&P rising above its highest close since 2007 on the news. Of course, not everyone is so sanguine about QE3, fearing that it will fuel inflation at worst, or have a marginal impact at best.  Thus far, the stimulus hasn’t materially affected inflation expectations, according to Bernanke, who cited a Fed study that also indicates the asset purchases have raised the level of economic output by almost 3% and increased private employment by over 2 million jobs.

In the near term, the economic recovery may continue to limp along no matter who is elected in November. In the meantime, we can focus on the inspirational words of Kodos/Clinton, who said, “We must move forward, not backward; upward, not forward; and always twirling, twirling, twirling towards freedom!”

Sarah DerGarabedian, CFA
Director of Research

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Market Update through 8/31/12

as of August 31, 2012        
  Total Return
Index 12 months YTD QTD Aug
Stocks        
Russell 3000 17.03% 13.15% 3.51% 2.50%
S&P 500 18.01% 13.51% 3.67% 2.25%
DJ Industrial Average 15.85% 9.19% 2.21% 1.04%
Nasdaq Composite 20.36% 18.71% 4.76% 4.55%
Russell 2000 13.40% 10.60% 1.91% 3.34%
EAFE Index* -3.35% 4.24% 3.45% 2.36%
*EAFE index does not include dividends.        
         
Bonds        
Barclays US Aggregate 6.13% 4.08% n/a 0.07%
Barclays Intermediate US Gov/Credit 4.27% 3.47% n/a 0.20%
Barclays Municipal  9.86% 6.07% n/a 0.13%
         
    Current   Prior
Commodity/Currency   Level   Level
         
Crude Oil    $95.43    $89.28
Natural Gas    $2.87    $3.15
Gold    $1,693.40    $1,602.70
Euro    $1.25    $1.23

Mark A. Lewis

Director of Operations

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Saving for College

It is that time of year when the air turns cooler, the leaves begin to change color, and the kids return to school.  Some of you may already have children in college and know the financial burden a good education can be.  Others may be setting up a savings plan for the first time.  This post is geared toward you.

You have probably heard of something called a “529 plan.”  This type of college savings plan is named after the section of the Internal Revenue Service code in which the plans were created.  I found an excellent article on, of all places, the SEC’s website.  In plain English, it explains the difference between the two types of 529 plans, tax benefits, and other interesting tidbits.  Here is the link:  http://www.sec.gov/investor/pubs/intro529.htm

Another great site to visit is www.savingforcollege.com.  You can learn about the 529 plans offered in your state.  The site has information about financial aid, scholarships, and lots of other things.

At Parsec, we are familiar with the basics of 529 plans.  Your financial advisor will be happy to answer any questions you might have, although we do not personally setup 529 plans.  We can guide you to resources with which we have experience.

Saving for your child’s college education does not have to be a painful experience.  As you have learned with your retirement savings, the best approach is to develop a plan and stick with it.  Utilizing a 529 plan might be a way to accomplish your goal.

Cristy Freeman, AAMS
Senior Operations Associate

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Market Recovery Continues

A “drawdown” is the change in the value of an index from a peak to a trough.  Typically, the steeper the drawdown, the longer it takes to recover back to a previous peak.  The drawdown in the S & P 500 index from October 2007 to March 2009 was about -56%, the worst since the Great Depression.

The all-time high on the S & P 500 index was 1565 in October of 2007.  This is about the same level as the peak in March of 2000.  As of this writing, the S & P 500 is around 1400.  The S & P is currently up about +107% from the March 2009 bottom, and -10.5% from the all-time high. 

A “bear market” is defined as a change of -20% or more from a previous peak.  Sometimes these happen quickly, like 1987. In October 1987, the market fell over 20% in one day yet ended up positive for the year. Other bear markets happen more slowly, like 2000-2002, which was about 2.5 years from peak to trough.    

Since the end of World War II, there have been 9 declines of 20% or more, with an average recovery time of about 3.5 years to return to the previous peak.  The current recovery is approaching 5 years, so it is slower than usual.  In looking at historical data, it is no surprise that it is taking longer since the magnitude of the decline was greater.

The economy continues to recover, just not as quickly as we would like.  Similarly, jobs are being created, but at a slower rate than previous recoveries.  Companies have high levels of cash on their balance sheets, and are increasing dividends.  For the broad US market in the 12 months ending 6/30/12, there were more than 18 dividend increases to every decrease. Stock valuations appear reasonable relative to historical averages, especially considering the current low interest rate environment that is expected to persist for the next year or two.  We believe these are significant positive factors that are currently being overlooked due to the media focus on the European debt crisis and the US election.

Bill Hansen, CFA

Managing Partner

August 27, 2012

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