Politics and Your Portfolio

A bitterly divided Congress, a government shutdown, an impending debt ceiling debate – this must be a sign that our political landscape is as bad as it has ever been. But, from what I can tell Americans are instead coming together and becoming increasingly united…in their disgust with our government! The Onion, self-acclaimed as “America’s Finest News Source” (they are a satirical news outlet) had a spectacular headline recently titled “Psychiatrists Deeply Concerned for 5% of Americans Who Approve of Congress”.  At least there is still a laugh to be had out of all of the political dysfunction out there!

Regardless of your political opinion and all jokes aside there are implications of the political debates in regards to your investments. Looking back to August 2011 when Congress narrowly avoided defaulting on our debt we can see the results of the poor work efforts by our elected officials. A last minute debt ceiling increase was passed back then, but Standard & Poors still downgraded U.S. Treasury debt from their highest credit quality of AAA based on the political dysfunction. Markets were shaken with uncertainty, and this resulted in a quick decline in the stock market – but oddly enough a rush of investors bought Treasury bonds for their safety. See the irony there?

Several days ago we saw a strong rally when headlines crossed that there were talks that both sides may agree to potentially a six week increase in the debt ceiling. I take this as showing how low the market expectations are for political outcomes – a strong rally on talks of maybe meeting about a maybe making a decision…not now, but within 6 weeks.  Had you have tried to time the market reading the headlines earlier last week, you would have missed this incredible rally that seemingly came as a result of very little.

What we do know is that in the end, as messy as it may be, a solution will come, the government will reopen, and the debt ceiling will be increased. Though the near-term uncertainty can hurt markets, just look at the longer-term results from August 2011 when the S&P 500 traded below 1,200 compared to over 1,700 now. Over time a recovering economy and growing company profits drive the stock market. The politics is just an unfortunate and embarrassing side-show along the way.

Travis Boyer, CFA
Financial Advisor

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More Questions to Ask

Harli’s prior blog post covered some good steps on what you should be considering when hiring a Financial Advisor. An important part of that is having an understanding of the investments that your Advisor recommends when implementing your portfolio. Once you’ve agreed to an asset allocation – how do you go about buying into that allocation?

One important item to understand here is whether or not the Advisor receives compensation for recommending certain investments. At Parsec, we are a fee-only firm which means our sole revenue source is our percentage fee based on the assets we manage for a client. This means we do not receive any compensation through the investments we purchase or sell on a client’s behalf. Other Advisory Firms or Brokers can receive up-front commissions or ongoing annual revenues that vary based on the type of investment they purchase for clients, and we feel this adds an unnecessary bias during the investment selection process.

Along with the importance of knowing if your Advisor is paid based on what they recommend is also knowing how much that investment costs you overall. If you purchase a mutual fund or exchange traded fund within your portfolio you should get a good understanding of their expense ratios to know what that fund costs you on an ongoing basis, and how do their costs impact their performance net of all fees and costs.

At Parsec, we try to limit the overall cost of client investments by tracking the mutual fund costs charged by the investments we recommend. For clients with a larger account size we may buy individual stocks for a large portion of their equity allocation and thus we remove the layer of fund manager costs. Clients will pay a transaction fee to buy or sell the individual stock, but there is no mutual fund expense on those assets – just our annual fee of assets under management.

If when interviewing an advisor you feel like you don’t have a full understanding of the costs of the advice you will receive, or the costs of the investments that will be purchased for you, then ask more questions! If you feel like you aren’t getting an honest answer then that should be a good sign to keep looking around.

Travis Boyer, CFA
Financial Advisor

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