March Update – Trading

Trading is an important, albeit often underappreciated part of investment management.  In this email, we’ll share with you our investment philosophy and how it drives our trading approach.  While Parsec uses both funds and individual securities across client accounts, this blog applies more to those portfolios with individual stock holdings.  In general, we use funds for smaller-sized accounts because of the immediate diversity it provides, at a relatively low cost.  We generally use individual securities for larger client portfolios as these portfolios offer economies of scale that can overcome trading costs.  Over the years, we have fine-tuned our trading approach with an eye towards minimizing costs and maximizing efficiency.

As you’ve heard us say time-and-again, Parsec does not engage in market timing.  Instead of trying to determine when one asset class will underperform and another outperform, we select our securities using a bottom-up fundamental research approach.   Using individual equities as an example, this means that we first screen any new stock ideas for attractive financial characteristics and then perform additional due diligence to determine its total return potential over the next several years.  Once a stock is added to a Parsec portfolio, we monitor the company regularly for changes in its competitive environment, its growth drivers, and valuation levels.  However, we do all of this in light of our long-term thesis on the stock, as opposed to the market’s near-term noise.

Taking a long-term investment approach in which we focus on a security’s total return potential often allows us to buy and hold securities for many years.  This keeps our portfolio turnover – a measure of how frequently assets are bought and sold – low, and in turn keeps our trading costs low.  When we do trade we use block trades whenever possible.  By aggregating all of our trades into one large transaction we can better assure that clients receive the same price when a given security is bought or sold.

In addition, our focus on a security’s long-term potential largely circumvents the need for specialized trade orders.  Typically short-term traders, and not long-term investors, utilize limit orders, stop orders, or other types of non-market orders.  These specialized trades often come with additional costs, including higher transaction fees for retail investors and various opportunity costs.

One such opportunity cost can arise when setting short-term price targets.  For example, using a limit order to purchase a security requires an investor to set a price target.  However, without thoroughly researching a security using fundamental analysis, price targets are often based on “a gut feel” or are knee-jerk reactions to an investor’s past experience with an asset.  In effect, unconscious emotions can drive the trading decision and lead to even higher costs.  These can come in the form of missed opportunities, as when a stock declines but doesn’t quite reach an investor’s price target to buy.  In this case if the stock then continues higher an investor may have missed-out on significant upside potential.

Another opportunity cost is possible when a security pays a dividend, but because an investor was waiting for a slightly lower price before buying, he or she inadvertently forfeited the added income.  In some cases the dividend payout might have amounted to more than the savings associated with buying at a lower price.

While there are many types of trades, and some that do add value, in general we’ve found that specialized trade orders often come with more costs than benefits.  This is why Parsec identifies assets using fundamental research and takes the long-term view on a security’s total return potential.  Doing so inherently reduces security turnover in a portfolio and thus trading costs.  It also avoids incurring hidden opportunity costs and, we believe, increases the likelihood of reaching your longer-term financial goals.

Thank you,

The Parsec Team

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Time to Update your Estate Plan?

Now that we have started a new year, it’s a good time for many of us to stop putting off getting an estate plan created or updated.

Under current tax law, most people do not have a concern with estate tax.  The current Federal estate tax exemption is $5.49 million per person. If properly elected, any unused exemption is portable between spouses.  Therefore, a married couple with an estate of $10.98 million or below could pass their entire estate to heirs without any Federal estate tax liability.

While much attention is focused on the tax aspects, estate planning is more a matter of organizing and simplifying your affairs so that your heirs are not burdened with additional stress at the same time they are grieving for the loss of a loved one. We recommend that you engage the services of a qualified attorney to guide you and create the appropriate documents.

Your estate plan should include a will and possibly living or revocable trusts. Advanced directives and incapacity planning are other items that are typically addressed as part of your estate plan. This includes having documents prepared such as a durable power of attorney, health care power of attorney and living will.

As part of your estate plan, you should review your beneficiary designations. By filling out a beneficiary designation form, individuals can bypass the probate process and pass specific assets upon their death directly to their heirs. Many types of assets such as IRAs, qualified retirement plans, life insurance policies and commercial annuities pass via beneficiary designation rather than through your will. In addition, beneficiary designations can be added to taxable investment accounts (known as Transfer on Death or “TOD”) and bank accounts (known as Payable on Death or “POD”). Note that while the assets passing by beneficiary designation bypass the probate process, they are still included as part of the decedent’s estate for calculating any potential estate tax liability.

There is talk that the estate tax may be changed or even eliminated this year. For most people that shouldn’t be a deterrent to getting their estate plan done, since few are affected by the estate tax in the first place. Having an updated estate plan gives you peace of mind and helps prevent additional stress on your heirs. Once you have a plan in place, it can always be modified as tax laws and your personal circumstances change.

William S. Hansen, CFA
President
Chief Investment Officer

bill

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2016 IRA Contribution Rules

The deadline to make IRA contributions for tax year 2016 is April, 18 2017. The maximum contribution is $5,500 per individual ($6,500 if age 50 or over) or 100 percent of earned income, whichever is less.

There are income limits which determine whether you can deduct your Traditional IRA contribution or if you qualify to make a Roth contribution. The following table gives the phase-out range for the most common circumstances.

Do you qualify to deduct your Traditional IRA contribution?
If your income is less than the beginning of the phase-out range, you qualify. If your income is over the phase-out range, you do not. If your income falls inside the range, you partially qualify.

Modified Adjusted Gross Income Phase-Out Range
Tax Filing Status For 2016 Contributions For 2017 Contributions
Single, participates in an employer-sponsored retirement plan: $61,000 – $71,000 $62,000 – $72,000
Married filing jointly, participates in an employer-sponsored retirement plan: $98,000 – $118,000 $99,000 – $119,000
Married filing jointly, your spouse participates in an employer-sponsored retirement plan, but you do not: $184,000 – $194,000 $186,000 – $196,000

Do you qualify to contribute to a Roth IRA?

Modified Adjusted Gross Income Phase-Out Range – Roth
Tax Filing Status For 2016 Contributions For 2017 Contributions
Single: $117,000-$132,000 $118,000-$132,999
Married, filing jointly: $184,000-$194,000 $186,000-$195,999

If your filing status differs from those listed above, please contact your advisor and he or she can help you determine whether you qualify.

Harli Palme, CFA, CFP®
Partner

Harli Palme

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The Perfect Gift? Ideas…From a Planning Perspective

December is here and 2016 is drawing to a close.  As we enter the holiday season, we scramble to pick the perfect gift for our family members, our friends, teachers… the list goes on.

At Parsec, we work with clients to create gifting strategies that fit into their overall financial plan.

This December we encourage you to think about giving and its potential longer term impact on both your family (children and grandchildren) and your taxes.  Let’s first review a powerful gifting strategy to younger family members: the custodial Roth IRA.

As long as there is earned income, which can come from mowing lawns, housework, babysitting etc., contributions to a custodial Roth IRA can be made up to the amount of the earned income but not over $5,500*.  For example, your 9 year old grandchild earned $1,000 over the summer through his lawn mowing business.  You can open a custodial Roth IRA for him and deposit a matching gift of $1,000. Let’s say he continues to mow lawns each summer for the next 10 years and you continue to match his earnings with a $1,000 holiday gift.  Assuming a 7% return each year, your gifts will grow to over $15,000 at the end of 10 years.  Remember this is only the beginning, the approximate $5,000 earnings in this example will continue to compound over time and ALL earnings are tax free upon withdrawal later in life.  Rewarding your grandchild’s hard work through Roth contributions is a holiday gift that offers valuable lessons on many levels.

Let’s switch gears to philanthropy.  Each year Parsec’s client service team processes hundreds of charitable gift requests from our clients.  These gifts of course offer tax advantages in various forms.  For many of our clients, the qualified charitable distribution or QCD brings the most formidable tax savings.  How does it work?  If you are over 70 1/2, up to $100,000 of your required minimum distribution (RMD) can be given directly to charity through a QCD.  The result: your AGI will be reduced dollar for dollar by the amount of the QCD.  A simple, yet impactful strategy:  on not only your charity of choice but also on your tax dollar.

As we enter this holiday season we hope that you reach out to your financial advisor to talk about gifting strategies that may be appropriate for you and your family.  Happy Holidays!

Betsy Cunagin, CFP®

Senior Financial Advisor

*$5,500 is the IRA contribution limit for 2016 and 2017.  

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The Benefits of Focusing on Your Long-Term Financial Goals

As your advisor, our main focus is helping you reach your long-term financial goals.  We say this a lot, but it bears repeating.  It’s worth revisiting because near-term portfolio returns and market noise can distract even the best investor from remembering why he or she invests in the first place.  For most of us, investing is about creating the life we want, giving back to family, friends, and community, and leaving a legacy.  At Parsec, our job is to lead you through difficult market periods, including times when your portfolio may lag the major market indexes.  Every portfolio will experience underperformance from time-to-time.  However, getting caught-up in weak near-term performance can actually hinder progress towards your long-term goals.

This happens when we lose sight of the big picture.  Asset class leadership naturally ebbs and flows over the course of any economic cycle, and so too will portfolio returns.  Financial behavioral scientists suggest that if we’re caught-up in near-term underperformance we’re more likely to act reactively instead of proactively.  Reacting to current portfolio performance increases the odds that we sell low, buy high, trade excessively, or even sit-out the next market run.  In other words, focusing on near-term market moves increases the odds that we hinder our long-term performance results.

In contrast, measuring your progress versus your long-term goals is more likely to increase proactive behaviors and thus improve the odds of realizing your objectives.  For example, framing portfolio returns in the context of your retirement savings target several years from now is more apt to help you keep calm during periods of market turbulence.  “Keeping your eye on the prize”, as they say, can cultivate resiliency and has the added benefit of lowering your anxiety levels.  When you’re less stressed, you’re more likely to engage in proactive behaviors like maintaining an appropriate asset allocation mix, rebalancing back to your target regularly, and staying invested during market downturns.

While we acknowledge that portfolio declines or underperformance is never fun, it’s important to recognize that difficult performance periods are par for the course.  Over time some assets and sectors will outperform while others will lag.  Rather than trying to time the market or catch the latest trend – which is extremely difficult to do – sticking with a diversified asset allocation and rebalancing regularly is a tried-and-true method for achieving your financial goals.

With that in mind, our job is to help you stay focused on the big picture.  Doing so lowers the odds of engaging in detrimental behaviors and increases your chances of success.  When you succeed, we succeed!

Thank you,

The Parsec Team

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10 ways to celebrate Independence Day:

Visit a historical site:

Western North Carolina is rich in history. One of my family’s favorite locations is Cherokee. In particular, we like to visit the Oconaluftee Indian Village. We always enjoy walking the trials and making new friends. Staff members are eager to share stories and have live demonstrations on how the early Cherokee people made jewelry, clothes, weapons, shelters, and canoes. We always seem to learn something on our trip back through time.

Read the Declaration of Independence

While many of us can recant passages of the document such as, “We hold these truths to be self evident,” how many of us have read or can recall the 27 grievances in the original writing leading to the declaration?

Get active – go for a hike, fishing, or camping:

Did you know that WNC has some of the arguably best trout fishing in the state? We have well over 3,000 miles of trout streams and each year the Wildlife Commission closes 1,000 miles for restocking and delayed harvesting. Currently, fishing season is wide open with a 7 daily keeper limit.

Make it memorable:

Consider investing in a decent photo or video camera. We took the plunge a few years ago and bought both types of cameras. We have a lot of fun capturing memories. Occasionally, we will look back on these priceless photos and videos to relive the moment and found this to be a great pass time. One of the things I like to do is compile short video clips and then set them to music; this makes a great way of preserving memories in a fun and engaging way.

Pack a picnic and watch the fireworks:

Admit it, many reading this cannot recall the last time they sat on a blanket and enjoyed a picnic dinner. How about trying a new recipe or pick up a box of fried chicken while picking out the perfect viewing area? Don’t forget to pack a frisbee to toss around. Looking for fireworks? Find them here!

Treat a veteran to lunch or dinner:

What better way to honor our nation’s heroes by treating them to a lunch? We see active duty servicemen and women at restaurants near the Asheville airport. Something we like to do is anonymously pay for their meal.

Make a difference:

Everyone has something they are passionate about. Why not take this passion and introduce it to someone new? For instance, an outgoing person might go to a nursing home and visit a resident. Someone who enjoys soccer could visit a local park and start a pick-up game.

Throw an Independence Day themed BBQ:

On a recent visit, the client arranged for a catered Low Country Boil as incentive for his staff to stay after hours for my education presentation and one-on-one meetings. This was my first boil and I was impressed at the simplicity of the food and great conversations. So much so, this inspired my family to invite a few good friends over for our first boil this summer! (If any have advice about how to make this go off without a hitch, please email me with your thoughts and suggestions.)

Watch the local 4th of July parade:

Remember when you were a kid and watched the parade? The nostalgia of candied apples, popcorn, marching bands, and waving the American flag just oozes fun and happy memories! It just doesn’t get much better.

Declare your independence, financially that is:

The Declaration of Independence is roughly 1,400 words. Financial independence does not require a formal “declaration” per se, but it does require a well thought out plan.   Just as our forefathers were resolute in their desire for independence, our decision to save and invest for our future should be a high priority. Things that should be considered are having adequate cash reserves, health, life and disability insurance, long-term savings and investments, and estate planning documents to name a few. The internet has a wide variety of tools and resources that may be helpful. However, the advisors at Parsec take a unique and tailored approach for client recommendations and advice. More importantly, our advice is consistent whereas information on the internet will vary. Our belief is that with proper savings, planning, and investment oversight most people can achieve financial independence. If you have questions or concerns that you would like us to address, please call or write.

I hope everyone has a happy and safe 4th of July!

Neal Nolan, CFP®, AIF®
Senior Financial Advisor
Director of ERISA Services

Neal

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Hidden Costs of College

Congratulations!  You have four years of tuition, room and board stashed away in your 529 Plan and Junior hasn’t even graduated from high school yet.  Now you can breathe easily, right?  Well…maybe, maybe not.

The published cost of college attendance can vary substantially from the actual cost for numerous reasons.   The primary contributor to this variance; a surprisingly small number of students graduate in four years.   In fact only 59% of students graduate within six years according to the National Center for Education Statistics.       Now before you blame Junior for taking too long to get that degree (and blowing your budget), understand that getting the classes needed to fulfill degree requirements at a large university can be a daunting, if not impossible, Hunger Games-like experience resulting in an extended stay.   Changing majors, transferring schools and required remedial classes are other common contributors to a longer than expected the graduation time line.

One cost-effective way to manage the timeline is to plan on taking required classes you couldn’t get during the regular school year at your local community college during the summer.   Budget for this (hopefully minimal) additional expense and have the classes pre-approved so your student receives credit for their work.  Also, insist that your student meet with their advisor before scheduling classes to confirm they are on the right path to meeting their degree requirements.  Now that you are on the four-year plan, it’s time to understand some of the other hidden costs of college.

While wandering the park-like grounds and admiring the architecture of the colleges on your tour list, it can be easy to forget a very important question.  Is this a comprehensive fee?  Quite often the answer is yes at a private college and hard to ascertain at a public school.   To help compare apples and oranges, take a checklist of possible extra fees or expenses on your tour so you ask the same questions everywhere.

  • Are there class-specific fees? For example, lab fees for science classes or studio fees for art or music classes.
  • Are there differential fees for specific majors?
  • Does the school charge more for additional credit hours? Some schools have a  50% tuition surcharge for credits in excess of degree requirements.
  • Is tutoring an additional expense? Is the tutoring remedial only?
  • Are there use fees for athletic facilities, the health center, and tech support?
  • Is there a fee for printing?
  • Can you rent textbooks at the campus bookstore?
  • What percentage of the student body lives on-campus vs. off-campus? If your student lives off-campus budget for rent, security deposit, utilities, furniture, and renters insurance.
  • How far is the school from your home? You may need to budget for travel expenses and summer storage fees.
  • What does it cost to have a car on-campus?
  • Do you receive college credit for study abroad programs?
  • What extracurricular activities interest your student? Greek organizations and club sports teams can cost thousands of extra dollars each year.
  • What is the process to get student tickets to football or basketball games and what do they cost?
  • What are some of the other small fees you can expect? Many schools charge an orientation fee, a matriculation fee, and a commencement/graduation fee.
  • And last but not least… expect a 3% fee for paying the other fees with your credit card.

Once you have narrowed down your list of potential colleges, find someone who has a student there and ask about the hidden extras.   You may be surprised to find that the private school, with a high four-year graduation rate, and a comprehensive fee compares more favorably than you expected to a large, public university.

Nancy Blackman
Portfolio Manager

Nancy Blackman - Parsec Financial Corporate Headshots

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Important Changes to your Social Security Benefit

In October, President Obama and the US Congress passed the Bipartisan Budget Act of 2015.  Included in that act was a clause that eliminated two popular Social Security claiming strategies: File-and-Suspend and Restricted Application.

File-and-Suspend:  A strategy where a person, who is at least full retirement age, files for social security benefits, but then immediately requests to suspend those benefits. This allows his/her spouse to take a spousal benefit on the filer’s record, while the filer’s benefits are delayed and continue to grow.

Restricted Application:  A strategy where a person, who is at least full retirement age, files for spousal social security benefits and delays his/her own benefit so it continues to grow. This allows the filer to receive some benefit now (the spousal benefit), and a larger benefit later.

Delaying your benefit pays off big. When you delay your benefit you earn delayed retirement credits, which equate to an annual 8% increase in benefits.

Those born before April 30, 1950 were grandfathered in to the old rules and may continue to use File and Suspend and Restricted Application strategies while delaying their credits. Please note, if you were born before April 30, 1950 and you wish to implement the File and Suspend Strategy, you must submit your application before April 29, 2016.

Those born after April 30, 1950 or on or before January 1, 1954 (age 62 in 2015) may only use the Restricted Application strategy.   If your spouse is receiving benefits and you have reached full retirement age, you may apply for a spousal benefit, while allowing your own benefit to accrue Delayed Retirement Credits.

For those born after January 1, 1954, neither strategy is available.  However, you may still choose to delay taking your benefits until age 70.  By doing so, you stand to increase your future benefits by 32%.

Please note that if you are already drawing Social Security, or if you have already set up File and Suspend, the new laws do not affect you.

Summary of Available Strategies

Age Can Participate Cannot Participate
66  by 04/30/2016 File & Suspend /Restricted Application
62 by January 1, 2016 Restricted Application File & Suspend
62 by January 2, 2016 File & Suspend /Restricted Application

There are many factors to consider when determining when to start taking Social Security.  We recommend that you meet with your financial advisor for guidance to help you with that decision.  And if you were born before April 30, 1950, please remember the April 29, 2016 deadline.

Tracy Allen, CFP®
Financial Advisor
Tracy Allen
Tracy Allen
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Remain calm and carry on: why stocks and stress don’t mix

The popular press is generating a lot of recession-related articles lately and with stocks starting the New Year on a weak note, it’s no wonder investors feel a little nervous. Year-to-date, U.S. large cap stocks are down about 10% while most international markets are down even more. Commodities continue to slide and global economic growth has been revised lower. This is certainly not a confidence-inspiring picture, but here’s why keeping calm and carrying on is the best course of action.

First, I want to illustrate why stocks and stress don’t mix. Let’s say that stocks are down 10% year-to-date, the global growth outlook is muddy at best, and you’re seeing a lot of articles suggesting that the US is headed for a recession. Assuming the above facts and a meaningfully-sized investment portfolio, most humans are likely to feel anxiety, stress, and maybe some fear. Is the market going to fall further? Are we heading for a recession?

Having read enough about neuroscience to be dangerous, I know that when we’re feeling anxiety, stress, and fear, the more evolved part of our brain – our neocortex – is usually off-line and the more primitive part of our brain – our limbic system or brain stem (a.k.a. lizard brain) – is typically running the show. When our lizard brain is calling the shots we often make poor, fear-based decisions because we can’t see the big picture. Our brain shuts down and we become reactive instead of proactive. In these instances our capacity to think higher-level thoughts is greatly reduced.

Speaking of the big picture, did you know that from 1926 – 2015, stocks have delivered average annualized returns of 10%? Notice that includes the two largest US market declines, the Great Depression, and the Great Recession. Not bad. When we get triggered by stress, facts like these can get overlooked and we could make decisions we’ll come to regret. Here’s a schematic of how that might look:

graph 1

You can see how our thoughts and emotions affect our behavior which then reinforces the above pattern or one like it. Unfortunately, the outcome stinks and so I’d like to propose an alternative – – one that leads to a much happier, healthier outcome.

In the alternative pattern, the same triggering event happens, only this time you’re aware of the stress and anxiety it triggers. The fact that you’re aware of the stress and anxiety is huge! It means you’re not identifying with the emotions and thus your rational-thinking, neocortex brain is still online. You now have choices. Given the old pattern, one strategy would be to call your advisor and get some reassurance that the sky isn’t falling. Another option is to simply turn off the TV or the computer and take some deep breathes. Maybe take a walk around the block or engage in an activity you enjoy. The point is to interrupt the old pattern. The more you can do this, the more your awareness grows, and in turn, the more options you have.

Following through with this example you can see that giving yourself a break from the triggering event and getting some perspective allows you to stay calm, and thus make better decisions. Just like the first illustration, when repeated, this one will also reinforce itself. And the outcome is much better.

graph 3

So now that you’re hopefully in a calm, peaceful state, we can talk about the current environment. Yes, stocks have gotten off to a shaky start but the US economy remains on stable footing. Jobs growth is strong, oil prices are low, consumer debt is in-check, and wage growth is finally starting to rise. It’s true that US manufacturing is contracting but it only accounts for about 12% of GDP. Meanwhile, US services sectors, which account for 88% of GDP, remain in expansion mode.

Stocks have been spooked by falling commodity prices, slowing growth in China, and fears of deflation. But most leading indicators remain strong and every recession since the 1970’s has been preceded by a spike in oil, not a decline. Finally, and speaking of perspective, there will always be some risk of recession simply because contractions are a natural and a healthy part of any business cycle. Without them we can spiral out-of-control into bubble-like environments. I for one intend to stay calm and carry on. Nothing else seems to help anyway.

Carrie A. Tallman, CFA
Director of Research

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Five Gas Saving Travel Tips for the Holidays

It’s that time of year again- entertaining, eating too much, and lots of travel.  Marshall Doney, AAA president and CEO, stated in a recent press release that over 46 million Americans will journey 50 miles or more from their home this Thanksgiving.  The chart below shows that gas prices are actually in our favor for traveling this Thanksgiving.

Here are five easy ways to save on fuel prices – not just for the holidays, but all the time!

2012-2015_Avg-Gas-Prices-11-23-15

    1. Drive the more fuel efficient car.  Many people jump to taking the family car with the most leg room and luggage space.  Perhaps take this opportunity to assess your packing and squeeze into the smaller more fuel efficient car.
    2. Lighten the load.  Take an inventory of what’s in your car.  By having a heavier car you use more fuel.  Take off the roof rack that you don’t plan on using this winter and empty out the trunk, leaving only the necessities.
    3. Get a tune up.  Consider getting your car serviced before taking off this holiday season.  The better shape your car is in, the more fuel you will save.
    4. Go back to driver’s ed.  Take this time to remember the basics of driving.  Accelerate slowly, eliminate aggressive braking and speeding.  All of these things lead to increased fuel cost.
    5. Find cheaper gas prices.  GasBuddy is my favorite app for this purpose.  You can use this to find the cheapest prices on your route.

Every penny counts when trying to stick to a budget to meet your long-term goals!

Ashley Gragtmans, CFP®
Financial Advisor

Ashley_Woodring(b)

 

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