Does Jiro Dream of Retirement Too?

I recently moved to the Asheville area after living in Atlanta for twelve years. Ironically, the seeds of my move started around the time I purchased my very first home in Brookhaven, a charming neighborhood in Atlanta. I say ironically because for the prior ten years I held a fairly good and financially stable job, yet had never considered buying a house. Why not you ask? Well, I wasn’t sure myself until last week when I watched the documentary, “Jiro Dreams of Sushi” – which, by the way, I highly recommend.

Jiro is a world-renowned – – perhaps the world-renowned – – sushi chef, operating a tiny ten-seat restaurant inside one of Tokyo’s hundreds of subway stations. Jiro seemed to have no worries about money as far as I could tell, and at age ninety-something, he wasn’t quite ready to retire either. Something about Jiro, his perspective on- and relationship to his work prompted questions within me, questions about my own career, my relationship to my work, and my dreams for the future. Because as far as I can tell, most of us, myself included, work and save, plan and invest, with the hope and dream of one day retiring so that we no longer have to work. But in Jiro’s case, his work was his dream. It was one and the same. Which really hit a nerve in me and at the same time provided some clarity.

What I realized was that for the ten years prior to buying my first house, despite having a good job that would allow me to do it, my dreams and plans for my future life did not involve doing the work I was doing at the time. Meaning, I was not fully engaged in my career or my life and as a result I was often on the lookout for an escape route – and buying a house would have been a major impediment to escape. The job was a good one, interesting enough, and certainly gave me financial stability, but I believed happiness lived in some other job, at some other firm, pursuing some other career. I became so hungry for change that in 2008 I actually quit my job and moved to France for nine months. Interestingly enough, despite a fantastic, and in many ways, unexpected trip, I came home to find myself in almost exactly the same place. I say almost because while the circumstances, people, and places looked about the same, my perspective had changed.

I returned to my old job, worked with the “old” coworkers, and rented another apartment in the same old city. But having lived across the pond, having had the experiences I had, and having returned, I saw in the end that there actually was no escape. Good news really, because before France I planned and saved my money to escape my life, but after France I planned and saved my money to live more deeply into my life. As a result of this small shift, life and I were much more on the same page. It was in the midst of this shift that I started taking a deeper interest in my work as a financial analyst. I became more curious and engaged, and in turn the work itself grew more engaging and satisfying. A virtuous cycle had begun and continues today. It was when I finally stepped into my life and stopped trying to escape it that a new life, as such, presented itself. Just a year and half after purchasing my first house in Atlanta, a new and exciting career and life opportunity presented itself, and in my dream-city (Asheville), no less.

All this to say, that while planning for retirement, setting goals, and making smart choices are hugely important and necessary components of a satisfying and rewarding retirement, so too is engaging with our current circumstances, in our current jobs, and in our current lives, just as they are today. Thanks Jiro.

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Where is My Money?

It seems there are always stories in the news about the latest scheme that has defrauded many people. Seeking a big return, people give their hard-earned dollars to criminals. The big return is never realized. All the money is lost.

With all the bad guys in our industry, I can understand how someone would look at Parsec with a skeptical eye. I am not going to discuss our performance returns or market strategies in this post. I want to discuss something a little more basic that everyone should consider when interviewing a potential investment advisor: “Where is my money?”

In some cases, the victim gives the criminal money to buy investments. In turn, the fraudsters provide the victim with a statement showing assets purchased with that money. It may contain the names of easily recognizable companies. Without an actual stock certificate behind that piece of paper, the statement is worthless.

At Parsec, we do not take custody of your assets. The assets are held at an independent broker, in your name. We recommend Charles Schwab, Fidelity, and T.D. Ameritrade, all brokers whose names you probably recognize. You will receive a quarterly statement from us that contains performance statistics and other information. You also receive a monthly statement from the independent broker so you know exactly what you own in each investment account.

Furthermore, we do not have the authority to move those assets to an unlike-registered account without your consent. You must sign a letter or form to authorize the movement of securities to unlike-registered accounts, which adds another layer of security.

When assets are held at a broker and registered to you, an independent source tells you what you own. There are no “phantom” assets. Also, giving someone the ability to move assets to accounts not registered in your name can be dangerous if in the wrong hands.

When you select an investment advisor, I hope you will ask this very basic question. You worked hard to accumulate what you have. Don’t let an unscrupulous person take it away from you.

Cristy Freeman, AAMS
Senior Operations Associate

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Leaking Hot Water Heaters

Our Asheville office was built in 1892.  I cannot speak for any upgrades made between 1892 and the mid-1980s, but I would like to think there were a few.  When Parsec moved into this building around 1986, almost the entire building had been remodeled.  It was brought up to what was then considered modern standards.

Over the years, we have experienced lots of challenges with our building.  For example, it is always fun to run network cable.  If you have ever renovated an old house, you can appreciate the architecture – and frustration – of buildings that were never designed for the age of technology.

Our latest adventure involves remodeling the top and main floor restrooms.  It was supposed to be a simple job of replacing fixtures, painting, et cetera.  Unfortunately, we discovered that the hot water heaters (inexplicably located in the ceiling) were leaking and needed replacement.  The contractor then uncovered significant water damage in one of the bathrooms, resulting in an almost complete gut of that room.

The project is now over budget due to these unexpected expenses.  As with everything else in life, the best laid plans are often derailed by things you cannot foresee.  The same principle applies to your financial life.

While we can design a careful plan for any financial goal, things happen.  You could encounter a bear market.  Or the stork can bring an unexpected baby late in life.  Or your college graduate child could move home to live with you, thwarting your plans to downsize your home.

The key to success is to be adaptable.  Realize that you will most likely need to periodically adjust your financial plan.  It will not be static.

We are here to help.  We greatly appreciate it when you tell us of life’s unexpected events.  We are a team, working together to help you meet as many of your financial goals as you can.  We encourage you to call us so we can stay on track.

Cristy Freeman, AAMS
Senior Operations Associate

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The Bucket List

Several years ago, I read a self-help book that promised to help me manage money better.  I do not remember much about the book, not even the title.  I do remember one exercise that was very useful.

I was supposed to create what is now commonly known as a “bucket list.”  I should list all of the things I wanted to do during my lifetime.  It did not matter how long the list was.  When finished with the list, I should then review it and think about how a change in money management practices could help me achieve those goals.  That would help me to set a budget, make more responsible spending decisions, et cetera.  After all, you need money to pay for most of the things you want to do in life.

I found the exercise to be very enlightening.  To my surprise, I saw that most of the items related to travel.  I realized that I needed to do a better job at maintaining an emergency fund and set a formal budget for travel.  I had been tapping the emergency fund whenever I wanted to visit some place new, which is a bad idea.  I setup a direct debit from my checking to my savings account so that savings could be automatic.  This act created a formal budget for both emergency savings and travel.

Today’s list is very different.  My revised list includes completing several projects around the house, paying off my mortgage a few years early, donating more money to my favorite charity, buying a nice road bike, and squirreling away more money for unexpected expenses and retirement.  Sure, there are a few personal goals that are not tied to money; I am not completely shallow.  In balance, the list is much more practical than years ago, when I wanted to see the world.

I still do not want to wake up one day at age 80 and realize all I ever did was work, work, work.  The list can help me stay focused on important things and achieve some of my goals.  Hopefully, I can strike the right balance between the practical (saving for retirement) and the fun (buying that road bike).  I encourage you to take some time to create your own list.

Then, please share your list with your financial advisor.  Goals change over time, so he or she should be aware of what you want from life.  Together, you can develop a financial plan to direct your savings in a manner that will bring you closer to achieving your goals.

Cristy Freeman, AAMS
Senior Operations Associate

 

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Are They Made from Real Girl Scouts?

I spotted a headline online recently announcing that a new flavor of Girl Scout cookies would have a secret ingredient.  I laughed out loud.  I immediately thought of that line from the “Addams Family” movie, delivered so well by Christina Ricci, “Are they made from real Girl Scouts?”  (Look it up on You Tube.) 

As it turns out, the secret ingredient is not Girl Scouts; it is a vitamin cocktail.  I looked at the ingredient label on their website.  Yes, you get a small dose of vitamins when you eat 3 cookies…along with 8 grams of fat.  Am I supposed to feel better when I eat more than 3 cookies, because the cookies are “good for me?”

We all know that, no matter how nutritious new forms of cookies, potato chips, and burgers may claim to be, they cannot replace a balanced diet that contains fruits and vegetables.  Fad diets come and go.  You might lose a few pounds, only to regain them because who can eat mango smoothies all the time? 

You can apply the same principle to your investments.  Chasing the latest fad in investment strategy can be costly.  It is important to be very thoughtful about your asset allocation.  As we have said many times, it is easy to have an allocation of 100 percent equities in an up market.  It is extremely difficult to stick with that strategy when the market drops 500 points in one day. 

Your investment advisor is here to help you.  If you have not taken a look at your asset allocation in awhile, now is a good time to begin the conversation.  Have your goals changed?  Has your family expanded?  Have you started a new business?  All of these events, as well as many others, can prompt a change.  We are here to help, so put down the Girl Scout cookies and give us a call.

Cristy Freeman, AAMS
Senior Operations Associate

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When Things are Going Well, Watch Out!!!

 

Before you cross the street,
take my hand.

Life is what happens to you
while you’re busy making other plans.

 -John Lennon, “Beautiful Boy”

When I built my house, there were certain things I really wanted.  Unfortunately, I did not discover a money tree on the property.  I had to face reality and eliminate some “wants.”  Lately, I have been thinking about tweaking the kitchen a bit.  I would like a new countertop and maybe a tile backsplash. 

Of course, life has a way of altering your plans.  One of my cats fell ill.  In six days, I racked up a sizable bill at the vet’s office.  Sadly, she did not survive.  As devastating as the event was, it would have been even worse if I had not squirreled away some cash in an emergency fund.  Knowing that I was financially able (to a point) to do as much as I could to save her was a relief. 

We have talked many times in this blog about saving for the inevitable rainy day.  It is one of the best financial decisions you can make.  You never know when your car might need repair, when one of your kids (human or furry) might be sick, or when you may lose your job.  These events are stressful.  Not having the funds to pay for them compounds the stress.

Automatically transferring funds to an emergency account is a great way to save.  Banks and brokerage firms will allow you to sweep a pre-determined amount from one account to another.  You determine when you want to transfer to take place. 

Conventional wisdom says to save 6 to 9 months of expenses.  I found it easier to first calculate the large, recurring bills – insurance, property taxes, et cetera.  I then added a certain amount for routine savings and overall maintenance items – upkeep of house and car; vet visits; and so on.  I took that figure and divided it by 12 months.  At every payday, my bank sweeps that sum from my checking account into my savings account.  I cannot access my savings account unless I visit the bank, so I avoid the temptation of withdrawing funds for something silly.

The automatic deduction has been wonderful.  I do not “feel the loss” because the money never stays in my checking account.  My emergency fund has saved me on so many occasions. 

You can setup automatic deductions with your investment accounts too.  I also have a sweep in place for a Roth IRA contribution.  We would be happy to assist you with setting up automatic deductions into your brokerage or other investment accounts.  Please contact your advisor if you are interested.

Cristy Freeman, AAMS
Senior Operations Associate

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I Hate Debt

Don’t we all??  I worry about placing myself in a situation where an unexpected event (car accident, illness, et cetera) could create a financial disaster.  As a result, I carefully monitor the level of both short- and long-term obligations I have. 

With interest rates at historic lows, I decided to take a closer look at refinancing my house.  I have refinanced two times already; should I do it again?  Some of you may be considering the same thing, so I thought I would talk a bit about how I made my decision.

It is important to understand what you are trying to accomplish.  In my regard, I want to pay off my house within 15 years, while keeping the monthly payment at a reasonable level.  Others may want to tap home equity so that they can pay down loans with higher interest rates or do some repairs to the home.  If this is the case with you, calculate in advance how much you need. 

The next step is to take a look at your credit report.  Some people have had some dings from the Great Recession.  Resolve any reporting issues in advance of applying for a loan.  It will save you a lot of aggravation later.

Now, let’s figure out if it is feasible to refinance.  I used the calculators that are available on the bankrate.com website.  Here is a link:  http://www.bankrate.com/calculators.aspx. They have a great mortgage amortization calculator that shows you total interest paid over the life of the loan.  You can also see the impact of extra amounts paid toward principal. 

Using this tool, I entered my current interest rate and loan terms.  I analyzed the impact of the extra payments I have been making toward principal each month.  Then, I entered a 15-year term but with a lower interest rate. 

I compared the total interest expense with my current rate vs. a lower estimated rate.  The difference in total interest paid for my current loan vs. the lower interest rate loan is about $5,000, as long as I continue to make extra payments toward principal.  Closing costs and refinancing fees add up, so I suspect that net difference between the two loans would be much lower. 

As long as I continue making extra payments toward principal, I will accomplish my goal of paying off the loan within 15 years.  The lower interest rate loan would also require a larger monthly payment.  I am not comfortable with that.  With my current loan, I can keep my lower payment amount, giving me some security in the event of a serious financial crunch. 

Lower interest rates can be very enticing.  In the long run, though, you could sacrifice financial peace-of-mind just to save a few dollars.  A careful analysis of your personal situation can help you make the right decision.  If all of this seems overwhelming, we are always here to help.  Your financial advisor is just a phone call away.

Cristy Freeman, AAMS
Senior Operations Associate

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Stock Market Volatility

It’s been a wild week for stocks.  Not only are stocks down roughly 9% from the end of July as of the close of market August 11, but the pathway down has been marked by extreme volatility.  This month we have experienced six of the 200 most volatile days of the past 50 years.  We have had daily losses of 2.5 – 6.6% and have had daily gains of greater than 4.5%.  These losses were kick started with the political wrangling of the debt ceiling, and were intensified with the ensuingU.S.debt rating downgrade by S&P.  The market losses and volatility are leaving many investors uncertain about the state of the economy and their portfolios.  We offer three scenarios to consider – base-case, worst-case and best-case – and their potential effects on the stock market.

The base-case scenario is the one that we consider most probable, and that is continued slow-growth in the near-term, with eventual normal growth resuming in the long-term.  We’ve seen two quarters of slow growth already, 0.4% for the first quarter of 2011 and 1.3% growth in the second quarter of 2011.  Slow growth quarters are historically not useful predictors of recessions.  Given our fragile economy, such slowing may induce the Federal Reserve to engage in more economic-stimulating measures.  We recognize that an offset to these growth stimulators are high, though slightly improving, unemployment, as well as global political and fiscal uncertainty.

Despite a slow-growth economy, corporate earnings are at an all time high, with expectations that S&P 500 earnings this year will be $100 per share.  This puts the stock market at about an 11.5 price-to-earnings ratio, far below its historical average of 15.  For this reason, we don’t see a catalyst for a further, significant, sustained drop in stocks.

The worst-case scenario is another recession.  Reasons for this possibility are well known:  tax uncertainty, high unemployment, nervous consumers.  General panic is not known to cause recessions, though some fear this could become a self-fulfilling prophecy.  Panic does indeed affect stocks however, which is what we are seeing currently.  Stocks are known to be a leading indicator of recessions.  When recessions do occur, the median historical market peak is about 7 months prior to the start of the recession.  But typically once you know you’re in a recession, it’s actually time to buy stocks.  In fact, the recessions of 1953 and 1990 saw stocks go straight up.

The best-case scenario is the resumption of robust growth.  The record corporate earnings may spur business and investor confidence.  There is said to be pent-up consumer demand waiting to be unleashed at the suggestion that theU.S.is still on the road to recovery.  Too, oil prices have come down considerably.  You may recall that just a few months ago high oil prices were a huge concern for the economy, as this necessary product would hamper other consumer spending.  And though theU.S.debt downgrade has spooked the stock market,U.S.treasuries, the very debt that was downgraded, have actually rallied.  This is because, in the end, investors still believe in the strength of theUnited States.

Our Chief Economist, Jim Smith, predicts year-over-year GDP growth of 1.9% for 2011 and 3.9% for 2012.  Whatever the economic outcome over the next few months, we must accept that our economy is a cyclical one, in which we experience recessions and expansions.  Long-term growth of GDP and corporate earnings leads to long-term appreciation of stocks.  Being a buyer and holder of equities gives you the ability to participate in this long-term growth.

We believe that to be a successful investor in stocks you have to accept the volatility, and the uncertainty that surrounds it.  Corrections and bear markets are part of the territory.  As an investor, it’s tempting to believe that you have the ability to guess the timing and direction of stocks, but attempting to do so is hazardous to your financial health.

Harli L. Palme, CFP®

Financial Advisor

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I Bonds Revisited

With interest rates remaining at very low levels, there are few options for earning any sort of a return on cash balances.

 Current yields:

Schwab Bank High Yield Savings                    0.40%

1 Year CD National Average                            0.46%

5 Year Treasury Note                                   1.85%

5 Year TIPS Note                                         -0.32% (plus inflation)

10 Year TIPS Note                                        0.70% (plus inflation)

Series I Savings Bonds                                4.60% (for the next 6 months)

One thing to consider for smaller balances is Series I Savings Bonds (“I Bonds”) issued by the U.S. Government.  The new rates came out May 1, and I was surprised to see that I Bonds are currently earning an annual rate of 4.60% for the next 6 months.  Please refer to my earlier blog posting “How to Make a Little More Money on Your Excess Cash (with a Bit of Work on Your Part)” or visit www.treasurydirect.gov for a more detailed description of I Bond features.

The earnings rate for I Bonds is a combination of a fixed rate, which applies for the life of the bond, and an inflation rate that changes semi-annually (think “I” as in “inflation”). The 4.60% earnings rate for I Bonds purchased through October 31, 2011 will apply for their first six months after issuance. I Bonds cannot be redeemed for 12 months after issuance, and there is a penalty of 3 months’ interest if they are redeemed before 5 years.  Purchases are limited to $5,000 per Social Security Number in electronic bonds and $5,000 in paper bonds, so a couple could purchase up to $20,000 annually.

If you act by October 31, you are in effect creating a 1 year CD with a yield of at least 2.30%.  For the next six months, I Bonds will earn interest at an annual rate of 4.60%.  The inflation rate will then reset.  Since the fixed rate is zero for the life of the bond, the earnings rate for the next 6 months will be the inflation rate.  If the semi-annual inflation rate stays the same at 2.30%, the earnings rate for the next 6 months will also be an annual rate of 4.60%.  In this case, you would earn about 3.83% for 1 year after factoring in the penalty for early redemption.  Even if the inflation for the second 6 months is zero, which is unlikely, you would earn a return of 2.30% over the next year versus 0.46% in a bank CD.

What if there is an emergency and you need the money?  Since you cannot redeem the bonds for 12 months, you need to leave some liquid cash on hand.  After 12 months, a penalty of 3 months’ interest is deducted from the redemption value.  But even after paying the penalty you would still be ahead of a bank CD, and considerably ahead if the change in inflation continues at its current level. In addition, I Bond interest is exempt from State income taxes and is tax-deferred until you redeem the bond.  Also, if you buy the bonds on the last day of the month, you still get interest for the full month.

All I Bonds have the same inflation component.  The only difference is in the fixed rate that each bond offers.  If the fixed rate increases significantly in the future, just redeem some bonds and pay the penalty.  Then buy some new bonds with the higher fixed rate (but remember the $10,000 annual limit on purchases for each Social Security Number).  After 5 years, there is no penalty on redemption. 

Another possibility is a short-term, high quality bond fund.  However, these do carry some interest rate risk.  For example, a popular short-term bond fund has a current yield of 1.41% and an effective duration of 1.85 years.  This means that if interest rates were to suddenly move up by 1%, the value of the fund would be expected to fall by about 1.85%.  This would wipe out over a year’s worth of interest, making it a less attractive alternative for cash balances.

Bill Hansen, CFA

May 13, 2011

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What Does “Fee Only” Mean?

Recently, I experienced the joy of shopping for a car.  I visited a dealership from whom I purchased my last vehicle.  It was an “enlightening” experience. 

By the time the third sales associate walked into the office, I was more than ready to leave.  He attempted to counsel this ignorant girl about the virtues of a lease.  Surely, I could see how fabulous a lease was, how practical it was?  Then, he made a big mistake.  He admitted that the dealership received better incentives for leasing vehicles than selling them outright.  So, whose best interests did he really have at heart? 

When looking at financial advisors, people sometimes ask the same question.  Parsec is a “fee-only” advisor.  That term can be a bit confusing.  Any phrase with the word “fee” in it has negative connotations. 

Our firm’s income is derived from the investment counsel fees we charge.  We do not receive commissions from the trades we place.  We derive no income from recommending a particular fund or other investment.  We do not receive bonuses for referring clients to a particular custodian. 

As a result, a fee-only advisor has the ability to provide impartial advice.  This is reassuring as we learn more every day about unscrupulous brokers pushing bad investments, solely for the big commissions received.

If you are not currently a Parsec client, we encourage you to take a closer look at fee-only investment advisors.  And, if you are a client, thank you for your continued faith in us!

Cristy Freeman, AAMS
Senior Operations Associate

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