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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Infrastructure Spending

The next driver of economic growth and company fundamentals?

Now that the U.S. presidential election is behind us and a big unknown has become known, stocks are responding favorably.  While equities are basking in a bit of short-term certainty following the November 8th election results, key questions remain.  One of the most significant relates to future government spending, and specifically, infrastructure.  After years of unprecedented monetary accommodation that may have artificially inflated equity prices, increased investments in our nation’s roads, bridges, and airports could provide a significant (and real) boost to corporate earnings and the economy.

Regardless of your presidential preference, both Clinton and Trump promised to increase infrastructure spending on the campaign trail.  Hillary planned to spend about $275 billion over five years while Donald claimed he would double her target.  Overall U.S. infrastructure recently received a grade of D+ from the American Society of Civil Engineers (ASCE), suggesting this is one instance in which competitive campaign rhetoric may work in our favor.

Most experts agree that the U.S. has underinvested in infrastructure for nearly three decades.  As a result, many of our bridges, roads, public buildings, and ports have not had significant upgrades in 50 to 100 years.  Government officials are well aware of the problem, but lack of bipartisanship has been a hurdle to distributing needed funds to critical projects.  While historically divided government has been more favorable for stocks, in this case, an all-Republican government may enable the passage of much needed infrastructure spending bills.

Research suggests that over the long-term, every $1 spent on infrastructure has the potential to boost economic activity by $3.  This is because updated roads, bridges, and buildings improve productivity and drive efficiencies.  Increased spending on these projects would also provide new jobs, further benefiting GDP growth.

While most focus on the economic gains, modernizing key infrastructure facilities may have the added benefit of reducing the harmful greenhouse gases that contribute to climate change.  According to a report by the Global Commission on the Economy and Climate, more than 60% of the world’s greenhouse gases are associated with old and ailing power plants, roads, buildings, and sanitation facilities, among others.

Finally, increased infrastructure spending may be the balm we need to escape from years of easy monetary policy that has inflated equity prices.  Stock valuations are trading above their long-term historical averages despite multiple quarters of weak sales and earnings growth.  Now with record-low interest rates poised to go higher and few tools left in the Federal Reserve’s tool box, a shift towards new fiscal policies that increase productivity and encourage corporations to invest – such as infrastructure spending – would provide companies with real sales and earnings drivers.  This in turn would help bridge the gap between currently lackluster fundamentals and elevated security prices.

To be sure, there are potential negatives associated with increased fiscal spending, including currently large labor shortages in the construction industry, dependence on prudent government spending, and regulatory red tape.  Likewise, increased infrastructure spending could add to an already elevated federal budget deficit.  However, taken altogether the positives appear to outweigh the negatives.  And new fiscal spending could be just what we need to keep the economy on track while supporting stock prices.

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Parsec’s Holiday Schedule


The holiday season is quickly approaching! While we plan to be here for all your year-end needs, we also look forward to spending a little extra time with friends and family. So that we can enjoy time with loved ones, our office will be closed for certain holidays. Please review our schedule below so that you can plan office visits and gifting request accordingly.

  • Thanksgiving: Our office will be closed on Thursday, November 24 and Friday, November 25, 2016.
  • Christmas: Our office will close at 1:00 p.m. on Friday, December 23 and all day on Monday, December 26 in observance of the Christmas holiday.
  • New Year’s Day: Our office will be closed on Monday, January 2, 2017.

The closures apply to all offices located in Asheville, Charlotte, Southern Pines, and Tryon.  Some employees may be planning to take a little extra time off around the holidays, but someone from your advisory team will always be here to help you!

For a little fun reading this season, make sure to check out our new holiday edition newsletter. The cranberry sauce looks tasty! We hope you enjoy time with your loved ones and have a safe, happy holiday season.

Happy Holidays!

ashley_woodringb

Ashley Gragtmans, CFP®

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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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Land Trust

Individuals who are large landowners often face challenges in planning their estates. The land may have a value that causes the estate to exceed the federal estate tax exclusion limit. Currently the limit is $5,450,000 per person. In many cases, the landowner may not want the land to be sold to cover estate taxes, but would rather see the land continue to be used as a farm, ranch, or preserved for its natural beauty. The landowner may want to consider a conservation easement.

A conservation easement is a voluntary legal agreement that benefits landowners and the public, as it protects land while leaving it in private ownership. The uses of the property are then limited to those uses that are consistent with the landowner’s and the conservation easement holder’s objectives. Conservation easements are individually tailored, but in general they benefit landowners by protecting the features of the property they wish to preserve. They potentially receive significant tax relief, and they maintain ownership of the land. The land provides public benefits by conserving open lands, farms, forests, and other natural resources.

The tax benefit to the landowner is realized at the time the conservation easement is placed on the land. The landowner basically sells the right to develop the land to a land trust. The value of the land for property tax purposes becomes the much lower highest and best use in conservation value. The conservation easement rides with the deed of the land, therefore the intent of the original owner for the use of the land is protected in perpetuity.

For our clients in southeastern North Carolina, the offices of Sandhills Area Land Trust (SALT) are located on Southwest Broad Street in Southern Pines, next door to Parsec’s Southern Pines office. They are a community-based, 501(c)(3) non-profit organization that works to preserve and protect land and its environs in Moore, Richmond, Scotland, Hoke, Cumberland, and Harnett counties.

SALT was founded in 1991. Since that time, it has worked with private landowners to negotiate conservation easements on their property, and more than 13,000 acres of working farms, water supplies, endangered ecosystems, and urban-space have been permanently protected. The North Carolina Sandhills is a region of rolling hills with sandy soil located between the Piedmont and the Coastal Plain. This area is home to the largest contiguous stands of long leaf pine forest in North Carolina, and many wetlands and dozens of rare plants and animals, which all need to be protected. With this goal in mind, SALT cultivates partnerships among landowners, local businesses and government agencies.

If you have any questions pertaining to the use of land conservation easements in your estate planning process, please contact your Parsec Financial Advisor.

Wendy S. Beaver, AAMS®

 

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What’s Up (or down) with Inflation?

Inflation isn’t exactly a hot topic these days, although the lack of it might be.  Despite aggressive monetary policy by the U.S. Federal Reserve (Fed) since the Financial Crisis, prices are relatively flat.  Along with increased money supply, a generally healthy economy and an improving employment picture would suggest higher prices.  So why is inflation depressed?

Inflation is defined as a sustained increase in the general level of prices for goods and services.  Basically, inflation happens when too much money is chasing too few goods or services.  While the Fed’s bond buying operations since 2009 have dramatically increased the amount of money in circulation, most of it has not reached consumers who would be most likely to spend it.  Instead, much of the cash generated by the Fed remains with large commercial banks that are unwilling to lend.

Steep losses tied to easy lending standards caused bankers to clamp down on loan issuance after the housing bubble burst.  Credit standards are finally starting to loosen, but many banks remain conservative when it comes to issuing new loans.

Another factor that may be preventing more money from reaching consumers is tied to legislation introduced in 2008 that allows the Fed to pay interest on excess bank reserves.  Historically, bank reserves held at the Fed did not earn interest.  A lack of return on reserves motivated banks to put their excess capital to work by issuing new loans.  However, now that banks can earn a very safe return on their reserves with the Fed, they are lending less.  While historically there has been a strong correlation between the US monetary base and inflation, that relationship has weakened following the new legislation.  From 2005 to 2015 while the monetary base rose at an annual rate of 17.8%, inflation expanded by only 1.9%.

But banks aren’t the whole picture.  Oil prices, which comprise roughly 8% of the Consumer Price Index (CPI), have plunged since July 2014.  Excluding oil and food, core CPI was actually up about 2.2% year-over-year in July.  But this is still below the long-term inflation average of 3.8% since the end of World War II.

Many argue that recently healthy jobs gains should fuel demand for goods and services and thus push prices higher.  While it’s true that the U.S. has added an average of 3 million jobs in each the last two years, consumers have only recently started to loosen their purse strings.  Since the Financial Crisis, many have instead focused on saving and paying down debt.  At the same time, flat wage growth has hindered spending.  But this is starting to reverse and the combination of high employment levels and now rising wages should support consumer spending and in turn, could add to upward pressure on the inflation rate. Of course, for inflation to pick up substantially would require accommodating increases in the money supply from the Federal Open Market Committee.

Finally, weaker global economic growth and a strong U.S. dollar have been headwinds for domestic inflation.  Our economy is one of the strongest in the world and the U.S. dollar has appreciated compared to many other currencies as a result.  This means that foreign currencies have declined relative to the U.S. dollar and the prices of imported goods are getting cheaper.  In order to compete with foreign goods, domestic companies have generally lowered their prices, putting downward pressure on inflation.  This phenomenon is known as “importing inflation”.

While there may be other factors responsible for low inflation, it’s worth noting that the current environment is generally positive for consumers and investors.  Low, but steady inflation levels – all else being equal – means lower grocery and gas bills, as well as higher real investment returns.  Inflation is often one of the biggest headwinds to achieving adequate portfolio returns.  Rising prices can eat into an investor’s real return and delay the achievement of financial goals.  But in this low-yield environment, low inflation is a benefit to investment portfolios which will have a better chance of delivering returns that outpace prices for goods and services.

To be sure, the current low-inflation environment may not last.  As with many trends, inflation may return to average or even above-average levels in the future.  We are starting to see wage income rise, consumers have increased their spending levels recently, and oil prices have rebounded year-to-date.  Rising inflation can erode portfolio returns and spending power, but modest, steady price gains are also associated with healthy economic growth in which consumers are spending, businesses have pricing power, and wages are growing.

Carrie A. Tallman, CFA
Director of Research

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Interesting Tidbit On Unclaimed Property

More people than you might expect are owed money and don’t even know it. Many different types of assets are escheated to the state for a variety of reasons. An individual might move – perhaps several times – and forget to update his or her address with all vendors. Funds may then be mailed to a previous address and subsequently be returned to the sender. The company will usually attempt to locate the individual; however, unclaimed funds will eventually be surrendered to the state. Alternatively, when family members pass away, assets are often left unclaimed or not cashed, so they are returned.

I have used the below website many times while working with clients or estates. Take a couple of minutes to check it yourself. Maybe you will find only enough extra cash for an ice cream cone, or perhaps it will be enough for a vacation. It is very easy to claim your cash.

https://www.nctreasurer.com/Claim-Your-Cash/Claim-Your-NC_Cash/Pages/Search.aspx

Vicki Oxner, RP®
Receptionist

Vicki Oxner - Parsec Financial Photo Shoot

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Market Update Through 06/30/2016

as of June 30, 2016
Total Return
Index 12 months YTD QTD June
Stocks
Russell 3000 2.14% 3.62% 2.63% 0.21%
S&P 500 3.99% 3.84% 2.46% 0.26%
DJ Industrial Average 4.50% 4.31% 2.07% 0.95%
Nasdaq Composite -1.68% -2.66% -0.23% -2.06%
Russell 2000 -6.73% 2.22% 3.79% -0.06%
MSCI EAFE Index -10.16% -4.42% -1.46% -3.36%
MSCI Emerging Markets -12.05% 6.41% 0.66% 4.00%
Bonds
Barclays US Aggregate 6.00% 5.31% 2.21% 1.80%
Barclays Intermediate US Gov/Credit 4.33% 4.07% 1.59% 1.43%
Barclays Municipal 7.65% 4.33% 2.61% 1.59%
Current Prior QTR
Commodity/Currency Level Level
Crude Oil $48.33 $38.34
Natural Gas $2.92 $1.96
Gold $1,320.60 $1,235.60
Euro $1.1110 $1.1396
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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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Implications for “Brexit”

Investors received surprising news this morning, as the United Kingdom (U.K.) voted to leave the European Union (EU).  While markets will no doubt experience increased volatility in the coming weeks, longer-term, we believe the negative impact of “Brexit” will be largely contained to Great Britain and Europe.

Trade accounts for about 40% of the U.K.’s gross domestic product (GDP), with most of those exports and imports tied to EU partners.  As a result of the recent vote, Britain is likely to see higher trade tariffs from the EU and more trade staying within continental Europe’s borders.  Both of these shifts could weigh significantly on Britain’s economic growth in the mid-term and would likely weigh on EU growth as well.  One positive is that the U.K. never adopted the Euro, choosing instead to maintain the British Pound as its currency.  This is should make an exit from the EU smoother and slightly less costly than if they had converted to the Euro, and suggests it could be less detrimental than if Greece had left.

While the U.K. is likely to experience the largest negative impact by leaving the EU, continental Europe is also at risk given its relatively fragile economic expansion following the Financial Crisis of 2008-2009.  From 2010 through 2015, EU GDP has grown at an average rate of just 1.2% compared to U.K. GDP growth of 2.0%.  Thus any major shock, such as one of its strongest members leaving the Block, could derail those modest growth levels.

Turning to the U.S., Europe is one of our larger trade partners with about 16% of total U.S. exports going to the Block last year.  This is not an insignificant number, and will likely weigh on U.S. GDP growth in the near-term.  However, the U.S. consumer remains the largest driver of our economy, accounting for about two-thirds of GDP growth.  Following the Financial Crisis of 2008-2009, the U.S. consumer has gotten healthier, supported by an expanding housing market, strong jobs growth, and deleveraging.  A resilient consumer and relatively better economic growth compared to the rest of the world should position us to better weather the recent developments in Europe.

To be sure, today’s news surprised investors and markets alike.  Although the near-term economic impact will likely be limited to the U.K. and Europe, the vote has broader implications for the future of the European Union.  While we can’t predict the longer-term repercussions of today’s historical vote, we can assure you of the benefits of staying invested in a diversified portfolio over the long-term.  Markets will experience sharp corrections, as well as strong rallies, yet clients who remain invested across asset classes throughout the market cycle have a better chance of reaching their financial goals.  With this perspective in mind, market declines like the one we’re seeing today simply represent an excellent opportunity to rebalance your portfolio at more attractive valuations levels.

 

Thank you,

The Parsec Team

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