It’s All Relative

I see that one of our recent blogs addressed the change of benchmarks on our client quarterly reports. I thought this would be an appropriate time to be a major buzz kill and hit you up with all kinds of technical mumbo-jumbo about what makes a good benchmark. I’ll try to make it light and amusing (I don’t know about you, but I’m already laughing).

Fortunately, I just finished reading the section on benchmarks in my CFA study material (yes, I’m still working my way through those exams – this marks year MMLXXVII in my progress…). The authors of my study guide suggest the acronym, “SAMURAI” to help you remember the seven properties of a good benchmark. (For me, “samurai” brings to mind hara-kiri, a form of Japanese ritual suicide by disembowelment, which is what I feel like doing every time I have to sit down and study this stuff.)

Before I continue, I just want to point out that the whole reason for even having a benchmark is so that you can compare your portfolio’s performance to something similar. It’s kind of like the investment management version of a high school reunion – you thought you were pretty successful until you found out that nerdy guy from homeroom had invented some kind of social networking site…you thought you were out of shape until you saw what happened to the head cheerleader…

Back to the acronym. A valid benchmark should be specified in advance, appropriate, measurable, unambiguous, reflective of the manager’s current investment opinions, accountable, and investable (I’d like to mention that MS Word doesn’t recognize the word “investable” and instead recommends “ingestible.” Mmm, benchmark…).

So, the manager should choose the benchmark at the beginning of the reporting period (you know, so she doesn’t wait until afterwards and pick a benchmark that underperformed the portfolio, just to make her look good) and it should be comparable to the portfolio in terms of style (i.e., you wouldn’t want to compare a portfolio of large cap domestic stocks to a small cap emerging market index). The benchmark should have a return that is measurable and a value that is frequently updated, with clearly identified securities whose weights are known. The manager should have current investment knowledge of the securities in the benchmark, and be familiar with the benchmark’s performance, with active management accounting for differences in portfolio construction (and performance) versus the benchmark. Lastly, an investor must be able to replicate the benchmark by buying securities that mimic its composition (or be able to eat it, according to Microsoft).

If you scroll down a bit and read Bill’s blog about the benchmarks displayed on quarterly reports, you’ll notice that we’re specifying the new benchmarks in advance, and we’re doing so because they better reflect the composition of our clients’ portfolios, compared to the old benchmarks. In addition, they’re all investable (you can purchase ETFs that mimic the indices mentioned). But I wouldn’t try to eat them, if I were you.

Sarah DerGarabedian, Research and Trading Associate

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Weekly Market Update through 2/4/11

as of February 4, 2011        
  Total Return
Index 12 months YTD QTD MTD
Stocks        
Russell 3000 27.77% 4.23% 4.23% 2.00%
S&P 500 25.79% 4.38% 4.38% 1.96%
DJ Industrial Average 24.15% 4.61% 4.61% 1.71%
Nasdaq Composite 31.67% 4.46% 4.46% 2.60%
Russell 2000 37.36% 2.16% 2.16% 2.43%
EAFE Index* 15.78% 3.93% 3.93% 1.60%
*EAFE index does not include dividends.        
         
Bonds        
Barclays US Aggregate 3.90% -0.90% NA -1.02%
Barclays Intermediate US Gov/Credit 3.75% -0.57% NA -0.96%
Barclays Municipal  0.15% -1.20% NA -0.46%
         
    Current   Prior
Commodity/Currency   Level   Level
         
Crude Oil    $88.78    $91.65
Natural Gas    $4.24    $4.32
Gold    $1,351.00    $1,330.30
Euro    $1.35    $1.36
         
         
RECOVERY!        
  Since 3/09/09      
Index  Total Return TR annualized    
Stocks        
Russell 3000 107.83% 46.68%    
S&P 500 101.53% 44.34%    
DJ Industrial Average 94.65% 41.74%    
Nasdaq Composite 122.46% 52.00%    
Russell 2000 139.10% 57.85%    
EAFE Index* 89.11% 39.61%    
*EAFE index does not include dividends.        

 

Mark A. Lewis

Research & Trading Associate

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An Introduction to Continuing Care Retirement Communities

If you are around people who are familiar with Continuing Care Retirement Communities (CCRCs), you are likely to hear the statement, “If you have seen one CCRC, you have seen one CCRC”…acknowledging the variation that exists among the organizations that carry that label. An in-depth familiarity with a given CCRC may provide no particular insight into another CCRC, even if it is in the same town.

Any entity that provides facilities and appropriate levels of care covering independent living, assisted living, and skilled care and controlled by a central management structure can be designated as a CCRC. What the differences mean to a consumer is, in part, that the service offered as part of the basic fee structure of one CCRC may be available for a fee at another CCRC and may not be available at all at a third. The key to all CCRCs is the continuity of care that gives a resident access to living arrangements that cover the three levels listed above.

The independent living option has a housing unit as a requirement and frequently adds a number of amenities. These amenities can be so attractive that there are residents who enter well before retirement. They have chosen the move to relieve themselves of the responsibility for home maintenance and/or to take advantage of the extras provided. The extras can include access to exercise facilities (gym, pool, tennis court, even golf courses), regular entertainment on the campus, organized excursions…anything that the management designs.

A second kind living arrangements is the assisted living level. This level is available to those who need assistance with the activities of daily living. A resident may have an opportunity to be on this level or a higher level of care on a temporary basis when recovering from an accident, an illness or a medical procedure. It is also an option when the resident needs ongoing assistance with bathing, eating, mobility or any of the other activities of daily living.

For those who need more assistance, there is the level of skilled nursing care. At this level, medication can be administered and special medical needs met. It is important to know that it is not for the acutely ill. It is not a substitute for a hospital. Further, the degree to which a facility is prepared to deal with dementia is one of the variations among CCRCs.

Two of the benefits cited by those who have chosen a CCRC over other options are 1) the knowledge that they have made a move that should allow them to avoid some of the uncertainty that comes with varying needs for living options and 2) the knowledge for a couple that, should one of them require a higher level of care than the other, they would not have to be separated by a significant distance.

There is no question that CCRCs meet a need, but they are not for everyone. Even for those who can use the services of a CCRC, not every CCRC matches a specific need. Any mention of a CCRC is incomplete without mention of the need to read contracts and have them reviewed by a legal and a financial advisor.

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Where did the S & P 500 on my quarterly report go?

Starting in 2011, we are changing two of the equity benchmarks on our quarterly reports.  We are removing the S & P 500 and Russell 2000, and replacing them with the Russell 3000.  We will continue to display the MSCI EAFE (Europe, Australasia, and Far East) index of international companies. 

What’s the difference?  The S & P 500 index consists of the 500 largest U.S. companies by market capitalization.  Market cap is a measure of company size; it is simply the number of shares outstanding times the price per share. Since our client portfolios include small and mid-sized companies for diversification purposes, we believe the Russell 3000 is a better benchmark to use.  It will make it easier for our clients to make an apples-to-apples comparison at a glance.

The Russell 3000 is a broader market index consisting of the 3000 largest companies in the U.S. by market capitalization.  It is more reflective of the total stock market rather than only large companies.  The Russell 3000 is also what we use internally for portfolio management, including setting target weightings for various economic sectors and company sizes.  We believe it is logical for our performance reporting to reflect the composition of the index that we use when managing client assets. 

Client portfolio returns are best compared to a blend of the Russell 3000 for U.S. companies and the EAFE for the portion of the portfolio invested internationally.

We have also changed our fixed income benchmark from the Barclays Aggregate Bond Index to the Barclay Intermediate Government /Credit Index.  We believe this is a better reflection of our client’s fixed income holdings with regard to the maturities and types of securities that we purchase.  For example, the Intermediate Government/Credit Index does not include mortgage-backed securities, which we typically do not invest in.

 

Bill Hansen, CFA

Managing Partner

 

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Weekly Market Update through 1/28/11

as of January 28, 2011        
  Total Return
Index 12 months YTD QTD MTD
Stocks        
Russell 3000 21.73% 1.41% 1.41% 1.41%
S&P 500 20.07% 1.59% 1.59% 1.59%
DJ Industrial Average 20.02% 2.26% 2.26% 2.26%
Nasdaq Composite 24.61% 1.31% 1.31% 1.31%
Russell 2000 29.13% -1.01% -1.01% -1.01%
EAFE Index* 11.71% 2.20% 2.20% 2.20%
*EAFE index does not include dividends.        
         
Bonds        
Barclays US Aggregate 5.48% 0.27% NA 0.27%
Barclays Intermediate US Gov/Credit 5.19% 0.51% NA 0.51%
Barclays Municipal  1.12% -0.75% NA -0.75%
         
    Current   Prior
Commodity/Currency   Level   Level
         
Crude Oil    $91.65    $87.76
Natural Gas    $4.32    $4.68
Gold    $1,330.30    $1,344.90
Euro    $1.36    $1.36
         
         
RECOVERY!        
  Since 3/09/09      
Index  Total Return TR annualized    
Stocks        
Russell 3000 102.20% 45.13%    
S&P 500 96.15% 42.82%    
DJ Industrial Average 90.28% 40.54%    
Nasdaq Composite 115.76% 50.20%    
Russell 2000 131.69% 55.96%    
EAFE Index* 85.96% 38.84%    
*EAFE index does not include dividends.        

 

Mark A. Lewis

Research & Trading Associate

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An Unexpected Windfall

At the start of every new year people make resolutions to lose weight, alter bad habits, or save more money.  While I cannot help you with some of those issues, I can offer a little advice on saving money.

For 2011, the IRS has reduced the employee-paid portion of the Social Security tax from 6.2 to 4.2 percent.  While that may not seem like a large amount of money on a per-paycheck basis, it can add up to a nice sum for the year.  If you earn the maximum Social Security wage limit of $106,800, 2 percent represents $2,136.

Before you grow accustomed to having a few extra dollars in your paycheck, I recommend you implement a plan now.  Here are a few suggestions:

  • Deposit the funds into your emergency savings account.  Everyone needs an emergency savings account.  Opinions vary about the amount.  Some suggest 3 months’ worth of routine expenses.  Other say 6 to 9 months are needed.  
  • If your emergency savings account is well funded, apply the dollars to debt.  You could apply the extra money toward the smallest debt, if you want to experience the rush of the early payoff.  However, you will be financially better off if you to apply it to the account with the highest interest rate.  Reducing debt levels is always a great idea.
  • Fund a Roth IRA if you qualify.  If not, apply the savings to another retirement vehicle, such as your company’s 401(k) or a traditional IRA account.

I recommend that you use automatic bank drafts for any of the above options.  It is a simple way to transfer the funds from your account before you can spend them.  Parsec can assist you with setting up an automatic transfer into your brokerage accounts.

I hope you have a safe, healthy new year and wish you the best of luck in accomplishing your goals!

Cristy Freeman, AAMS
Senior Operations Associate

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There are No Loans for Retirement

In preparing for a child’s college education, parent’s can plan for the future expense in one of three ways: hope for scholarships, pay for part of it, or pay for all of it.

As I watched my 4 year old daughter play her favorite game over the snowy holiday, I began to consider what her future holds.  I can’t help but chuckle at some of the sayings she comes up with. Some of her other favorite games include tea party and art, though I must admit, it gets a little old when she plays “teacher” and is in charge of the crayons.  After all, one can only find so many uses for a single color. 

While I can’t be sure what she’ll choose as a career, a dentist, teacher, pre-school director, or stay-at-home-mom, my wife and I have started saving for her future through the North Carolina 529 college savings program and that is what brings me to this writing.  College is hopefully in her future, but if not we have the option of changing who the beneficiary is on the account.  We are comforted in the knowledge that if she chooses not to further her education, the funds can be used to pay for another member of the family (including a cousin).  Also, saving with the benefit of a tax deduction is a nice feature.  When considering what savings program to choose, an investor basically has three philosophical options:

  • Do nothing and hope for scholarships
  • Save for part of the expense
  • Save for, or pay for, all of the expense

 We chose to save for part of the expense.  We got a bit of a late start on having a family so our daughter will be entering college right about the same time that we are going to be slowing down for retirement.  We are faced with an interesting dilemma: We can sacrifice our future savings goals so that she can graduate college with little to no debt, or we can allow her to grow and accept responsibility for her own education through loans and work study programs.  Our philosophy for her education is best described as follows: we will save what we think we can afford and if we are in a position to help by paying down or paying off student loans when she graduates, then we will.  But one thing is for sure: there are no loans for retirement.

Neal Nolan, CFP(R)

Financial Advisor

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Weekly Market Update through 1/21/11

as of January 21, 2011        
  Total Return
Index 12 months YTD QTD MTD
Stocks        
Russell 3000 18.53% 1.72% 1.72% 1.72%
S&P 500 17.27% 2.13% 2.13% 2.13%
DJ Industrial Average 17.38% 2.68% 2.68% 2.68%
Nasdaq Composite 19.96% 1.40% 1.40% 1.40%
Russell 2000 24.57% -1.31% -1.31% -1.31%
EAFE Index* 7.12% 1.83% 1.83% 1.83%
*EAFE index does not include dividends.        
         
Bonds        
Barclays US Aggregate 4.84% -0.12% NA -0.12%
Barclays Intermediate US Gov/Credit 4.58% 0.05% NA 0.05%
Barclays Municipal  0.13% -1.56% NA -1.56%
         
    Current   Prior
Commodity/Currency   Level   Level
         
Crude Oil    $87.76    $92.25
Natural Gas    $4.68    $4.56
Gold    $1,344.90    $1,419.00
Euro    $1.36    $1.33
         
         
RECOVERY!        
  Since 3/09/09      
Index  Total Return TR annualized    
Stocks        
Russell 3000 102.83% 45.93%    
S&P 500 97.20% 43.75%    
DJ Industrial Average 91.06% 41.34%    
Nasdaq Composite 115.95% 50.90%    
Russell 2000 130.97% 56.42%    
EAFE Index* 85.28% 39.03%    
*EAFE index does not include dividends.        

 

Mark A. Lewis

Research & Trading Associate

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2010 Roth IRA and Regular IRA Contributions

The deadline to contribute to your Roth or Traditional IRA for the tax year 2010 is April 15, 2011. You can contribute $5,000 or the amount of earned income for the year, whichever is less. If you’re over 50, you can contribute an additional $1,000.

Your income determines if you qualify for a tax-deductible Traditional IRA contribution, or if you qualify to make a Roth IRA contribution.

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
Single, participates in an employer-sponsored retirement plan      $56,000 – $66,000
Married, participates in an employer-sponsored retirement plan      $89,000 – $109,000
Married, your spouse participates in an employer-sponsored retirement plan, but you do not.  $167,000 – $177,000
 
Do you qualify to contribute to a Roth IRA?
Single $105,000 – $120,000
Married, filing jointly     $167,000 – $177,000

 

Harli L. Palme, CFP®

Financial Advisor

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Benchmark Returns – 2010

as of December 31, 2010      
  Total Return
Index 2010 4th QTR December
Stocks      
Russell 3000 16.93% 11.59% 6.78%
S&P 500 15.06% 10.76% 6.68%
DJ Industrial Average 14.06% 8.04% 5.33%
Nasdaq Composite 18.15% 12.34% 6.29%
Russell 2000 26.86% 16.25% 7.94%
EAFE Index* 4.90% 6.23% 8.02%
*EAFE index does not include dividends.      
       
Bonds      
Barclays US Aggregate 6.54% NA -1.08%
Barclays Intermediate US Gov/Credit 5.89% NA -1.25%
Barclays Municipal  2.38% NA -1.94%
       
  Current   Prior
Commodity/Currency Level   Level
       
Crude Oil  $92.25    $91.12
Natural Gas  $4.56    $4.11
Gold  $1,419.00    $1,401.30
Euro  $1.33    $1.31
       
       
RECOVERY! Since 3/09/09    
   Total Return TR annualized  
Index      
Stocks      
Russell 3000 99.39% 46.30%  
S&P 500 93.08% 43.73%  
DJ Industrial Average 86.07% 40.83%  
Nasdaq Composite 112.97% 51.71%  
Russell 2000 134.04% 59.81%  
EAFE Index* 81.95% 39.10%  
*EAFE index does not include dividends.      

 

Mark A. Lewis

Research & Trading Associate

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