Are your affairs in order if you died tomorrow? Is your will or trust up-to-date? Do you have the assorted legal documents all in place: healthcare power of attorney, durable power of attorney? Have you checked the beneficiaries on your retirement accounts lately? Be Prepared – isn’t that the Boy Scout motto? We have seen clients with five or six separate IRA accounts or brokerage accounts at various places. Combining like-type accounts is much simpler and certainly less paperwork. Do you have old stock certificates lying around? If you would deposit them now into your brokerage account you will save your beneficiaries much time and trouble. Do you have a safe deposit box? We have seen clients that have had multiple bank accounts and more than one safe deposit box. Your beneficiaries need to know where to find the paperwork that leads them to your various accounts, certificates and safe deposit boxes. I recently had a client die and his daughter found a notebook in his residence with detailed instructions on where everything was, including a map of downtown Asheville with instructions on how to find Parsec Financial. You might also consider checking on your parent’s situation (if they would permit that).

Barbara Gray, CFP®

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The Holidays Are Approaching!

Can you believe it is November already? The holiday season is fast approaching, a time when everyone is frantically looking for gift ideas for loved ones or considering year-end charitable giving. Have you considered giving highly-appreciated stock this year?

I will give you a minute to catch your breath from laughing. Yes, some people still have it, even after the market meltdown. You could certainly sell some of the stock and offset the gains with losses you are carrying over from last year. You might also consider it for gift giving.

A gift of stock to a minor can lead to valuable lessons about investing and financial responsibility. Just ask our founder, Bart, and his wife, Elaine. If their children wanted the hottest sneaker or the latest video game, they had to use funds from dividends on stocks they owned. Mom and Dad were not an ATM. Their children learned good money management skills, which is something everyone could use.

No, I am not trying to score brownie points because year-end reviews are soon. Kids learn a lot when they have a vested interest in the activity.

Also, charities would welcome a gift of stock. You must have owned the stock longer than one year. You can claim a tax deduction on the value of the stock at the time of transfer. You will not incur a capital gain, as long as you give the shares, not the proceeds from a sale. You will incur a capital gain if you sell the shares first.

Of course, there are tax issues, exclusions, and other requirements, depending upon the type of gift. If you have a particular stock you would like to give, please contact your financial advisor.

It is important to process the transaction early. The later you wait in December, the harder it is for brokers to complete the transaction before year end. Besides, with all the chaos that surrounds the holiday season, wouldn’t it be nice to cross off one thing on the to-do list as soon as you can?

Now, let’s all take a deep breath and prepare ourselves for the madness to come. I hope everyone has a safe and happy holiday season.

Cristy Freeman, AAMS
Senior Operations Associate

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Who Says it isn’t Easy Being Green?

Well, I finally broke down and invested in a socially responsible mutual fund. I don’t know what’s happening to me – I’m starting to have feelings, a conscience – and I was so convinced that I’m perfectly logical. I blame it on becoming a parent. I’m suddenly much more concerned about how companies are making profits, rather than just if they are. And apparently, I’m not the only one – socially responsible investing (or SRI) has been around for over 250 years, beginning with early religious proponents such as the Society of Friends (a.k.a., Quakers) and John Wesley. Though the objectives of some socially responsible mutual funds are still rooted in religious principles, most are now concerned primarily with environmental sustainability and corporate governance. A mutual fund (or fund company) with socially responsible objectives screens its investments both for elements it doesn’t want (business practices that are harmful to individuals or the environment) and for elements it does (clean technologies, ethical business practices, respect for human rights).

Finding out the objectives of a particular socially responsible fund is a relatively simple matter of searching for the fund company online – they usually list that sort of information on their website. (Well, I say simple, though recently my computer was infected with a virus that attacked my search engine of choice. I noticed something was amiss when Google was all dressed up for Thanksgiving – on October 12th. After glancing at my calendar to make sure it wasn’t already the fourth Thursday in November, I saw it was Thanksgiving – in Canada! The virus was redirecting me to Google Canada, for some reason, as well as to malware-loaded sites, but our IT folks got me all cleaned up.)

In this article I’ve focused mainly on mutual funds, because with individual stocks, it’s easier to pick and choose the companies in which you’d like to invest. When you buy shares of a fund, though, you are buying a basket (sometimes hundreds) of individual companies, and it’s hard to know what you own, since you are in effect paying the fund manager to choose the investments for you. However, you can find a socially responsible fund that screens companies for the qualitative measures that are important to you, a process for which they are much better equipped than the typical individual investor. And, with SRI accounting for about 11% of the US investment marketplace (according to, it’s getting easier to find funds with good track records and reasonable expenses. 

So, what’s the main takeaway here? That apparently, Canadians celebrate Thanksgiving, too. Not that there’s anything wrong with that, eh?

Sarah DerGarabedian

Research and Trading Associate

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When Mutual Funds Make Sense

The best thing about mutual funds is that they are an easy way to hold a diversified investment.  The difficult thing about mutual funds is that many mutual funds underperform the broader market, they can be expensive, and there are so many options available that picking among them can be daunting.  But it is possible to pick high quality, low expense mutual funds that are suited to you, and it is important to determine when a portfolio calls for them.

It is our philosophy that in large portfolios, mutual funds are best used to get exposure to international, small-cap, and some mid-cap companies.  This is because the universe of international and small companies is so large, it is best to rely on an active manager who specializes in those areas.  Also, research and financial data is not as readily available on international and small-cap stocks, making active managers all the more important. 

We do believe, however, that we can create a well-diversified portfolio of large-cap, domestic (S&P 500) companies by buying individual stocks.  There is a plethora of research available on these companies, making financial data transparent and easy to obtain.  The trading costs on individual stocks is low enough that this is a more cost effective way to get exposure to this area if your portfolio is large enough to fit 30-50 individual positions of a reasonable size.

In smaller portfolios it becomes less cost effective to buy individual stocks.  To get 40 individual stocks in a portfolio that already encompasses bonds, international and small-cap funds, we would need to resort to very small position sizes.  The smaller the position size, the larger the transaction cost as a percentage of the holding.  Therefore, we believe that depending on the size and the number of accounts within a portfolio, mutual funds may be the best option.

When we choose mutual funds we look for those of the highest quality.  We focus on long-term performance track records, various risk measures associated with the funds, and low-cost investments.  We routinely assess the quality of the funds we hold, and screen for new additions to our fund buy list.  If a fund no longer meets our criteria, we will replace it with a fund we view as better.

To what extent a client has mutual funds in their portfolio is determined on a case-by-case basis.  Sometimes this comes down to client comfort level and perspective.  Other times it is a function of the type and size of accounts in a portfolio.  We work with clients to determine what makes the most sense for their particular situation.

Harli L. Palme, CFP®

Financial Advisor

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Inflation Ahead?

With the extraordinary amount of fiscal and monetary stimulus pumped into the financial system over the last 12-18 months, many investors are concerned with the prospect of future inflation. The large U.S. budget deficit is another potential inflationary factor if it is financed by the government expanding the money supply.

Despite these factors, inflationary expectations in the bond market are quite low. There is even a small but vocal minority of market participants that believe that deflation remains a significant risk. One way to determine the markets’ expectation for inflation over the next ten years is to compare the yields of U.S. Treasury Notes against those of Treasury Inflation Protected Securities (TIPS) of similar maturity. The current yield on the 10-year U.S. Treasury Note is 3.33% as of this writing, while the 10-year TIPS yield is 1.5%. The difference of these two numbers is the implied inflation rate over the next 10 years of 1.83%. If inflation over the next 10 years turns out to be higher than 1.83%, then you would be better off buying the inflation-protected security. Since 1926, inflation has averaged about 3% annually. While we do not believe that there will be a sharp increase in inflation over the next 1-2 years, it certainly is a possibility over the longer term. Therefore, within the fixed income allocations of our client portfolios, we have been avoiding purchases of traditional Treasury securities in favor of TIPS.

 What asset classes would perform better in an inflationary environment? Among fixed income investments, we would expect inflation-protected bonds and high-yield bonds to perform better. Although the short-run impact of inflation on stocks has historically been mixed, stocks typically act as a hedge against inflation over longer time periods. This is particularly true of companies and industries that have the ability to pass along price increases to consumers, or those that have comparatively low levels of fixed assets. Our core strategy of broad diversification and no market timing would remain unchanged, whether the environment is inflationary or deflationary. The main determinant of a portfolio’s return is the asset allocation. Having the discipline to stick with your chosen allocation is more important than the specific allocation that you choose.

Within the equity portion of client portfolios, we may overweight certain sectors or industries that we believe would fare better in a particular inflationary environment. However, since the future is uncertain, our main goal remains to create client portfolios that will perform well in a variety of economic scenarios.

 Bill Hansen, CFA

October 9, 2009

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The Uncertain Future of the Estate Tax

Although it isn’t a pleasant subject, estate taxation will probably begin to seep into media coverage.  Why?  Because currently it is set to disappear entirely in 2010 only to return in 2011 with a 55% rate on the portion of estates over $1 million.  

In 2009 the value of an inheritance shielded from taxation is $3.5 million with the excess taxed at a 45% rate. This is the next to last year of President George W. Bush’s 10-year $1.35 trillion across-the-board tax cut effecting estate taxation.  

Politically speaking, President Obama has proposed permanently locking in the exclusion of $3.5 million and the current tax rate of 45%.  Congressional Republicans favor a full repeal.  The central players on estate tax policy are currently preoccupied with the health care debate: Senate Finance Chairman Max Baucus (D, Mont.) and House Ways and Means Chairman Charles B. Rangel (D, N.Y.).  So, you can imagine that many different scenarios could play out. 

Given all the issues facing our lawmakers and demanding their time, I would suspect the simplest route would be to fall back on a one year extension of the current rate and exemption.  Then, it could be more adequately addressed next year.   

Although I personally favor repeal, I’m reminded of the quote from Mark Bloomfield, president of the American Council for Capital Formation, “Those people who believe repeal of the estate tax will happen are probably more delirious than Ralph Nader thinking he could be president of the United States.”    

Michael E. Bruder, CFP®, CTFA

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Risky Business

The wild 700-point, daily market swings certainly gave us all a nasty lesson in market risk. Let’s take a closer look at risk because market risk is not the only risk involved in investing.

There are two main categories of risk: systematic and unsystematic. Think of systematic risk as non diversifiable or risk that is inherent in the system. Investors cannot control which direction interest rates will go. The value of the dollar will most likely be different ten years from now, but who knows what that value will be? Systematic risk encompasses market fluctuations from all the unknowns in the system as a whole.

Unsystematic risk, however, is unique to a particular investment. For example, the future of the company who makes the hottest trendy item might be more uncertain than the company who makes peanut butter. You can reduce this type of risk by having a well-diversified portfolio.

Keep in mind that there are risks in not being invested, such as opportunity cost and purchasing power risk. Opportunity cost is the cost of missing a positive return because a person was not invested in a rising market. Purchasing power risk occurs when an investor’s lower-returning asset class does not keep pace with inflation. For example, money market interest rates are now near zero, yet the price of everything else continues to rise.

Each of us has a different risk tolerance. As you evaluate yours, please consider your financial goals. Do you plan to retire soon? Are you already retired? Do you have children who will be entering college soon? Do you want to start your own business?

If your risk tolerance and financial goals have changed, please talk with your advisor.

Cristy Freeman, AAMS
Senior Operations Associate

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Gold as an Investment

We are frequently asked about gold as an investment. Sir Isaac Newton set the gold price in 1717 and it remained the same for two hundred years. The gold standard was lifted in the 1970’s and the price has fluctuated since then. The price was $40.62 in 1971 and it rose to $615 in 1980. The return from 1980 to 1990 was -4.6% (1990 price was $383.51). The return from 1990 to 2000 was -3.12% ($383.51 to $279.11). The period from 2000 – 2008 was good for gold with a return of 15.2% ($279.11 – $871.96).

Large company stocks (from Ibbotson) had a return of 9.62% from 1926 – 2008; small company stocks returned 11.67%; and long term government bonds returned 5.7%. Gold returns for the same time period returned 4.67%. Don’t forget those returns do not factor in the average inflation rate of 3%. If you bought gold in 2000, you would have out-performed stocks as the last decade has been dismal for stocks. Gold is currently at a very high price of $1,006 today, so if you are thinking of buying gold, you just might be buying high. Another drawback to investing in gold is that it is considered a collectible and is not granted favorable capital gains treatment.

Barbara Gray, CFP®

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Reporting Qualified Charitable Distributions (QCD’s)

Clients will be relieved to know that this option, first effective in 2005, has been extended for 2009.   It was designed to allow an IRA owner to take all or part of their required minimum distribution (RMD) as a distribution payable to a qualified charity and not be included in the account owner’s income.  Recall, RMDs have been suspended for 2009.

Some of the QCD requirements are: the IRA owner must be at least 70 ½ at the time of the transfer; it must be a direct transfer to the charity; it is capped at $100,000 per account owner per year; there is no charitable deduction, and the charitable substantiation rules apply. 

I’m sure a lot of you have heard about the QCD.  However, most are confused as to who reports it and how.  Make no mistake; reporting is the taxpayers’ responsibility!   On your Form 1040 tax return line 15 refers to IRA distributions.  On 15a, list the amount for the QCD.   Since line 15b refers to the amount of an IRA distribution that will be taxed, you would enter -0-.    If you want you can also add the words “qualified charitable distribution” or “QCD”. 

Hopefully, this brings some clarity to the reporting procedure!

Michael E. Bruder, CFP®, CTFA

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Things Seem to be Getting Less Bad…

Stocks are up today after comments from Federal Reserve chairman Bernanke that the economy is on the verge of recovery.  We believe that the recession has either ended, or is in the process of ending, although the official date will likely not be known until sometime in 2010.  By the time the end date is officially proclaimed, the recession will be long over, although there are some that believe there is still a risk of a “double-dip” or that a second recession may occur.

 There are a number of factors that contribute to our optimism:

 –Existing home sales reported today were better than expected at +7.2%;

 –The four-week moving average of unemployment claims has been declining from the peak in early April;

 –Investor cash levels, although down from their record high in March (at the recent market bottom), are still equivalent to about 40% of the value of the entire U.S. stock market.  Even a small percentage of this cash entering the market would be a significant positive for stock prices;

 –The level of housing starts is below that needed to absorb the formation of new households, and the level of auto manufacturing is currently below scrappage levels, indicating future improvement in these industries;

However, there is still negative news.  The delinquency rate on home mortgages was reported at 9.2% for the second quarter, 4.3% of which were already in the process of foreclosure. About half of these foreclosures were “prime” borrowers. While future inflation is a risk due to the extraordinary recent fiscal and monetary stimulus measures, we do not see an immediate threat given the current unemployment rate of over 9%.

While the economy is not without its challenges, fear indicators such as the CBOE VIX index (of implied volatility in options contracts) and TED spread (difference between U.S. Treasury bills and interbank interest rates) have returned to more normal levels similar to those before the failure of Lehman Brothers.  We have seen a significant improvement in the overall mood, both in the media and among people we talk to. 

With the stock market up over 50% from the recent bottom on March 9, many are wondering whether the current rally can continue and for how long.  It is important to remember that the S&P 500 index is still 35% below the peak reached in October 2007, which coincidentally is about the peak reached in March 2000.  The current decade is on pace to be one of only three 10-year periods in modern history with negative stock market returns.  Because this decade has been so terrible for investors, we believe that better times lie ahead and that stock market returns will revert upward toward their historical average of 9-10% annually.  Nobody knows for sure when this might happen.  While it is possible that we may retest the recent lows, the improvement in the mood and slowly improving economic news makes us believe that there is significantly more upside than downside from here.

Bill Hansen, CFA

August 21, 2009

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