How much is that Doggie in the Window?

According to a recent announcement from the American Pet Products Association, Americans spent $55.7 billion last year on their pets. That’s billion, not million. An article at Time.com (http://time.com/#23451/pets-dogs-cats-spending-americans/) cleverly noted that the figure is $10 billion more than Germany spends on its defense budget.

I admit I am one of these people. My little rescue dog hit the lottery when she came to live with me. She has seven dog beds, if you include her car seat (yes, car seat). She owns more jackets than I do, although they are all for function, not fashion. She has multiple, color-coordinated harnesses, collars, and leashes so that she need never feel ashamed about how she looks. When we go on vacation, she has as much luggage as I do. Yes, she is spoiled rotten.

I am not alone. Bill Geist of the “CBS Sunday Morning” program tells a hilarious story about his “free” rescue dog: http://www.cbsnews.com/news/even-cat-people-fall-in-puppy-love/.  Sometimes, the unexpected costs can really add up.

In our industry, I see a number of fees that some people pay for investments: high commission rates for certain products, either on the front or back end of the transaction; frequent, unnecessary trade costs from a practice called “churning;” and expensive investment counsel fees. Before long, that simple purchase of 100 shares of ABC Widget Works has cost a fortune in added fees.

When you are evaluating an investment advisor, consider how the person earns his or her money. Does he receive a commission for his or her investment recommendations? Is he or she directly affiliated with a broker? Does he or she charge an additional investment counsel fee? While he or she may promise a great gross return on investment, the net return after all of those fees may be no better than what you would find with a simple savings account.

At Parsec, we do not receive commissions for any of the investment products we recommend – no commission from the trade, no commission for recommending a certain security, nothing. In addition, when we recommend mutual funds, we look for funds that do not carry significant internal fees.

We are not beholden to a particular broker. We have four brokers who we like to recommend, based upon client needs.

We do charge an investment counsel fee that we think is reasonable to industry standards. When you sign a service agreement, you see upfront what your fee schedule will be. On a quarterly basis, you receive a reports package that includes information about net-of-fee investment performance, current holdings, et cetera. We are also here to help with planning – everything from college savings to retirement to estate. We like to think service goes beyond placing a trade. Our clients pay us to act as a partner in planning their future.

Everything in life – from owning a home to adopting a rescue dog – has the potential for unexpected costs. How you invest your money, though, should be a little more straightforward. With a little research in advance, you can evaluate whether or not fees charged for service are reasonable and affordable.

Now, if you will excuse me, I need to order organic food for my doggie. And maybe I will pick up a bottle of shampoo. She told me she is tired of smelling like a bowl of oatmeal.

Cristy Freeman, AAMS
Senior Operations Associate

Happy 5th Anniversary, Bull Market!

That’s right, it’s the Wood Anniversary for the market, which hit bottom on March 9, 2009. Since then, it has come roaring back – the S&P 500 is up 174% for the 5-year period (that’s price change only, not total return). Not too shabby.

The WSJ has a nice article here showing the anniversary in five charts. According to one of the charts, this rally is the second-best since WWII (beaten only by the S&P’s 228% gain from 10/82 through 10/87). The article’s author thinks there is still room to go in the market recovery, saying that investors’ confidence in the rally will continue to fuel stock market inflows.

No one knows what the future will bring where the market is concerned, but the present is a far cry from five years ago. Happy Friday, happy bull market anniversary, and here’s to five more years!

Sarah DerGarabedian, CFA
Portfolio Manager

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

The Best Man for the Job is…a Woman?

I was pleased to read yet another article supporting the importance of women in portfolio management. The article (found here) cited a recently released report which found that an index of hedge funds managed by women outperformed the HFRI Global Hedge fund Index over a 6.5-year period. During that time, the female-managed fund index rose 6%, while the HFRI declined 1.1%. Of course, the sample size was relatively small, as only about 125 of the 10,000+ hedge funds have female portfolio managers. Still, the data seem to support the notion of gender diversity in investment management. There have been many articles written about how men and women differ in their approach to investing, indicating that women investors on average have a performance edge on men.

Many theories abound as to why this might be the case. Some of the most popular theories are that women tend to be more risk-averse (less testosterone) and are therefore less likely to take risky bets that don’t pay off. Another theory is that women lack “over-confidence” leading them to trade less, which has shown to contribute to outperformance. This particular article also suggested that these women hedge fund managers took a longer-term view compared to their male counterparts, which paid off over the time period in question.

Fortunately, Parsec is ahead of the curve when it comes to gender diversity in the investment management arena. Three of our five CFA charterholders are women, and are active members of our Investment Policy Committee. We don’t really know the reasons behind the findings in these studies, but some of the theories described above make sense to us. At Parsec, we don’t see this as a gender issue, just good investing. Our philosophy has always been one with a long-term view that eschews market timing and excessive risk-taking. While this approach doesn’t guarantee outperformance, it is a prudent way to invest for retirement, and we do know the research supports that.

Sarah DerGarabedian, CFA
Portfolio Manager

Time is Running Out!

When we were kids, it seemed to take FOREVER for Christmas to get here.  After Thanksgiving, you knew it was close but oh so far!  Nowadays, it seems as if December just flies by.  We have so much to do!  How do we get it all done?

In the midst of the holiday chaos, let’s take a moment to handle charitable donations.  Your favorite non-profit organization appreciates anything you can do for them. 

You still have time to make a donation.  You must make cash donations by December 31 to count them toward the 2013 tax year. 

If you want to donate securities, call us the second you read this blog post.  Time is running out to ensure processing of these types of donations by December 31.

Also, if you have old clothes, furniture, or other items to donate, you should deliver the items to the charity by December 31.  (Some charities even offer pick-up service.)  Make a detailed list of the items you donated.  If something is particularly valuable, it would be a good idea to snap a picture.  You would have proof, if you are ever audited, of the item’s condition.

It is possible to get everything done on time.  As I mentioned, charities need our support.  Just take a deep breath, make a list, and do one thing at a time.  If you planned to make a donation, just add them to the “to do” list.

We hope everyone has a safe holiday season and a healthy, happy new year.

Cristy Freeman, AAMS
Senior Operations Associate

Investing Like a Psychopath (or at least like a Vulcan)

I recently read an article by Morgan Housel about the detrimental effect emotions and memories have on investing behavior (you can read it here). Not surprisingly, people tend to recall bad memories more easily than good ones, and seek to avoid experiencing those emotions again. When such behavior interferes with investing, you get something called loss aversion. Housel explains it like this:

“The market falls 50% in 2008 and early 2009. That hurts. Then it rallies 130% over the next few years, recouping all of your losses and then some. This feels OK, but not nearly good enough to ease the shock you felt from the 50% crash, which was emotional and memorable. You remember the crash much more vividly than the ensuing rally, and you change your portfolio to make sure you never suffer through a crash again. You buy bonds, hold a lot of cash, and swear off stocks for good. We’ve seen quite a bit of this behavior over the last few years. And we know it comes at the expense of long-term performance.”

A study conducted on people whose brains suppress emotion (due to the presence of a lesion on the brain) found that they did not suffer from loss aversion, and were able to make rational decisions that resulted in a higher payoff. One of the study’s authors referred to these people as “functional psychopaths” since their choices were unaffected by emotions (personally, I think “Vulcan” would have been a bit less insulting, but perhaps this guy is the only scientist on the planet unfamiliar with Star Trek).

In addition, “our memories of emotional experiences tend to get rearranged and distorted, so much so that some of what we remember never actually occurred.” (I think the author must be acquainted with some of my extended family members – I am all too familiar with this phenomenon.) So what is an investor to do? Housel provides the same advice as that given to dieters – keep a journal. It’s easy to say you’ll be a rational investor (or a healthy eater) but far more difficult in practice. The best way to remain accountable is to keep an accurate history, refer to it, and learn from it.

Live long and prosper.

Sarah DerGarabedian, CFA
Portfolio Manager

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

Print Me a Heart Valve, Stat!

20 years ago, I was a sophomore in college. I had a phone in my dorm room (connected to the wall by a cord) but I did not have a computer. If I needed one, I went to the computer lab on campus. I did not have an email account until my senior year. That same year, I distinctly remember my chemistry professor telling the class about this crazy thing called “the World Wide Web.” Fast forward 20 years and here I sit, with a tiny device that fits in my pocket and is a portal to the collective knowledge of the human race. And if for some reason I can’t get an answer to something in less than 3 seconds, I go ballistic. If you haven’t seen Louis CK’s bit about “Everything’s Amazing and Nobody is Happy,” you have to go to YouTube right now and watch it. I’ll wait.

20 years ago an iPhone would have seemed incredible, yet now they are ubiquitous and more essential to life than oxygen. On the few occasions I’ve left mine behind at home or at the office, I panic like I’m in one of those dreams where you suddenly realize you’re at the grocery store with no clothes on. I mean, it wasn’t that long ago that I routinely traveled around with NO PHONE AT ALL, oblivious to the perils that such a situation engendered.  

So what do these musings of mine have to do with finance? Nothing. But I was reminded of how fast technology moves when someone asked me about 3-D printing the other day. I’ve heard a little about it on NPR, but I’m not too familiar with the technology, so I did a little online research (ah, Google, another thing I can’t live without). In a nutshell, it’s a Star Trek-like technology that pretty much allows you to print an object. As in, one minute there’s nothing, and the next minute BOOM there’s a pen. (I’m sure it takes longer than a minute, but you know what I mean.) Apparently, the technology has been around for about 30 years, but it’s only now becoming inexpensive and accessible to consumers. There are practical applications for something like this in manufacturing, architecture, and medicine, but also in the consumer world. One that sounds totally awesome is the ability to download data from the web that would allow you to build a spare part for something that is no longer manufactured anywhere. In your home! Or, instead of shipping a product to a far-away destination, the data could be sent digitally to a printer that makes the product locally. How cool is that?

Most of the companies at the forefront of this technology are small-caps. Fewer analysts follow small-cap stocks, and research reports are scarce compared to the companies we follow in our coverage universe. This makes it difficult for me to formulate an opinion on the stock of small companies like these (for as you know, just because you like a company and/or its product, it doesn’t necessarily follow that the company’s stock is a good investment). I think 3-D printing is amazing technology and I imagine the applications will be myriad, but at this stage in the game much of the investment landscape is speculative. When buying individual stocks, our focus is on established, shareholder-friendly companies with strong balance sheets, positive fundamentals, attractive valuations, and good prospects for earnings growth and total return.

Sarah DerGarabedian, CFA
Director of Research

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

Keep Calm and Carry On

While reading an article about the Nobel Prize award to two American economists, I spotted a headline to the right.  It featured a link to a story CNN wrote in honor of International Day of the Girl.  Titled “To my 15-Year Old Self:  Things I Wish I’d Known,” the writer posed that question to notable women in a variety of fields.  The link showed a picture of Oprah, because you always have to ask her those sorts of questions.

I find her rather annoying, so, naturally, I clicked the link.  The problem I have with her is she seems out of touch.  It is easy to talk about “living your truth” and “risking everything to pursue your passion” when you are a multi-billionaire for whom the risks brought great reward.  Do you think the person who just lost everything when his/her business collapsed feels happy and fulfilled because they “followed their dream?”  Doubtful.

Anyway, as I read the quotes from these highly successful ladies, it occurred to me that living in the past can be a dangerous thing.  Sure, it is good to look back and say, “Oh, I really wish I had not done that.”  On the other hand, you can become so paralyzed by fear of making the same mistake that you take no action at all.  The key is to learn from the mistake and get on with your life.

We can do that in our portfolios too.  There was a time when I was reluctant to invest excess cash in my portfolio because of current market conditions.  As a result, I missed out on some of the upticks in the market.  The lesson I learned is emotion has no place in investing. 

You may have similar feelings now with the upcoming election.  What happens if Obama is re-elected?  What would Romney do if he becomes President?  Will this country fall into a Great Depression or have a huge economic boom?  No one knows.  However, I would bet that, if you looked at previous elections, similar comments were said about the president and candidate then.  It happens with every election.  Work the crowd into a frenzy so they will watch the news.

We cannot change the past.  We cannot predict the future.  Let’s focus on what we can control (our behavior), keep calm, and carry on.

Cristy Freeman, AAMS
Senior Operations Associate