Carolinas Investment Consulting // Summer 2013 // Volume VI // The Consultant

Mid-Year Market Update 2013
Oliver Cross
Kitt Kirchner
Sabine Vellucci

The first half of 2013 was eerily similar to the previous three, with the U.S. stock market racing off to a fast start – its best in 15 years – only to see a pullback in May. Non-U.S. markets, however, were much more of a mixed bag with Japan’s momentum continuing from 2012 while many International and Emerging Market countries struggled. Of note in the first half of the year:

  • Escalating concerns about the Fiscal Cliff and Sequestration proved to have little impact on the U.S. economy and markets; housing, consumer confidence, employment, the U.S. budget deficit, and energy output, to name a few, have shown
    signs of steady improvement
  • Europe remains stuck in a recession with six straight quarters of economic contraction; however, growth is expected to pick up in the second half of 2013
  • Emerging Markets suffered a steep decline to start the year due to concerns out of China and a strengthening U.S. dollar
  • Central banks around the globe reaffirmed the need for liquidity to drive growth, although the Federal Reserve began illuminating the path for
    tapering their bond purchase program. This led to a sell-off in the bond market

Below is a global performance summary table for major asset classes during the first half of the year:

toprightchart

Source: Zephyr StyleADVISOR, 6/30/13

Key highlights :

  1. U.S. stocks were the clear leaders at the mid-way point, while U.S. bonds had their worst start since 1999 due to rising yields in May and June. The S&P 500 enters mid-summer higher than each of the 14 largest Wall Street firms’ year-end predictions back on January 1st
  2. Commodity prices continued to decline on weaker global demand and China slowdown concerns
  3. Emerging Markets – home to much of the world’s economic growth and 2012’s best-performing stock market – have lost ground to other global equity markets so far this year

Despite the media’s insatiable appetite for focusing on the weak areas of the economy or calling for the next correction or collapse, the Dow has marched from below 7,000 to over 15,500 since the Financial Crisis (at the time of writing).

Global equity markets still look attractive for investors with a long enough horizon to withstand the inevitable fluctuations. The U.S. is trading around 15X earnings while the International and Emerging Markets are trading at 13X and 10X, respectively. While the U.S. has recently enjoyed a disproportionate return advantage versus its global peers, we still believe a globally diversified portfolio is the best approach for managing money and risk. The U.S. made up two-thirds of the world’s stock market value (global market cap) in 1980, but that figure is closer to one-third today. Given their recent underperformance, cheaper valuations, and favorable demographics, international markets have become an attractive hunting ground for many of our money managers.

The bond market, however, continues to be the big question mark as the yield on the 10-Year Treasury has risen from 1.4% to 2.7% in the past year, with much of the move occurring during May and June (see below). We continue to favor shorter duration bonds, which should hold up better in the event rates continue to rise. At such low yields, bonds remain in place mostly for defense and ballast. Rising yields are not all bad so long as the move upward is orderly. In fact, higher yields should be viewed positively by investors who actually begin to earn greater real yields (yields in excess of inflation).

2013 has been a most unusual year thus far in the markets with such a wide divergence among global equity returns and a negative first half in the bond market, which we haven’t seen since 1999. However, our message remains the same: focus on the things in life you can actually control, like goal-setting, understanding your (or your institution’s) true risk tolerance, evaluating your income needs, getting organized, and creating an investment plan you can actually stick with in good times and in bad. These decisions will have infinitely more to do with your long-term success than whatever events unfold in the second half of 2013.

Enjoy the rest of your summer, and we look forward to helping you get organized, plan for the future, and achieve the long-term benefits of a well-diversified portfolio.

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Social Security Strategies for Married Couples

Deciding when to begin receiving Social Security benefits is a major financial issue for anyone approaching retirement, because the age at which you apply for benefits will affect the amount you’ll receive. If you’re married, this decision
can be especially complicated. You and your spouse will need to plan together as married couples may qualify for retirement benefits based on their own earnings records, and/or their spouse’s earnings record.

In addition, a surviving spouse may qualify for widow or widower’s benefits based on what his or her spouse was receiving. Fortunately, there are several planning opportunities available to potentially boost both your Social Security retirement income and income for your surviving spouse. Here’s an example of one strategy.

“File and Suspend”

Generally, a husband or wife is entitled to receive the higher of his or her own Social Security retirement benefit (a worker’s benefit) or as much as 50% of what the spouse is entitled to receive at full retirement age (a spousal benefit). But here’s the catch: a husband or wife who is eligible to file for spousal benefits based on the spouse’s record cannot do so until the spouse begins collecting retirement benefits.

There is an exception—someone who has reached full retirement age but who doesn’t want to begin collecting retirement benefits right away may choose to file an application for retirement benefits, then immediately request to have those benefits suspended, so that the eligible spouse can file for spousal benefits.

The “file and suspend” strategy is most commonly used when one spouse has much lower lifetime earnings, and thus will receive a higher retirement benefit based
on the spouse’s earnings record than on his or her own earnings record. Using this strategy can potentially boost retirement income in three ways.

  1. The spouse with higher earnings who has suspended benefits can accrue delayed retirement credits at a rate of 8% per year (the rate for anyone born in 1943 or later) up until age 70, thereby increasing that retirement benefit by as much as 32%
  2. The spouse with lower earnings can immediately claim a higher (spousal) benefit
  3. Any survivor’s benefit available to the lower-earning spouse will also increase because a surviving spouse generally receives a benefit equal to 100% of the monthly retirement benefit the other spouse was receiving at the time of death

Here’s a hypothetical example. Tom is approaching his full retirement age (FRA) of 66, but he wants to postpone filing for Social Security benefits so that he can increase his monthly retirement benefit from $2,000 at FRA to $2,640 at age 70 (32% more). His wife Leslie (age
65, but with much less lower lifetime earnings) wants to retire at her FRA (also 66). She will be eligible for a higher monthly spousal benefit based on Tom’s work record than on her own–$1,000 vs. $700. So Tom files an application for benefits, but then immediately suspends it. Tom then earns delayed retirement credits, resulting in a higher retirement benefit at age 70 and a higher widow’s benefit
if Leslie survives him.

Things to keep in mind

  • Using the “file and suspend” strategy may not be advantageous when one spouse is in poor health or when Social Security income is needed as soon as possible
  • Delaying Social Security income may have tax consequences
  • Contacting your CIC Consultant is the first step if you would like assistance in reviewing your options

Get the Liquidity You Need Without Disrupting Your Long-Term Investment Strategy

Understanding all of your financing options is an important part of reaching your financial goals.

Whether your plan will succeed depends in part on how you manage both sides of your personal balance sheet, which includes not only the assets (investment portfolio, etc.) but the liabilities (mortgages and other loans) as well.

Before liquidating investment assets and potentially disrupting your long-term investment focus, you may want to consider the broad range of borrowing options available to help you with liquidity and maximize potential tax benefits.*

CIC often consults with our clients on the most advantageous borrowing strategies available for your specific needs. Leveraging our relationships
with custodial partners First Clearing (a non-bank affiliate of Wells Fargo) and Charles Schwab as well as our independent network of other banks, lenders and brokers, CIC can provide access to and advice on a variety of lending products.

In addition to assisting clients with your home mortgage, refinancing and home equity lines of credit needs through our firm’s contacts, your Consultant may also help by advising on the merits of a securities-backed line of credit. Securities-backed lending lets you borrow money at extremely competitive rates using your eligible marketable securities as collateral.

* Consult your tax and/or legal advisor to determine tax deductibility

Securities-Backed Line of Credit Benefits

  • Stay invested and manage your tax exposure – Use eligible assets in your portfolio as collateral for a line of credit, instead of liquidating them. That way, you can pursue your investment strategy and better manage the timing of potential tax exposure*
  • Competitive rates and no fees – Typically lower rates than other forms of financing based on the market-driven LIBOR index. No application, set-up, maintenance or non-utilization fees
  • Flexibility – Borrow from the line up front, over time or establish as a source of standby liquidity. Access funds with checks or wire transfers. You pay interest only on the portion of the line you use
  • Long term – Three years, revolving (borrow, repay, and re-borrow whenever you wish)
  • Quick and convenient access – Limited underwriting process for clients with qualifying securities and asset levels
  • Meet diverse needs – Funds can be used for practically any purpose (home improvements, medical costs, or unplanned expenses) other than to purchase securities or pay off a margin account

Leveraging your assets in this manner may be more cost-effective than other alternatives and may be a good fit for your long-term investment plan. Feel free to give us a call for help determining if a borrowing solution can help address your needs.

Welcome Aboard

We are pleased to welcome the newest additions to the CIC team: Joyce Cmiel and Walker Shelton

Joyce will be assuming the role of Relationship Manager and will be working
primarily with the team supporting George. She brings a wealth of industry
knowledge and experience to our team having served as an adviser herself, and
as an arbitrator in the securities industry. Joyce and her husband are new to the
Charlotte area, relocating from California, and have three children.
Walker joins us from Vanguard as an addition to the Financial Planning team, as
this integral wealth strategy and planning component to our work with families
continues to grow. Walker is originally from Boone, North Carolina and graduated
from Appalachian State University where he majored in Finance and Banking. He
holds his CFP® and securities licenses and brings a fresh outlook to the group. We
look forward to introducing to you these valued members of our firm.

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Consultants

Oliver R. Cross III

R. Christopher Gammon, CFA, CFP®

Christopher K. Grogan

Thomas E. (Ted) Highsmith

David A. Perkins, J.D., CPA, CFP®

and George H. Edmiston, Jr., President & Founder

Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional.

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5605 Carnegie Boulevard, Suite 400, Charlotte, NC 28209
704-643-2455 | www.carolinasinvest.com
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