Do You Have a Taxable Investment Account – Doctor?

Posted on December 11, 2014 by Dr. David Edward Marcinko MBA MEd CMP™

Is it Time to Harvest?

[By Lon Jefferies MBA CFP®]

Tax harvesting is the process of selling assets for the purpose of creating either long-term capital gains or losses to minimize your tax bill. This procedure is usually conducted near the end of a calendar year.

While many people are familiar with the concept of tax loss harvesting, fewer physicians or clients are familiar with the more recently developed process of tax gain harvesting. Between these two procedures, virtually everyone with a taxable (not tax-advantaged) investment account should make adjustments to their portfolio before the year ends.

Who Qualifies For the 0% Capital Gains Rate?

First, it is important to understand that capital gains (the growth on investments within a taxable, non retirement investment account) are taxed differently than ordinary income (wages, pensions, Social Security, IRA distributions, etc.). While short-term capital gains (recognized on the sale of assets held less than a year) are essentially considered ordinary income, long term capital gains, or recognized gains on assets held more than a year, are taxed at advantageous tax rates. While ordinary income tax rates range from 10% to 39.6%, capital gains tax rates range from 0% to 20%.

Second, it is crucial to understand what enables a taxpayer to qualify for the 0% capital gains rate. If a taxpayer is in the 10% or 15% ordinary income tax bracket, they qualify for the 0% long-term capital gains rate.

For a married couple filing jointly, the 15% tax bracket ends at $73,800 of taxable income ($36,900 for single taxpayers). Thus, if a married taxpayer has a taxable income (which includes long-term capital gains but is also after deductions and exemptions) of less than $73,800, all their long-term capital gains will be tax free. If the taxpayer is in a tax bracket anywhere between 25% and 35% (taxable income of $73,800 and $457,600, or between $36,900 and $406,750 for single tax filers), they will pay long-term capital gains taxes at 15%. Only those in the top tax bracket of 39.6% (married taxpayers with a taxable income over $457,600 and single taxpayers with taxable income over $406,750) will pay capital gains taxes at 20%.

Tax Loss Harvesting

During the calendar year, assets have been purchased and sold in most taxable investments accounts. The sale of an asset creates a net gain or loss, both having tax implications. Investors should have an understanding of what their long-term capital gains tax rate will be so they can determine whether a taxable gain or loss is preferable.

For instance, an individual who does not qualify for the 0% capital gains tax rate may wish to minimize the amount of taxable gains they recognize during the year, which would reduce their tax bill. If the investor currently has a net long-term capital gain (which is probable after the strong year the market had in 2013), then it is likely worthwhile to sell any assets in the portfolio that are currently worth less than the investor’s purchase price. This tax loss harvesting would reduce the net gain recognized during the year and lower the investor’s tax bill.

In some cases, by taking advantage of all potential losses within a portfolio an investor has the ability to negate all capital gains created during the year, completely eliminating their capital gains tax bill. Further, the IRS will allow investors to recognize a net capital loss of up to a -$3,000 per year. This -$3,000 loss can be used to lower the taxpayers ordinary income. This is particularly advantageous in that the capital loss reduces a type of income that is taxed at higher tax rates.

Harvesting Gains

Harvesting gains from a taxable portfolio is a more recently developed concept. Once the 0% long-term capital gains tax rate became a permanent part of the tax code with the passing of the American Taxpayer Relief Act of 2012 (signed January 2nd, 2013), in some scenarios it began making sense to recognize long-term capital gains on purpose to potentially avoid a larger tax bill in the future.

Suppose a taxpayer’s taxable income is consistently $65,000 a year. Additionally, suppose our hypothetical taxpayer won’t withdraw funds from his taxable account during the next few years, but may need a large lump sum distribution five years down the road. Recall that the 0% capital gains rate ends when a married taxpayer’s taxable income (which includes long-term capital gains) exceeds $73,800. Consequently, this hypothetical taxpayer has the ability to recognize $8,800 ($73,800 – $65,000) in long-term capital gains every year without increasing his tax bill. If this $8,800 in gains is recognized every year by simply selling and immediately repurchasing appreciated assets, he would raise the cost basis of his investment by $44,000 ($8,800 gain recognized annually for five straight years). He could then sell and withdraw that $44,000 without creating a tax liability.

Alternatively, if the investor does not harvest gains during the years when no distributions are taken, withdrawing $44,000 of gains five years down the road would create a sizable tax bill. He would still be able to recognize $8,800 of gains tax free in the year of distribution, but the remaining $35,200 of gains would cause his taxable income to be over the $73,800 limit, eliminating access to the 0% capital gains rate. That $35,200 would be taxed at the 15% capital gains rate, creating a federal tax bill of $5,280. With proper planning, this significant tax bill can be avoided.

***

The Bottom Line

Tax harvesting has no purpose in tax-advantaged retirement accounts such as IRAs and 401ks because all distributions from these accounts are taxed as ordinary income. However, taxable individual or trust investment accounts can almost certainly benefit from tax harvesting. Speak to your accountant and financial planner to understand whether capital gains or losses are desirable for you this year and determine the amount of taxable gains already recognized. This will help you determine what type of harvesting should take place.

Tax harvesting can be a difficult and confusing concept. However, a competent financial planner who utilizes this procedure within your taxable investment account can significantly lower your tax bill. Speak to your adviser to ensure you are reaping the tax benefits available to you.

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Filed under: Investing, Portfolio Management, Taxation | Tagged: capital gains, Investing, Lon Jefferies MBA CFP®, Tax harvesting | 3 Comments »

My Stock Market Forecast for 2015

Posted on December 9, 2014 by Dr. David Edward Marcinko MBA MEd CMP™

All Forecasts Will Be Wrong

[By Lon Jefferies MBA CFP®]

The investment media is a rare industry in which professionals are rewarded for making bold projections but never punished for being wrong. The more outlandish a pundit’s forecast the more attention it receives.

Yet, surprisingly little consideration is given to how accurate the prediction turns out to be.

At the beginning of 2014, there were some widely-accepted expectations regarding the investment environment.

Let’s review those predictions and analyze how precise they really were.

Interest Rates

In a study conducted by Bloomberg at the beginning of the year, all 72 economists surveyed predicted higher interest rates and falling bonds prices in 2014. Consequently, investors were questioning whether they should reduce or eliminate the bond portion of their portfolios until the rate increase occurred.

So, have we experienced this rise in interest rates?

On January 1st, 2014, the yield on the 10-year Treasury note was 3 percent. On November 13th, the yield on the same note was 2.35 percent. That’s right — interest rates actually decreased significantly during the year. As a result, intermediate U.S. government bonds (ticker – IEF) produced a return of 7.38% during the year. Not bad for the conservative portion of your portfolio!

Quantitative Easing

The most widely promoted fear among forecasters was that the phasing out of the Federal Reserve’s quantitative easing (QE) program would diminish stock returns. Prognosticators worried that the Fed would lower the amount of loans the government would buy from commercial banks, thus reducing the amount of money available for new businesses to borrow leading to less innovation and the creation of fewer jobs.

But, was the reduction of quantitative easing a legitimate fear? In fact, this possibility came to fruition. In December of 2013, the Federal Reserve was buying $85 billion of financial assets from commercial banks each month. The Fed reduced this amount during every meeting it held this year, finally eliminating the action completely in October.

However, the elimination of Quantitative Easing did not have a negative impact on the unemployment rate, which declined from 6.7% in January to 5.8% in October. Further, the S&P 500 has gained 12.31% year-to-date (as of 11/13/14). Clearly, fading out the Quantitative Easing program didn’t have the negative impact on stocks that many pundits expected.

Increased Volatility

Another widely held viewpoint at the beginning of the year was that 2014 was likely to be more volatile than anything experienced in 2012 or 2013. There was talk about valuations and P/E ratios being too high, concern about the war in Ukraine (ISIS wasn’t even in the headlines yet), and endless noise about unfavorable weather patterns impacting the market.

So, has 2014 been a wild ride? Since 1929, the S&P 500 has experienced either a rise or a decline of more than 1% during 23% of trading days. In 2014, the S&P 500 moved more than 1% only 15% of the time. Less movement equates to less volatility, so again forecasters were inaccurate.

2015 Forecasts

Bloomberg News recently published a story titled Predictors of ’29 Crash See 65% Chance of 2015 Recession, in which the grandson of a prognosticator who luckily forecasted the Great Depression is still getting attention for a guess his grandfather made 85 years ago. If giving credence to forecasters isn’t ridiculous enough, suggesting there is a gene for forecasting is insane!

The article doesn’t mention that the same grandson made similar headlines with the same forecast in both 2010 and 2012; of course, those predictions did not work out so well. You will start hearing many 2015 projections soon, so pay no heed.

***

Ignore the Pundits

The most significant lesson inherent in these numbers is that market expectations are essentially useless. Despite their abysmal track record, the news media loves forecasters because they capture attention and fill space. Unfortunately, pundits making projections are rarely held to their inaccurate forecasts and are allowed to continue making a living showing they have no greater knowledge than the average investor.

Of course, this is not to say that interest rates will never rise, that bond values will never decline, and that the market won’t return to the roller coaster it is. In fact, all those things are certain to happen. Unfortunately, anyone who contends to know “when” likely doesn’t actually know anymore than you or me. For this reason, having and sticking to a diversified investment strategy that coincides with a detailed financial plan is the most probable path to financial success.

More:

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Conclusion

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Filed under: Investing, Portfolio Management | Tagged: Bloomberg News, emerging markets, great depression, Lon Jefferies MBA CFP®, market forecasting, Quantitative Easing, stock markets | 5 Comments »

2014 – A Near Record Year for IPOs

Posted on December 8, 2014 by Dr. David Edward Marcinko MBA MEd CMP™

A 2014 Wrap-Up

[By Inside the Ticker]

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More:

Assessment

http://www.msn.com/en-us/money/inside-the-ticker/graphic-a-very-big-year-for-ipos/ss-BBfECz7?ocid=iehp#image=2

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Conclusion

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***

Filed under: Investing, Portfolio Management | Tagged: Famous IPOs [Including WebMD], Initial Public Offering, IPOs | 6 Comments »

Out-Look on Global Inflation Rates for 2015

Posted on December 2, 2014 by Dr. David Edward Marcinko MBA MEd CMP™

A Mixed Picture

[By BNY Mellon]

[Click to Enlarge]

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Understanding the “Least” Important Issues for Physician-Investors

Posted on November 20, 2014 by Dr. David Edward Marcinko MBA MEd CMP™

A Dimensional Fund Advisors Survey

By Rick Kahler MS CFP® http://www.KahlerFinancial.com

In this ME-P, I will focus on the three least important things investors want to know. The rankings came from a survey of investors, funded by Dimensional Fund Advisors, conducted in March 2014 by Advisor Impact.

All three deserved to be much higher on the list. In my experience, they are what most physicians and all investors really need to know.

The factors

These three factors are:

What are the chances the investment will lose money? Only 10% of investors thought it was important to ask about factors that contributed to historic performance. Just one-third thought it important to even ask about historical performance in general.
What type of volatility can they expect? Only 17% of investors considered this important.
How and why did the advisor select the investment for their portfolio? Only 21% of survey respondents thought this was important, and just 8% asked about the investment managers chosen.

Drilling Down and Going Granular

Some of these factors may seem difficult to understand, but they do matter. Give your financial advisor a chance to explain them; it can help you become a more informed investor.

Chances of losing money

This factor could be better addressed by asking about the specific factors that influenced historic performance of the security over various long-term economic climates. True, looking at the past performance of an investment is never a guarantee of future performance.

Yet, if the historical periods evaluated contain a variety of economic conditions (high inflation, various economic cycles, various political influences, etc.) and long-term holding periods (at least 10 years or more), looking backward may give you a reasonable idea of what future performance might look like.

Volatility

Most investors will cognitively agree they fully understand that most investments that carry any chance of real (after inflation) significant long-term return will fluctuate. I say “cognitively” because, once that fluctuation happens on the downside, all cognitive understanding sometimes goes out the window and the emotional brain takes control.

One way of internalizing the potential fluctuation of an investment is to ask about its volatility. Specifically, it’s standard deviation. This measure of the amount of variation from the average is something an advisor can easily find out for almost every bond, stock, and mutual fund. Take the standard deviation times three, then subtract that number from the average return. This is the amount of value over one year your investment could drop (or rise) in 99% of all years. Stated conversely, there is only a 1% chance your investment would drop further in any one year.

Portfolio Fit

I recently sent back a shirt that hung on me like a tent. While it would have been perfect for a larger guy, it was not a fit for me. Investments are similar. While some are perfect matches for one portfolio, they can be lethal in another. An over-allocation to emerging market stocks may make perfect sense for a newborn, but it could be a retirement disaster for a 90-year-old.

Assessment

It’s important to ask why an investment belongs in your portfolio. You want investments (asset classes) that complement one another by tending to fluctuate independently of each other.

In an ideal balance of investments, when some decrease in value the other half increase an equal or greater amount, and all of them earn a real return over time.

Conclusion

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FINANCE: Financial Planning for Physicians and Advisors
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Dictionary of Health Economics and Finance
Dictionary of Health Information Technology and Security
Dictionary of Health Insurance and Managed Care

Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

Filed under: CMP Program, Investing, Portfolio Management | Tagged: Advisor Impact, Dimensional Fund Advisors, investing risks, Portfolio Management, Rick Kahler CFP® | Leave a comment »

Is it Time to Reduce Your Bond Exposure?

Posted on October 7, 2014 by Dr. David Edward Marcinko MBA MEd CMP™

On Investment Portfolio Analysis

By Lon Jefferies MBA CFP®

For the last half-decade, investors have been continually concerned about rising interest rates and the effect they may have on the bond portion of their investment portfolio.

The fear is that if interest rates rise, the bonds currently held by investors will be outdated and provide investment returns that are less than what new bonds issued at the higher yields would return.

Concerned?

There is validity to this concern – if an investor could buy a bond yielding 4% on the open market, why would anyone buy a bond that yields only 3%, unless they could do so at a significant discount? Given that today’s interest rates are considerably lower than historical averages and expected to rise in the future, would now be a good time to sell some of the bonds in your portfolio?

Consider the Timing

First, let’s consider one of the most basic principles of investing – that markets are unpredictable. Are we certain that interest rates will rise, and are we confident this rate increase will happen soon? I’d contend the answer to both questions is no.

Actually, the majority of investors have believed interest rates would rise since the first round of quantitative easing took place in 2009, and have suspected rates would rise in every calendar year since. Quite simply, this has not happened. In fact, interest rates are currently lower than they were during the majority of 2009 despite five years of buzz about interest rate hikes.

During this five-year period, how have bonds performed? From 2009 through 2013, the Barclays Aggregate Bond Index (AGG) returned 5.93%, 6.54%, 7.84%, 4.22%, and -2.02%, respectively. Bonds only declined once during the five-year period, by a relatively nominal -2.02%, and still averaged a compound rate of return of 4.86%—not bad for the conservative portion of a portfolio.

Additionally, various bond categories have done even better than the Aggregate Bond Index, which consists of just U.S. government and corporate bond holdings. For instance, emerging market bonds (EMB) achieved a compounded return of 9.30%, while high yield bonds (HYG) returned 12.26% annually over the same five-year span. An investor whose bond portfolio was diversified among a range of asset categories has far from suffered since the expectation of a rate increases began.

Will You Miss the Stability of Bonds?

Let’s also consider the consistency of bonds. Since 1980, the Aggregate Bond Index has achieved a positive return an astonishing 31 out of 34 years (91% of the time!). Given this data, perhaps bonds aren’t as likely to decline in value as some investors think.

Equally amazing, although the bond index has achieved an annual return as high as 32.65% during this time period (in 1982), the largest loss it ever suffered in a calendar year over the same period was just -2.92% (in 1994). Over the entire 34-year period, the index obtained an average annual gain of 8.42%. Bottom line: Over the last 34 years, bonds have offered a lot of return for relatively little risk.

Diversification: the Most Important Factor

Not putting all your eggs in one basket is another basic principal of investing, and the primary motivation for having a significant portion of your portfolio allocated in bonds. It is important to remember that for an investor with a long-term perspective, equities will likely provide the majority of investment growth and return in a portfolio while bonds are needed to reduce volatility and risk.

For example, while a portfolio that was 100% stocks suffered a 38.6% loss in 2008, a portfolio that was 50% stocks and 50% bonds suffered a loss of only 14.5% the same year—still not pleasant, but much more manageable.

***

Correlation

Bonds reduce risk in a portfolio because their return has a low correlation to the return of stocks. How low? Since 1928, both the S&P 500 and the 10-year treasury note have lost value during a calendar year only three times (in 1931, 1941 and 1969). That is less than 4% of all annual periods!

Further, since the Barclays Aggregate Bonds Index was created in 1973, the index has never decreased in value in the same year as the S&P 500. Amazing, but true! Clearly, bonds are fulfilling their role as a diversifier and reducing the volatility in your portfolio.

There is Always a Role for Bonds

Despite the continuous threat of rising interest rates, bonds have continued to perform. More importantly, history illustrates that mixing bonds with stocks smoothes out the investment results of your portfolio.

Assessment

Don’t get sucked in by the media buzz. Bonds are too valuable an asset to disregard.

The Author:

Lon Jefferies is a Certified Financial Planner with a fee-only approach to ensure the client’s best interest is the top priority. He isn’t paid commission and gains nothing through recommendations but his client’s satisfaction. He has contributed to national publications like The Wall Street Journal, The New York Times, USA Today, Morningstar.com and Investment News.

Conclusion

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Filed under: Investing, Portfolio Management | Tagged: bonds, Investing, Investment Portfolio Analysis, Lon Jefferies MBA CFP® | 1 Comment »

Physician Creditor Protection for IRAs, Annuities and Insurance for 2014-15

Posted on September 17, 2014 by Dr. David Edward Marcinko MBA MEd CMP™

A SPECIAL ME-P REPORT

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Asset Protection Planning for Qualified and Non-Qualified Retirement Plans, IRAs, 403(b)s, Education IRAs (Coverdell ESAs), 529 Plans, UTMA Accounts, Health/Medical Savings Accounts (MSA/HSAs), Qualified and Non-Qualified Annuities, Long-Term Care Insurance, Disability Insurance and Group, Individual and Business Life Insurance [Ohio Focus]

By Edwin P. Morrow III; JD LLM MBA CFP® RFC®

EDITOR’S NOTE:

Hi Ann,

A couple years ago you posted an earlier version of the attached Asset Protection Outline. I updated it to include quite a bit more discussion of different protection levels for various kinds of accounts, and included more discussion of states other than Ohio, including a 50 state chart with IRA/403b protections.

So please delete the old one and replace with this one which contains more topics, including some substantial discussion of issues regarding current class action litigation jeopardizing asset protection for Schwab and Merrill Lynch IRAs.

Regards
Ed

###

The Importance of Asset Protection as Part of Financial and Estate Planning for Doctor’s and Medical Professionals

Asset Protection has become a ubiquitous buzz-word in the legal and financial community. It often means different things to different people. It may encompass anything from buying umbrella liability insurance to funding offshore trusts.

What is most likely to wipe out a client’s entire net worth? An investment scam, investment losses, a lawsuit, divorce or long-term health care expenses? “Asset Protection” may be construed to address all of these scenarios, but this outline will cover risk from non-spousal creditors as opposed to risk from bad investments, divorce, medical bills or excessive spending. Prudent business practice and limited liability entity use (LP, LLP, LLC, Corporation, etc) is the first line of defense against such risks. Similarly, good liability insurance and umbrella insurance coverage is paramount.

However, there is a palpable fear among many of frivolous lawsuits and rogue juries [especially among physicians and medical professionals]. Damages may exceed coverage limits. Moreover, insurance policies often have large gaps in coverage (e.g. intentional torts, “gross” negligence, asbestos or mold claims, sexual harassment).

As many doctors in Ohio know all too well, malpractice insurance companies can fail, too. Just as we advise clients regarding legal ways to legitimately avoid income and estate taxes or qualify for benefits, so we advise how to protect family assets from creditors. Ask your clients, “What level of asset protection do you want for yourself?

For the inheritance you leave to your family?” Do any clients answer “none” or “low”? Trusts that are mere beneficiary designation form or POD/TOD substitutes are going out of style in favor of “beneficiary-controlled trusts”, “inheritance trusts” and the like.

Table of Contents

While effort is made to ensure the material is accurate, this material is not intended as legal advice and no one may rely on it as such. Sections II(d), II(i), V, VI and XI were updated Feb 2012, but much of the material and citations have not been verified since 2010. Permission to reprint and share with fellow bar members is granted, but please contact author for updates if more than a year old.

T.O.C. [Page Number]

I. Importance of Asset Protection 2

II. State and Federal Protections Outside ERISA or Bankruptcy 4

a. Non-ERISA Qualified Plans: SEP, SIMPLE IRAs 5

b. Traditional and Roth IRAs, “Deemed IRAs” 7

c. Life Insurance 9

d. Long-Term Care, Accident/Disability Insurance 13

e. Non-Qualified Annuities 13

f. Education IRAs (now Coverdell ESAs) 16

g. 529 Plans 17

h. Miscellaneous State and Federal Benefits 18

i. HSAs, MSAs, FSAs, HRAs 18

III. Federal ERISA Protection Outside Bankruptcy 20

IV. Federal Bankruptcy Scheme of Creditor Protection 26

V. Non-Qualified Deferred Comp – Defying Easy Categorization 30

VI. Breaking the Plan – How Owners Can Lose Protection 32

(incl Prohibited Transactions and Schwab/Merrill Lynch IRA problems) 35

VII. Post-Mortem – Protections for a Decedent’s Estate 51

VIII. Post-Mortem – State Law Protections for Beneficiaries 52

IX. Post-Mortem – Bankruptcy Protections for Beneficiaries 54

X. Dangers and Advantages of Inheriting Through Trusts 56

XI. Piercing UTMA/UGMA and Other Third Party Created Trusts 59

XII. Exceptions for Spouses, Ex-Spouses and Dependents 61

XIII. Exceptions when the Federal Government (IRS) is Creditor 62

XIV. Fraudulent Transfer (UFTA) and Other Exceptions 68

XV. Disclaimer Issues – Why Ohio is Unique 69

XVI. Medicaid/Government Benefit Issues 71

XVII. Liability for Advisors 72

XVIII. Conflicts of Law – Multistate Issues 73

XIX. Conclusions 75

Appendices

A. Ohio exemptions – R.C. §2329.66 (excerpt), §3911.10, §3923.19 78

B. Bankruptcy exemptions – 11 U.S.C. § 522 excerpts 80

C. Florida IRA exemption – Fla Stat. § 222.21 (note-may be outdated) 85

D. Sal LaMendola’s Inherited IRA Win/Loss Case Chart 86

E. Multistate Statutory Debtor Exemption Chart 88

###

Assessment

This outline will discuss the sometimes substantial difference in legal treatment and protection for various investment vehicles and retirement accounts, with some further discussion of important issues to consider when trusts receive such assets.

Beware of general observations like: “retirement plans, insurance, IRAs and annuities are protected assets” – that may often be true, but Murphy’s law will make your client the exception to the general rules. The better part of this outline is pointing out those exceptions.

2012 WHITE PAPER LINK:

Creditor Protection for IRAs Annuities Insurance Nov 19 2010 WC CLE Feb 2012 update

***

2014 WHITE PAPER LINK UPDATE:

Optimal Basis Increase Trust Aug 2014

***

ABOUT THE AUTHOR:

Mr. Edwin P. Morrow III, a friend of the Medical Executive-Post, is a Wealth Specialist and Manager, Wealth Strategies Communications Ohio State Bar Association Certified Specialist, Estate Planning, Probate and Trust Law Key Private Bank Wealth Advisory Services. 10 W. Second St., 27th Floor Dayton, OH 45402. He is an ME-P “thought leader”.

Constructive criticism or other comments welcome.

Conclusion

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Filed under: Estate Planning, Experts Invited, Financial Planning, Health Insurance, Insurance Matters, Portfolio Management, Risk Management | Tagged: 403(b) plans, 529 plans, Annuities and Insurance, anuities, asset protection, Creditor Protection Working White-Paper for IRAs, disability insurance, Education IRAs, Edwin P. Morrow III JD, Estate Planning, Financial Planning, HSA, insurance planning, IRAs, LTCI, MSA, Non-Qualified Retirement Plans, Qualified Retirement Plans, Risk Management, UTMA, Wealth Specialist | 5 Comments »

Is it Fire Drill Time for Physician Investors?

Posted on August 14, 2014 by Dr. David Edward Marcinko MBA MEd CMP™

Catastrophes and “Black Swans” Happen

An ME-P Special Report

By Lon Jeffereis MBA CFP® CMP®

History tells us that over a long enough time span catastrophes are likely to occur. Fires, flooding, earthquakes – none can be prevented and all can be potentially devastating. While these events can’t always be avoided, we can prepare for these “black swans.”

Running practice fire drills enables us to act appropriately during misfortune while maintaining emergency food storage ensures we won’t starve when tragedy strikes.

Just as physical calamity can turn lives upside down, financial upheaval can lead to an unrecoverable loss. Fortunately, we have the ability to prepare for financial uncertainty in the same way we prepare for other exposures. As the current bull market is now both the fourth longest in history (64 months) and the fourth largest (+192% gain), now would be a perfect time to ensure you are prepared for the next market pullback.

Run a Portfolio Fire Drill

You can run a fire drill for your portfolio by understanding the loss potential of your holdings. It is critical to recognize that the amount of volatility your portfolio will experience in declining market environments is dependent on your asset allocation – how much of your account is invested in stocks vs. bonds. The larger the percentage of stocks in a portfolio, the more the portfolio’s value will increase during bull markets but decrease when the market declines. Let’s look at the historical performance and risk levels of a range of diversified stock-to-bond ratios:

Asset Allocation – Risk & Return (1970-2013)

***

Portfolio Allocation	Average Annual Return	Large Loss 08′
100% Stocks	10.85%	-39%
80% Stocks20% Bonds	10.33%	-30%
60% Stocks40% Bonds	9.99%	-20%
50% Stocks50% Bonds	9.76%	-15%
40% Stocks60% Bonds	9.49%	-11%
20% Stocks80% Bonds	8.85%	-4%

***

After determining the asset allocation of your portfolio, ask yourself how you would respond to another market correction like we experienced in 2008. For this exercise, considering loss in dollar terms is particularly productive. For instance, if 80% of your portfolio is invested in stocks, you might be able to convince yourself that you could sustain a 30% loss. However, supposing you have $500k invested, a 30% loss would mean your portfolio is suddenly depleted to $350k — $150k of hard earned money just evaporated. To many, the thought of losing $150k is more uncomfortable than the thought of a 30% loss.

Next, picture every media outlet sending warnings day after day about how the market is only going to get worse. Imagine yourself checking what the markets are doing multiple times a day and constantly being disappointed that it is another day of losses.

Lastly, visualize your occasional friend, neighbor or family member bragging about how he got out of the market before the collapse and telling you how you are a fool for not doing so.

***

[Accidents Happen]

How would you respond in such an environment? Would you have a hard time sleeping or digesting your food? It’s critical to be honest with yourself. If you would stray from your long-term investment strategy by selling after a market drop and waiting for the market to recover, your current portfolio may be too aggressive. If so, scale back the assertiveness of your portfolio by reducing your stock exposure now because selling stocks during a market decline is the last thing you want to do.

Sound financial planning suggests individuals should scale back the assertiveness of their portfolio as they approach retirement. While a young worker with 30 years until retirement can afford to be aggressive and has time to recover if a large loss in suffered, a person who is closer to retirement can’t afford to endure a significant loss right before the invested funds are needed to cover life expenses.

Maintain an Emergency Financial Storage

As stocks and bonds are the long-term portion of your investment portfolio, cash equivalents are your tool for dealing with short-term spending needs. Before even investing, everyone should have an emergency reserve holding enough cash to cover three to six months of expenses. These funds should only be tapped in the event of a job loss or a medical emergency.

Be Prepared

Additionally, investors who are taking withdrawals from their portfolio in order to meet cash flow needs should also have the equivalent of two years of necessary withdrawals in cash at all times. These funds should be used to cover living expenses during the next market correction. Having this emergency financial storage will prevent you from having to take withdrawals in a down market and allow your portfolio time to recover.

Assessment

No one knows when the next bear market will come. However, just like winter follows every fall, market corrections will ultimately come after every bull market. Preparing for such a financial downturn will ensure you act appropriately when the time comes and prevent financial catastrophe.

BOOK: Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

Conclusion

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

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PHYSICIANS: www.MedicalBusinessAdvisors.com
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BLOG: www.MedicalExecutivePost.com
FINANCE: Financial Planning for Physicians and Advisors
INSURANCE: Risk Management and Insurance Strategies for Physicians and Advisors

BOOK:

Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

Filed under: Financial Planning, iMBA, Inc., Portfolio Management, Risk Management | Tagged: asset allocation, Black Swans, Lon Jefferies MBA CFP® | Leave a comment »

A 2014 Stock Market Mid-Year Review

Posted on July 14, 2014 by Dr. David Edward Marcinko MBA MEd CMP™

What Do We Know?

[A SPECIAL R&D REPORT FOR THE ME-P]

By Lon Jefferies MBA CFP®

If you pay close enough attention to the news media you’ll eventually learn that much emphasis is placed on pundits’ forecasts, but very little consideration is given to how accurate the projections turn out.

When 2014 started, there were some pretty widely-accepted expectations regarding the investment environment. Let’s take a minute to review those anticipations and analyze how precise they turned out to be.

Interest Rates

One of the most universally accepted beliefs going into 2014 was that interest rates were on the cusp of rising, and that consequently, bond returns would drop. (Of course, this has been the expectation for around five years now, but that is a discussion for a later time.) Investors were questioning whether they should reduce or eliminate the bond portion of their portfolios until the rate increase occurred.

So, have we experienced the rise in interest rates we were expecting? On 1/2/14, the yield on the 10-year Treasury note was 3%. As of 6/30/14, the yield on the same note was 2.516%.

That’s right — interest rates have actually decreased over the last six months. Did those who stuck with their investment strategies and maintained their bond positions experience a decline in their portfolio’s value?

Here is how a variation of different bonds have performed year-to-date (as of 6/30/14):

US Government Bonds (IEF): 4.89%
US TIPS (TIP): 5.25%
Corporate Bonds (LQD): 5.37%
International Bonds (IGOV): 5.66%
Emerging Market Bonds (LEMB): 6.42%

Equities

How about the equities side of the portfolio?

In January, predictions for stocks were all over the map — some predicted a full out correction (a loss of more than -20%), some predicted that we would keep chugging along at 2013′s pace, and most predicted something somewhere in between. There were, however, many factors that were a common cause of concern.

So, was the reduction of the Fed’s Quantitative Easing a legitimate fear? In fact, this possibility has come to fruition. In December, the Fed was buying $85 billion per month of financial assets from commercial banks and other private institutions. The Fed has reduced this monthly amount during every meeting it has held this year, and that amount is now down to $35 billion per month. However, the key question is what impact has this had on the stock market.

Here is how a wide basket of equities have performed year-to-date (as of 6/30/14):

The most widely accept fear among equity investors was the phasing out of the Fed’s Quantitative Easing (QE) program. Investors worried that the Fed would begin lowering the amount of loans the government would buy from commercial banks each month, which would lower the availability of capital in the economy.

Historically, less money in the system leads to less investing in new businesses, less innovation, and fewer jobs created.

Large Cap Stocks (IVV): 7.08%
Mid Cap Stocks (IJH): 7.57%
Small Cap Stocks (IJR): 3.30%
Foreign Stocks (IEFA): 4.34%
Emerging Markets (IEMG): 4.70%
Real Estate (IYR): 16.09%
Commodities (DJP): 7.32%
Gold (GLD): 10.27%

Volatility

The last widely-held viewpoint at the beginning of the year was that 2014 was likely to be a year more volatile than anything we had experience in 2012 or 2013. There was a lot of clatter about valuations and PE ratios being too high, concern about the war in Ukraine, a consensus that China was about to experience a drastic decline in both imports and exports, and a general feeling that the market was due for a significant (if not healthy) pullback.

Additionally, how much have we heard about unfavorable weather patterns over the last six months?

Lessons Learned

Of course, all of this is not to say that interest rates will never rise, that bond values will never decline, and that the market won’t return to the roller coaster it is.

In fact, all those things are certain to happen. Unfortunately, anyone who contends to know the uncertain part of this equation — when — likely doesn’t actually know anymore than you or me. For this reason, having and sticking to a diversified investment strategy that coincides with a detailed financial plan is the most likely path to financial success.

The most significant lesson inherent in these numbers is that market expectations are essentially useless. Near the beginning of the year, the vast majority of experts anticipated interest rates to rise, bond values to drop, and volatility to increase. Unfortunately, pundits making projections are rarely held to their inaccurate forecasts and are allowed to continue making a living showing they have no greater knowledge than the average investor.

Assessment

So, has 2014 been a wild ride?

The S&P 500 dropped by -5.51% from 1/22/14 – 2/03/14, and by -3.89% from 4/2/14 – 4/11/14. These are the only declines of more than 2% that the S&P 500 has experienced all year!

Additionally, as of 6/30/14, the S&P 500 has now gone 54 consecutive trading days without an up or down move of greater than 1%, the longest stretch since 1995! By historical standards, 2014 is considered to be a very smooth ride.

More:

Stock Market at New Highs!

Conclusion

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FINANCE: Financial Planning for Physicians and Advisors
INSURANCE: Risk Management and Insurance Strategies for Physicians and Advisors

Filed under: Investing, Portfolio Management | Tagged: 2014 Stock Market Review, Investing, Lon Jefferies MBA CFP®, Portfolio Management | 12 Comments »

Understanding Some Common Portfolio Payout Methods

Posted on July 7, 2014 by Dr. David Edward Marcinko MBA MEd CMP™

By Dr. David Edward Marcinko MBA CMP™

Recognizing the risk that market volatility represents to long-term portfolio health, investment accounts and endowment funds utilize a variety of methods to calculate periodic payouts.

Investment Yield: An investment portfolio using this method spends only its dividends and interest and re-invests any unrealized and realized gains. There would appear to be two primary disadvantages of this method. First, the payout amount will be extremely volatile as yields on equity and fixed income investments fluctuate. Second, the endowment manager could be encouraged to adopt a short-term focus on yield to the detriment of purchasing power preservation.
Percentage of the Prior Year’s Ending Market Value: An endowment using this method would withdraw some fixed percentage of the prior year’s market value. As with the Investment Yield method, disbursements from the endowment can be somewhat volatile under this method.
Moving Average: This approach, which is most common among educational institutions, generally involves taking a percentage of a moving average of the endowment market value. The percentage commonly approximates 5% over a 3-year period.
Inflation Adjusted: This portfolio method simply adds some factor to the applicable rate of inflation for the institution or investor.
Banded Inflation or Corridor: This account method is similar to the Inflation Adjusted method except that it establishes a corridor or band of minimum and maximum increases in an attempt to limit the volatility of the disbursement amounts.

More:

Stock Market at New Highs!

Conclusion

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

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INSURANCE:Risk Management and Insurance Strategies for Physicians and Advisors

Filed under: CMP Program, Portfolio Management | Tagged: certified medical planner, CMP, David E. Marcinko, Endowment Management, Portfolio Payout Methods | 1 Comment »

Stock Market at New Highs!

Posted on June 18, 2014 by Dr. David Edward Marcinko MBA MEd CMP™

Is this a Bubble?

[A SPECIAL R&D REPORT FOR THE ME-P]

By David K. Luke MIM, MS-PFP, CMP™ [Certified Medical Planner™] http://www.networthadvice.com

The market news has been replete with the phrase “new market high“ in the business news every couple of weeks as of late. The corresponding message is often that the stock market is likewise in a bubble. The S&P 500 index and the Dow Jones Industrial Average index are at all-time highs. The indexes have surpassed the 2007 peak.

The reality is however that the S&P 500 is up less than 6% from the beginning of the year, and the Dow is up about 2%. Most investors, of course, do not invest just in these two indexes, as these two indexes represent very large capitalized companies.

I am reminded of the customer in 1995 when I worked at a national brokerage firm that called me to liquidate his entire stock portfolio. “The stock market was too high,” he said. He was 5 years too early.

Risk Mitigation

Most investors will have a diversified portfolio that includes mid-cap stocks, small-cap stocks, and international stocks as well as large cap stocks such as found in the S&P 500.

Of course, these equity investments are also typically subdivided into the broader categories of “Growth” and “Value.” Which means most investors that believe in diversification will own four different “types” of stock, each divided into two different categories for eight different baskets of stock if you will. The typical daily news will focus only perhaps on the S&P 500, which is a portfolio of large capitalized growth stocks. This is only one of the eight different types of stock that an investor would typically own.

In strong bull markets, typically all eight categories of stock go up together with some degree of correlation. This is also true in strong bear markets with all eight categories of stock going down in some degree of correlation. Portfolio managers typically try to offset high correlation of investments by owning investments in asset classes that typically do not all correlate together. This is a major technique used to reduce the volatility in an account.

However as you can see so far this year, most all of the eight stock indexes with the exception of small-cap growth are up slightly in line with the S&P index.

***

[As of June 13, 2014]

Name	Ticker	% Total Return YTD	% Total Return 12 Month
Large Cap	iShares S&P 500 Growth	IVW	5.59	22.55
iShares S&P 500 Value	IVE	5.76	18.39
Mid Cap	iShares S&P MidCap 400 Growth	IJK	2.69	18.24
iShares S&P Mid-Cap 400 Value	IJJ	7.66	23.19
Small Cap	iShares S&P Small-Cap 600 Growth	IJT	-0.52	20.8
iShares S&P Small-Cap 600 Value	IJS	2.3	21.37
Foreign Large Blend	iShares Core MSCI EAFE	IEFA	3.75	19.25
Barclays Aggregate Bond Index	iShares Core US Aggregate Bond	AGG	3.26	2.39

Source: Morningstar

***

Inflation

The buying power of the US Dollar has changed over the years. The Consumer Price Index (CPI), a common measure of inflation, has averaged around a 3% annual increase from 1913 – 2014 according to the U.S. Department of Labor Bureau of Labor Statistics.

In fact, an item purchased for $5.00 in 1913 would have a cost of $119.73 today, or a cumulative rate of inflation for the past 100 years of 2,294.7%. The cost of living rising each year is a safe bet. Inflation has increased every year in the past 50 years with one exception: 2009 when inflation fell -0.4%.

Update: 06/17/2014 04:10 ET

**[Market Update]**
Symbol	Last	Change
DOW	16,808.49	+27.48
NASDAQ	4,337.23	+16.13
S&P	1,941.99	+4.21

Conclusions:

The Market Indexes at new highs does not indicate a bubble. In fact, the market should, relatively speaking, regularly be hitting new highs because of the consistency of positive inflation. Prices of goods and services today are at all-time highs. Does that mean we are in an “inflation” bubble? No. This is normal.
The S&P 500 is not an accurate measure of the US economy. While the S&P 500 is the common “market” indicator in the US, only about 55% of the earnings of the index come from the US. (Source: RBC Capital Markets Research, Capital IQ 2012). This is because mainly large multinational companies such as Google, IBM, and Apple that have a significant amount of overseas revenues weight the index.
The S&P 500 or the Dow Jones Industrial Average (DJIA – 30 stocks) is most likely not an exact reflection of your personal stock portfolio, which would expectantly be more diversified. A typical well-diversified long-term investment portfolio would include not just large cap stocks (such as found in the S&P 500 or DJIA), but mid, small, and international stocks from the growth and value camp, as well as a diversified bond holding.
Overpriced stocks, just like overpriced real estate, are more prudently ascertained by value measures, not simply by raw index numbers. A stock hitting new highs could still be quite undervalued. Meaningful variables such as earnings growth, price to earnings ratio, dividend yield, price-to-book, price-to-sales, and other metrics should be considered.

Conclusion

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

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FINANCE:Financial Planning for Physicians and Advisors
INSURANCE:Risk Management and Insurance Strategies for Physicians and Advisors

Filed under: Interviews, Op-Editorials, Portfolio Management | Tagged: certified medical planner, CMP™ Course, david luke, Dow Jones Industrial Average, Stock Market at New Highs!, stock market bubbles, The S&P 500 index | 15 Comments »

Two Healthcare Sectors the Stock Market Got Wrong on Election Day 2012

Posted on June 2, 2014 by Dr. David Edward Marcinko MBA MEd CMP™

How various sectors in the Health Care Industry fared under the PP-ACA legislation?

[A SPECIAL R&D REPORT FOR THE ME-P]

By David K. Luke MIM, MS-PFP, CMP™ [Certified Medical Planner™]

Website: http://www.networthadvice.com

There has been a lot of speculation since the words “Affordable Care Act” were first whispered years ago on how the various sectors in the Health Care Industry would fare under such legislation. I proposed that a good indicator would be to look at the performance of the individual health care sector stocks on the first trading day after the election.

(See With Obama Election Win, “Mr. Market” Weighs in on the ACA Equity Winners and Losers by David K. Luke on November 16, 2012).

Link: With Obama Election Win “Mr. Market” Weighs in on the ACA Equity Winners and Losers

The day after Pres. Obama’s reelection on Wednesday, November 7, 2012 the stock market was down over 2% as measured by the S&P 500 and the Dow Jones Industrial Average (DJIA). The common reason given was increased doubt that the impending “fiscal cliff” issue, which was splitting the House and the Senate, would be resolved. There was however, another big concern on investor’s mind: the future of the Affordable Care Act. While the election was close when measured by the popular vote with President Obama earning 51.06% versus Mitt Romney with 47.20%, the electoral vote showed a hands-down Obama victory with 332 versus 206 votes. Investors voted with their pocketbooks with that first trading session following the election showing certain healthcare sectors up in price, other healthcare sectors with moderate returns, and certain healthcare sectors down in price.

Disparate Health Care Sector Returns

It is interesting to look back now over a year and a half later and see how accurate those investor votes were on that first day of realization that health care reform was continuing forward at a much faster pace now that President Obama would be serving a second term. Keeping in mind that the day was a very negative day as a whole in the stock market, a number of healthcare sectors were up in price. This group includes Hospital Stocks and Medicaid HMOs. Note the phenomenal one-day returns (in a down 2% market!) on the sample stocks in these two groups:

Hospital Stocks

Health Management Associates (HMA) +7.3%
HCA Holdings Inc. (HCA) +9.4%
Community Health Systems Inc. (CYH) +6.0%
Tenet Healthcare Corp. (THC) +9.6%

Medicaid HMOs

Molina Healthcare Inc. (MOH) +4.6%
Centene Corp. (CNC) +10.1%
WellCare Health Plans Inc. (WCG) +4.4%

Such positive returns on a big down day in the market indicates investors assessing these healthcare sectors being good investments under an Obama presidency and a positive outlook for the implementation of the Affordable Care Act. The other up sector on that day was the Drug Wholesalers, up almost 1% on that negative day. (See “Selected Health Care Performance” Chart – below).

The market had a tepid response to the Pharmacy Benefit sector, as well as the Generic Pharmacy, Testing Labs, and Big Pharma. In my sample group, these sectors were down -.4%, -7%, -1.7%, and -1.4% respectively. It is important to note however that these sectors while slightly positive or barely negative still performed better than the general market that day.

Two Sectors

But, the two healthcare sectors that the stock market severely punished with the voting of substantially more sellers than buyers by investors on that first post-election day were the Medical Device Companies (down 2.5% in the sample group) and the Medicare Part D Companies (down 4.7% in the sample group). The thought at the time was that Medical Device Companies, facing an impending medical device excise tax of 2.3% on the sale of most medical devices in the United States, would be devastated, and that Medicare Part D Companies would face severe profit constraints with tighter-fisted government regulations imposed by the ACA.

***

The Retro-Specto-Scope

In hindsight, investors were correct on two out of the three predictions based on stock market prices on the various healthcare sectors. Hospital Stocks, Medicaid HMOs, and Drug Wholesalers, the leading sectors indicated to be winners with the impending implementation of the ACA, are up 69.8%, 63.6% and 76.5% respectively in the sample groups since November 7, 2012. This remarkable and closely parallel return for these three sectors seemed to prove that the stock market on November 7, 2012 correctly picked the three winning health care sectors! The S&P 500 index for the same time is up 32.02%, a nice return for 1 ½ years but about half the return of these apparently huge benefactors of the ACA. The healthcare sectors that investors felt less positive about (but more positive than the general stock market) on that first postelection day were Pharmacy Benefit Companies, Generic Pharmacy Companies, Testing Labs, and Big Pharma. These four health care sectors are up 43.8%, 40.5%, 6.4%, and 20.5% respectively. Again, in terms of ranking the sectors, these four sectors performed in line based on the comparative returns of the other healthcare sectors.

Wisdom of Crowds

Amazingly, it appears that the emotional Mr. Market predicated quite accurately on Wednesday, November 7, 2012, in one day of trading, not just which health sectors would be good investments for the near future, but the actually ranking of the future performance of the sectors! It seems as though the stock market, as one large voting machine, precisely dissected the over 20,000 pages + of resulting legislation created from the original 906 pages (pdf here) of the PPACA law and distilled it down to profits and losses with the resulting winners and losers in the health care industry in one trading session.

Two [2] Big Misses

Investors however were way off on their concerns about Medical Device Companies and Medicare Part D Companies. The two sample groups were up 71.3% and 66.4% in the time of November 7, 2012 to May 19, 2014 respectively, more than double the S&P 500 for the same period, and in line with the best performing sectors! This is spite of the fact that stock sample of these two groups were the two worst performers on post-election day trading. What happened?

***

The “Medical Device Excise Tax” Fable and the “Private Insurers Will Control Costs” Fairy Tale

Wall Street has sharpened their pencils in the last year and a half and realized they have gravely underestimated the profit potential of the Medical Device makers and the Managed Care Health Insurers, in spite of the ACA. Based on stock price performance of the sample group of major players in the past 18 months, fewer sectors look as profitable as the Medical Device Industry and the Medicare Part D Industry. What happened?

The Medical Device industry states that the tax will cost the US “tens of thousands of jobs” and that those jobs will be shipped overseas. A number of issues that are involved here however refute these claims (http://www.factcheck.org/2013/10/boehner-and-the-medical-device-tax/. It appears that any targeted reductions were not related to the implementation of the tax, which became effective January 1, 2013, in spite of heavy protest by the industry. Medical technology continues to have a bright future regardless of the tax.

The notion that the “Affordable” Care Act will help reign in the rampant cost increases of Medicare’s “Part D” program seem to be elusive. Private insurers have done a poor job of keeping drug prices down, especially when compared to the discounts the government gets for Medicaid. Medicare Part D companies wield significant influence on Capitol Hill, and impending steeper discounts look unlikely.

Everybody Wins, Except …

Before the ACA implementation, about 85% of Americans had health insurance. Currently with an additional 7 million Americans with health insurance thanks to Obamacare, an additional 2.2% of Americans now have coverage, or about 87% of all Americans. How can such a slight increase in new health care consumers be responsible for such large anticipated profits in the health care sector? It cannot. Wall Street is telling us that the new health law is not about new customers, but about increased profit margins for the health care industry. I can draw three conclusions:

The Affordable Care Act may not be so affordable for health consumers
Most companies in the Health Care Industry stand to gain financially with ACA. There is one sure loser with ACA: The physician, who can only look forward to increased workloads and mpending Medicare SGR pay cuts.

THE CHART [Research and Development]

Selected Health Care Sector Stock Performance Random Sampling of Publically Traded Companies From President Obama Re-election Date to Present

Chart

Conclusion

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Filed under: Breaking News, CMP Program, Drugs and Pharma, Experts Invited, Investing, Portfolio Management | Tagged: ACA, Affordable Care Act., CMP Program, david luke, Health Care Industry, Healthcare Sectors, hospital stocks, Investing, medicaid HMOs, Pharmacy Benefit sector, www.CertifiedfMedicalPlanner.org | 3 Comments »

How Much is a Financial Advisor Really Worth?

Posted on April 17, 2014 by Dr. David Edward Marcinko MBA MEd CMP™

And … Can it be Quantified?

[By Staff Reporters]

How much of a boost in net returns can financial advisors add to client portfolios? According to Vanguard Brokerage Services®; maybe as much as 3%?

The Study

In a recent paper from the Valley Forge, PA based mutual fund and ETF giant, Vanguard said financial advisors can generate returns through a framework focused on five wealth management principles:

• Being an effective behavioral coach: Helping clients maintain a long-term perspective and a disciplined approach is arguably one of the most important elements of financial advice. (Potential value added: up to 1.50%).

• Applying an asset location strategy: The allocation of assets between taxable and tax-advantaged accounts is one tool an advisor can employ that can add value each year. (Potential value added: from 0% to 0.75%).

• Employing cost-effective investments: This component of every advisor’s tool kit is based on simple math: Gross return less costs equals net return. (Potential value added: up to 0.45%).

• Maintaining the proper allocation through rebalancing: Over time, as investments produce various returns, a portfolio will likely drift from its target allocation. An advisor can add value by ensuring the portfolio’s risk/return characteristics stay consistent with a client’s preferences. (Potential value added: up to 0.35%).

• Implementing a spending strategy: As the retiree population grows, an advisor can help clients make important decisions about how to spend from their portfolios. (Potential value added: up to 0.70%).

Source: Financial Advisor Magazine, page 20, April 2014.

The Fine-Print

But, Vanguard notes that while it’s possible all of these principles could add up to 3% in net returns for clients, it’s more likely to be an intermittent number than an annual one because some of the best opportunities to add value happen during extreme market lows and highs when angst or giddiness [fear and greed] can cause investors to bail on their well-thought-out investment plans.

More: http://www.CertifiedMedicalPlanner.org

Assessment

Most retail financial services products are designed to enhance the well-being of the Financial Advisor and/or vendor at the expense of clients. The clients get only the leftovers. Of course, no one tells them that secret. They have to figure it out for themselves. As the old line goes, “Where are the customers’ boats?”

Source: Rowland, M: Planning Periscope [Where Advisors are the Clients]. Financial Advisors Magazine; page 36, April 2014

Conclusion

Are doctors different than the average investors noted in this essay?

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***

Filed under: CMP Program, Experts Invited, Interviews, Portfolio Management | Tagged: financial advisors, How Much is a Financial Advisor Worth?, Investing, investment advisor, www.CertifiedMedicalPlanner.org | 4 Comments »

Understanding Average [Physician] Investor Results

Posted on April 16, 2014 by Dr. David Edward Marcinko MBA MEd CMP™

On the failure of the average investors to keep up with investment markets

[By Lon Jefferies MBA CFP® http://www.NetWorthAdvice.com]

The following chart was recently published by Bob Doll at Nuveen Investments:

Epic Failure

Doll attributes the failure of the average investor to keep up with investment markets (or even inflation, for that matter) to market timing and emotionally driven decisions to move into and out of the market.

The Data

How long has it been supposedly common knowledge that investors are better off choosing an investment strategy that represents their risk tolerance and sticking to it both in the good times and bad? Still, this data illustrates that investors are terrible at sticking to their strategy when markets stall, and still have an overwhelming urge to buy after the market has already done well and sell shortly after a market drop (i.e. buy high and sell low).

A Financial Plan

Again, having a defined, documented investment strategy can help you avoid the types of behavior that cause other investors to significantly under-perform the market. This is where having a written financial plan can be invaluable.

Assessment

Of course, working with a financial advisor with a history of executing a steady, buy-and-hold approach can provide important support in avoiding detrimental behaviors during the rough times.

Conclusion

Are doctors different than the average investor noted in this essay?

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Cyclical Stocks versus Defensive Stocks

Posted on April 7, 2014 by Dr. David Edward Marcinko MBA MEd CMP™

Industry and Economic Cycles

By Tim McIntosh MBA CFP® MPH http://www.SIPLLC.com

The distinction between cyclical stocks and defensive stocks lies in how closely related the stock’s performance is to industry and economic cycles.

Cyclical Stocks

Stocks that operate in industries that are highly correlated to the strength of the domestic economy are considered to be cyclical stocks.

For example, the construction and automobile industries are generally considered cyclical industries given that demand for their products is highly related to the current economic environment. In periods of weak or declining economic growth, demand for automobiles and new construction products decline, thus resulting in a decline in earnings for companies operating within those industries.

Defensive Sticks

Defensive stocks are viewed as being less susceptible to fluctuations in the overall economy.

For example, since demand for food products is generally considered to be less dependent on the strength or weakness of the overall economy, food stocks are generally considered defensive stocks.

More:

Conclusion

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Determining Intrinsic Stock Value Using the Dividend Discount Model

Posted on February 24, 2014 by Dr. David Edward Marcinko MBA MEd CMP™

What it is – How it works?

By Dr. David Edward Marcinko MBA CMP™

http://www.CertifiedMedicalPlanner.org

The Dividend Discount Model (DDM) is one of the most widely used valuation methods for estimating a stock’s intrinsic value. A stock can be thought of as the right to receive future dividends. A stock’s intrinsic value is defined as the present value of its dividends under the DDM.

In its simplest form (i.e., zero-growth), the DDM determines a stock’s value by dividing the stock’s dividend by the investor’s required rate of return. The investor’s required rate of return should reflect current interest rates plus the risk associated with investing in the stock.

Rate of Return

The rate of return determined under the CAP-M [Capital Asset Pricing Model] is frequently used in the DDM.

For example, assuming that ABC Corporation pays a $2.00 dividend per share and that an investor requires a 10 percent return for holding ABC stock, the stock’s intrinsic value is $20 ($2/0.10).

Shortcomings

Shortcomings of the zero growth DDM include the following:

The model assumes that the stock’s dividends will remain constant over time.
The model assumes that dividends are the only source of return available to stock investors, ignoring the effect of reinvested earnings.
The model can only be used to value stocks that pay dividends.
The model assumes that the company and the dividends last forever.

Despite its shortcomings, the DDM highlights the point that the stock market is discounting mechanism and that financial investments should be assessed in light of the future cash flows that they are expected to provide investors.

A Variation

One variation on the DDM that may be appealing to healthcare professionals involves determining the present value of a stock’s earnings rather than simply its dividends.

Theoretically, owning a stock entitles investors to a claim on the earnings that are left after accounting for the company’s costs (including interest costs). A model accounting for a stock’s earnings rather than just dividends may help account for the capital appreciation element of owning stocks because a corporation can either invest its earnings back into the company to pursue growth opportunities or distribute the earnings to shareholders in the form of dividends.

Conclusion

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Filed under: Investing, Portfolio Management | Tagged: Capital Asset Pricing Model, CAPM, DDM, Dividend Discount Model | 4 Comments »

Learn the “Right” Investing Lessons from 2013

Posted on January 9, 2014 by Dr. David Edward Marcinko MBA MEd CMP™

Understanding the Recency Effect

By Lon Jefferies MBA CFP® www.NetWorthAdvice.com

The year 2013 was viewed as a very positive one by most investors; especially physician-investors.

The S&P 500 index (measuring large cap U.S. stocks) was up 32.39% for the year.

However, the reality is most other asset categories didn’t come close to keeping up with the pace set by U.S. equities.

For instance:

Foreign Stocks (IEFA): 22.46%
Emerging Markets (IEMG): -2.77%
Real Estate (IYR): 1.16%
US Government Bonds (IEF): -6.09%
US TIPS (TIP): -8.49%
Corporate Bonds (LQD): -2.00%
International Bonds (IGOV): -1.37%
Emerging Market Bonds (LEMB): -6.73%
Commodities (DJP): -11.12%
Gold (GLD): -28.33%

In Hindsight

In retrospect, the way to maximize your gain last year would have been to hold a completely undiversified portfolio consisting of nothing but U.S. stocks. The danger going forward is to learn the wrong lesson from 2013. Investors always have the temptation to fall prey to the Recency Effect, continuing and exaggerating the behaviors that worked in the recent past believing the environment we’ve just been through will be permanent.

The Long-Term Benefits of Diversification

Many will abandon their investment strategy because it didn’t give them the absolute best result last year, failing to recognize the long-term benefit of diversification. I’d argue that a better perspective is to remind yourself that the definition of diversification is that you always dislike a portion of your portfolio.

Always Laggards

Even in the most widely prosperous market environment, a truly diversified portfolio will have an element or two that lags the market. In fact, if at any time a portion of your portfolio isn’t generating negative returns, you should be concerned about a lack of diversification in your investment strategy.

Allocate Assets Now

Now is an ideal time to review your asset allocation and remind yourself why we diversify. Modifying your allocation with a focus on what happened in 2013 would be similar to guessing a coin flip will land on tails because it did on the previous flip.

Assessment

The correct lesson to take from 2013 is that over time, a well-diversified portfolio is capable of producing sufficient returns to help you reach your investment goals while minimizing risk.

Conclusion

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Filed under: Investing, Portfolio Management | Tagged: asset allocation, DJIA, Lon Jefferies, Recency Effect, S&P 500 Index, U.S. equities., www.NetWorthAdvice.com | 1 Comment »

The Impact of Rising Interest Rates on Bonds

Posted on January 7, 2014 by Dr. David Edward Marcinko MBA MEd CMP™

On Interest and Exchange Rates

By Lon Jefferies MBA CFP® www.NetWorthAdvice.com

An interest rate hike has been widely anticipated for some time. According to an October survey of 50 top economists conducted by the Wall Street Journal, the yield on the 10-year Treasury was forecasted to rise nearly one percentage point to 3.47% by the end of 2014.

What impact would such a rise have on your investment or retirement portfolio?

The Impact

Christopher Philips, a senior analyst in Vanguard’s Investment Strategy Group, points out the historical inaccuracy of such forecasts.

For instance, a similar survey conducted in 2010 had economists predicting a 4.24% 10-year Treasury yield by the end of the year, an increase from 3.61% at the time of the forecast. In actuality, rates declines to 3.30% at year-end. The inaccuracy of these forecasts is well documented.

In fact, as Allen Roth mentioned in the December issue of Financial Planning Magazine, a 2005 study by the University of North Carolina titled “Professional Forecasts of Interest Rates and Exchange Rates” found economists predict future rates far less accurately than a random coin flip would fare as a predictor.

Clearly, we can’t be confident what interest rates will do in 2014, but what if economists are finally correct and rates rise? How damaging would an interest rate increase be for bonds? If interest rates rise one percentage point next year, the intermediate aggregate bond index is expected to lose -2.8% — far from catastrophic. Of course, such potential risk is notably minimal when compared to the downside of owning stocks (remember the -36.93% loss endured by the S&P 500 in 2008?).

Historical Performance

It is also interesting to study how bonds have historically performed in periods of rising interest rates. Craig Israelsen, a BYU professor, recently documented how bonds performed during the two most recent periods of rate increases. Israelsen points out that although the federal discount rate rose from 5.46% to 13.42% from 1977 through 1981, the intermediate government/credit index had a 5.63% annualized return during that period. The next period of rising interest rates was from 2002 through 2006, when the federal discount rate had a fivefold increase: from 1.17% to 5.96%. During this period, the intermediate government/credit index obtained a 4.53% annual return. Clearly, even in an environment of rising interest rates, bond performance was surprisingly strong.

###

Most importantly, investors should never forget the value bonds add to a portfolio as a diversifier to stocks. Frequently, the performance of stocks and bonds are inversely related.

For instance, when the stock market suffered during the tech bubble crash of 2000-2002, the Barclays Long-Term Government Bond Index rose 20.28%, 4.34%, and 16.99% in those years, respectively.

Current Indices

More recently, when the S&P 500 lost -36.93% in 2008, the Long-Term Government Bond Index rose 22.69% during the year. This diversification benefit may prove useful when stocks ultimately cool off from the extended hot streak they have experienced since 2009.

In 2013, the Aggregate Bond Index decreased in value by -1.98%. Given the occasional negative correlation in performance between stocks and bonds, is it really surprising that bonds didn’t produce a positive return given the incredible year stocks had (S&P 500 up over 32%)? Additionally, held within a diversified portfolio, isn’t the -1.98% return produced by bonds during the recent equity surge a small price to pay for the additional security they are likely to provide when markets reverse?

Assessment

It doesn’t seem prudent to avoid bonds entirely during periods of expected interest rate increases.

First, forecasts of rising rates are far from certain.
Second, even if interest rates rise bonds are still likely to be far less risky than stocks.
Third, rising interest rates don’t necessarily mean declining bond values are a certainty – in fact, bonds performed quite well during the past two periods of rate increases.
Finally, bonds are a vitally important part of a diversified portfolio, and owning uncorrelated and negatively correlated assets will be critical when equities ultimately lose their momentum.

Conclusion

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Filed under: Investing, Portfolio Management | Tagged: Allen Roth, Barclays Long-Term Government Bond, bonds, Christopher Philips, Craig Israelsen, Lon Jefferies, Vanguard’s Investment Strategy Group, www.NetWorthAdvice.com | 2 Comments »

On Bull Markets under Democrats

Posted on December 26, 2013 by Dr. David Edward Marcinko MBA MEd CMP™

A Political Discourse by Kevin Outterson

[By Staff Reporters]

The Dow hit an inflation adjusted record high this week (WSJ). Here is the (unadjusted) S&P since 1975 with Republican administrations in red and Democrats in blue.

Before you jump to partisan conclusions, last month, Tyler Cowan reviewed the Blinder and Watson paper on why Democrats preside over superior economic performance (their conclusion: mostly good luck).

Source: Bull markets under Democrats

More:

Conclusion

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Seeking Securities Analysts, Stock-Brokers and Investment Bankers for New “Financial Planning Textbook for Doctors”

Posted on December 24, 2013 by Dr. David Edward Marcinko MBA MEd CMP™

Planning our newest major textbook

By Ann Miller RN MHA [ph-770-448-0769]

[Executive-Director]

Dear Stock Brokers, IBs and Securities Analysts,

Greetings from the Institute of Medical Business Advisors, in Atlanta, Georgia.

Historical Review

As you may know, we released: Financial Planning Handbook for Physicians and Advisors, some time ago. It has enjoyed much success and acclaim in the medical and financial service sectors.

Recently, we have been asked to produce the next edition of this book for our target market of physicians, nurses, medical professionals, healthcare administrators – and those in the financial services sector who target this large and fertile, but rapidly changing niche market.

Why Now?

Urgency for the update has been prompted by ARRA, HI-TECH, the flash-crash of 2008 and the day-crash of 2011; by social, macro-economic and demographic changes; by political fiat and especially the PP-ACA.

Our medical colleagues are frustrated, afraid and fearful for their financial futures. They WANT informed advice.

Thus, true integrated financial planning information that targets this market – very expertly and specifically – is greatly needed.

The Invitation

And so, we ask if you are interested in contributing an updated vision of an existing book chapter.

INVESTMENT BANKING-SECURITIES-MARKETS-MARGIN
HOSPITAL EMPLOYEE BENEFITS AND STOCK OPTIONS
INVESTMENT POLICY STATEMENT CONSTRUCTION

Not to worry – The original MS-WORD® chapter files are archived and available for use. We will forward it to you, upon assignment acceptance.

And, we are again fortunate that our Editor-in-Chief will be Dr. David Edward Marcinko FACFAS MBA CMP™ along with Professor Hope Rachel Hetico RN MHA CMP™ serving as Managing Editor.

They opined at a recent interview for the ME-P.

” … We have entered into an emerging era in the financial planning ecosystem. It is a new era where one size does not fit all; and off-the-shelf financial products and mass sales customization is no long adequate for physicians and medical professionals; or their related generic financial planners or wire-house advisors.

It is a period of rapid change, shifting reimbursement paradigms and salary reductions that focus the healthcare industrial complex on pay-for-performance [P4], compensation for value and quality care; rather than procedures performed and quantity of care.

All must learn to do more with less professionally; and plan their personal financial lives more efficiently than ever before. Mistakes will be more difficult to overcome and the wiggle room that high income earning physicians, nurses and medical professionals used to enjoy is being narrowed by demographic, economic, social, technological and political fiat.

This emerging financial planning analog follows the health industry’s fiscal metamorphosis …”

Style Instructions

The look and feel, format and style, and font and size of the book will remain the same. We use endnotes, not foot notes; and include mini-case reports or illustrative case models. It will be a major text; not a handbook.

Timeline for submission is about 3 months. Additional time is available, if needed, for a comprehensive update. But, we are trying to avoid running too far along into 2014 in order to avoid income tax season and the related time constraints on all concerned.

A Pleasure – Not Burden

This should be a pleasurable project for you; and not anxiety provoking.

So, if you are a medically focused and experienced financial advisor with an: MBA, CFP®, PhD, MD, DDS, MSA/MS, CPA, RN, CMP®, DO, JD and/or CFA degree or designation, etc; please let me know if you are interested in updating and revising our chapters. OR, authoring a new to the world chapter.

Your Payback

In return for your conscientious industry, you will receive a complimentary edition of the entire textbook; be listed on this ME-P as thought-leader with related book advertising content attributed to you; and given e-exposure to our almost 600,000 readers and ME-P subscribers …. Such the deal!

And, you will be added to our roster of experts for potential referrals, interviews, pod-casts and other marketing efforts

Assessment

Regardless of your decision, we remain apostles promoting your core vision of physician focused financial planning whenever possible.

Or, you may suggest another possible author- writer-expert contributor; if you wish.

Just let me know; ASAP [MarcinkoAdvisors@msn.com]

Thank you.
ANN
ANN MILLER RN MHA
[Executive-Director]
INSTITUTE OF MEDICAL BUSINESS ADVISORS, INC.
Suite #5901 Wilbanks Drive
Norcross, Georgia, 30092-1141 USA
[Ph] 770.448.0769

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NOTICE: This invitation is not for all readers of the ME-P. It is a privilege invitation intended for those who possess the needed credentials, as decided by us, with an inclination to serve. We reserve the right to accept or reject contributors, and content, at our own non-disclosed discretion.

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Understanding NYSE / NASD Minimum Credit Requirements

Posted on November 25, 2013 by Dr. David Edward Marcinko MBA MEd CMP™

A Primer for Physician Investors and Medical Professionals

By: Dr. David Edward Marcinko; MBA, CMP™

[Editor-in-Chief]

[PART 8 OF 8]

NOTE: This is an eight part ME-P series based on a weekend lecture I gave more than a decade ago to an interested group of graduate, business and medical school students. The material is a bit dated and some facts and specifics may have changed since then. But, the overall thought-leadership information of the essay remains interesting and informative. We trust you will enjoy it.

Introduction

We have seen that there are rules which stipulate that no brokerage firm may arrange for any credit to any client whose margin account does not have an equity of at least $2,000. The principal application of this rule is to initial transactions in newly opened margin accounts, however, it does apply at all times.

Example: A doctor buys 100 shares, at $15, in a new margin account. His margin call is $1,500.

Rationale: $2,000 would be too much to require as it exceeds the total purchase price. However, a loan to the doctor isn’t allowed to be extended until, and unless, the account has equity of $2,000. The trade is simply paid in full -100% of the purchase price is the margin call.

Example: A doctor buys 200 shares, at $15, in a new margin account (assume Regulation T = 60%).

His margin call is $2,000

Rational: Regulation T 60% would be $1,800 (60% x $3,000). Since this would be $200 shy of the minimum equity level of $2,000, the call is the $2,000 minimum equity.

Example: A doctor buys 300 shares, at $15, in a new margin account. (assume Regulation T = 60%) His margin call is $2, 700.

Rationale: The account will have equity of $2, 700 (60% x $4,500), which is more than the $2,000 minimum. Therefore, the Regulation T initial requirement prevails.

The important points to remember about minimum credit requirements are:

1. You are not called upon to pay more than the purchase price.

2. You cannot be granted a loan until the account has an equity of at least $2,000.

3. If a decline in the market value of an existing account puts the equity below $2,000, there is no requirement to bring the equity back up to $2,000.

4. You may not withdraw money or securities from the account, if in doing so, you either:

bring the equity below $ 2,000, or
bring the equity below the maintenance level

These are the only times SMA may not be withdrawn from an account

The Short Sale

Selling short is engaged in by medical professionals who anticipate a market decline. By selling borrowed property (shares of stock) at the current market value, the doctor expects to return the borrowed property (shares of the same issuer bought in the marketplace) to the lender, normally the investor’s brokerage firm, when the market price is lower, thus profiting from the drop in price.

Essentially this is the buy low, and sell high philosophy. However, when executing a short sale one is selling high initially, then buying low later to “cover”, or close out the deal by buying low and selling high in the reverse order .

Bear in mind that the short seller is borrowing property, not money. However, due to the high degree of risk inherent in short selling, it is permitted only in a margin account. A Regulation T call is required as a show of good faith, a way the client demonstrates the financial wherewithal to buy back the property. Let’s look at a short sale transaction and the subsequent effects of market fluctuations on equity, as we did previously with buying on margin (long margin).

Credit Balance and Equity

A doctor shorts (sells short) 100 shares at $100 per share with Regulation T at 60%. The margin account would be credited with the proceeds of the sale, though the doctor has no access to these monies at this point in the deal. The account should also be credited with the doctor’s required Regulation T margin call. Therefore, the credit balance in a doctor’s margin account is the sum of the proceeds of the short sale, plus the Regulation T margin call. This number will not change, regardless of future market fluctuations. The credit balance in a short margin account is a constant.

What does change with market fluctuations?

the cost of buying back the borrowed property to cover the short sale.
the equity in the account.

Equity in a short margin account is computed as follows:

Credit of $ 16,000 – CMV $10,000 equals $ 6,000 equity.

Now, let’s evaluate the effect of appreciation in the market price

If the stock rises to $120 per share, then the credit of $16,000 – CMV $ 2, 000, equals $ 4,000 equity.

Remember, the credit balance does not change when CMV fluctuates. The equity in this account is no longer Regulation T.

Let’s determine the amount by which the account is restricted (remember, any margin account with equity below Regulation T is restricted). Or, 60% X $12,000 = $ 7,200 – $ 4,000 = $ 3,200

Also, it should be clear, the equity percentage of this account is less than 60%, by the formula:

Equity / CMV = $ 4,000/$ 12,000 = 33.33%

This is the basic principle of the short sale; as the market price of the shorted stock increases, the equity decreases. The reverse is also true; as the price declines, the equity rises. Remember, short sellers are anticipating a market decline. Also, when buying long, or selling short, any change in market value causes a dollar for dollar change in equity.

Minimum Maintenance Requirements (Short)

If the market continues to appreciate to $160 per share, the equity drops to zero.

Suppose that the market price rose to its theoretical maximum, or infinity? The doctor’s loss would be infinite. Remember, the maximum potential loss on a short sale is unlimited!

To protect against such an occurrence, industry Self Regulatory Organizations (SROs) developed regarding the minimum equity that must be maintained in a margin account. The minimum maintenance in a short account is equity of 30% of CMV. Note that this is higher than the 25 % figure for long margin accounts due to the nature of extreme risk of loss in the short sale.

Given that the CMV has risen to $160 per share ($16,000 total CMV), the minimum equity required to be maintained under SRO rules is 30% x CMV or $4,800 equity. The doctor would receive a $4,800 maintenance call to bring his equity from -0- to the $4,800 minimum.

Remember, as in (cash) long accounts, there is no requirement to bring a margin account up to Regulation T equity. The maintenance equity is the percentage up to which the account must be brought when and if equity drops below the 25% or 30% levels.

Excess Equity (SMA) and Buying Power

We have seen what market appreciation does to a short seller. Let’s evaluate the effects of market depreciation in value. If the declines to $85, per share, then $ 16,000 credit – CMV $ 8,500 = $ 7,500 equity. Again, market fluctuations don’t affect credit balance. The equity in the account is now higher than Regulation T, and SMA (excess equity) has just been created.

And, as before, excess equity (SMA) can be used to buy more securities. Couldn’t it also be used as the Regulation T down payment on another sale? Yes, this is another use of SMA that is called shorting power or “selling power”. The formula for buying power as well as shorting power is exactly the same: Remember, it’s SMA / RT to use buying power.

In this case, $2,400 / 60% = $4,000 of buying (shorting) power after the decline to $85, the doctor could buy long or sell short another $4,000 worth of stock and use his SMA to meet his 60% ($2,400) Regulation T Margin call. Recall, the margin call for a short sale is the same as for a long purchase.

Cheap Stock Rule

The SROs created a set of special maintenance rules in short margin accounts to protect against unreasonable risk in low-priced issues. These rules are appropriately labeled the “cheap stock” rules.

At all times, a doctor must maintain equity in a short margin account of the greater of the following:

30% of the CMV (SRO Minimum Maintenance Requirement)
$2,000 (SRO Minimum Credit Requirement)

3. Equity as required under the rules below

The cheap stock rules are as follows:

Stock Price Minimum Maintained Equity

0 – $2.50 per share $ 2.50 per share

$2.50 – $5.00 per share 100% of per share price

$5.00 per share and up $ 5.00 per share

Example: A doctor shorts 1,000 shares of a $1.50 per share stock. How much must he deposit initially and how much must be maintained in the account?

First, since Regulation T won’t come into play until equity hits $2,000, the SRO minimum credit requirement of $2,000 should come into play. However, since this is a cheap stock, we determine if the requirements of those special rules require more than $2,000. They do, and require a minimum be maintained in this short margin account of at least $2.50 per share sold short (1,000 shares at $2.50 each = $2,500 minimum that needs to be in this account at all times to comply with SRO rules).

Furthermore, if the market begins to rise, the cheap stock rules would require that at all times the amount of money in the account be at least 100% of the price per share until the stock hits $5. For example, if the stock rose to $4 per share, the doctor would have to have $4,000 in the account to carry the position (1,000 shares times 100% of CMV, $4 per share in this case).

Day Trading and the Internet

Internet day trading has become something of an, investment bubble of late, suggesting that something lighter than air can pop and disappear in an instant. This has occurred despite the fact that most lay and healthcare professionals who engage in such activities, do not appreciated even the basic rules of margin and debt, as reviewed review. History is filled with examples: from the tulip mania of 1630 Holland and the British South Sea Bubble of the 1700’s; to the Florida land boom of the roaring twenties and the Great Crash of 1929; and to $ 875 an ounce gold in the eighties and to the collapse of Japans stock and real estate market in early 1990’s. To this list, one might now add day Internet trading

The cost of compulsive gambling, arising from internet day trading activities, may be high for the physician, his family and society at large. Compulsive gamblers, in the desperation phase of their gambling, exhibit high suicide ideation, as in the case of Mark O Barton’s the murderous day-trader in Atlanta. His idea actually became a final act of desperation. Less dramatically is a marked increase in subtle illegal activity. These acts include fraud, embezzlement, CPT up-coding, medical over utilization, excessive full risk HMO contracting, and other “alleged white collar crimes.” Higher healthcare and social costs in police, judiciary (civil and criminal) and corrections result because of compulsive gambling. The impact on family members is devastating. Compulsive gamblers cause havoc and pain to all family members. The spouses and other family members also go through progressive deterioration in their lives. In this desperation phase, dysfunctional families are left with a legacy of anger, resentment, isolation and in many instances, outright hate.

Recent Updates

Since most people, including medical professions, initially loose at day trading, they give up and decide not to do it anymore. As there is a minimum amount of money, about $ 25,000-50,000 of trading capital needed to start, this loss is a powerful de-motivator. Still, scared by the Barton incident, the NASD and NYSE have recently proposed new rules for those who engage in questionable day trading activities. One proposal would provide that a minimum equity of $ 25,000 be maintained at all times, versus the current $ 2,000 for other margin accounts. If the amount of a pattern day trader fell below the new threshold, no further trading would be permitted until the threshold was maintained.

Options Trading

Stock options are contracts that obligate medical investors to either buy or sell a stock at a specific price, by a specific date. For example, a put option is a bet on falling prices. Let’s suppose Dr. Jane Smith holds a put option on XYZ stock, with a $ 50 exercise price, and the stock falls to $ 45. The value of the put rises in the options market because it lets her sell a $ 50 share, which is above the market price. A call option, on the other hand, is a bet on rising prices. Again, Dr. Smith holds a call option on XYZ stock, with an exercise price of $ 50. If the share rises to $ 55, the value of the option increase since she may buy for $ 50, a stock now worth $ 55.

In 1999, Charles Schwab, the biggest on-line brokerage executed more than 30 million option trades. Due to this demand, Schwab launched other complex services, such as the on-line simultaneous buying and selling of options. Also crowding the options field, are new upstart on-line brokerages, such as: Interactive Brokers, Preferred Capital Markets Technology and CyberCorp. They provide powerful software which will allow options in the future to trade as effortlessly and efficiently as stocks.

In mid-2000 the Reuters Group PLC Instinet Corporation, the electronic network most widely used by institutional investors, opened an Internet brokerage aimed at consumers, including healthcare practitioners. Instinet will let retail clients place orders alongside institutions, and will offer access to charts, news and research. Thus, artificially empowering the individual investor, as well as again tempting the compulsive prone addict.

Acknowledgements

The assistance Mr. James Nash, of the Investment Training Institute, in Tucker, GA is acknowledged in the preparation of this ME-P.

Conclusion

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Web Sites of Interest

http://www.tradehard.com

The ultimate super site for investment bankers and traders. Started by a group of well known stockbrokers, day traders, and money managers. This site offers advice about how to work the market to your advantage.

http://www.internetinvesting.com

This is an investor’s guide to on-line brokers, discount brokers, day trading and after hours investing. The site offers stock quotes, financial news, investment banking strategies, a book list and daily commentary about the market. This is a serious text heavy resource.

References and Readings

Atkinson, W., and Crawford, AJ.: On-line investing raises questions about suitability. Wall Street Journal, November, 28, 1999.
Farrell, C.: Day Trade On-line. John Wiley & Sons, New York, 1999.
Friedfertig, M.: Electronic Day Trader’s Secretes. McGraw-Hill, New York, 1999.
Gibowicz, Peter: Registered Representative (Study Program ,Volume II). Edward Fleur Financial Education Corporation, New York, 1998.
Gibowicz, Peter: Quick Seven. Edward Fleur Financial Education Corporation, New York, 1998.
Gibowicz, Peter: Registered Representative (Study Program, Volume I). Edward Fleur Financial Education Corporation, New York, 1998.
Kadlec, CW.: Dow 100,000: Fact or Fiction. New York Institute of Finance, New York, 1999
Nash, J: Securities Markets. In, Nash, J: (International Training Institute Manual). Atlanta, 1999.
Nassar, DS: How to Get Started in Electronic Day Trading. McGraw-Hill, New York,
1999.
Schmuckler, E: The Addictive Personality. In, Marcinko, DE (2001 Financial Planning for Medical Professionals. Harcourt Professional Publishing, New York, 2000.

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How to Succeed as an “Active-Passive” Investor [Part II]

Posted on November 22, 2013 by Dr. David Edward Marcinko MBA MEd CMP™

An Oxymoron—Part Two

By Rick Kahler CFP® http://www.KahlerFinancial.com

Continued from last week, here are the remaining keys to help fine-tune your core passive investment strategy for optimum success.

5. Asset allocation.

This is critical. Study after study shows the most important determinate in your overall investment success isn’t picking the right stocks, bonds, or real estate. According to one researcher, a good asset allocation strategy can add about 0.5% to your long-term return. It’s your overall mix of various asset classes that will ultimately have the greatest impact on your success or failure. Investing your entire 401(k) in several stock index funds can be as insane as putting everything into bond funds. Even a mix of stocks and bonds, while better, can leave a portfolio over-exposed to the fortunes of one sector and exposed to the failing of one country’s economy.

6. Manager and index selection.

Especially if you are over 40 and have retirement in sight, successful passive investing isn’t quite as easy as calling Vanguard and putting everything in an S&P 500 index fund. Every asset class has multiple indexes, with managers who all have their differences in philosophy, execution, and fees. Some adhere to traditional indexes while others build their own indexes based on their research. Picking the right index with the right manager can add up to 2% over the long haul to the annual return generated by a good asset allocation.

7. Rebalancing.

Once you set your target allocations, you need to periodically sell off the advancing asset classes to purchase more of the lagging classes. Suppose you want 30% of your portfolio in U.S. stocks and 30% in bonds. If stocks are doing well and bonds are not, over time you might end up with 35% stocks and 25% bonds. Selling stocks and buying bonds to rebalance the allocations is a disciplined form of “buy low and sell high.” Without it, your portfolio will miss out on some extra returns and over time take on more risk and volatility. Research shows that periodic rebalancing can add 0.5% to 1.5% annually over the long term.

8. Asset placement and taxes.

Other adjustments need ongoing attention in any portfolio. Asset class location helps minimize tax consequences by matching the assets with the right account. IRA’s are best for certain asset classes, while Roth IRA’s do best with others and taxable accounts with still others. This matching can add up to 0.5% annually, so getting it right can be a big deal. It’s also important to tweak asset class allocations to adjust for long-term bear or bull markets, significant economic or tax policy changes, or changing personal situations. Another necessity is minimizing taxes by efficient and timely loss and gain harvesting.

9. Uncovering scams and ill-suited investments.

Recently a client asked me about a start-up online business in which several of her friends had invested. While there were many things about it that concerned me, at the core this just wasn’t an investment opportunity that suited my client’s expertise, goals, or risk tolerance. I strongly urged her to pass, and she did. Within six months the offering was found to be a well-pitched scam, and everyone who invested lost their money. Having someone to help investigate the legitimacy of investment ideas can always be helpful.

10. Keeping it sensibly simple.

Keeping things simple for simplicity’s sake doesn’t always produce the desired benefits. While it’s simple to put your whole portfolio into one stock or one mutual fund, the results could end up adding layers of complexity to your life. The right amount of sensible complexity can turn a good passive investing strategy into a highly successful one.

Assessment

How to Succeed as an “Active-Passive” Investor [Part I]

Conclusion

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Why Physician-Investors Must Understand TAMPs

Posted on November 21, 2013 by Dr. David Edward Marcinko MBA MEd CMP™

Third Party Outsourcing of Your Investments

By Dr. David Edward Marcinko MBA CMP™

Turnkey Asset Management Programs (TAMPs) allow independent financial advisors [FAs], Registered Investment Advisors [RIAs] – typically fiduciaries – to outsource the management of some or all of their clients’ assets.

More recently, Certified Public Accountants, law firms and banks also are using them to enter the financial advice marketplace

Managed Account Services

With a TAMP, financial advisors gain access to managed account services that allow them to offload time-consuming functions, such as research, portfolio construction, rebalancing, reconciliation, performance reporting, and tax optimization and reporting, which allows them to focus on clients’ personal financial needs, marketing, advertising and sales concerns

Fee-Based Accounts

TAMPs are a form of fee-account, which charge fees based on a percentage of the total assets managed in the program. TAMPs appeal to independent financial advisors who are building a fee-only business, because they can avoid the cost of building their own fee-accounts platform and can implement a TAMP in about 90 days, instead of the year or longer required to develop the same capabilities in-house.

TAMPs also help independent advisors avoid employee hiring and payroll costs related to internal administration and research, which for a modest program requiring a staff of 8-10 employees can typically cost $1 million per year in ongoing overhead. Because TAMPs serve financial advisors, individual retail investors are not able to directly invest their assets in a TAMP.

###

“Meet and Greet” Meetings

So, the next time your FA has a quarterly meeting with you to discuss the status of your investment account or retirement portfolio, just realize that s/he is usually only the middleman. S/he is not buying, selling or trading stocks for you. An “anonymous omniscient other” behemoth firm is actually doing the work and merely placing your name on a glossy automated printed report. Your FA passes the report along as his/her alone, complete with his/her name and firm embossed, therein. Usually with a supplication like this.

The courtesy of your referral is our only reward.

And, the day of your quarterly meeting, in his/her fancy office, is probably the first and only day the report is even reviewed by the FA. This is why most of the FAs time is spent prospecting, or in marketing, advertising and/or other sales activities. All the heavy-lifting is done elsewhere.

In the industry, this type of Financial Advisor is known as an asset aggregator. And, in the retail sector, most FAs are asset aggregators or gatherers.

http://en.wikipedia.org/wiki/Turnkey_Asset_Management_Program

Number Crunching

Now, let’s say you have one millions dollars to invest and the FA charges you one percent of your AUMs; annually. This is common in the industry with ranges up to 3%, or so. Yep; that’s ten grand out of your pocket.

The Financial Advisor thus receives about $5,000/per year and the TAMP gets the same; year after year. This is reduced to $2,500 or so, to the FA, after office overhead costs. It does not matter if the market, or your account, is up or down. Such the deal!

Nevertheless, the money is automatically flowing away from you much like an annuity; or cash cow. Since you do not actually write a check out to the FA or firm, you may forget about the fees. Get the idea!

Therefore, a firm with $100 million dollars in AUMs earns about: $1-M X 50% = $500,000/year. With scale-ability, it is easy to see how Wall Street has all those skyscrapers in Manhattan, Chicago, London or Tokyo. AUM fees go up drastically, with little increase in overhead. Remember the economic concepts of marginal revenues and marginal costs!

In the industry, we call this Recurring Income. RI is preferred over a one time stock-broker commission [one-time sale] because it’s producing revenue for the TAMP and FA 24/7/365.

To be sure, it is difficult for FAs to obtain such clients; but once in the fold, clients are loathe to leave.

Assessment

Is it a wonder why big firms and wire-houses [brokerages] place their employee FAs under non-compete clauses? In other words, you the client, are owned by the company. You are not a client of the individual FA. So, when an FA leaves or retires, your account stays with the firm unless you transfer it. Expect to receive a very hard sell to stay, when you threaten to leave.

More:

Conclusion

Now, you know why sales skills are needed – over financial acumen – in this business. A great personality trumps education and brain power, most every time.

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How to Succeed as an “Active-Passive” Investor [Part I]

Posted on November 13, 2013 by Dr. David Edward Marcinko MBA MEd CMP™

An Oxymoron—Part One

By Rick Kahler CFP® http://www.KahlerFinancial.com

A fundamental principle I preach is that having a core of passively managed mutual funds is the foundation of successful long-term wealth building. I practice that principle, as well: about 75% of the securities in my personal portfolio are passively selected.

My commitment to this approach has evolved both from my own years of investing experience and from reading reams of research. I’m convinced that “beating the market” over the long term is as elusive a goal as capturing a wild jackalope.

Fundamental Strategy

Does that mean investing is as simple as giving most of your money to passive managers and kicking back? Not quite. Yes, investing in the index funds of a diversified group of asset classes and leaving them alone is a good fundamental strategy that will help you secure your financial future. To be even more successful, however, it helps to actively apply some additional strategies.

Additional Strategies

I was reminded of this by a June 2013 blog post from Bob Seawright of Madison Avenue Securities. Here, inspired by and adapted from his “top ten” list, are some of the factors that strongly affect the success of passive investors. While financial professionals can help with all of these strategies, investors going it alone can also benefit from paying attention to them.

Link: http://rpseawright.wordpress.com/2013/06/04/financial-advice-a-top-ten-list/

Top Ten List

1. What’s the point?

A successful investment strategy starts with establishing clear, objective, and realistic goals. Most people bypass this step, thinking it is unrelated to their investment selection. Yet very few people on their deathbeds focus on how great it was to get a 7% annual return on their investments. Drilling down to what is really important in your life is no simple task, but it is essential. Creating a life worth living means using portfolio returns to support your dreams and desires! Knowing where you are going and why is the first step to establishing a successful portfolio.

2. A written investment plan.

Yes, you need your investment strategy in writing. This both insures that you have one and helps you clarify it. I find that writing things down often helps me find gaps and inconsistencies in what I thought was a complete and rational plan.

A written investment plan should state:

a. Your investment philosophy. Are you a passive or active investor, or both?

b. Your goals and objectives for your funds. This answers the question, “How and when will this money support my life?”

c. Guidelines and constraints you will adhere to in managing your money. What tenure do you want in a manager, what is your upper limit on expense ratios, how much flexibility will you give a manager, what quantifiable factors will take you out of a market or bring you back in?

A written plan will bring structure and discipline to your investment strategy, qualities most investors lack.

3. Manage your behavior.

We all have blind spots, biases, and delusions. How you behave in the face of market declines and advances will affect your long-term portfolio returns more than any other single factor. To make this even more challenging, your brain is naturally wired for investment failure. Identifying and reframing your money scripts can help you rewire your brain for success instead. Working with a financial coach or therapist can be invaluable to help you negotiate your own mind.

4. Financial planning.

Many people think financial planning is limited to investment advice. Yet it is much broader and deeper. Financial planning not only helps you build wealth, but helps you use it wisely to support the life you want.

More:

Assessment

Six more keys to successful passive investing will be covered soon in Part II.

How to Succeed as an “Active-Passive” Investor [Part II]

Conclusion

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Underwriting US Government Securities Issues

Posted on October 29, 2013 by Dr. David Edward Marcinko MBA MEd CMP™

A Primer for Physician Investors and Medical Professionals

By: Dr. David Edward Marcinko; MBA, CMP™

[Editor-in-Chief] http://www.CertifiedMedicalPlanner.org

[PART 4 OF 8]

Introduction

The underwriting of US Government securities is the largest underwriting market in the world, but are issued a bit differently than we have seen to date, in this series..

For example, there is no such thing as a negotiated underwriting on a US Government security. All offerings of the Treasury are sold by auction. The auction is conducted by the Federal Reserve Bank of New York in accordance with a published schedule. Unfortunately, they are not open to the public, just primary dealers. A bank or investment dealer is appointed by the president of the Federal Reserve Bank of New York and are the only entities authorized to buy and sell government securities in direct dealings with the FED. One becomes a primary dealer through qualifications of reputation, underwriting capacity, and adequacy of staff and facilities.

Currently, 13 and 26-week treasury bills are offered every week on Mondays, while 52- week bills are auctioned once a month. Treasury notes and bonds are auctioned much less frequently on a schedule that will not be asked on your exam. Those dealers wishing to acquire a particular Treasury security enter bids on a yield basis rather than at a specific price. This method is sometimes called a Dutch auction. As a practical matter, about a week or so before the proposed auction, the Treasury announces the following four items: amount, maturity date, nominal or coupon rate anticipated, and the minimum denominations available (except for T bills which don’t have interest coupons and always carry a minimum denomination of $10,000).

Can the individual medical professional purchase newly issued Treasuries? Yes! Rather than turning in a competitive bid, as the primary dealer does, the individual will turn in a non-competitive bid. Competitive bidding with governments is similar to the other competitive bidding discussed above. The underwriter turning in the lowest bid, wins. Due to the enormous size of Treasury offerings, it is extremely rare that the lowest bidder is able to take the entire issue. That being the case, the Treasury moves to the next best and the next best bidders, until most of the issue is taken. There is always a small portion left over for the non-competitive bidders. Non-competitive bids may only be made in amounts of $1 million or less. All non-competitive bids are automatically filled at the average yield of the competitive bids which have been accepted.

Underwriting State Issues (Blue Sky Registration)

Unlike Federal issues, there are three types of State registration that are important for the medical professional to know:

Notification: This is the simplest form of registration and is used by a an issuer who has been in continuous operation for at least the previous three years. Most, but not all, states permit registration by notification.

Coordination: This occurs when an issuer wishes to coordinate a Federal registration under the Securities Act of 1933 with Blue Sky registration in one or more states. Under most circumstances, the Blue Sky registration automatically becomes effective when the Federal registration statement becomes effective.

Qualification: Any security may be registered in a state by qualification, but it’ s most commonly used by those issuers who are unable to use notification or coordination. Registration by Qualification becomes effective when so ordered by the State Administrator.

Exempt Securities

There are many securities which are exempt from the Act of ’33 registration and prospectus requirements. They include:

US Government and Federal Agency issues.
Municipal, State issues and commercial paper with a maturity not in excess of 270 days.
Intra-state offerings (Rule 147) because they are blue-sky chartered within the state.
Small Public offerings (Regulation A) if the value of the securities issued does not exceed $5,000,000 in any 12 month period. An issuer using the Regulation A exemption does not make the normal filings with the SEC in Washington. Instead, they file a simplified disclosure document with their SEC Regional Office, known as an Offering Statement. It must be file at least 10 business days prior to the initial offering of the securities. No securities may be sold unless issuer has furnished an offering circular (full disclosure document) to the purchaser at least 48 hours prior to the mailing of confirmation of the sale, and, if not completed within 9 months from the date of the offering circular, a revised circular must be filed. Every 6 months, issuers must file a report with the SEC of sales made under the Regulation A exemption until offering is completed.
Traditional insurance policies are considered to be securities and are exempt, as are fixed annuities. However, some of the newer forms of life insurance, like variable life, as well as variable annuities, have investment characteristics and, therefore are not exempt from registration.
Commercial paper and banker’s acceptances (9 month or shorter maturity), since they are money market instruments.

The Private Placement (Regulation D) Securities Exemption

Since the Securities Act of 1933 requires disclosure of all public offerings (other than the exemptions just described), it should make sense that any securities offering not offered to the public would also be exempt. The Act provides a registration exemption for private placements, know as Regulation D.

Since one of the stated purposes of the Act of 1933 is to prevent fraud on the sale of new public issues, an issue which has only a limited possibility of injuring the public may be granted an exemption from registration. The SEC just doesn’t have the time to look at everything so they exempt offerings which do not constitute a “public offering”. Strict adherence to the provisions of the law, however, is expected and is scrutinized by the SEC. This exemption provision of the Act of ’33 lies within Regulation D.

Regulation D describes the type and number of investors who may purchase the issue, the dollar limitations on the issue, the manner of sale, and the limited disclosure requirements. Bear in mind at all times that from the issuer’s viewpoint, the principal justification for doing a private, rather than public offering, is to save time and money, not to evade the law. Remember, it is just as illegal to use fraud to sell a Regulation D issue as it is in a public issue. However, if done correctly, a Regulation D can save time and money, and six separate rules (501-506).

Rule 501: Accredited investors are defined as: corporations and partnerships with net worth of $5,000,000 not formed for the purpose of making the investment; corporate or partnership “insiders”; individuals and medical professionals with a net worth (individual or joint) in excess of $1,000,000; individuals with income in excess of $200,000 (or joint income of $300,000) in each of the last two years, with a reasonable expectation of having income in excess of $200,000 (joint income of $300,000) in the year of purchase; and any entity 100% owned by accredited investors.

Rule 502: The violations of aggregation and integration are defined:

Aggregation: Sales of securities in violation of the dollar limitations imposed under Rules 504 and 505 (506 has no dollar limitations).

Integration: Sales of securities to too large a number of non-accredited investors, in violation of the “purchaser limitations” set forth in Rules 505 and 506 (504 has no “purchaser limitations”).

Rule 503: Sets forth notification requirements. An issuer will be considered in violation of Regulation D, and therefore subject to Federal penalties, if a Form D is not filed within 15 days after the Regulation D offering commences.

Rule 504: Enables a non-reporting company to raise up to $1,000,000 in a 12-month period without undergoing the time land expense of an SEC registration. Any number of accredited and non-accredited investors may purchase a 504 issue.

Rule 505: Enables corporations to raise up to $5,000,000 in a 12-month period without a registration. The “purchaser limitation” rule does apply here. It states that the number of non-accredited investors cannot exceed 35.

Rule 506: Differs from 505 in two significant ways. The dollar limit is waived and the issuer must take steps to assure itself that, if sales are to be made to non-accredited investors, those investors meet tests of investment “sophistication”. Generally speaking, this means that either the individual non-accredited investor has investment savvy and experience with this kind of offering, or he is represented by someone who has the requisite sophistication. This representative, normally a financial professional, such as an investment advisor, accountant, or attorney, is referred to in the securities business as a Purchaser Representative.

Obviously, we would have few problems if only medical investors in private placements were accredited investors, but that is not always the case. Since we are limited to a maximum of 35 non-accredited investors, how we count the purchasers becomes an important consideration. The SEC states that if a husband and wife each purchase securities in a private placement for their own accounts, they count as one non- accredited investor, not two. It would also be true that if these securities were purchased in UGMA accounts for their dependent children, we would still be counting only one non- accredited investor.

In the case of a partnership, it depends upon the purpose of the partnership. If the partnership was formed solely to make this investment, then each of the partners counts as an individual accredited or non-accredited investor based upon their own personal status, but if the partnership served some other purpose, such as a law firm, then it would only count as one purchaser .

Regulation D further states that no public advertising or solicitation of any kind is permitted. A tombstone ad may be used to advertise the completion of a private placement, not to announce the availability of the issue.

As a practical matter, however, whether required by the SEC or not, a Private Offering Memorandum for a limited partnership, for example, is normally prepared and furnished so that all investors receive disclosure upon which to base an investment judgment.

If any of the provisions of the Securities Act of 1933 are violated by an issuer, underwriter, or investor, this is known as “statutory underwriting”, underwriting securities in violation of statute. One who violates the ’33 Act is known as a statutory underwriter. One all too common example of this occurs when a purchaser of a Regulation D offering offers his unregistered securities for re-sale in violation of SEC Rule 144, an explanation of which is given below:

In simple English, SEC Rule 144 was created so that certain re-sales of already-existing securities could be made without having to file a complete registration statement with the SEC. The time and money involved in having to file such a registration is usually so prohibitive as to make it uneconomical for the individual seller. What kinds of re-sales are covered by Rule 144 and are important to the medical investor? Let’s first define a few terms.

Restricted Securities: Unregistered Securities purchased by a medical or other investor in a private placement. Also called Letter Securities, Legend Securities, referring to the fact that purchasers must sign an “Investment Letter” attesting to their understanding of the restrictions upon re-sale and to the “Legend” placed upon the certificates indicating restriction upon resale.

Control Person: A corporate director, officer, greater than 10% voting Stockholder, or the spouse of any of the preceding, are loosely referred to as Insiders or Affiliates due to their unique status within the issuer .

Control Stock: Stock held by a control person. What makes it control stock is who owns it, not so much how they acquired it.

Non-Affiliate: An investor who is not a control person and has no other affiliation with the issuer other than as an owner of securities.

Rule 144 says that restricted securities cannot be offered for re-sale by any owner without first filing a registration statement with the SEC:

unless the securities have been held in a fully paid-for status for at least two years;
unless a notice of Sale is filed with the SEC at the time of sale and demonstrating compliance with Rule 144
unless small certain quantity apply.

More:

Part 3: On New Issues and Securities Stabilization

Conclusion

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On Target Date Retirement Funds for Physicians

Posted on September 12, 2013 by Dr. David Edward Marcinko MBA MEd CMP™

What You Haven’t Considered

By Lon Jefferies MBA CFP® http://www.NewWorthAdvice.com

An increasing number of physician investors are utilizing target-date funds in their investment accounts and employer retirement plans.

In theory, an individual should select a target-date fund that matches their estimated year of retirement, such as the Vanguard Target Retirement 2015, or Fidelity Freedom 2020 fund. The philosophy of these funds is that as one ages, the proportion of stocks in their portfolio should decline, while their exposure to less volatile fixed-income positions increases.

My Concerns

While I agree with the concept that investors should continually make their portfolios less aggressive as they age, there are two concerns I have about utilizing these funds.

First and most obviously, an appropriate asset allocation for an individual physician investor as they enter retirement is dependent on their risk tolerance and is best not left to generalizations. At retirement, an aggressive doctor may be comfortable holding a portfolio that is 70 percent stocks while a more conservative investor may not be able to tolerate the volatility that accompanies a portfolio that has any more than 40 percent exposure to equities.

Of course, assuming these two investors retired around the same time, a target-date fund would place both in a one-size-fits-all asset mix.

Next, and perhaps less obvious but equally important is the fact that an asset allocation is better designed around when the investor will need the money as opposed to when they will retire.

Case Examples:

Consider two hospital employees who are retiring in 2015, and consequently, are invested in the Fidelity Freedom 2015 target-date fund (which is quite conservative – only 45 percent stocks and a 55 percent mix of bonds and cash). One of these employees will be taking an early retirement at age 59 and won’t be allowed to draw a Social Security benefit for at least three years.

As a result, this individual will need to draw a large amount of funds from his retirement account in order to pay for the first several years of retirement. The worst thing that could happen to a retiree is to endure a market crash shortly after leaving the workforce and suffers an excessive loss right as the funds are needed.

In such a case, the physician investor wouldn’t have time to wait for the market to recover and would be forced to sell at a loss. If money will need to be withdrawn sooner rather than later, sound financial planning says it should be invested in a conservative portfolio that is likely to limit loss, potentially similar to the 45 percent stock and 55 percent bond mix that the Fidelity Freedom 2015 fund provides.

###

Another Case Example:

Now consider that the second hospital employee invested in the Fidelity Freedom 2015 fund is age 67, will immediately be receiving a full Social Security benefit when he retires, and has a healthy pension from his employer. With two significant sources of income immediately upon leaving the workforce, this employee may not need to withdraw meaningful assets from his investment portfolio during the early years of his retirement.

Now, with a longer investment time frame before funds will be withdrawn, a more assertive portfolio is likely appropriate for this investor as he can afford to endure a full market cycle of pullbacks and advances while attempting to achieve superior gains.

Assessment

Hopefully this example illustrates the importance of considering other potential income sources and the timing of your expenses during retirement rather than simply treating target-date funds as your entire asset base. While the theory of target-date funds is sound, other factors should be considered before utilizing them as a significant portion of your investment nest egg.

Conclusion

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Medical Risk Management: http://www.jbpub.com/catalog/9780763733421

Hospitals: http://www.crcpress.com/product/isbn/9781439879900

Physician Advisors: www.CertifiedMedicalPlanner.org

Filed under: Financial Planning, Investing, Portfolio Management, Retirement and Benefits | Tagged: Fidelity Freedom 2020, http://www.NewWorthAdvice.com, Lon Jefferies, retirement planning, Target Date Retirement Funds, Vanguard Target Retirement 2015 | 2 Comments »

R.I.P. Muriel “Mickie” Siebert

Posted on August 28, 2013 by Dr. David Edward Marcinko MBA MEd CMP™

On Muriel Siebert

“Mickie” Siebert, founder of the brokerage firm that bears her name, Muriel Siebert & Co. Inc., bought a seat on the New York Stock Exchange in 1967.

She was one of the pioneers in the discount brokerage field, as she transformed Muriel Siebert & Company (now a subsidiary of Siebert Financial) into a discount brokerage in 1975, on the first day that Big Board members were allowed to negotiate commissions; the so-called “May Day” decision.

BORN: Sept. 12, 1932, in Cleveland.

DIED: Aug. 24, 2013, in New York.

EDUCATION: Attended Western Reserve University (now Case Western Reserve University) 1949-1952.

FAMILY: Never married and did not have any children.

Link: http://news.msn.com/obits/muriel-siebert-first-woman-member-of-the-nyse-dies?ocid=ansnews11

###

Assessment

She was the first woman to become a member of the New York Stock Exchange [NYSE].

Visit: www.SiebertNet.com

Conclusion

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Medical Risk Management: http://www.jbpub.com/catalog/9780763733421

Hospitals: http://www.crcpress.com/product/isbn/9781439879900

Physician Advisors: www.CertifiedMedicalPlanner.org

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Passive Investing with a “Steroid Twist”

Posted on August 21, 2013 by Dr. David Edward Marcinko MBA MEd CMP™

A Core and Satellite Philosophy

By Rick Kahler CFP® http://www.KahlerFinancial.com

“Keep your hands away from your investments and back away from the market reports.”

That pretty much sums up passive investing, the approach I have practiced for years. I’ve preached it for years, too, and did so in a recent column. The wisest way to build wealth is by investing in a variety of asset classes, setting target allocations in each asset class, and then taking your hands off except to periodically rebalance to the original target allocations.

For most of us, including doctors, the best way to invest in an asset class is to give our funds to a mutual fund manager who will purchase the appropriate investments. Mutual fund managers have a choice of actively or passively managing the money you give them to invest.

Passivity

Passive managers try to match market indexes, which are groups of companies representing a cross-section of a certain type of investment. The most popular index in the world is probably the S&P 500 index, which consists of the largest 500 companies in the United States. Another popular index is the Dow Jones Industrial Index which is made up of 30 companies. When we consider the US has almost 10,000 companies, we can quickly see that many indexes represent just a segment of the entire market.

Research indicates it is very hard to beat an index, especially with stocks, bonds, real estate investment trusts, and commodities. I prefer to keep about 80% of my investment portfolio in a broad variety of passively managed investments in these asset classes.

Timing or Strategy?

Where do I put the other 20%? In mutual funds with active managers who try to earn returns similar to stocks and bonds and that are not correlated to either.

This may seem to make me a hypocrite. I’ve been saying for years not to be a market timer, and now here I am suggesting you do just the opposite with a portion of your portfolio. Not hypocrisy at all. What I’ve preached for many years is that neither you nor I have any business timing investments. That doesn’t mean no one should ever do it.

So, is it timing or strategy?

Core and Satellite Philosophy

It can be wise to put a small portion [satellite] of our portfolios [core] into various investment strategies with active managers. The key is to find managers who have a disciplined approach that eliminates emotion and who have long-term track records of success. These strategies include managers who attempt to time markets by shorting stocks they think will decline in value and buying stocks they think will rise.

It also includes one investment strategy, managed futures, that I call “timing on steroids.”

###

Rationale

My reason for including some actively managed funds is to have part of my investment portfolio that is not correlated to stocks. I want these investments to have a positive return over a long period, but also to move in opposition to other major asset classes, especially stocks. So when stocks are up, I am not fazed if my managed futures are down. And, when stocks are down, I am thankful when my managed futures are up. If both asset classes earn 6 to 9% over a long period of time, I’m happy.

So, call it … passive investing with a steroid twist.

Assessment

So I stand by my commitment to passive investing. It’s based on research suggesting that timing the markets is a loser’s game.

Yet part of passive investing is having a fully diversified portfolio. This includes having a small portion—20% or less—in mutual funds with disciplined, successful active managers. My job is to research and find those managers. Then it’s okay to let them time their hearts out. I just make sure I don’t try to time the timers.

More:

Conclusion

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Filed under: Interviews, Portfolio Management | Tagged: active investing, Core and Satellite Philosophy, passive investing, Rick Kahler CFP® | 1 Comment »

Is Passive Investing Right for You?

Posted on August 7, 2013 by Dr. David Edward Marcinko MBA MEd CMP™

On the “Buy low and Sell high” Strategy

By Rick Kahler CFP® http://www.KahlerFinancial.com

“Buy low and sell high.” That was my simple approach when I was a smart young investment advisor. I poured over a company’s balance sheet, earnings statements, and forecasted returns. Then I bought those companies that were bargains and waited for my gains to roll in. More times than not, they did—eventually.

The problem came with the “not” and “eventually.” A majority of my picks did go up in value, but the minority that were “nots” still lost enough to have a negative impact on my bottom line. Even more frustrating, some of my “nots” turned into gains “eventually” after I sold them.

My investment returns were similar to findings from Dalbar, Inc., a financial services research firm. Dalbar’s studies have shown that average active investors barely beat inflation over the long term. They significantly underperform investors who put their money in an index fund of stocks and leave it alone.

So much for my early investment brilliance! Over the past 40 years, I’ve learned that with every passing year I know less than I thought I did the year before. I’ve proven to myself I have no idea where any market is going tomorrow, next month, next year, or in the next 10 years.

This awareness has led me to become increasingly passive in my investments. In passive investing, rather than trying to time the buying and selling of winners and losers, you instead buy a representative sample of the entire market. This is possible in any market: bonds, stocks, real estate investment trusts, or commodities. You simply buy mutual funds and exchange-traded funds (ETF’s) called index funds.

Benefits

The two biggest benefits of passive investing are cost and diversification.

Costs

Index funds have incredibly low costs, with annual fees as low as 0.1%. Contrast that with the average equity fund that costs 1.5%, fifteen times more. According to research, 97% of active mutual fund managers don’t beat the index over 20 years. Even the 3% who do must beat the index by more than the 1.5% fee they charge, in order for their investors to come out ahead.

Diversification

The smaller number of stocks owned – the more my fortunes are tied to those few companies. It’s the old adage, “don’t put all your eggs in one basket.” By owning index funds, I own hundreds or thousands of securities. While I will never hit a home run, I also will never strike out. My returns will be “average.” Investing may be one of the few professions where being average puts you in the 97th percentile of all investment managers.

The NaySayers

Not all of my peers agree with this philosophy. Many very smart investment advisors jumped off the passive investing bandwagon after 2008 and returned to tactical asset allocation, which is another name for timing the markets.

###

Harold’ Strategy

A noted investment advisor, Harold Evensky MBA CFP® of Evensky & Katz, addressed this issue at a conference last year. After the 2008 crisis, his firm hired researchers to evaluate whether they could find any tactical strategies that would have avoided the crisis. They found some that, in hindsight, would have worked. Yet he didn’t feel those strategies could be comfortably applied looking forward. Instead, the firm decided to add a 20% allocation to non-correlated alternative investments, something I’ve done since the late 90’s. In other words, they increased their clients’ diversification.

Assessment

The bottom line is that passive investing actually gives you more control. It allows you to focus on reducing costs and taxes, the aspects of investing you can control. It frees you from trying to beat the market and worrying over what you can’t control.

Conclusion

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Hospitals: http://www.crcpress.com/product/isbn/9781439879900

Physician Advisors: www.CertifiedMedicalPlanner.org

Filed under: Investing, Portfolio Management | Tagged: active investing, Dalbar, diversified porfolios, ETFs, Evensky & Katz, exchange-traded funds, Inc., Mutual Funds, passive investing, Rick Kahler CFP® | 1 Comment »

Twelve Steps of Financial Independence for Doctors

Posted on July 8, 2013 by Dr. David Edward Marcinko MBA MEd CMP™

A Basic Guide

By Lon Jefferies MBA CFP® CMP®

Want to get your finances in order? Consider this comprehensive 12-step guide to address each element of your personal financial situation. In most cases, you should not address a step until all previous steps are satisfied.

1. 401(k) 403(b) Match: Without exception, if your employer matches 401(k) contributions, you should maximize whatever they’re offering. If it’s a dollar-for-dollar match, that’s an instant 100 percent return! Even the 50 percent return of a two-for-one match is irresistible.

2. Consumer Debt: Pay off your credit cards and all other unsecured loans, prioritizing the debts with the highest interest rates. Credit cards frequently charge rates as high as 30 percent. Paying off a card with 30 percent APR is comparable to getting a 30 percent investment return. Not completing this step will hamper your entire financial plan.

3. Cash Flow: You can’t develop wealth if you spend more than you make. Construct and follow a written budget to ensure you are living within your means. Your budget should include saving at least 10 percent of your gross income for retirement. Constantly compare actual spending with your budget and hold yourself accountable! Mint.com is an excellent free tool for this step.

4. Emergency Reserve: Develop a liquid savings account consisting of enough money to cover three to six months of expenses. These funds should only be utilized in crisis such as a job loss or medical emergency.

5. Life Insurance: If you have dependent children, you likely need life insurance. Cost-efficient coverage can frequently be obtained via your employer. To calculate the amount of coverage to purchase, first determine how much money your survivors would need to maintain a comfortable lifestyle, and then subtract any income they will generate as well as any savings you’ve accumulated. Alternatively, if you don’t have children in your household and your spouse is self-sufficient, you may not need life insurance coverage.

6. Disability Insurance: Getting hurt can completely derail your financial planning. A loss of income halts your savings and likely leads to increased debt. Obtain enough disability coverage to bridge the gap between earnings and expenses in the event of an injury. Coverage can frequently be purchased through your employer.

7. Estate Planning: Obtain a power of attorney, medical directive and living will. These documents allow you to designate the person you would like to make decisions for you if you become incapacitated. They also specify your preferences regarding life-prolonging medical treatments. Ensure both primary and contingent beneficiaries are assigned to your retirement accounts. Finally, develop a will or trust to ensure all other assets are distributed as you desire when you die.

8. Retirement Contributions: With risk exposures covered, it’s time to return to retirement planning efforts. Again, a 401(k) is an attractive retirement vehicle because it frequently offers an employer match and allows large annual contributions ($18,500 or $25,000 for individuals over age 50). If your employer doesn’t offer a 401(k), you can still contribute up to $6,500 (or $7,000 if over age 50) to an IRA. IRA contributions can be made on behalf of both spouses, even if only one is employed.

9. Traditional or Roth: The type of account that is best for you depends on when you want to pay taxes. A traditional retirement account allows an immediate tax deduction, the investments grow tax deferred, and the money isn’t taxed until the funds are withdrawn from the account. Alternatively, taxes are paid on Roth contributions immediately, but both contributions and growth are completely tax free when withdrawn during retirement. Put simply: will you be in a higher tax bracket now or when you withdraw the funds?

10. Asset Allocation: The most important investment decision you can make is how much of your portfolio will be invested in stocks versus bonds. A higher proportion of stocks leads to increased risk, but the potential for greater returns. The more time you have until the funds are needed, the more risk you can usually afford to take. Consequently, you should reduce the proportion of stocks in your portfolio as you approach retirement in order to minimize your risk factor. Identify an asset allocation that is aggressive enough to accomplish your investment goals while exposing you to an acceptable level of risk.

11. Get Caught Up: According to a recent Fidelity study, your nest egg should be one times your salary by age 35, three times your salary by 45, five times your salary by 55 and seven times your salary by 67.

12. Education Planning: Only after your retirement savings is where it should be can you focus on your children’s college education. At this point, explore a Utah Educational Savings Plan 529 (uesp.org) or a Coverdell Education Savings Account, both of which offer tax advantages if used for schooling.

Assessment

Does this mean you don’t need a financial advisor? Of course not! A qualified, comprehensive financial planner can add value, address shortcomings, and answer questions in each of these areas. Once you have completed each of these steps, you can be confident you have your financial ducks in a row.

###

Conclusion

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Filed under: Financial Planning, Insurance Matters, Portfolio Management | Tagged: cash flow, Consumer Debt, disability insurance, financial advisors, Financial Planning, Independence for Doctors, life insurance, Lon Jefferies, www.NewWorthAdvice.com | 1 Comment »

Are Doctors Bad Investors?

Posted on June 7, 2013 by Dr. David Edward Marcinko MBA MEd CMP™

A Longboard Assessment Management Study for Lay Investors

###

Assessment

And so, are doctors and other medical professionals really bad investors?

More:

Conclusion

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Hospitals: http://www.crcpress.com/product/isbn/9781439879900

Physician Advisors: www.CertifiedMedicalPlanner.org

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How Volatile Is the Stock Market Today?

Posted on June 4, 2013 by Dr. David Edward Marcinko MBA MEd CMP™

And … Is it Dangerous?

By Lon Jefferies CFP® MBA www.NetWorthAdvice.com

Based on conversations with physician and clients, I’d suggest that most investors view the market of the new millennium as more volatile and fragile than it’s been in the past.

JUNE 4, 2013

DOW	15,253.7	+138.1
NASDAQ	3,465.49	+9.58
S&P	1,640.61	+9.87

New concerns that could affect a portfolio are seemingly always coming to light – think of the near-financial collapse of the U.S. economy during the last recession, the U.S. debt downgrade, the potential bailout crises in Europe and the possible devaluation of the euro, domestic unemployment concerns, and the perennial concern about the inflation/deflation of the dollar.

Add to this the idea that the world has become a more unstable place and the reality that supercomputers make thousands of trades every second.

How Valid Are the Concerns?

To determine the validity of these perceptions, Allan Roth analyzed the performance of the Wilshire 5000 (an index of the market value of all stocks actively traded in the United States) since 1980 in the May edition of Financial Planning Magazine. Surprisingly, Mr. Roth found that market swings of more than 30% weren’t much more common during the past 10 years than they were from 1980-2002. In fact, on a monthly basis, market swings of more than 10% actually occur less these days than in the past.

On a daily basis, the mean standard deviation of returns (a measure of volatility) over the entire 32-year period was 1.01%. In other words, during 68% of trading days, the index increased or decreased by less than 1.01%. Further, on 95% of trading days the index went up or down by no more than 2.02% (or two standard deviations). While daily standard deviation hit a record in 2008 of more than 2.5%, last year actually had lower volatility than the overall average. Consequently, while volatility hit a high in 2008, it has been at a very normal level since.

###

Why the Perceptions?

So why do investors perceive more uncertainty in today’s environment? Mr. Roth mentions a few hypotheses:

Magnitude Effect – To suffer a 2.5% decrease in 1972, the S&P 500 would have needed to decrease by 2.54 points. To endure a 2.5% decrease today, the index would need to decrease by 41.25 points. Although both represent the same investment loss, we perceive the double digit point swing as larger and more dramatic.
Availability Bias – Humans overestimate the probability of events associated with memorable or vivid occurrences. Memorable events are further magnified by excessive coverage in the media. Because the market crash of 2008 was so remarkable, investors tend to overestimate the probability of a similar crash and underestimate the probability of market appreciation, which historical data says is significantly more likely.
Access to Information – Jason Zweig, a columnist for the Wall Street Journal, says “today between websites, Facebook, Twitter, the TV and smart phones, an investor couldn’t escape knowing about a big move in the stock market if he or she tried. Whatever you pay attention to, while you are attending to it, will always seem more significant than it really is.”
Simple Fear and Pessimism – Meir Statman, a finance professor at Santa Clara University, suggests “people who think the U.S. is in decline view investing as riskier now than in the past, when they believe the country was better off, and no amount of data showing actual volatility would change their minds.” Similarly, Daniel Kahneman, a Nobel laureate and Princeton professor suggests “people always think the present is more volatile than the past. Because we know that historic crises have resolved themselves, we may simply remember the past as being less volatile than we viewed it at the time.”

More:

Assessment

It’s likely beneficial for physicians and all investors to evaluate their behavior and determine if they exhibit any of these biases. History tells us that the most dominate factor leading to investment success is to keep your asset allocation steady. Being aware of tendencies that might encourage us to make rash investment decisions could save us a lot of stress during critical market movements.

Conclusion

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Filed under: Investing, Portfolio Management, Risk Management | Tagged: How Volatile Is the Stock Market Today, Lon Jefferies | 6 Comments »

Strategic Importance of Healthcare Capital Investing

Posted on March 19, 2013 by Dr. David Edward Marcinko MBA MEd CMP™

For Leaders, Governors, Physicians and Hospital Executives

[By Calvin Weise CPA, CMA]

Some of the most important strategic decisions hospital executives make are related to capital expenditures. Almost every hospital has capital investment opportunities that are far in excess of their capital capacity. Capital investments are bets on the future. How these capital bets are placed has long-lasting implications. It is of utmost importance that hospitals bet right.

Hospitals as Business Entity

Hospitals are capital intensive businesses. Hospital buildings are unique structures that require large amounts of capital to construct and maintain. Inside these buildings are pieces of expensive equipment that have fairly short lives. Technological innovations continually drive demand for new and more expensive equipment and facilities. The ability to continually generate capital is the lifeblood of hospitals. In order to compete and succeed, it’s imperative for hospitals to continually invest in large amounts of capital equipment and expensive facilities.

Capital investment is fueled by profit. In order to continually make the necessary capital investments, hospitals must be profitable. Hospitals unable to generate sufficient profit will fail to make important capital investments, weakening their ability to compete and survive.

Hospital managers bear important responsibility in choosing which capital investments to make. There are always more capital opportunities than capital capacity. In many cases, capital opportunities not taken by hospitals create openings for others with capital capacity to fill the vacuum. By not taking such opportunities, hospitals are weakened, and their operating risk increases.

Responsibility

Stewardship is a term that aptly describes the responsibility borne by hospital managers in making capital investments. The New Testament parable of the talents describes this kind of stewardship. In this story, a merchant entrusted three managers with money to invest. One manager was given five units, another two, and a third one. At the end of the investment period, the two managers given five units and two units reported a 100% return. The manager given one unit reported zero return — he was fired and his unit was given to the first manager.

Leadership

This is stewardship — and hospital managers are stewards of their organizations’ assets. Too often, not-for-profit hospital managers hold an erroneous view of the returns expected of them. Like the third manager in the parable, they think zero return on equity is acceptable. They understand capital investment funded by debt needs to cover the interest on the debt, but they view capital investments funded by equity as having no cost associated with the equity. From an accounting perspective, they are right. From a stewardship perspective they are dead wrong — just like the third manager in the parable.

Here’s why: as stewards, they are responsible for managing the entrusted assets. They can either put these assets at risk themselves, or they can put those assets in the market and let other managers put them at risk. If they choose to put them at risk themselves, then they have the mandate of creating as much value from putting them at risk as they would realize if they put them in the market for other managers to put at risk. They have the duty to realize returns that are equivalent to the returns they could realize in the market; otherwise, they should just put them in the market. They can either invest in hospital assets or work the assets themselves, or they can invest in financial market assets so others can work the assets. When they choose to invest in hospital assets, the required return is not zero. That’s the return they get fired for. The required return is equivalent to market returns.

Assessment

Thus, when evaluating performance of hospital management teams, the minimum acceptable performance level is return on equity that is equivalent to the return that could be realized by investing the hospital assets in the market. And when evaluating a capital investment opportunity, it is important to apply a capital charge equivalent to the hospital’s weighted cost of capital — a measure that imputes an appropriate cost to the equity portion of the capital along with the stated interest rate for the debt portion of the capital structure.

Conclusion

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Physician Advisors: www.CertifiedMedicalPlanner.org

Filed under: Funding Basics, Investing, Portfolio Management | Tagged: calvin weise, Healthcare Capital Investing | 1 Comment »

Are Physicians Investing in International Bonds?

Posted on February 4, 2013 by Dr. David Edward Marcinko MBA MEd CMP™

A Global Approach to Investing

By Rick Kahler MS CFP® ChFC CCIM www.KahlerFinancial.com

US investors and fans of the St. Louis Rams have something in common. Both have seen their home teams fall from prominence to mediocrity in the past ten years. In 2000 the Rams won the Super Bowl, but in 2011 they ended the season tied for the worst record in the league. The US ranked as the world’s third freest economy in 2000, but by 2010 had fallen to number 18.

So, how do physicians and other investors allocate their funds in a country that’s in economic decline? Much like an ardent fan of the Rams who is also an astute gambler! You cheer for your team to win, but you place your bets on the stronger opponents.

Global Investing

It’s critical today to take a global approach to investing. Since the US now makes up less than half of the world’s wealth, it makes sense to invest the majority of your portfolio in the stocks and bonds of other countries. This is simply another form of diversification. Not only does it make sense to have US government bonds and the bonds from a wide range of companies in your portfolio, it also makes sense to diversify and hold a wide range of bonds of international companies and foreign governments.

While it isn’t uncommon for physician investors to have some exposure to international stocks, I find it is unusual for them to have investments in international bonds.

Investing in Bonds

When you invest in bonds, you are lending to a borrower who promises to pay interest and to repay the loan on a certain date. Bonds represent an IOU from a US or foreign corporation or government.

As with any bond, an important factor to consider is the credit quality of the issuer. This can become more complex with foreign bonds, as many countries don’t have the same standards of accounting required in the US.

More:

Foreign Bonds

A unique feature of foreign bonds is the effect that currency exchange rates have on your investment. Fluctuations in the local currency can enhance or depress your returns.

For example, if you want to purchase bonds denominated in the Australian dollar (AUD) you will first need to exchange your US dollars (USD) for AUD and then purchase the bonds. If the USD drops in value against the AUD, then the value of your Australian bonds goes up because your AUD now buy more USD. The reverse happens if the USD appreciates against the AUD.

Direct Purchase of Mutual Funds

There are two ways to purchase international bonds. You can buy bonds directly from a securities broker or purchase shares of a mutual fund that invests in foreign bonds. Any fund with “international” in its name invests only in bonds of countries outside the US. If the fund has “global” in its name, it includes both foreign and US bonds in its mix.

The two categories of international bonds include those issued by developed nations like the United Kingdom, Japan, or Germany, and those issued by emerging market nations like India, Brazil, or Morocco. Emerging market bond funds invest in bonds from developing nations, risking greater losses for the chance of higher returns.

In my portfolios, I generally split my bond allocations 50/50 between the US and foreign bonds. Currently, our fund manager favors the bonds of Australia, New Zealand, and Canada.

Assessment

The Rams did better in 2012 than in 2011, so fans can hope they regain their top status in 2013. We can also hope the US can stop its economic slide and regain its global prominence in the next decade. But, until there is evidence of a turnaround, international bonds are one way physicians can avoid betting too heavily on the home team.

Conclusion

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Filed under: Investing, Portfolio Management | Tagged: Australian dollar, International Bonds, international stocks, Mutual Funds, Rick Kahler CFP®, US government bonds | 4 Comments »

Protecting Patient Privacy

Posted on January 6, 2013 by Dr. David Edward Marcinko MBA MEd CMP™

How Important Is It – Really?

By Dr. David Edward Marcinko MBA

By Matthew Pelletier [safety consultant]

The U.S. Health Insurance Portability and Accountability Act (HIPAA) is the federal law protecting the privacy and security of patients’ health information and was enacted in 1996.

HIPAA laws also protect electronically communicated information. Understanding the significance and importance of HIPAA laws is vital to all medical and health organizations. Companies are required to follow HIPAA laws and protect patient privacy.

Share and Share Alike – NOT!

The privacy rule is an important aspect of HIPAA and makes it illegal for patient’s private health information to be shared by health professionals unless the patient consents. This encompasses patient information which is written, verbal or electronically communicated. Many health care and medical organizations use healthcare training videos in order to educate their workforce on the importance of patient privacy laws.

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Review

As the infographic above illustrates, patient privacy is very important and the cost in breach of privacy can be costly:

• With 60% of hospitals having a minimum of 2 breaches in privacy the cost per hospital is estimated at $2 billion dollars.
• The average number of records which are lost or stolen in each violation of privacy is 1,769.
• The main causes of electronic patient information breaches is due to employees, portable electronic devices and third-party errors.
• 7 out of 10 hospitals don’t view patient privacy as a priority though it costs them money if breached.

With 38% of hospitals choosing not to inform anyone of patient privacy breaches while over 40% of breaches are only reported by the patients themselves, HIPAA violations can result in being very costly to medical and healthcare organizations, not just hospitals. HIPAA training videos are a solution to help the workforce understand the importance of patient privacy laws.

Assessment

Conclusion

Your thoughts and comments on this ME-P are appreciated. And, are these issues a moral equivalency? Does privacy even exist anymore in an era of social media, the Internet, Google Earth and Google Maps, etc.

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Filed under: Portfolio Management, Risk Management | Tagged: David E. Marcinko, HIPAA, Matthew Pelletier, Protecting Patient Privacy | 5 Comments »

Doctor’s and the Fiscal Cliff

Posted on December 19, 2012 by Dr. David Edward Marcinko MBA MEd CMP™

What’s a Physician-Investor to Do?

By Rick Kahler MS CFP® ChFC CCIM www.KahlerFinancial.com

So the economic train is speeding faster and faster, and the edge of the fiscal cliff is getting closer and closer, and the passengers are starting to scream. Meanwhile, the guys in the cab of the engine are arguing about whether to hit the brakes or blow the whistle.

What’s the best thing for any investor to do?

Nothing!

Based on my emails this week from clients and readers of my column, there seems to be widespread concern among investors that we’re on the verge of panic and the markets are about to head south.

It reminds me of the good old days, back in the fall of 2008, when the markets were dropping 900 points a day. I’m sensing that the fear among investors about going over the fiscal cliff is similar to the fear of four years ago. The only difference is that the markets aren’t falling today.

Those who assume the markets are about to drop may be right. If that’s the case, what should you be doing to your portfolio to prepare? Assuming it is globally diversified, not a thing.

The News

Many investors, and medical professionals, already are sitting on the sidelines in bonds, shifting through a plethora of bad news and waiting for markets to tank. They have good reason for their expectations. There has been a steady stream of bad news over the past year: a feeble global economic recovery, the near certainty the US will raise taxes and cut spending (a/k/a the fiscal cliff), staggering budget deficits around the globe, the prospect of a EuroZone breakup, a highly negative and divisive presidential election, banking scandals, and a nationwide drought.

Bonds

Considering all the uncertainty, it’s easy to explain why investors have generally favored bonds over stocks during the past 12 months.

With all this bad news, one could expect stocks to be down significantly. For the 12-month period ending September 30, 2012, however, 40 markets had positive returns, with six countries—including the US—delivering a total return in excess of 30%. This is according to the investment analysis firm Morgan Stanley Capital International.

While most investors think successful investing requires constant attention to current events, research says the opposite is true. The more that investors pay attention to the breaking news and adjust their portfolios, the lower their returns.

Bailing Out

But, with the looming fiscal cliff, shouldn’t a wise investor bail out now and then buy back in at the bottom? It would be like jumping off the train before the crash, then waiting until it has hit the ground, been repaired, and is back on track before you get on again. The only problem is there’s no way to know whether the markets will go down, or if they do, how to know when they hit bottom and it’s time to get back in.

Going to Cash?

The worst action you could take right now is to sell out your portfolio and go to cash.

If you have a globally diversified portfolio, the US decision to tax more and spend less will have much less impact.

For example, our typical 60/40 portfolio only has 13.5% in US stocks and 25% in US bonds. Over half of it is in international stocks, bonds, and non-US correlated investment strategies. It’s designed to cushion even extreme fluctuations in the markets.

Assessment

Anyone who is appropriately diversified has no need for fear as we get closer to plunging off the fiscal cliff. To protect your investments, don’t sell out. To preserve your peace of mind, don’t panic. Above all, don’t jump. The best possible response is to simply stand by and watch the train wreck.

Conclusion

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Filed under: Investing, Portfolio Management, Taxation | Tagged: Doctor’s and the Fiscal Cliff, EuroZone, Morgan Stanley Capital International, Rick Kahler CFP® | 3 Comments »

Will Higher Taxes Damage Your Portfolio?

Posted on December 6, 2012 by Dr. David Edward Marcinko MBA MEd CMP™

Discussing Stock Market Performance

By Lon Jefferies CFP® MBA

Net Worth Advisory Group

lon@networthadvice.com

www.networthadvice.com

Do higher taxes equate to negative stock market returns? Does anyone economic variable accurately predict stock market performance?

A number of our Net Worth Advisory Group physician and lay clients have indicated they are concerned about the impact higher taxes could have on the stock market. News organizations and campaign rhetoric create the impression that there is a cause and effect relationship between taxes (or whatever the hot discussion topic is) and stock market performance. Since 1926, the stock market has obtained positive returns during a calendar year 72% of the time.

Economic Variables

Here are the facts about how various economic variables have impacted investment returns:

PERSONAL INCOME TAXES: From 1926-2011 there were 20 years where personal income taxes (for incomes over $150,000, adjusted for inflation) increased over the previous year. The stock market went up 13 of those years, or 65% of the time.
CORPORATE TAXES: From 1926-2011 there were 11 years where corporate taxes increased over the previous year. The stock market went up 6 of those years, or 55% of the time.
LONG-TERM CAPITAL GAINS: From 1926-2011 there were 11 years where the long-term capital gains tax rate increased over the previous year. The stock market went up 9 of those years, or 82% of the time.
INTEREST RATES: From 1956-2011 there were 27 years where interest rates (measured by the Treasury Bill) increased over the previous year. The stock market went up 24 of those years, or 89% of the time.
INFLATION: From 1926-2011 there were 43 years where the inflation rate increased over the previous year. The stock market went up 33 of those years, or 77% of the time.
NATIONAL DEBT: From 1940-2011 there were 38 years where the national debt as a percentage of gross domestic product (GDP) increased over the previous year. The stock market went up 30 of those years, or 79% of the time.
DEFICITS SPENDING: From 1926-2011 there were 38 years where deficit spending increased over the previous year. The stock market went up 30 of those years, or 79% of the time.
COMPANY PROFITABILITY: From 1961-2011 there were 25 years where the earnings of S&P 500 companies increased over the previous year. The stock market went up 21 of those years, or 84% of the time.
COMPANY DIVIDENDS: From 1961-2011 there were 21 years where S&P 500 companies increased their dividends over the previous year. The stock market went up 17 of those years, or 81% of the time.
UNEMPLOYMENT: From 1948-2011 there were 20 years where the unemployment rate increased over the previous year. The stock market went up 9 of those years, or 45% of the time.

Predictions?

As the data indicates, there is no single economic variable, positive or negative that consistently predicts stock market performance. The market may produce positive or negative returns in 2013, but it’s not likely to be because the personal income tax for high income families increased.

The Unemployment Figures

It’s worth noting that the only economic factor that led to a declining market more frequently than not is rising unemployment. While the unemployment rate remains at 7.8%, high by historical standards, it has been steadily decreasing since October of 2009 when it reached 10%.

Additionally, the only other individual indicator that seems to have even a marginally significant negative impact on stock market returns is an increase in the corporate tax rate; if President Obama can get Congress to agree with him, he would like to decrease that rate from 35% to 28% next year. Consequently, history indicates that neither rising unemployment nor increased corporate tax rates will apply in 2013 and should not hamper stock market returns.

Suggestions

History has taught us over and over again that time in the market is much more important than timing the market. It has also taught us that one of the biggest mistakes investors make is to say “these conditions have never existed before and this time is different.”

Need a recent example? Remember the general consensus investors reached about Europe near the beginning of the year? It may surprise you that Europe (as measured by the Vanguard MSCI Europe ETF) has returned over 17% year to date, significantly outpacing the growth of the S&P 500.

Assessment

I personally believe the best game plan for medical professionals is to develop a fundamentally sound diversified portfolio, only investing money you don’t anticipate spending for at least 10 years in stocks, and stay the course.

Conclusion

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Filed under: Investing, Portfolio Management, Taxation | Tagged: investing portfolio management, Lon Jefferies, Will Higher Taxes Damage Your Portfolio? | 4 Comments »

With Obama Election Win “Mr. Market” Weighs in on the ACA Equity Winners and Losers

Posted on November 16, 2012 by Dr. David Edward Marcinko MBA MEd CMP™

The Wisdom of Crowds

By David K. Luke MIM, Certified Medical Planner™

Website: www.networthadvice.com

The first trading session following the election on Wednesday, November 7, 2012 gave us some clues on how different sectors of the health care market may be affected by the ACA, as Obama’s win confirms that health reform marches forward. “Mr. Market” has spoken.

“Mr. Market”

For those that may be unaware, “Mr. Market” was Benjamin Graham’s term for the stock market in explaining fluctuations. Graham is the father of value investing and Warren Buffet’s most influential mentor. According to Graham, Mr. Market is emotionally unstable but doesn’t mind being slighted. If Mr. Market’s quotes are ignored, he will be back again tomorrow with a new quote.

So, the point is that successful investors do not place themselves in emotional whirlwinds often created by the market. This first post-election trading session was such a whirlwind. Large groups of people (such as those that voted with their pocketbook in this telling stock market session) are smarter than an elite few, or so goes the premise of James Surowiecki’s Wisdom of the Crowds.

Now; what did we learn from the combined investing public wisdom about the future of healthcare companies profitability with ACA?

Keep in mind the overall market was down 2.4% on the day as measured by both the Dow Jones Industrial Average and the Standard & Poor 500. The biggest concern of the day was investor worry about the so called “fiscal cliff” and the debate over billions in spending and tax increases. Considering the total market on November 7th, health care stocks performed as a group better than the averages, but Mr. Market definitely parsed health care stocks by sector from “great” to “dreadful” based on the implications of impending health care reform:

Great:

Hospital Stocks

Health Management Associates (HMA) +7.3%
HCA Holdings Inc. (HCA) +9.4%
Community Health Systems Inc. (CYH) +6.0%
Tenet Healthcare Corp. (THC) +9.6%

Yes, there were stocks that went up stridently on the big down day. Not surprisingly, hospital stocks are expected to benefit from the estimated 30 million Americans who will line up for insurance coverage beginning in 2014, increasing profits and decreasing bad debts.

Medicaid HMOs

Molina Healthcare Inc. (MOH) +4.6%
Centene Corp. (CNC) +10.1%
WellCare Health Plans Inc. (WCG) +4.4%

Health insurers that typically focus heavily on Medicaid are up in line with ACA provisions to expand care for the poor. Mr. Market tips his hat to Centene Corporation, which has been successful in procuring multi-line coverage contracts with States including long-term care, vision, dental, behavioral health, CHIP and disability.

Good:

Drug Wholesalers

McKesson (MCK) +1.3%
Cardinal Health (CAH) +.5%
AmerisourceBergen (ABC) +1.0%

Growth in prescription drug spending means increased revenues for the drug wholesalers, so ACA should be a positive for this group. But because a majority of wholesaler profits come from generic drugs, and because wholesalers are indirectly affected by changes in pharmacies, pricing pressures will keep the wholesalers in check.

Fair:

Pharmacy Benefit Mangers

Express Scripts (ESRX) -0.4%
CVS Caremark Corp (CVS) -0.4%

As an intermediary between the payor and everyone else in the health-care system, PBMs process prescriptions for groups such as insurance companies and corporations and use their large size to drive down prices. These companies are incentivized to cut costs and have been thought to benefit greatly from ACA, and will expand prescription drug insurance plans sold through health insurance exchanges starting in 2014.

Generic Pharmaceuticals

Teva Pharmaceutical Industries Ltd ADR (TEVA) -0.7%
Mylan Inc (MYL) -0.8%
Dr. Reddy’s Labs (RDY) -0.6%

Health care reform is good for generic drugs with anticipated increased dispensing of drugs in general. With more funds spent on Medicaid, the ACA will certainly be generic oriented and should fare better than the name-brand drugs. Pricing pressures are expected over the longer term however.

Testing Laboratories

Quest Diagnostics (DGX) -1.5%
Laboratory Corp of America (LH) -1.9%

More patients you would think would mean more medical tests. In a recent Gallup survey, physicians attributed 34 percent of overall healthcare costs to defensive medicine (think diagnostic blood tests/invasive biopsies, etc). ACA may curb this expensive part of medicine and appears to have very negative implications going forward as Labs will have intense pressure to reduce rates. However, these larger labs held up better than the market averages suggesting that lab work isn’t going away with ACA.

Big Pharmaceutical Companies

Pfizer Inc. (PFE) -2.2%
GlaxoSmithKline PLC (GSK) -0.8%
Eli Lily & Co. (LLY) -1.2%

The name-brand large Pharmaceutical companies have agreed to rebate Uncle Sam on Medicaid purchases and must give the elderly discounts. But there will be a lot more of us taking drugs too.

I’ve ranked these 4 health care sectors “fair” considering that broader stock market averages were down 2.4% for the day and Mr. Market was kinder to this group with only a slight negative. Likewise, it appears that he is anointing this group as a benefactor of upcoming reforms.

Not Good:

Medical Device Companies

Medtronic Inc. (MDT) -3.0%
Stryker Corporation (SYK) -1.6%
Boston Scientific Corp. (BSX) -3.6%
Zimmer Holdings Inc. (ZMH) -1.8%

The 2.3% excise tax on revenue of medical-device companies is looking more inevitable, in spite of industry lobbying group efforts.

Dreadful:

Medicare Part D Companies

Humana Inc. (HUM) -7.9%
WellPoint (WLP) -5.5%
Cigna Corp. (CI) -0.7%

Even though managed-care companies should gain millions of new customers thanks to the ACA, profit margins are expected to decline significantly. Mr. Market went easy on Cigna, perhaps because of the company’s focus on self-insured large employers.

Currently

Currently it is unclear how the increased revenue generated from more patients will affect the increased margins to the various sectors of the healthcare market. Also, too much weight should not be placed on this one day action by the market. One thing is clear however, and that is how Mr. Market and the market at large feels at first blush towards the impending implementation of the ACA based on the November 7, 2012 trading of the respective stocks.

Assessment

Remember: Mr. Market is temperamental and can change his mind anytime!

About the Author:

David K. Luke MIM, a Certified Medical Planner™, focuses on helping physicians, medical professionals, and successful retirees with financial planning, investment and risk management. He directs physicians through their complex planning needs, helping them foster a better medical practice and lifestyle. David is a fee-only financial planner.

Disclosure:

Percentage changes in price of stocks represent published change in price from closing price November 6, 2012 to closing price November 7, 2012. Stocks listed here are not considered to be past, present or future recommendations to buy or sell securities and is for educational purposes only. This information should NOT be considered as investment recommendations or advice but rather summary comments and opinions on the health care market by David K. Luke, MIM CMP™, who is entirely responsible for the contents of this article.

Link: www.CertifiedMedicalPlanner.org

Conclusion

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Filed under: Drugs and Pharma, Investing, Portfolio Management | Tagged: ACA, Big Pharmaceutical Companies, CMP Program, CMP www.CertifiedMedicalPlanner.com, david k. luke, drug wholesalers, Generic Pharmaceuticals, hospital stocks, James Surowiecki’s, medicaid HMOs, PBMs, Pharmacy Benefit Mangers, Testing Laboratories | 3 Comments »

Medical Practice and Health 2.0 Risk Management is Now a Part of Financial Planning for Doctors

Posted on November 10, 2012 by Dr. David Edward Marcinko MBA MEd CMP™

Ann Miller RN MHA [Executive-Director]

http://www.CertifiedMedicalPlanner.org

About Us

Our ME-P Editor, Dr. David Edward Marcinko MBA CMP™, is a nationally recognized healthcare financial and business advisor to physicians, clinics, hospitals and medical practices. Based in Atlanta Georgia, as a Certified Medical Planner™, Dr. Marcinko leads the industry delivering expert financial and managerial advice to all healthcare entities and stakeholders regarding managed care contracting, operations, strategic planning, revenue growth, health 2.0 business modeling and physician litigation support.

Dr. Marcinko is a sought-after author and speaker with three-decades of expert healthcare consulting experience. He has authored hundreds of healthcare business, finance, economics and management articles and dozens of text books. He is a chosen speaker among prominent national healthcare groups and financial services associations.

Committed to addressing the needs of each client, Dr. Marcinko and the iMBA Inc team takes great pride in personally leading every consulting team that produces effective response time and measurable results for satisfied colleagues and corporate clients www.MedicalBusinessAdvisors.com

Educational Inititatives

That’s why the R&D efforts of our governing board of physician-directors, accountants, financial advisors, academics and health economists identified the need for integrated personal financial planning and medical practice management as an effective first step in the survival and wealth building life-cycle for physicians, nurses, healthcare executives, administrators and all medical professionals.

Now – more than ever – desperate doctors of all ages are turning to knowledge able financial advisors and medical management consultants for help. Symbiotically too, generalist advisors are finding that the mutual need for extreme niche synergy is obvious.

But, there was no established curriculum or educational program; no corpus of knowledge or codifying terms-of-art; no academic gravitas or fiduciary accountability; and certainly no identifying professional designation that demonstrated integrated subject matter expertise for the increasingly unique healthcare focused financial advisory niche … Until Now!

Enter the Certified Medical Planner™ charter professional designation www.CertifiedMedicalPlanner.org

Assessment

And so, for all financial services professionals interested in the fast-moving healthcare advisory space: Medical Practice and Risk Management is Now a Part of Financial Planning for Doctors

Conclusion

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Filed under: "Advisors Only", "Doctors Only", CMP Program, Financial Planning, Portfolio Management, Practice Management, Professional Liability, Risk Management | Tagged: CertifiedMedicalPlanner.org, CMP Program, CMP www.CertifiedMedicalPlanner.com, Dr. David Marcinko, financial planning for doctors, malpractice | 2 Comments »

About the Institute of Medical Business Advisors, Inc

Posted on July 8, 2012 by Dr. David Edward Marcinko MBA MEd CMP™

iMBA, Inc

[www.MedicalBusinessAdvisors.com]

Championing the Financial Success of

Doctors and their Consulting Advisors

[Career Development Products and Services]

PRACTICES: www.BusinessofMedicalPractice.com
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ADVISORS: www.CertifiedMedicalPlanner.org
FINANCE: Financial Planning for Physicians and Advisors
INSURANCE: Risk Management and Insurance Strategies for Physicians and Advisors
Dictionary of Health Economics and Finance
Dictionary of Health Information Technology and Security
Dictionary of Health Insurance and Managed Care

Your Personal DR. Invitation: Letterhead.iMBA_Inc.

Filed under: "Advisors Only", "Doctors Only", Career Development, CMP Program, Financial Planning, Health Insurance, iMBA, Inc., Information Technology, Insurance Matters, Investing, Marketing & Advertising, Portfolio Management, Practice Management, Practice Worth, Professional Liability, Recommended Books, Retirement and Benefits, Risk Management | Tagged: Championing the Success of, CMP, doctors, Dr. Marcinko, financial advisors, institute of medical business advisors, podiatrists, www.CertifiedMedicalPlanner.org, www.medicalbusinessadvisors.com, www.PodiatryPrep.com | 2 Comments »

Why Doctors Must Consider Fees When Building A Retirement Nest Egg

Posted on June 13, 2012 by Dr. David Edward Marcinko MBA MEd CMP™

Understanding Mutual Fund Share Classes and Costs

[By Rick Kahler MS CFP® ChFC CCIM]

www.KahlerFinancial.com

Doctors – Do you want to add $500,000 or more to your retirement nest egg? Pay attention to the fees that mutual funds charge you for investing your money. Few physicians or small investors understand that the same mutual fund can charge a wide range of fees, depending on the share class you select.

For many medical professionals and most Americans, the best way to build wealth is to live on less than you make and invest 15% to 35% of your paycheck into mutual funds. It’s essential to find funds that are diversified among five or more asset classes.

The Choice After Mutual Fund Selection

Once you’ve found a mutual fund with a mix of appropriate asset classes, there’s one more choice to make. What class of shares should you buy? The most popular classes are A, B, and I shares; however, many funds offer even more classes like C, F, and R shares.

The difference between the classes has nothing to do with the underlying management or structure of the mutual fund. All share classes own the same stocks or bonds. The difference lies in the fees you pay the mutual fund for their services and for commissions to brokers who sell the funds.

Types of Share Classes

Many A shares and almost all B, C, F, and R shares impose sales commissions, often called “loads,” which are based on the amount you invest. For example, A shares usually charge you a one-time commission ranging from 4.0% to 5.75% of your initial investment. With B shares there is no up-front commission, but they will charge you a stiff penalty to sell the funds in the early years and will impose an additional annual commission often ranging from .25% to 1.00% a year. Some discount brokers will waive the upfront commission on A shares for their customers.

Typically the best shares to purchase are the I class, which don’t have any commissions associated with them and offer the lowest management fees of any other share class. The downside is that I shares often require a minimum investment ranging from $10,000 to $1,000,000. Financial advisors often have relationships with discount brokers that allow them to purchase the shares for clients in smaller amounts.

Fee Comparisons

It pays to compare fees.

For example, a comparison of fees available at the website of the Financial Industry Regulatory Authority (finra.org/fundanalyzer) shows that a $10,000 investment in the Invesco S&P 500 Index fund’s A shares will cost you $129 a year, while the same investment in the C shares will run $163. If instead you invest in the Fidelity Spartan 500 Index fund you will pay just $11.50 annually, which is over 1% less than the Invesco A shares.

The Savings

It’s surprising what a 1% savings means to your retirement nest egg. According to a study by the Vanguard Group reported by Jack Hough in SmartMoney.com, if a 25-year old saves 9% of his pay in a mutual fund, paying .25% a year in expenses versus 1.25% amounts to having an additional $500,000 by age 65.

Assessment

With all that said, most investors don’t have either the knowledge or the time to construct a diversified portfolio of mutual funds that will carry them through to retirement. Paying a fee or commission for advice can ultimately save you a lot of money. There are advisors who will help smaller investors select investments for an hourly or flat fee. Others charge fees based on the size of your portfolio, which normally range from .3% to 1.5%.

Conclusion

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

PRACTICES: www.BusinessofMedicalPractice.com
HOSPITALS: http://www.crcpress.com/product/isbn/9781466558731
CLINICS: http://www.crcpress.com/product/isbn/9781439879900
ADVISORS: www.CertifiedMedicalPlanner.org
FINANCE: Financial Planning for Physicians and Advisors
INSURANCE: Risk Management and Insurance Strategies for Physicians and Advisors
Dictionary of Health Economics and Finance
Dictionary of Health Information Technology and Security
Dictionary of Health Insurance and Managed Care

Filed under: Investing, Portfolio Management, Retirement and Benefits | Tagged: discount brokers, Financial Industry Regulatory Authority, FINRA, Index Funds, Invesco, Mutual Fund fees, mutual fund share classes, Mutual Funds, retirement planning, Rick Kahler CFP®, stock-brokers | 4 Comments »

On the Financial Rain in Spain for Physician Investors

Posted on June 12, 2012 by Dr. David Edward Marcinko MBA MEd CMP™

Understanding European Woes and the Global Financial Crisis

By Daniel Minihan

Spain has been the focus of the latest woes in Europe over the past few weeks. And, the key issue surrounding their banks is over lending into a property market that has fallen sharply. So, I thought the chart below best summed up their predicament.

GFC Confidence

In the lead up to the GFC, Spanish confidence was riding high and was directly correlated to retail spending, which is not dissimilar to where the USA was (and currently is).

But, after the property market tanked, so did confidence and with it went the desire to spend. With unemployment in Spain approaching 25% of the workforce, household spending is dropping which perpetuates a cycle of higher unemployment which in turn puts more pressure on the property market and the banks that lent into it

Assessment

The Spanish bank rally fizzled yesterday.

Link: http://money.msn.com/market-news/post.aspx?post=ee6e272d-7247-4e14-b33a-d8e82d337ffa

Not sure where this one will end. How about you?

Conclusion

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Medical Risk Management: http://www.jbpub.com/catalog/9780763733421

Hospitals: http://www.crcpress.com/product/isbn/9781439879900

Physician Advisors: www.CertifiedMedicalPlanner.org

Filed under: Investing, Portfolio Management | Tagged: emerging markets, EU, euro, european debt, GFC confidence, Global Financial Crisis | 2 Comments »

Euro Currency in the Cross Hairs? [Video]

Posted on June 6, 2012 by Dr. David Edward Marcinko MBA MEd CMP™

How We Got There – A Review for Physician Investors

By Jonathan Reyes

It’s been two decades since the dream of a unified Europe inched toward a reality. But, as crises have taken hold and bail-outs have become commonplace, how has the continent’s shared currency weathered the storms?

Video Link: http://www.infographicsarchive.com/economics/video-infographic-the-euro-in-the-crosshairs-how-we-got-here

Source: Video infographic made for Bloomberg TV.

Assessment

Important information for all medical professsionals and retail physician investors interested in emerging markets or international investing.

Conclusion

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

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FINANCE: Financial Planning for Physicians and Advisors
INSURANCE: Risk Management and Insurance Strategies for Physicians and Advisors
Dictionary of Health Economics and Finance
Dictionary of Health Information Technology and Security
Dictionary of Health Insurance and Managed Care

Filed under: Investing, Portfolio Management, Videos | Tagged: Bloomberg TV, emerging markets, euro, Euro in the Cross Hairs?, European Union, international investing, Jonathan Reyes | 10 Comments »

A Look at Some Famous IPOs [Including WebMD]

Posted on May 24, 2012 by Dr. David Edward Marcinko MBA MEd CMP™

Where Are They Now?

Assessment

With all the FB hoopla recently, we thought it would be fun to look at some other famous IPOs.

Link: http://marketday.msnbc.msn.com/_news/2012/05/23/11830823-facebooks-dream-ipo-is-starting-to-look-like-a-nightmare?lite

Channel Surfing the ME-P

Conclusion

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CLINICS: http://www.crcpress.com/product/isbn/9781439879900
ADVISORS: www.CertifiedMedicalPlanner.org
FINANCE: Financial Planning for Physicians and Advisors
INSURANCE: Risk Management and Insurance Strategies for Physicians and Advisors
Dictionary of Health Economics and Finance
Dictionary of Health Information Technology and Security
Dictionary of Health Insurance and Managed Care

Filed under: Breaking News, Investing, Portfolio Management | Tagged: Facebook, Famous IPOs [Including WebMD], FB, initial public offerings, IPOs, WebMD | 1 Comment »

The Trouble with Stock Marketing Timing

Posted on May 9, 2012 by Dr. David Edward Marcinko MBA MEd CMP™

Visual Statistics for ME-P Readers

Here are some statistics on the perils of market timing presented in an infographic format, including the facts that:

Over 20 years, ending in 2008, the annual return of the S&P 500 in the U.S. was 8.4% compared to the Average Investor who received 1.9%;
This cost market timers around $127,000 over that period; and
85% of sell decisions are wrong and are manly based on emotion.

Conclusion

Link: http://feeds.feedburner.com/HealthcareFinancialsthePostForcxos

Our Other Print Books and Related Information Sources:

Health Dictionary Series: http://www.springerpub.com/Search/marcinko

Practice Management: http://www.springerpub.com/product/9780826105752

Physician Financial Planning: http://www.jbpub.com/catalog/0763745790

Medical Risk Management: http://www.jbpub.com/catalog/9780763733421

Hospitals: http://www.crcpress.com/product/isbn/9781439879900

Physician Advisors: www.CertifiedMedicalPlanner.org

Filed under: Investing, Portfolio Management | Tagged: buy-sell decisions, Investing, Marketing Timing, The Trouble with Stock Marketing Timing | Leave a comment »

Public Misconceptions of Private Equity

Posted on March 21, 2012 by Dr. David Edward Marcinko MBA MEd CMP™

A Political Season Review

By Rick Kahler CFP® MS ChFC CCIM

www.kahlerfinancial.com

During tax time and this very political season, some of the attacks on Mitt Romney as a Presidential candidate have focused on his tenure with the private equity firm Bain Capital. Critics and rivals have denounced Romney as “profiteering off the backs of fired workers,” and running a “vulture capital” rather than a “venture capital” fund. A PAC supporting Newt Gingrich even produced a documentary about Bain which tries hard to leave viewers with the idea that capitalism isn’t evil, but private equity firms are.

The Negative Impressions

Some of this negativity may come from a lack of understanding as to what “private equity” really means. Here’s my explanation.

First, equity just means “common stock.” Whether equity is public or private depends on whether the company lists its shares on a public exchange, like the New York Stock Exchange or the NASDAQ, or is privately held. When you purchase a share of common stock, either directly or through a mutual fund, you buy it from a public stock exchange where anyone can buy or sell shares of stock. Private equity shares, however, are bought and sold privately, just like houses or small businesses.

One of the benefits of a public exchange is that it makes owning a slice of a company exceedingly affordable. For example, for about $600 you can own a share of Apple, the largest company in the U.S. If Apple were privately held, you would need $500 billion to buy it. If you were a little short on cash but still wanted a piece of Apple, you and 999 of your closest friends could pool your resources. You’d only need $500 million each.

That is exactly what a private equity company does. It brings together substantial investors, usually institutions, pooling their money to purchase companies not available on public exchanges. This requires raising or borrowing amounts that may be in the billions of dollars. The minimum to invest in a public equity company is often one million to 25 million dollars or more, putting it out of reach of most Americans.

An Asset Class

However, that doesn’t mean John Q. Public doesn’t own a slice of the private equity pie. Public pension funds, like the South Dakota Retirement System, have invested over $200 billion in private equity funds. The SDRS invests over 10% of its $7.8 billion fund in private equity. Many investment officers and committees feel this is such an important asset class that not holding a portion of their portfolio in private equity would violate their fiduciary duty to the fund.

Why Invest Privately?

Why invest in companies that are privately held? They often are purchased for lower prices than their publicly traded cousins, which makes owning them more profitable. In other cases a private equity firm will purchase a company that is failing or purchase a public firm and make it private.

In most every case, the private equity company’s aim is to try and improve the profitability of the company in the hope of reselling it at a profit or taking it public. Sometimes this is successful; sometimes it isn’t.

Goals of Private Equity Firms

What is the goal of a private equity company? Why, to produce a return for its investors, of course. Like any other business, its ultimate goal is not to create jobs. While more jobs may be a byproduct of creating better profitability, that isn’t always the case. Nor should it be.

Assessment

Failing to turn around a struggling company or laying off a division that is sucking a company dry in order to save the company isn’t evil. It is a natural and crucial component of a competitive free market system, a system that has given the U.S. one of the highest standards of living the world has ever known.

Conclusion

Link: http://feeds.feedburner.com/HealthcareFinancialsthePostForcxos

Our Other Print Books and Related Information Sources:

Health Dictionary Series: http://www.springerpub.com/Search/marcinko

Practice Management: http://www.springerpub.com/product/9780826105752

Physician Financial Planning: http://www.jbpub.com/catalog/0763745790

Medical Risk Management: http://www.jbpub.com/catalog/9780763733421

Healthcare Organizations: www.HealthcareFinancials.com

Physician Advisors: www.CertifiedMedicalPlanner.com

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Filed under: Alternative Investments, Portfolio Management | Tagged: Bain Capital, Mitt Romney, NASDAQ, New York Stock Exchange, NYSE, Private Equity, Public Misconceptions of Private Equity, rick kahler, venture capitalists, vulture capital | 2 Comments »

Financial Planning for Physicians

Posted on January 20, 2012 by Dr. David Edward Marcinko MBA MEd CMP™

A Handbook for Doctors and their Financial Advisors

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Book Review and Summary

Financial Planning for Physicians and Advisors describes a personal financial planning program to help doctors avoid the perils of harsh economic sacrifice.

It outlines how to select a knowledgeable financial advisor and develop a comprehensive personal financial plan, and includes important sections on: insurance and risk management, asset diversification and modern portfolio construction, income tax and retirement planning, and medical practice succession and estate planning, etc.

When fully implemented with a professional’s assistance, this book will help physicians and their financial advisors develop an effective long-term financial plan.

Order now: http://www.jblearning.com/catalog/0763745790/

###

Filed under: "Advisors Only", "Doctors Only", Book Reviews, Financial Planning, Investing, Portfolio Management | Tagged: Dr. David Marcinko, Estate Planning, Financial Planning for Physicians, insurance planning, investing for doctors, medical practice worth, medical risk management | 2 Comments »

The Quest for “Alpha”

Posted on October 31, 2011 by Dr. David Edward Marcinko MBA MEd CMP™

A New Book Review

By Peter Benedek PhD CFA

In “The Quest for Alpha” Larry Swedroe systematically dismantles the theory that active money management (defined by him as stock selection and market timing) can lead to alpha (returns above risk-adjusted benchmark) after fees. He argues that “if markets are highly efficient, efforts to outperform are unlikely to prove productive after the expense of the efforts.

If that’s true, the winning strategy is to focus on the following: asset allocation, fund construction, costs, tax efficiency, and the building of globally diversified portfolios that minimize, if not eliminate, the taking of idiosyncratic, and therefore uncompensated, risks.”

He also argues that “In order to show that markets are inefficient, we need to see evidence of persistent outperformance beyond the randomly expected. Otherwise, we cannot differentiate skill from luck.”

Swedroe then ploughs through the available evidence on: mutual funds, pension plans, hedge funds, private equity/venture capital, individual investors and behavioral finance, to conclude that the evidence does not support the pursuit of active management in the quest for persistent alpha after costs.

Some messages [for doctors] and us all

“all activity is counterproductive” or “please don’t do something, just stand there”
attempts to generate alpha by the various means mentioned above are thwarted by: (1) highly efficient markets, (2) “the costs of exploiting any inefficiencies are sufficiently great to make it difficult to generate persistent alpha sufficient to overcome the costs of the effort, and (3) “if there are inefficiencies, the competition to exploit them causes them to disappear rapidly”
“since the underlying basis of most stock market forecasts is an economic forecast, the evidence suggests that stock market strategists who predict bull and bear markets will have no greater success than do economists” (and he equates economists forecasting skill level equivalent to guessing)
described “the winning investment strategy” involves a globally diversified portfolio of passively managed funds (such as index funds and exchange traded funds) tailored to an individual’s unique ability, willingness and need to take risk….(as well as) integrating an investment plan into a well-developed estate, tax, and risk management (insurance of all types) plan.”
referring to the futility of active management and getting its practitioners to recognize that, he quotes Sinclair “It is difficult to get a man to understand something when his salary depends on his not understanding it”
William Sharpe is quoted as explaining the active vs. passive debate as: “If “active” and “passive” management styles are defined in sensible ways, it must be the case that: (1) before costs, the return on the average actively managed dollar will equal the return on the average passively managed dollar, and (2) after costs, the return on the average actively managed dollar will be less than the return on the average passively managed dollar”…so “active management is a negative sum game, also known as the loser’s game…(and) the quest for the Holy Grail of alpha is the triumph of hope, hype, and marketing over wisdom and experience.
Swedroe explains how one might improve portfolio performance relative to S&P500 alone by increasing its diversification across asset classes

Assessment

To paraphrase the message of the book, you have to be lucky, not smart, to generate after costs, alpha on a risk-adjusted basis with active management. And there are very many smart [physician] investors competing, but very few will end up being lucky.

So doctors, you’ll want to read this book, and then re-read it every time you get the urge to be active.

Conclusion

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OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

Filed under: Book Reviews, Experts Invited, Financial Planning, Investing, Portfolio Management | 1 Comment »

Let’s Meet Dr. Peter Benedek CFA

Posted on October 15, 2011 by Dr. David Edward Marcinko MBA MEd CMP™

At Your Service as Our Newest ME-P “Thought-Leader”

By Ann Miller RN MHA

[Executive-Director]

www.retirementaction.com

Peter Benedek retired in 2002, after almost thirty years working as an engineer, manager and then executive in telecommunications Research and Development. While having a PhD in Electrical Engineering, he was always also interested in the financial world.

Enabling Others to Control their Destinies

However, due to work and family pressures, he had the opportunity to delve deeply in a formal finance related study only after retirement. The collapse of telecom industry, coincidental with retirement, reinforced his interest in financial related matters – not just as an intellectual pursuit – but also as a means to better understand how to manage his own personal financial affairs, and assist others to better manage their affairs in order to achieve some level of control over their destinies.

What Peter Brings to the ME-P Ecosystem

Dr. Benedek is no novice however. In the summer of 2006 he successfully completed the three levels of study toward the Chartered Financial Analyst designation offered by the CFA Institute®. He is thus a CFA charter-holder.

Assessment

In addition to authoring his pro bono website, he started providing research and consulting services to investment management firms in 2009.

Conclusion

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

DICTIONARIES: http://www.springerpub.com/Search/marcinko
PHYSICIANS: www.MedicalBusinessAdvisors.com
PRACTICES: www.BusinessofMedicalPractice.com
HOSPITALS: http://www.crcpress.com/product/isbn/9781466558731
CLINICS: http://www.crcpress.com/product/isbn/9781439879900
ADVISORS: www.CertifiedMedicalPlanner.org
BLOG: www.MedicalExecutivePost.com
FINANCE: Financial Planning for Physicians and Advisors
INSURANCE: Risk Management and Insurance Strategies for Physicians and Advisors

Filed under: Experts Invited, Investing, Portfolio Management | Tagged: Financial Planning, Investing, Peter Benedek, Portfolio Management, www.RetirementAction.com | Leave a comment »

More on Life-Cycle Investing [Revolution or Evolution]?

Posted on September 29, 2011 by Dr. David Edward Marcinko MBA MEd CMP™

Are you Ready for its Implications – Doctor?

By Peter Benedek, PhD CFA

Founder: www.RetirementAction.com

Background

The financial planning and investment advice, like that offered on this website, has been rolling along on a framework based on wealth accumulation by saving and investing for the long-term; especially for medical professionals, but generally for us all!

The emphasis is generally heavily slanted toward equities, which historically delivered much higher average return than fixed income investments; this of course is due to the fact that the higher volatility (risk) is rewarded by higher returns. The effect of average historical inflation is included by working with “real” dollars. The analysis to estimate required savings rates to achieve certain standard of living and withdrawal rates or methods once in retirement, tends to be built on historical average returns of different asset classes, largely disregarding the potential impact of volatility of equities around the expected retirement date (and start of de-accumulation); the implication being that stocks are a safe investment in the long-run. More recently, Monte-Carlo methods started to be used to include the effect of historical or predicted volatility, and then calculating the probability of exhausting your actual/expected assets at retirement, given various withdrawal rates or methods.

Chorus of Growing Rumblings

During the past few years a faint though growing rumble has been emerging. It remains to be determined if this is a revolution or just an evolution, but under the heading of “life-cycle investing” many are starting to challenge both the fundamental framework and implementation that is used in investing in preparation for retirement. This matter has taken on increasing urgency as the demise of traditional Defined Benefit pension plans and the corresponding transfer of risk from plan sponsors (professionals) to individuals (mostly untrained, undisciplined and incompetent in the financial field).

The New Framework

Zvi Bodie PhD, of Boston University is one of the earliest and most in-your-face advocates of this new framework. (The first time I came across his work was around the technology stock crash after I read in the papers that my lifetime employer had a $2.5B pension plan shortfall, and I started reading about how pension plans should be managed; contrary to practice he was advocating significant reduction of equity component in pension plans). One has to pay attention because he is a well respected financial economist of long standing and he challenges the current ‘common wisdom’ that leads to the following fallacies:

– stocks are safe in the long-run (not)
– diversification is the only way to reduce risk (not)
– wealth is about assets (not quite)
– stocks overcome the effect of inflation (maybe)
– target-date funds solve asset allocation/rebalancing problem (maybe).

Definition of Total Wealth

In fact the whole starting point of the new framework is about the definition of wealth (Total Capital), which in this new framework is defined as:

TC (Total Capital) = HC (Human Capital) + FC (Financial Capital)

and Human Capital is defined as the present value of future earnings.

Typically, we start out with a mix of 0% FC and 100% HC and ends up with 100% FC and 0% HC. Wealth is not about assets, but about sustainable ‘real’ spend-rate. Looking at wealth through the entire Life-Cycle as HC and FC forces us to rethink what is an expense vs. an investment (e.g. cost of higher education). But even more so, it forces us to think about risk.

Risks

So let’s look at risk, or rather risks and their changing nature/emphasis throughout the life-cycle:

– disability (initially most wealth is HC, so loss of earning ability can be disastrous)
– death (with young family/dependents, death of (a) breadwinner can lead to poverty)
– investment/market (especially near the start of de-accumulation, when volatility around retirement can result in significant reduction in retirement income and/or delay in the start date of retirement)
– longevity (not only are people retiring earlier, but life expectancy has increased to 19 and 12 years, for 65 and 75 year olds and is growing; of course about 50% of individuals live past the life expectancy indicated.

For example, a 65 year old medical professional couple, there is about a 50%, 25% and 10% probability to one of them living to 90, 95 and 100, respectively).The net effect is that people are spending more time in retirement).

– inflation (this is scourge throughout the life-cycle, but it especially severe during retirement, eating away at your predominant financial capital).

Other risks are: are you saving enough? Are you annuitizing at the ‘right’ time (interest rates, mortality credits, costs)?

The Solution / Implementation

Now let’s look at some of the solutions proposed for each of these risks:

– disability and disability insurance AND/OR death and life insurance
– market/investment: diversification/asset-allocation (including futures and options), hedging (including options), single vs. multi-period investment horizon (i.e. in the long-run you appear to be OK, but on the way, as you are withdrawing funds annually during a succession of negative returns, you may become insolvent), cap investment in employer
– longevity: DB plans, (delayed) SS/CPP, immediate or deferred annuities (especially if inflation indexed), estate/bequest plan
– inflation: inflation indexed bonds, inflation indexed annuities.

Other solutions may be reverse mortgages, life settlements (assuming the need is dire and costs are not prohibitive).

Diversification

So you will note that diversification is part of the plan, but it is only a small part of the story in this framework. In addition the mechanisms (insurance and hedging) that are used to reduce/eliminate these various risks, introduce new problems: higher costs (e.g. insurance is not free) and counterparty risk (e.g. will the insurance company be solvent when the claim must be paid). So we’ll have to figure out what is the right mix of saving/investing, insuring and hedging and perhaps, as professor Bodie seems to suggest, a smaller but more certain piece of cake is what we should settle for! Pretty tough to swallow, considering that we’ve gotten used to believe that we can have it all if we do the right things.

Assessment

This new framework is more complex (not that today’s planners don’t worry about inflation, insurance and longevity), but it also make life-time sustainable income (not assets) as the focus of wealth, and it makes everything more explicit. Much of the ‘financial engineering’ mechanisms proposed as the solution are already used for HNWI, the challenge will be to get it delivered to doctors and the average investor.

References

You can learn more about life-cycle investing in the following:

1. In the FPA Journal of Financial Planning, Paula Hogan in “Life-cycle investing is rolling our way” discusses what life-cycle planning is about and the implications for planners.

2. Zvi Bodie in “Retirement investing: a new approach” appearing in Financial Engineering News, illustrates application of life-cycle investing principles using inflation protected bonds, determining suitable asset allocation based on investors’ willingness to postpone retirement and call options to protect downside while maintaining upside opportunity.

3. Still on the conference, there is Anna Rappaport’s post-conference update on “Expanding solutions for retirement income management- risks, barriers and dreams” where she looks at the various implications/perspectives of the stakeholders in retirement benefit delivery: individuals, insurer/financial services company, employer and regulatory.

4. And finally the related “Lifetime financial advice: human capital, asset allocation and insurance” by Ibbotson, Milevsky, Chen and Zhu tackles an integrated view of life-cycle finance. They also have an excellent presentation on annuities and show the principles of how to create an asset allocation composed of risk-free and risky assets, and annuities; they also show the impact of risk aversion and the bequest motive will affect the resulting mix.

Conclusion

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

PRACTICES: www.BusinessofMedicalPractice.com
HOSPITALS: http://www.crcpress.com/product/isbn/9781466558731
CLINICS: http://www.crcpress.com/product/isbn/9781439879900
ADVISORS: www.CertifiedMedicalPlanner.org
FINANCE: Financial Planning for Physicians and Advisors
INSURANCE: Risk Management and Insurance Strategies for Physicians and Advisors
Dictionary of Health Economics and Finance
Dictionary of Health Information Technology and Security
Dictionary of Health Insurance and Managed Care

Filed under: Investing, Portfolio Management | Tagged: life-cycle investing, Peter Benedek | 3 Comments »

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