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The Final Financial Round-Up for 2016

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Rick Kahler MS CFP

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

You know we are in a long-running bull market when you see people at the gym keeping one eye on their smart phones to see if the Dow Jones Industrial Average has finally breached the 20,000 mark.

With so much uncertainty at this time last year, nobody could have predicted double-digit returns on U.S. stocks at year-end. After all, the US stock market ended 2015 in negative territory and began 2016 with the worst start since 1930, falling 10% in two weeks.

The Markets

The markets eventually bottomed in mid-February and began a long, slow recovery, turning positive by the end of March. However, the going wasn’t easy. Global stock markets suffered a setback with the Brexit vote in the U.K. and endured another hard bump right after the elections.

In the end, the Dow finished 2016 at 19,762.60, a return of 13.4% for the year. International stocks of developed countries did not follow suit, finishing the year down 1.88%.

Related categories

In other categories, real estate investments, as measured by the Wilshire U.S. REIT index, finished up 7.24% for calendar 2016, and commodities, as measured by the S&P GSCI index, gained 27.77%.

The decades-long bond bull market is probably over, as interest rates have begun to rise. Even with the Federal Reserve rate increases, interest rate moves have not exactly been dramatic. Over the past year, rates on 10-year Treasury bonds have risen from 2.25% to 2.44%, while 30-year government bond yields have risen from 3.00% to 3.07%.

***

stock market

***

Unpredictable events in the investment world

As always, there were many unpredictable events in the investment world. Anyone lucky enough to have speculated on the Brazilian Bovespa index—comparable to the U.S. S&P 500—would have reaped a gain of 68.9% this year, despite all the headline drama around the Zika virus and political uncertainties reported on during the Olympic games. Russian stocks were up 51% for the year, despite the recent sanctions from the U.S. government and the lingering international sanctions related to the invasion of the Crimean peninsula.

What’s going to happen in 2017?

It’s clear that Donald Trump wants to accelerate America’s economic growth, but his policy prescription has not always been clear. Some traders expect the economy to respond positively with lower taxes and deregulatory policies.

However, it is helpful to remember that we are entering the ninth year of economic expansion, the fourth longest over the last 125 years. The first two years of a presidential term are not kind to the US stock markets. Since 1941 we have had 30 bear markets with 17 bear market lows occurring in the first year of the presidential term, 12 in the second year, one in the third year, and none in year four (the election year). Every year of this longstanding bull market, we have to look over our shoulders and wonder when and how it will end.

There are many unknowns around the globe

Growth in the U.S. since the financial crisis of 2008 has not exactly been robust; the U.S. GDP has averaged just 2.1% yearly increases. Still, the unemployment rate has slowly dropped from a post-recession peak of 10% to less than 5% currently. China’s economic growth has stalled for the second consecutive year, and a looming banking crisis in Italy could force the country to leave the Eurozone.

Markets always have a way of surprising us

Trying to time the market and get out in anticipation of a downturn is a loser’s game. The history of the markets has been a general upward trend that benefits long-term investors.

Assessment

As always, my advice is to broadly diversify your portfolio, periodically rebalance, and hang on for the long term.

Conclusion

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***

Tools for Navigating the Market Pullback

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On Stock market uncertainty?

By Lon Jefferies CFP MBA lon@networthadvice.com | http://www.networthadvice.com 

Lon JefferiesOn August 24th 2015, the Dow Jones Industrial Average opened the day decreasing in value by more than 1,000 points, equating to a -6.42% decline. One of the most volatile days in memory continued, with the DOW fighting back to nearly even by mid-day, down only 98 points or about -0.60%.

Unfortunately, the bounce couldn’t be maintained through the market close with the DOW ending the day down 588 points, off about -3.6%.

How are investors to deal with this level of uncertainty?

First and foremost, remember that this is what diversification is for. It is easy to look at a major market index like the DOW or the S&P 500 and equate the performance of those assets to the performance of your portfolio. However, the first thing investors should remind themselves is that they don’t have a portfolio consisting of only large cap stocks, which is what is measured by both the DOW and S&P 500 index.

In fact, most investors don’t have a portfolio consisting of just stocks. Many investors who are nearing or enjoying retirement may have a portfolio that is closer to only 50% or 60% stocks. If an investor only has 50% of his portfolio invested in stocks, only 50% of the portfolio is invested in the asset that declined in value by -3.6% on August 24th, meaning the individual’s portfolio likely only decreased by about -1.80%. While a -1.80% decline is not pleasant, it is hardly catastrophic.

The next step is to remind ourselves that temporary sharp market declines are common. Morgan Housel, one of my favorite financial writers, noticed that the correction the market is currently experiencing is still not nearly as bad as the correction that took place in the summer of 2011 when the DOW lost 2,000 points in 14 days (a loss of about -15.5%). Mr. Housel points out that no one now remembers or cares about that short-term correction. These market pullbacks will always come and go, and the world will continue to turn.

Additionally, it is useful to acknowledge that while we tend to remember dramatic and shocking market decreases, stocks tends to be an efficient investment over time. Another one of my favorite financial journalists, Ben Carlson, pointed out in his blog that when investors think of the ‘80s the first thing that comes to mind is usually the Crash of ’87 when the Dow lost -22% in one day (Black Monday). However, U.S. stocks were up over 400% during the decade. Similarly, even though stocks are up 200% since March of 2009, many investors have spent the last five years trying to anticipate the next 10% – 20% correction. In retrospect, an investor would have clearly been better off riding the equities rollercoaster during both the good and bad times and ending with a 200% gain rather than being out of the market in an attempt to avoid a small temporary decline. Given a long enough investment time frame, this has always been true and I believe this will continue to be the case.

Finally, as I pointed out in a previous article, it is useful to recall that market corrections are actually a good thing for long-term investors. Fear among investors is what creates the equity risk premium that enables stocks to produce superior investment results when compared to investments with no risk such as CDs and money markets, which essentially experience no growth after accounting for inflation. When investors forget that equities can go both up and down in value, everyone wants to invest their money in stocks. This excess demand inflates asset purchase prices to the point that owning equities is no longer profitable. Market declines reintroduce risk to the investing public, and it is the presence of risk that makes stocks an appreciating asset. Thus, for those who don’t intend to sell their investments for 10+ years, short periods of volatility are a positive because they recreate the equity risk premium which raises rates of return over time.

***

Bear + A Falling Stock Chart

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Logical steps

These are all logical steps for mentally dealing with market corrections. For those who need it, Josh Brown from CBNC proposes a less logical step for tricking your mind into embracing the market pullback. During scary market environments, Mr. Brown proposes that you identify a couple of stocks you’ve always felt you missed out on. Have you always wished you got in earlier on Apple, Google, Netflix, Chipotle, etc? A market correction like we are experiencing might be the perfect opportunity to become an owner of a great stock at an attractive price. Why not set a number for each of these stocks – say, if they drop in value by 20% – and if those targets are met you commit to buying some shares?

This strategy truly enables you to use lemons to make lemonade. It provides an opportunity to buy shares of companies that you have always wanted without overpaying for them. This mental trick can actually cause you to hope that the market correction continues because you are now hoping for a chance to buy. Rooting for a further correction can certainly make volatile market periods more tolerable.

As I mentioned, this mentality isn’t completely logical because the rest of your portfolio will likely need to decline in value in order to afford you the opportunity to purchase those coveted stocks. However, implementing this strategy is a bit of a mental hedge that enables you to get something good out of whichever direction the market turns. Think of promising yourself a fancy dinner if your favorite sports team loses – of course you don’t want your team to lose, but even if they do you still get something positive out of it.

Assessment

I’m confident that most of my clients already know that selling in the middle of a market correction is not a good idea. Still, I acknowledge that doing nothing as the market seems to be collapsing around you can be nerve-racking – even though it has historically been an appropriate response. Hopefully these mental strategies and tricks enable you to stick to your long-term buy-and-hold investment strategy which has always proved to be profitable given a long enough time frame.

NOTE:

–On a side note, I had zero clients call or email expressing a desire to sell positions yesterday. This enabled everyone to participate in today’s market bounce. Smart clients rule. 

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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

David K. LukeThe 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.

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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%.

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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:

  1. 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.
  2. 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.
  3. 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.
  4. 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

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Is a Stock Market Correction Imminent?

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Destined for a significant pullback; or not!

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

Lon JefferiesThe market has allowed itself a well-deserved “cool down” period during the month of August. The S&P 500 was down 3.13% while the Dow Jones Industrial Average was down 4.45% for the month.

After Running of the Bulls

After the roaring bull market we’ve enjoyed since April 2009, it is natural for investors to question whether this is a turning point and the market is destined for a significant pullback.

Currently, it is valuable to remind ourselves that even through the woes of August, the S&P 500 is only down 4.5% from its recent all-time high.

Wall Street Writes

Additionally, it is useful to define some terms, as Josh Brown, one of my favorite Wall Street writers, recently did:

Percentage    Drop: Defined    As: Feels    Like:
less than   5% Pause “whatever”
5% to 10% Dip Refreshing
10%+ Correction Nerve-wracking
20%+ Bear Market Panic
50%+ Crash Can’t Get   Out of Bed

The Market Pause

You may have heard the word correction in the financial media lately. With a market pause still under 5%, it’s probably a bit early to start talking about a correction. Still, let’s assume we are headed for an actual correction, or a loss of 10% to 20%.

Expectations

What should we expect? Here are some interesting numbers that Mr. Brown accumulated:

  • Since the end of World War II (1945), there have been 27 corrections of 10% or more. Only 12 of these corrections evolved into bear markets (a loss of 20%+). The average decline during these 27 episodes has been 13.3% and they’ve taken an average of 71 trading days to play out.
  • On average, the market has endured a correction every 20 months. Of course, the corrections aren’t evenly spaced out — 25% of the corrections occurred during the 1970′s, and another 20% occurred during the secular bear market of 2000-2010. However, from 1982 through 2000, there was just four corrections of 10% or more. This is relevant as it illustrates that bull markets can run for a long time without a lot of drama.
  • Since the stock market’s bottom in March of 2009, there have been two corrections. In the spring of 2010 the S&P 500 lost 16% over 69 trading days. In the summer of 2011, the S&P 500 dropped a hair over 20% before snapping back. Technically, this qualified as a bear market, which would mean the current rally is only two years old as opposed to almost five years old if dated from March of 2009.
  • The market pulled back 9.9% during 60 days in the summer of 2012. While not quite a correction, this dip set up one of the greatest rallies of all time.
  • There have been 58 bull market rallies (defined as market advances of 20% or more) in the post-war period, and they have run for an average of 221 trading days and resulted in an average gain of 32%. Comparatively, when measured by both length and magnitude, the current bull market is overdue for a correction and has been for awhile.

###

Stock_Market

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Financial Action Plan

So what should you do assuming we are heading for a correction?

First, it is critical to remind yourself that if you are following sound financial planning principals, you already have an investment portfolio that matches your risk tolerance and investment time horizon.

Remember that just because the market loses 10% doesn’t mean your portfolio will lose 10%. In fact, if you scaled back the assertiveness of your portfolio as you transitioned into retirement and your portfolio is only 60% stocks, your portfolio would likely only be down approximately 6%.

Second, in the instance of an investor with a portfolio that is 60% equities, recall that you selected such a portfolio because you deemed a 6% loss to be acceptable. In fact, if due diligence was completed when you selected an asset allocation, you were aware that the largest loss a 60% stock, 40% bond portfolio suffered during the last 44 years was -19.35% (2008).

Additionally, you were aware that such a loss could (and likely would) happen again and you determined that was acceptable.

Grinding Teeth

Thus, for medical professionals and other investors who have done their planning, the best thing to do in the event of a market correction is grit your teeth and do very little!

For those doctors who haven’t planned in advance, now would be an ideal time to do your homework and create a portfolio that matches your situation and behavior patterns.

Assessment

Once you’ve done your planning, all you need to do is remember what Josh Brown calls the ABCs of investing: Always Be Cool.

Conclusion

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Did You Survive the [Fleeting-Tweeting] “Flash-Crash” of 2013?

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The Day the Dow Jones Industrial Average Lost 150 Points

By Lon Jefferies, MBA CFP™  http://www.NetWorthAdvice.com

Lon JefferiesThe stock market just reached an all time high, crossing 15,000 for the first time.

But, within three minutes during last April 23, 2013, the Dow Jones Industrial Average lost nearly 150 points, and approximately $136 billion of market value was wiped out. The recovery was just as fast, and markets returned to having a profitable session (both the Dow and the S&P 500 were up over 1% for the day). The crash and recovery both happened so fast that many Americans, and physician-investors, weren’t even aware of the events.

So what happened?

On Tweeting

Believe it or not, the crash was caused by a tweet – a 140 character message posted on Twitter. The Associated Press Twitter account — which has nearly 2 million followers — was hacked and a false tweet of “Breaking: Two Explosions in the White House and Barack Obama is Injured” was posted. The message was quickly debunked by the President’s staff and markets corrected themselves. Both the crash and recovery took place in less than five minutes.

Lessons Learned

Several lessons were learned that day.

First, the power of social media is now undeniable. This was caused by a simple twelve-word lie on the internet. Further, information about the market collapse and recovery were widespread via Twitter and Facebook instantaneously, while the whole episode was over before television networks had a chance to report the events.

Second, it’s amazing how fragile our world is these days. News regarding terrorism has the potential to dramatically affect the market as well as other important aspects of our lives. It’s concerning how the world might respond if the President really was injured. (Interestingly, however, the market didn’t suffer after the Boston Marathon tragedy.)

Third, it is fascinating to examine how different asset categories responded in a time of perceived crisis. Investors build diversified portfolios hoping that when one asset category collapses, another asset class will rally. Some investors swear that gold will be the asset to own when the world struggles. Yet, when the market experienced a flash crash, gold did not rally but treasury bonds and the Japanese Yen did. Gold investors shouldn’t be as confident in their investment after this experience.

Finally, automated trading platforms have become more prevalent in the stock market. These tools execute mandatory, instant sell orders in defined market environments. When the crash occurred, algorithms read headlines and saw the initial market reaction and computers created automatic sell orders at what turned out to be the worst possible time. Traders utilizing automatic trading mechanisms with stop-loss orders suffered exaggerated losses, as they sold right after the market dip and didn’t participate in the recovery. This is a potential weakness of automatic trading that many didn’t recognize.

College Tuition Rising as Stocks are Dropping

Assessment

Why are many physician-investors unaware of this unusual market event? In reality, this drastic swing didn’t affect most investors hoping to improve their retirement. Individuals with a long-term investment strategy built around their risk tolerance don’t need to worry about these types of short-term market errors. At the end of the day, “buy-and-hold” investors had nothing to worry about and came out ahead. Perhaps we should be bragging via Twitter…

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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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Understanding and Using Portfolio Performance Benchmarks

Concerning Periodic Measurements and Meters

By Dr. David Edward Marcinko MBA, CMP™

[Publisher-in-Chief]

The stock market has been booming lately; flirting with DJIA 12,000. Up almost 100% since March 2009, after being down almost 50%. And so, perhaps this is a good time to [re]-evaluate the performance of your investment portfolio[s]. But how?

Performance measurement has an important role in monitoring progress towards any physician’s portfolio’s goals.  The portfolio’s objective may be to preserve the purchasing power of the assets by achieving returns above inflation or to have total returns adequate to satisfy an annual spending need without eroding original capital, etc.  Whatever the absolute goal, performance numbers need to be evaluated based on an understanding of the market environment over the period being measured.

Time Weighted Return

One way to put a portfolio’s a time-weighted return in the context of the overall market environment is to compare the performance to relevant alternative investment vehicles.  This can be done through comparisons to either market indices, which are board baskets of investable securities, or peer groups, which are collections of returns from managers or funds investing in a similar universe of securities with similar objectives as the portfolio.  By evaluating the performance of alternatives that were available over the period, the physician investor and his/her advisor are able to gain insight to the general investment environment over the time period.

The Indices

Market indices are frequently used to gain perspective on the market environment and to evaluate how well the portfolio performed relative to that environment.  Market indices are typically segmented into different asset classes. 

Common stock market indices include the following:

  • Dow Jones Industrial Average- a price-weighted index of 30 large U.S. corporations.
  • Standard & Poor’s (S&P) 500 Index – a capitalization-weighted index of 500 large U.S. corporations.
  • Value Line Index – an equally-weighted index of 1700 large U.S. corporations.
  • Russell 2000 – a capitalization-weighted index of smaller capitalization U.S. companies.
  • Wilshire 5000 – a cap weighted index of the 5000 largest U.S. corporations.
  • Morgan Stanley Europe Australia, Far East (EAFE) Index – a capitalization-weighted index of the stocks traded in developed economies. 

Common bond market indices include the following:

  • Lehman Brothers Government Credit Index – an index of investment grade domestic bonds excluding mortgages [N/A].
  • Lehman Brothers Aggregate Index – the LBGCI plus investment grade mortgages [N/A].
  • Solomon Brothers Bond Index – similar in construction to the LBAI.
  • Merrill Lynch High Yield Index – an index of below investment grade bonds.
  • JP Morgan Global Government Bond – an index of domestic and foreign government-issued fixed income securities. 

The selection of an appropriate market index depends on the goals of the portfolio and the universe of securities from which the portfolio was selected.  Just as a portfolio with a short-time horizon and a primary goal of capital preservation should not be expected to perform in line with the S&P 500, a portfolio with a long-term horizon and a primary goal of capital growth should not be evaluated versus Treasury Bills.

While the Dow Jones Industrial Average and S&P 500 are often quoted in the newspapers, there are clearly broader market indices available to describe the overall performance of the U.S. stock market.  Likewise, indices like the S&P 500 and Wilshire 5000 are capitalization-weighted, so their returns are generally dominated by the largest 50 of their 500 – 5000 stocks.  While this capitalization-bias does not typically affect long-term performance comparisons, there may be periods of time in which large cap stocks out- or under-perform mid-to-small cap stocks, thus creating a bias when cap-weighted indices are used versus what is usually non-cap weighted strategies of managers or mutual funds. 

Finally, the fixed income indices tend to have a bias towards intermediate-term securities versus longer-term bonds.  Thus, an investor with a long-term time horizon, and therefore potentially a higher allocation to long bonds, should keep this bias in mind when evaluating performance.

Assessment

RIP: Lehman Brothers

Peer group comparisons tend to avoid the capitalization-bias of many market indices, although identifying an appropriate peer group is as difficult as identifying an appropriate market index.  Further, peer group universes will tend to have an additional problem of survivorship bias, which is the loss of (generally weaker) performance track records from the database.  This is the greatest concern with databases used for marketing purposes by managers, since investment products in these generally self-disclosure databases will be added when a track record looks good and dropped when the product’s returns falter.  Whether mutual funds or managers, the potential for survivorship bias and inappropriate manager universes make it important to evaluate the details of how a database is constructed before using it for relative performance comparisons.

Conclusion

And so, your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com and http://www.springerpub.com/Search/marcinko

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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