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    As a state licensed life, P&C and health insurance agent; and dual SEC registered investment advisor and representative, Marcinko was Founding Dean of the fiduciary and niche focused CERTIFIED MEDICAL PLANNER® chartered professional designation education program; as well as Chief Editor of the three print format HEALTH DICTIONARY SERIES® and online Wiki Project.

    Dr. David E. Marcinko’s professional memberships included: ASHE, AHIMA, ACHE, ACME, ACPE, MGMA, FMMA, FPA and HIMSS. He was a MSFT Beta tester, Google Scholar, “H” Index favorite and one of LinkedIn’s “Top Cited Voices”.

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“Medical Management and Health Economics Education for Financial Advisors”

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Your thoughts and comments are appreciated.

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***

The Yerkes-Dodson Law, Management, Investing and the Corona Pandemic?

Performance Increases with Anxiety and Excitement to a Point

By Dr. David E. Marcinko MBA

Courtesy: www.CertifiedMedicalPlanner.org

The Yerkes–Dodson law is an empirical relationship between arousal and performance, originally developed by psychologists Robert M. Yerkes and John Dillingham Dodson in 1908.

LINK: https://www.springerpub.com/dictionary-of-health-economics-and-finance-9780826102546.html

The law dictates that performance increases with physiological or mental arousal, but only up to a point. When levels of arousal become too high, performance decreases. The process is often illustrated graphically as a bell-shaped curve which increases and then decreases with higher levels of arousal.

LINK: https://juniperpublishers.com/gjidd/pdf/GJIDD.MS.ID.555606.pdf

MONEY: https://medicalexecutivepost.com/2018/09/19/money-beliefs-and-luxury-lifestyle-tv/

INVESTING: https://medicalexecutivepost.com/2013/04/24/more-on-money-psychology/

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PODCAST: https://www.bing.com/videos/search?q=YERKES-DODSON+LAW&&view=detail&mid=6ACB86065FA362A3AC1D6ACB86065FA362A3AC1D&&FORM=VRDGAR&ru=%2Fvideos%2Fsearch%3Fq%3DYERKES-DODSON%2BLAW%26FORM%3DHDRSC3

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Assessment: Your thoughts and comments related to the Corona Virus Pandemic, Investing and Money Psychology are appreciated.

***

BUSINESS, FINANCE, INVESTING AND INSURANCE TEXTS FOR DOCTORS:

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Another CERTIFIED MEDICAL PLANNER® “In The News”

YAHOO Finance!

Courtesy: http://www.MedicalExecutivePost.com

“The extensive experience of our professional team allows us to implement a rigorous process to identify ‘Best in Class’ opportunities in our focus areas,” said Amaury Cifuentes CFP®, CMP® one of the firm’s founders. “We assist in providing capital, innovative solutions and strategic expertise to our portfolio throughout the investment cycle.”

LINK: www.CertifiedMedicalPlanner.org

The partners in the firm include:

Amaury Cifuentes, CFP®, CMP® has 30 years of experience in banking and finance; financial planning and investments with an emphasis on business lending, real estate and private investments. He is a Certified Medical Planner®, giving him an enhanced knowledge of the medical industry’s specific needs.

LINK: https://finance.yahoo.com/news/bluekey-wealth-advisors-announces-formation-150000988.html

Assessment: Your congratulations are appreciated.

TEXTS FOR PHYSICIAN EXECUTIVES AND HOSPITAL CXOs:

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TEXTS FOR PHYSICIANS AND ADVISORS

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

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****

2020: Stock Markets Party Like It’s 1999?

2020: Party Like It’s 1999?

By Vitaliy Katsenelson CFA

The stock market marched higher for the year even though US companies as a whole did not become more valuable, just more expensive, as earnings failed to grow from 2018 to 2019. Earnings are estimated to be up about 5% for 2020 (though these estimates are usually revised down as the year progresses).

If you look at the quality of this non-growth, then the rose-tinted glasses of the average stock market investor quickly prove inadequate. Corporate debt is up 5% in 2019, and a good chunk of the increase went into stock buybacks. As stocks become  expensive their benefit from earnings per share growth diminishes.

LINK: https://contrarianedge.com/2020-party-like-its-1999/?utm_source=IMA++-+Main+Articles&utm_campaign=ef3ee0520d-2020_PARTY_1999&utm_medium=email&utm_term=0_f1c90406d1-ef3ee0520d-55139025

Assessment: Your thoughts are appreciated.

BUSINESS, FINANCE, INVESTING AND INSURANCE TEXTS FOR DOCTORS:

1 – https://lnkd.in/ebWtzGg

2 – https://lnkd.in/ezkQMfR

3 – https://lnkd.in/ewJPTJs

THANK YOU

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

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Mature Company Stocks Are Not Bonds

Dividends bring tangible and intangible benefits

vitaly

By Vitaliy Katsenelson CFA

 

You can also listen to the article here, or by clicking on the buttons below:

Like many professional investors, I love companies that pay dividends. Dividends bring tangible and intangible benefits: Over the last hundred years, half of total stock returns came from dividends.

In a world where earnings often represent the creative output of CFOs’ imaginations, dividends are paid out of cash flows, and thus are proof that a company’s earnings are real.

Finally, a company that pays out a significant dividend has to have much greater discipline in managing the business, because a significant dividend creates another cash cost, so management has less cash to burn in empire-building acquisitions.

Mature Company Stocks Are Not Bonds

***

[PHYSICIAN FOCUSED FINANCIAL PLANNING AND RISK MANAGEMENT COMPANION TEXTBOOK SET]

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

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

Fifty Shades of Warren Buffet -OR- New Year in Omaha

A POD-Cast

By Vitaliy Katsenelson CFA

50 Shades of Warren Buffet or Next Year In Omaha

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Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

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On Stock Investing Fear!

vitaly

By Vitaliy Katsenelson CFA

Stock Investors: You Have Nothing to Fear but Fear Itself

    

This article is Part 1 of a 3-part series discussing how investors can avoid acting irrationally. Read Part 2 and Part 3.

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

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Book Dr. David Edward Marcinko CMP®, MBA, MBBS for your Next Medical, Pharma or Financial Services Seminar or Personal and Corporate Coaching Sessions 

Dr. Dave Marcinko enjoys personal coaching and public speaking and gives as many talks each year as possible, at a variety of medical society and financial services conferences around the country and world.

These have included lectures and visiting professorships at major academic centers, keynote lectures for hospitals, economic seminars and health systems, keynote lectures at city and statewide financial coalitions, and annual keynote lectures for a variety of internal yearly meetings.

Topics Link: toc_ho

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[PHYSICIAN FOCUSED FINANCIAL PLANNING AND RISK MANAGEMENT COMPANION TEXTBOOK SET]

  Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™ Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

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[HOSPITAL OPERATIONS, ORGANIZATIONAL BEHAVIOR AND FINANCIAL MANAGEMENT COMPANION TEXTBOOK SET]

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[Foreword Dr. Phillips MD JD MBA LLM] *** [Foreword Dr. Nash MD MBA FACP]

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Don’t let Population Health Demographic Trends Guide “Investment” Decisions

A Different Perspective on Population Health

By Dr. David Edward Marcinko MBA CMP®
http://www.CertifiedMedicalPlanner.org

Definition

Population health has been defined as “the health outcomes of a group of individuals, including the distribution of such outcomes within the group”. It is an approach to health that aims to improve the health of an entire human population or cohort. http://www.HealthDictionarySeries.org

History

In fact, the nominal “father of population health” is colleague and Dean David B. Nash MD MBA of Jefferson Medical School in Philadelphia. And, although I attended Temple University down the street, David still wrote the Foreword to my textbook years later; Financial Management Strategies for Hospitals and Healthcare Organizations [Tools, Techniques, Checklists and Case Studies].

Factors

Now age, income, location, race, gender  and education are just a few characteristics that differentiate the world’s population. These are called ”disparities” and they have a major impact on people’s lives; especially their healthcare. And, I’ve written about them before.  Perform a ME-P “search” for more.

So, it’s only natural that we’re keeping an eye on two major demographic trends: aging baby boomers and maturing Millennials [1982-2002 approximately].

Why it’s important

The impact of large population shifts propagate throughout an economy benefitting certain sectors more than others and influencing a country’s growth prospects; tantalizing investing ideas?

Example:

For example, as baby boomers retire, we’ll likely see higher spending on health care, but less on education and raising children. Likewise, tech-savvy Millennials will likely prioritize consumption on experiences over cars and houses [leading economic indicator].

So, can we profit from these trends?

Assessment

Well maybe – maybe not! Overall economic prospects may not be completely affected by these trends. Spending habits on combined goods and services will shift, rather than rise or decline.

So, be careful. What matters most for your investment success is your demographics and investing according to your personal circumstances and goals [paradox-of-thrift].

Conclusion

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. https://medicalexecutivepost.com/dr-david-marcinkos-bookings/

Subscribe: MEDICAL EXECUTIVE POST for curated news, essays, opinions and analysis from the public health, economics, finance, marketing, IT, business and policy management ecosystem.

***

Appreciating Post Cyber Monday Stock Market Volatility

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Living with Ambiguity [Is it Friend or Foe?]

By Robert Klosterman CFP® http://www.whiteoakswealth.com/

The stock market was down a bit last month and up last week, and then down today; back and forth, rising and falling and rising again the last few years, etc, etc.

Now: 23 557 DJIA

Whipsaw is the word I’ve heard to describe it lately. And, without a doubt, the question that gets asked the most is “How do you like this volatility?”

My reply, without exception, is “I LOVE volatility. I do prefer upside volatility to downside though”. The response is a smile or an outright laugh. Of course, few physicians or laymen I have ever met get worried about upside price movements in investing.

Third Quarter 2017

The third quarter of 2017 – post election results – clearly experienced both major up and downside volatility with the recent emphasis on the upside. Investors that fully invested in equities saw their portfolios rise in the positive and record-breaking direction.

Europe

The market pundits have a daily hero to pin the market movements on. Europe, Syria, Russia and Putin, Turkey, Greece, US Congress stalemates and other forces like the death of Fidel Castro are some of the most recent “good guys” that have given rise to Mr. Market’s positivity. Did we mention  Donald Trump?

How Long?

The bigger question is how long will these issues persist? Established societies, often described as western economies, have some significant headwinds facing them for the next few years: high debt, mounting costs of social insurance programs, and the likelihood of higher taxes to solve the problems.

There is nothing new or unique about that last sentence. There seems to be a wide consensus on those points and coupled with the record low interest rates, investors seem to have few traditional options to consider. It appears likely that it will take a few years to resolve these issues and provide a platform for above average growth.

Strategies

There are a number of strategies that can utilize volatility including Long-Short, Mean Reversion, Managed Futures and Market Neutral, etc [previously noted on this ME-P]. These provide returns in a secular bear market that may continue for a few more years.

Link: https://medicalexecutivepost.com/2007/11/28/what-is-a-market-neutral-fund/

It’s also important to recognize that while the US and Western Europe maybe having to face the headwinds there are economies in parts of the world that will likely experience above average growth rates for the next few years. For the most part, these emerging markets include Brazil, Russia, India and China (BRIC). A strong dollar not-withstanding.

BRIC Analogs to the USA

In the 1870‘s, the US was an emerging market the same way the BRIC economies are today’s emerging markets; developmentally analogous. Whereas the US and Western Europe face many headwinds, some of these emerging economies actually have wind in their backs. Trade surplus, demographics, low debt and low cost of Government are some of the key advantages. These countries’ standard of living is changing to the positive, and they have a large percentage of their population that can move up and be a purchaser of goods and services where previously they could not.

Income Generation

Another important focus will be on income generation. For many years the income portion of an investment in equities was half or more of its return. Only in recent years has the largest portion come from capital gains. We are likely “back to the old days” in order to achieve returns that will offset inflation and meet longer-term investment goals

Opportunities exist in a variety of areas, including real estate, Mortgage Backed Securities, Private Equity and others to have more focus on income as a dominant portion of the total return.

Assessment

Volatility is going to be with us and it would be wonderful to have the confidence needed to say the emphasis would be on upside volatility, but that is not the case right now. The optimum strategies are to align portfolios with the world we live in today.

IOW: Doctors, medical professionals and all investors must learn to “live with ambiguity.”

About the Author

Robert J. Klosterman® has been listed as one of the Top 250 Financial Advisors in the United States by Worth Magazine. He has also been recognized as one of the top 150 Financial Advisors by Mutual Fund Magazine, Medical Economics and Bloomberg’s Wealth Manager Magazine. Bob’s published quotes appear frequently in dozen’s of local and national publications, including USA Today, the New York Times, Minneapolis Star Tribune, CFP Today, Barron’s and Fortune.

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Conclusion

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

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

***

What I Didn’t Know Then?

About Money

[By Rick Kahler MS CFP®]

Fifty years ago I scraped together $100 that I earned moving lawns and invested in my first stocks. I had heard a person could make a lot of money owning stocks. The ones I bought were all very small regional companies that I selected with the help of a stock broker who said they had great promise. They all eventually went out of business.

The next time I had some money to invest, at age 19, I bought a house. My $1,000 down payment grew into $4,000 in a couple of years. I took that money and invested it into the futures market. Within days it was gone.

It probably isn’t a surprise that, after these painful lessons, I put my investable dollars into buying real estate. It took me 10 years to even consider investing money into the stock market.

While I did okay investing in real estate, my foray into more liquid investments could have been much less painful had I known then what I know now.

Here’s what I finally learned: buying individual stocks and trying to beat the market is a game very, very, very few people do well at.

Had I taken that first $100 and purchased an index fund that invested in the 500 largest companies in the US (the S&P 500), 50 years later my $100 would have grown to $12,600, which is 10.2% a year. But I didn’t know that then.

My kids, however, are a little smarter. Six years ago they invested around $100 each into the Vanguard Dividend Appreciation Fund that owns just over 100 large company stocks. Their $100 is now worth around $300, which is a little over 20% a year. If that return would continue, at the 50-year anniversary of their original $100 investment they would each have just over $920,000. While I will guarantee you the 20% returns will not continue, they are well on their way to doing far better with their initial $100 investments than I did with mine.

Which leads me to wonder if the growth of their stock investments is likely to equal the growth of the past 50 years. According to Jonathon Clements of HumbleDollar.com, in a July 1, 2017 blog post , repeating the returns of the past is probably unlikely.

First he contends that because of “the aging of America and the accompanying slow growth in the workforce, the current century’s real economic growth has been sluggish, averaging 1.9% a year over the past 17 calendar years. That’s likely to continue.”

If you take real economic growth of 2%, add inflation of 2%, and add the average 2% dividend yield of stocks, you are looking at a 6% long-term return. Based on Clements’s math, that means $100 will grow to $1,840 in 50 years. That’s a fraction of the $12,600 accumulation of the past 50 years.

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Clements notes the focus here is on just US stocks, suggesting the outlook for international stocks is much brighter. Other asset classes that could also do well are real estate and commodities.

Assessment

he bottom line is often the same: placing your bets on one stock, one asset class, or one country carries with it a high amount of risk. Most long-term investors need to seriously consider diversifying their nest egg globally in several asset classes. While such investors will never hit a home run, they will also never have to forfeit the game.

After my early attempts at investing, it took me a long time to learn what I didn’t know then. My hope is that writing about my mistakes can help others learn sooner what I do know now. 

Conclusion

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

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***

The New DOL Rule Survey

A Conversation?

[By Rick Kahler MS CFP®]

I recently learned about an unexpected response to the new Department of Labor rule which mandates that all financial advisors and brokers act as fiduciaries (that is, in the best interest of the consumer) when dealing with customers’ retirement plans.

This means brokers will be discouraged from selling high fee and commission products to a customer’s IRA or similar retirement plan. The ruling may force many brokers to revamp for IRA products that have lower fees and commissions.

The Survey

However, according to a J. D. Power survey as reported in Financial Planning, customers are not happy with their brokers charging them lower fees. While the survey found that the clients of fee-only advisors were “generally more satisfied with what they pay their firm,” it also found that commission-based clients are going to leave in droves if their advisors switch to a lower-cost, fee-only model.

Let me get this straight

A broker who until now has owed no fiduciary duty to the customer, and who sells high fee and commission products to that customer, will now be forced by their company to place the consumer’s interest first. When dealing with the customer’s IRA, the broker cannot receive commissions and can only earn a lower fee. The broker places a low-fee product in the client’s IRA.

The result?

The client is so upset they will take their business to another firm.

According to J. D. Powers, that is correct. Their survey says around 60% of the customers of brokerage firms that may have to switch to fee-only when dealing with customer’s IRAs will “probably” or “definitely” take their business to another firm.

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I am imagining the following conversation between a customer and a broker

Broker:

“Because of the new DOL regulations I can no longer sell you a high fee and commission variable annuity to be owned by your IRA. To comply with the ruling, my company has eliminated the 7% upfront commission on this annuity; we will now charge you a 1% annual fee. They also reduced the annual management expenses from 3% to 1%. Plus, now any advice I give you or product I recommend must be in your best interests.”

Customer:

“So you are eliminating the upfront 7% commission and replacing that with a 1% annual fee, which means 7% more of my money immediately goes to work for me in the investment, right?”

Broker:

“That’s right.”

Customer:

 “And instead of the upfront commission you are charging a new 1% annual fee, but reducing the annual management costs of the investments from 3% to 1%. So I’ll still make an additional 1% every year I own this, in addition to saving 7% up front, right?”

Broker:

“That’s right.”

Customer:

 “And further, you’re now going to look out for my best interests rather than the best interests of your company.”

Broker:

 “Yep.”

Customer:

“This is ridiculous. I’m outta here!”

Broker:

“Where are you going?”

Customer:

“To find a firm that will continue to sell me high commission, high fee products for my IRA and that will work against my best interests!”

Broker:

“You probably won’t find any. Every financial company selling investment products to IRAs has to comply.”

Customer:

 “I’ll find someone, somewhere. Goodbye!”

Assessment

This defies all logic. I can only make up stories as to why the survey found the majority of brokerage customers would leave. Might some believe the new fees would cost them more than they currently pay?

My best assumption is that there was no explanation of what “fee-only” or “fiduciary” meant. So, if the results of the J. D. Power survey don’t make a lot of sense to you, join the crowd.

Conclusion

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The Role of Asset Classes

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By Charles Schwab

Various Asset Classes and Diversification

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infographic_web-1-updated_3

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More:

Conclusion

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MDs Must Know When it’s OK to be Average

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Should Active Investors Expect to Lose?

Rick Kahler MS CFP

By Rick Kahler MSFS CFP®

When it comes to investing, it’s a losing proposition to try and be anything better than average. Even if you are a doctor.

I was recently reminded of this important investing precept when I attended a presentation by Ken French, a noted professor of finance at Dartmouth College.

Dr. French Speaks

“The theory is institutions are smarter than ‘dumb’ individual and can add value,”

said French.

“That is simply not true.”

His research has found that institutions are no better at trying to beat the market than individual investors. When you pay someone to do better than the market, French told us,

“You should expect to lose. It’s really hard to identify the great managers. You are wasting your time and money trying to beat the market.”

If there’s no point in trying to beat the market through “active” investing, what is the best way to invest? Through “passive” investing, that accepts average market returns. You need to reduce expenses, diversify your portfolio into index funds of various asset classes, minimize taxes, and exhibit discipline.

  1. Reduce expenses. Passive investing generally costs around 0.20% a year in fees, compared to around 1.35% for active investing.
  2. Diversify into index funds. Simply select an index in the asset classes you want to hold. The inherent strategy of the index will determine when to buy and sell. For example, the inherent strategy of the S&P 500 is to own a fraction of the largest 500 companies in the US. Every June, those companies that fell out of the top 500 largest are sold and those that made it into the top 500 are purchased.
  3. Minimize taxes. The limited buying and selling of passive investing tends to reduce investment-related taxes.
  4. Exhibit discipline. Relying on the inherent strategy of an index fund puts some distance between you and buying/selling decisions, making it easier to maintain your investment discipline during market fluctuations.

You may be thinking that, if “passive” is the way to go, you might as well make things even simpler. Why not just put your retirement money in the bank and forget it? While you can certainly do that, the results may be disastrous. If you want more than just Social Security for your retirement, you need your money to grow.

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stock-exchange

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Considerations

In 1913, nine cents bought a quart of milk. In 1963, the same nine cents bought a small glass of milk. In 2015, nine cents bought seven tablespoons of milk. Clearly, putting money under the mattress doesn’t work for the long term. The culprit of the declining purchasing power of that nine cents is inflation. The moral of this story is to make sure your money grows at least as fast as inflation. That requires investing it.

Example:

It would require $13 today to equal the purchasing power that $1 provided in 1926. Had you put one dollar in the bank in 1926, you would have $21 today. Having invested the dollar in long-term bonds would give you $132. However, invested in the S&P 500 Index (stocks), you would have $5,386.

A Mix

Does that mean you should invest all of your retirement assets in stocks? If you are one year old, probably so. If you are 60 years old, probably not. For most of us, a mixture of index funds that include many asset classes—such as global stocks, global bonds, global real estate, and commodities—is the best strategy.

Assessment

Research supports the value of diversified passive investing as long-term strategy. According to a study by Dalbar, Inc., average passive investors earn 3% to 4% more annually than average active investors. Over time, that makes a huge difference.

Conclusion

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The POWER of Three

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Rick Kahler MS CFP

By Rick Kahler MSFS CFP®

At a recent workshop sponsored by the Center for Action and Contemplation, I was introduced to a principle that could be a helpful way to frame and change hurtful money behaviors. It’s based on the work of Adrian Bejan, a professor of mechanical engineering at Duke University, whose Constructal Law describes the physics of life as a flow system.

Flow Systems

Flow systems consist of three interweaving forces: affirming (what moves or flows), denying (what opposes or resists), and reconciling (what brings the first two into a new relationship).

With a sailboat, for example, the affirming force is the wind. The denying force is the rudder. The reconciling force is the helmsman who figures out how to bring the two oppositional forces together. When the helmsman finds the right balance between the wind and the rudder, the boat sails forward. Without the helmsman there is no forward progress, and a sailboat floats aimlessly.

Law of Three

In human interaction, philosophers often refer to this principle as the Law of Three. One place we can see it is in the US government. We have an affirming force (a Democratic Senator, say) that proposes a bill and the denying force (perhaps a Republican House member) that opposes it. The result is gridlock unless the third reconciling force (perhaps moderate members of both parties) can merge mutually acceptable pieces of both the affirming and denying forces into new legislation.

It’s important to recognize that no force is inherently good or bad, and neither is the reconciliation always positive. For example, Hitler was the reconciling force of the two opposing forces in pre-WWII Germany.

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SIB flow chart

The key to transformation—creating a new system or behavior—is becoming aware of the two conflicting forces and finding a way forward

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How can we apply the Law of Three to our finances?

Take the example of a chronic overspender who tried for years to reduce his spending and live within his means. The problem was his love for “big boy” toys. There wasn’t a boat, ATV, motorcycle, or power tool that didn’t call to him. Predictably, like a sailboat without a helmsman, his financial ship was blown about aimlessly and in danger of sinking deeper and deeper in debt.

When he learned about the Law of Three, he initially thought the affirming force was his desire for financial solvency and the resisting force was his penchant for the toys. Actually it was just the opposite. The affirming force was his unrestrained desire for the toys and the resisting force was the nagging reminder of financial insolvency. He came to recognize that the missing third force was a conscious relationship with the toys.

He had a long-time pattern of struggling with the desire, unsuccessfully trying to resist it, and feeling ashamed and guilty when he finally gave in and bought the new toy. His first step toward change was to notice what went on emotionally when he began craving another toy, and he identified a pattern of feeling empty, lonely, and anxious at those times. Focusing on the anticipation of buying the new toy pushed aside the difficult feelings. He also came to see that he found much of his identity as the guy with the newest toy.

Assessment

With financial therapy, he was able to reconcile the historical causes of those emotions with the desire for the toys and financial solvency. This shift allowed him to greatly reduce his spending on toys but still occasionally and consciously buy one. He was able to live within his budget and begin funding a retirement plan. Becoming able to apply the reconciling force allowed him to move forward with his financial goals. 

Conclusion

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On Warren Buffett’s Letters-to-Partners

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Investment Theory #1:

b696a884043ecbafbdeedcb29d9ee5bb

By David Shahrestani

Warren Buffett’s 1957 Letter to Partners In 1956, Warren Buffett concluded his work for Benjamin Graham and returned to Omaha, where he started an investment partnership. This partnership was…

Investment Theory #1: Buffett’s Letters

Conclusion

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For Investors – Discovering Truth Takes Time

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Discovering Truth Takes Time

vitaly
By Vitaliy Katsenelson, CFA Institutional Investor Magazine
The Roman philosopher, playwright, statesman and occasional satirist Lucius Annaeus Seneca wasn’t talking about the stock market when he wrote that “time discovers truth,” but he could have been.

In the long run a stock price will reflect a company’s (true) intrinsic value. In the short run the pricing is basically random.

Here are two real-life examples:

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For Investors, Discovering Truth Takes Time

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Conclusion

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Investment Lessons Learned from the Poker Table

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“I don’t know”

vitaly

               By Vitaliy Katsenelson CFA                   

These three words don’t inspire a lot of confidence in the messenger and probably will not get me invited onto CNBC, but that is exactly what I think about the topic I am about to discuss. I received a few e-mails from people who had a problem with a phrase in one of my blog posts this fall.

In that article I examined various risks that other investors and I are concerned about. The phrase was “the prospect of higher, maybe even much higher, interest rates.” These readers were convinced that higher interest rates and inflation are not a risk because we are not going to have them for a long, long time, that we are heading into deflation. These readers basically told me that I should worry about the things that will come next, not things that may or may not happen years and years down the road. I am pretty sure that if that phrase had addressed the risk of deflation and lower interest rates ahead, I’d have gotten as many e-mails arguing that I was wrong — that we’ll soon have inflation and skyrocketing interest rates, and deflation is not going to happen. I don’t know whether we are going to have inflation or deflation in the near future.

More important, I’d be very careful about trusting my money to anyone holding very strong convictions on this topic and positioning my portfolio on the basis of them. Any poker player knows that the worst thing that can happen is to have the second-best hand. If you have a weak hand, you are going to play defensively or fold (unless you are bluffing) and likely won’t lose much.

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md-defeated-

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But, if you’re pretty confident in your hand, you may bet aggressively (god forbid you go all-in) — after all, you could easily have the winning cards. Four of a kind is a great poker hand unless your opponent has a straight flush. Generally, the more confident you are in an investment, the larger portion of your portfolio will be placed in that position.

Therefore superconvinced inflationists will load up on gold, and superconvinced deflationists will be swimming in long-term bonds. If their predictions are right, they’ll make a boatload of money. If they’re wrong, however, they will have the second-best-hand problem — and lose a lot of money. The complexity of the global economy has been increased by monetary and fiscal government interventions everywhere. There is no historical example to which you can point and say, “That is what happened in the past, and this time looks just like that.” When was the last time every major global economy was this overlevered and overstimulated? I think never. (Okay almost never, but you have to go back to World War II.) What is going to happen when the Fed unwinds its $4 trillion balance sheet? I don’t know.

Also the transmission mechanism of problems in our new global economy is so much more dynamic now than it was even a decade ago. Just think about the importance of China to the global economy today versus 2004. That year U.S. imports from China stood at $196 billion. Just in the first eight months of 2014, they were $293 billion. China was single-handedly responsible for the appreciation of hard commodities (oil, iron ore, steel) over the past decade as it gobbled up the bulk of incremental demand.

Now, I don’t want to sink to the level of the one-armed economist — but conversation about inflation and deflation is just that, an “on one hand . . . but on the other hand” discussion. Just like in poker, second-best hands may be tolerable if, when you went all-in, you did not leverage your house, empty your kid’s college fund or pawn your mother-in-law’s cat. Even if you lost your money, you will live to play another hand — maybe just not today.

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th

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In the “I don’t know” world, second-best hands when you bet on inflation or deflation are acceptable on an individual position level (you can survive them) but are extremely dangerous, maybe fatal, on an overall portfolio level.

Investing in the current environment requires a lot of humility and an acceptance of the fact that we know very little of what the future holds. I’d want the person who manages my money to have some discomfort with his or her economic crystal ball and to construct my portfolio for the “I don’t know” world.

Assessment

As a writer, you know you are in trouble when you have to quote both Albert Einstein and Mahatma Gandhi in the same paragraph, but when I ask readers to do something as difficult as I am in this column, I need all the help I can get. “It is unwise to be too sure of one’s own wisdom,” Gandhi said. “It is healthy to be reminded that the strongest might weaken and the wisest might err.” Einstein took the idea a step further: “A true genius admits that he/she knows nothing.” Smarter and humbler people than me were willing to say, “I don’t know,” and it is okay for us mortals to say it too.

Repeat after me . . . 

Conclusion

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How Physicians and All Investors Should Deal With the Overwhelming Problem Of Understanding The World Economy

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“What the —- do I do now?”

vitaly

By Vitaliy N. Katsenelson CFA

A SPECIAL ME-P REPORT

This was the actual subject line of an e-mail I received that really summed up most of the correspondence I got in response to an article I published last summer. To be fair, I painted a fairly negative macro picture of the world, throwing around a lot of fancy words, like “fragile” and “constrained system.” I guess I finally figured out the three keys to successful storytelling: One, never say more than is necessary; two, leave the audience wanting more; and three … Well, never mind No. 3, but here is more.

Before I go further, if you believe the global economy is doing great and stocks are cheap, stop reading now; this column is not for you. I promise to write one for you at some point when stocks are cheap and the global economy is breathing well on its own — I just don’t know when that will be. But if you believe that stocks are expensive — even after the recent sell-off — and that a global economic time bomb is ticking because of unprecedented intervention by governments and central banks, then keep reading.

Today

Today, after the stock market has gone straight up for five years, investors are faced with two extremes: Go into cash and wait for the market crash or a correction and then go all in at the bottom, or else ride this bull with both feet in the stirrups, but try to jump off before it rolls over on you, no matter how quickly that happens.

Of course, both options are really not options. Tops and bottoms are only obvious in the rearview mirror. You may feel you can time the market, but I honestly don’t know anyone who has done it more than once and turned it into a process. Psychology — those little gears spinning but not quite meshing in your so-called mind — will drive you insane. It is incredibly difficult to sit on cash while everyone around you is making money. After all, no one knows how much energy this steroid-maddened bull has left in him. This is not a naturally raised farm animal but a by-product of a Frankenstein-like experiment by the Fed. This cyclical market (note: not secular; short-term, not long-term) may end tomorrow or in five years. Riding this bull is difficult because if you believe the market is overvalued and if you own a lot of overpriced stocks, then you are just hoping that greater fools will keep hopping on the bull, driving stock prices higher.

More importantly, you have to believe that you are smarter than the other fools and will be able to hop off before them (very few manage this). Good luck with that — after all, the one looking for a greater fool will eventually find that fool by looking in the mirror.

Last Spring

As I wrote in an article last spring, “As an investor you want to pay serious attention to ‘climate change’ — significant shifts in the global economy that can impact your portfolio.” There are plenty of climate-changing risks around us — starting with the prospect of higher, maybe even much higher, interest rates — which might be triggered in any number of ways: the Fed withdrawing quantitative easing, the Fed losing control of interest rates and seeing them rise without its permission, Japanese debt blowing up. Then we have the mother of all bubbles: the Chinese overconsumption of natural and financial resources bubble. Of course, Europe is relatively calm right now, but its structural problems are far from fixed. One way or another, the confluence of these factors will likely lead to slower economic growth and lower stock prices. So “what the —-” is our strategy? Read on to find out. I’ll explain what we’re doing with our portfolio, but first let me tell you a story.

My Story

When I was a sophomore in college, I was taking five or six classes and had a full-time job and a full-time (more like overtime) girlfriend. I was approaching finals, I had to study for lots of tests and turn in assignments, and to make matters worse, I had procrastinated until the last minute. I felt overwhelmed and paralyzed. I whined to my father about my predicament. His answer was simple: Break up my big problems into smaller ones and then figure out how to tackle each of those separately. It worked. I listed every assignment and exam, prioritizing them by due date and importance. Suddenly, my problems, which together looked insurmountable, one by one started to look conquerable. I endured a few sleepless nights, but I turned in every assignment, studied for every test and got decent grades. Investors need to break up the seemingly overwhelming problem of understanding the global economy and markets into a series of small ones, and that is exactly what we do with our research. The appreciation or depreciation of any stock (or stock market) can be explained mathematically by two variables: earnings and price-earnings ratio. We take all the financial-climate-changing risks — rising interest rates, Japanese debt, the Chinese bubble, European structural problems — and analyze the impact they have on the Es and P/Es of every stock in our portfolio and any candidate we are considering.

Practical applications

Let me walk you through some practical applications of how we tackle climate-changing risks at my firm. When China eventually blows up, companies that have exposure to hard commodities, directly or indirectly (think Caterpillar), will see their sales, margins and earnings severely impaired. Their P/Es will deflate as well, as the commodity supercycle that started in the early 2000s comes to an end. Countries that export a lot of hard commodities to China will feel the aftershock of the Chinese bubble bursting. The obvious ones are the ABCs: Australia, Brazil and Canada.

However, if China takes oil prices down with it, then Russia and the Middle East petroleum-exporting mono-economies that have little to offer but oil will suffer. Local and foreign banks that have exposure to those countries and companies that derive significant profits from those markets will likely see their earnings pressured. (German automakers that sell lots of cars to China are a good example.)

Japan is the most indebted first-world nation, but it borrows at rates that would make you think it was the least indebted country. As this party ends, we’ll probably see skyrocketing interest rates in Japan, a depreciating yen, significant Japanese inflation and, most likely, higher interest rates globally. Japan may end up being a wake-up call for debt investors. The depreciating yen will further stress the Japan-China relationship as it undermines the Chinese low-cost advantage.

So paradoxically, on top of inflation, Japan brings a risk of deflation as well. If you own companies that make trinkets, their earnings will be under assault. Fixed-income investors running from Japanese bonds may find a temporary refuge in U.S. paper (driving our yields lower, at least at first) and in U.S. stocks. But it is hard to look at the future and not bet on significantly higher inflation and rising interest rates down the road.

untitled

[Moscow]

A side note:

Economic instability will likely lead to political instability. We are already seeing some manifestations of this in Russia. Waltzing into Ukraine is Vladimir Putin’s way of redirecting attention from the gradually faltering Russian economy to another shiny object — Ukraine. Just imagine how stable Russia and the Middle East will be if the recent decline in oil prices continues much further.

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[Defense Industry]

Inflation and higher interest rates

Defense industry stocks may prove to be a good hedge against future global economic weakness. Inflation and higher interest rates are two different risks, but both cause eventual deflation of P/Es. The impact on high-P/E stocks will be the most pronounced. I am generalizing, but high-P/E growth stocks are trading on expectations of future earnings that are years and years away. Those future earnings brought to the present (discounted) are a lot more valuable in a near-zero interest rate environment than when interest rates are high. Think of high-P/E stocks as long-duration bonds: They get slaughtered when interest rates rise (yes, long-term bonds are not a place to be either). If you are paying for growth, you want to be really sure it comes, because that earnings growth will have to overcome eventual P/E compression. Higher interest rates will have a significant linear impact on stocks that became bond substitutes. High-quality stocks that were bought indiscriminately for their dividend yield will go through substantial P/E compression.

These stocks are purchased today out of desperation. Desperate people are not rational, and the herd mentality runs away with itself. When the herd heads for the exits, you don’t want to be standing in the doorway. Real estate investment trusts (REITs) and master limited partnerships (MLPs) have a double-linear relationship with interest rates: Their P/Es were inflated because of an insatiable thirst for yield, and their earnings were inflated by low borrowing costs. These companies’ balance sheets consume a lot of debt, and though many of them were able to lock in low borrowing costs for a while, they can’t do so forever. Their earnings will be at risk.

Charlie Munger speaks

As I write this, I keep thinking about Berkshire Hathaway vice chairman Charlie Munger’s remark at the company’s annual meeting in 2013, commenting on the then-current state of the global economy: “If you’re not confused, you don’t understand things very well.” A year later the state of the world is no clearer. This confusion Munger talked about means that we have very little clarity about the future and that as an investor you should position your portfolio for very different future economies. Inflation? Deflation? Maybe both? Or maybe deflation first and inflation second?

I keep coming back to Japan because it is further along in this experiment than the rest of the world. The Japanese real estate bubble burst, the government leveraged up as the corporate sector deleveraged, interest rates fell to near zero, and the economy stagnated for two decades. Now debt servicing requires a quarter of Japan’s tax receipts, while its interest rates are likely a small fraction of what they are going to be in the future; thus Japan is on the brink of massive inflation. The U.S. could be on a similar trajectory.

Let me explain why

Government deleveraging follows one of three paths. The most blatant option is outright default, but because the U.S. borrows in its own currency, that will never happen here. (However, in Europe, where individual countries gave the keys to the printing press to the collective, the answer is less clear.) The second choice, austerity, is destimulating and deflationary to the economy in the short run and is unlikely to happen to any significant degree because cost-cutting will cost politicians their jobs. Last, we have the only true weapon government can and will use to deleverage: printing money. Money printing cheapens a currency — in other words, it brings on inflation. In case of either inflation or deflation, you want to own companies that have pricing power — it will protect their earnings. Those companies will be able to pass higher costs to their customers during a time of inflation and maintain their prices during deflation.

On the one hand, inflation benefits companies with leveraged balance sheets because they’ll be paying off debt with inflated (cheaper) dollars. However, that benefit is offset by the likely higher interest rates these companies will have to pay on newly issued debt. Leverage is extremely dangerous during deflation because debt creates another fixed cost. Costs don’t shrink as fast as nominal revenues, so earnings decline.

Crystal ball

Therefore, unless your crystal ball is very clear and you have 100 percent certainty that inflation lies ahead, I’d err on the side of owning underleveraged companies rather than ones with significant debt. A lot of growth that happened since 2000 has taken place at the expense of government balance sheets. It is borrowed, unsustainable growth that will have to be repaid through higher interest rates and rising tax rates, which in turn will work as growth decelerators. This will have several consequences:

  1. First, it’s another reason for P/Es to shrink.
  2. Second, a lot of companies that are making their forecasts with normal GDP growth as the base for their revenue and earnings projections will likely be disappointed.
  3. And last, investors will need to look for companies whose revenues march to their own drummers and are not significantly linked to the health of the global or local economy.

The definition of “dogma” by irrefutable Wikipedia is “a principle or set of principles laid down by an authority as incontrovertibly true.” On the surface this is the most dogmatic columns I have ever written, but that was not my intention. I just laid out an analytical framework, a checklist against which we stress test stocks in our portfolio. Despite my speaking ill of MLPs, we own an MLP. But unlike its comrades, it has a sustainable yield north of 10 percent and, more important, very little debt. Even if economic growth slows down or interest rates go up, the stock will still be undervalued — in other words, it has a significant margin of safety even if the future is less pleasant than the present.

Final bits

There are five final bits of advice with which I want to leave you:

  1. First, step out of your comfort zone and expand your fishing pool to include companies outside the U.S. That will allow you to increase the quality of your portfolio without sacrificing growth characteristics or valuation. It will also provide currency diversification as an added bonus.
  2. Second, disintermediate your buy and sell decisions. The difficulty of investing in an expensive market that is making new highs is that you’ll be selling stocks that hit your price targets. (If you don’t, you should.)

Of course, selling stocks comes with a gift — cash. As this gift keeps on giving, your cash balance starts building up and creates pressure to buy. As parents tell their teenage kids, you don’t want to be pressured into decisions.

Assessment

In an overvalued market you don’t want to be pressured to buy; if you do, you’ll be making compromises and end up owning stocks that you’ll eventually regret. Margin of safety, margin of safety, margin of safety — those are my last three bits of advice. In an environment in which the future of Es and P/Es is uncertain, you want to cure some of that uncertainty by demanding an extra margin of safety from stocks in your portfolio.

Conclusion

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WHO / WHAT Are the Best Predictors of Stock Market Performance?

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Lon Jefferies

By Lon Jefferies MBA CFP®

WHO Are the Best Predictors of Stock Market Performance?

Every day CNBC airs dozens of “financial professionals” making market forecasts. Similarly, every financial publication has multiple pieces regarding the future of the stock market. With so much information, how is it possible to determine who is worth listening to and what information to incorporate into your investment strategy?

Dropping Names

Without dropping any names, I’d suggest that the more confident a market pundit is about his or her prediction, the more you should question their advice.

People who make strong, unwavering forecasts are interesting to watch and appear as intelligent, appealing leaders whose advice is worth following. Meanwhile, people who frequently say phrases such as “it depends,” “maybe,” or even “I don’t know” don’t seem to be adding much value and don’t appear to be any more knowledgeable than the average investor. Yet, I’d suggest you tune out the stanch forecaster pounding his fist on the table as he speaks and rather listen closely to the individual who is less willing to make firm predictions.

Stock market performance

Stock market performance is clearly not a result of any singular factor such as whether or not companies will generate more profits than expected. If this was the case, making market predictions would be easy – one could simply guess the answer to be yes or no and have a 50% chance of being correct. Rather, hitting profit targets is only point A on a long list of factors impacting stock market performance.

Point B may be whether or not the Federal Reserve will raise interest rates during their next meeting. Again, our market forecaster could guess yes or no to this question and have a 50% chance of being correct. However, when considering both factors A and B, now our market forecaster has to be right twice on two issues where there is only a 50% probability of being correct on each. Simple math tells us there is only a 25% chance that this will occur (50% x 50% = 25%).

Point C may be whether the republicans or the democrats win the 2016 election. Again, there is a 50% chance of either possibility. Now there are three factors in play, each with a 50% probability, so the probability that the market pundit will get all three factors correct is 12.5% (50% x 50% x 50% = 12.5%).

Point D may be whether the US dollars strengthens or weakens when compared to other currencies. Again, there is a 50% chance of getting this right, so when we consider all four factors, there is now a 6.25% chance of getting it right (50% x 50% x 50% x 50% = 6.25%).

The equation

There are hundreds of factors that go into this equation. Will Greece have another economic crisis? Will the price of oil go up or down? Will a war breakout with Russia? This is exactly why forecasting market performance is so difficult!

For this reason, the people who make the best forecasters are people who say phrases such as “perhaps,” “however,” and “on the other hand” a lot. Doing so illustrates that the individual has looked at the situation from a lot of different perspectives and realizes that everything may not go according to plan. These types of people also tend to admit when they are wrong more willingly and update their analysis utilizing the latest information available, even if the new information doesn’t reflect what they previously anticipated. Their thought process is likely: “I got point A wrong, so I need to adjust my thinking on point B, which will have an impact on point C, so how does this change my perspective on point D.” We’ll call this a point-A-to-point-B-to-point-C-to-point-D mentality.

By comparison, the forecaster who makes the strong prediction while staring into the camera likely utilizes more of a point-A-to-point-D mentality. They are less likely to admit that there are more factors affecting market performance than can be managed, and less likely to incorporate new information that doesn’t coincide with his previous prediction when making forward-looking forecasts. Their thought process is likely: “I may have gotten point A wrong, but that doesn’t matter. All that matters is point D and I believe I got that right when making my prediction.” This approach is obviously less logic-based than the approach taken by the forecaster who knows there are too many factors to enable an individual to make a confident prediction.

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Assessment

While people who make confident predictions regarding market performance are entertaining to watch and provide advice that is simple to follow (he said buy, so I’ll buy), their advice is not likely to be any more accurate than other market pundits. In fact, if they are unwilling to admit when they get any potential factor concerning market performance wrong, their advice may be more damaging then useful.  By comparison, market forecasters who utilize phrases such as “however,” “it is hard to say,” and “I’m not sure” provide advice that may come off as unhelpful or impossible to follow, but it is these people who provide logic-based nuggets of information that are likely to benefit your investment portfolio.

ABOUT

Lon Jefferies, a Certified Financial Planner™ (CFP), is a fee-only financial advisor and trusted fiduciary at Net Worth Advisory Group in Salt Lake City, Utah. He is dedicated to providing comprehensive financial planning and investment management on a fee-only basis.

Conclusion

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14 Smart Things to Consider for Your 2015 Year-End Financial Checklist

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Be Ready for a Great 2016!

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[By Patrick Bourbon CFA]

1. IRA – 401(k) / 403(b) retirement accounts – Are you on track for a comfortable retirement?   You could increase the funding of your IRA and company retirement plan like a 401(k) or 403(b) accounts.   401(k) and 403(b) accounts allow individuals younger than 50 to contribute $18,000 each year, and individuals 50 and older to contribute $24,000. Some plans allow workers to make additional contributions of after-tax money.

For those under 50, the maximum is $53,000 for 2015. Doing so does not reduce your taxable income, but taxes are deferred on any earnings that the after-tax money makes. Later, some people roll these contributions into a Roth IRA, tax-free so the money would then grow tax-free.   Traditional and Roth IRAs allow individuals younger than 50 to contribute $5,500 each year and individuals 50 and older to contribute $6,500. Even if you earn too much to contribute to a Roth IRA directly, you can open a traditional nondeductible IRA and convert it to a Roth; there is no income limit on traditional nondeductible IRAs or conversions.    Returns generated in IRA and 401(k) / 403(b) accounts compound tax-free over their entire life.

2. Start tax planning! It’s not too early to think about taxes. Asset location & Tax efficiency   Review your taxable and non-taxable accounts to ensure they are optimized for tax efficiency. If you have foreign bank accounts, make sure you comply with FATCA and FBAR (forms FinCEN 114, 8938, 8621…). If you have forgotten, you may look into the Offshore Voluntary Disclosure Program (OVDP) or Streamlined procedures.

3. Portfolio rebalancing   Make sure you have rebalanced your portfolios to keep them in line with your goals, time horizon and risk tolerance. The market movements this summer may have thrown off your portfolio balance between stocks and bonds.   David Swensen, the Chief Investment Officer at the Yale Endowment, performed an analysis that showed optimal rebalancing could add 0.4% to your annual return.

4. Harvest your capital losses   Maybe it is time to sell some funds, ETF, stocks to generate some capital losses?   Tax-loss harvesting is a method of reducing your taxes by selling an investment that is trading at a significant loss.  Find out if you have any loss carryovers from prior years to be applied against capital gains (from sale of funds, ETF, stocks… in your taxable/brokerage accounts). If your current year’s capital losses exceed your capital gains, you have a net capital loss. You can use up to $3,000 of that loss ($1,500 if you are married filing separately) to offset other taxable income such as your salaries, wages, interest and dividends. If the capital loss is more than $3,000, you can carry over the excess and apply it against capital gains next year.

5. Emergency fund   Don’t forget to establish or tune up your emergency fund. This is a good time to set aside money for next year’s cash needs. It is an account that is used to set aside funds to be used in an emergency, such as the loss of a job, an illness or a major expense.

6. Review your insurance policies   Do you have a life, disability and long term care insurance? Make sure you and your loved ones are well protected if something happens to you. Your life may have changed (birth, marriage …). If you do have enough coverage it is also a good time simply to review the different types of coverage you have. Whole life or Variable Universal Life may help you reduce your taxes.

7. Health Spending Account   Did you maximize your contribution to your healthcare HSA? The interest and earnings in this account are tax free! The maximum contribution for 2015 is $3,350 for an individual and $6,650 for a family ($1,000 catch-up over 55). The contributions are tax deductible and withdraws are non-taxable if they are used for medical expenses. Over the age of 65 you can withdraw funds at your ordinary tax rate (if the distribution is not used for unreimbursed medical expenses). Fidelity estimates that a 65-year-old couple retiring in 2014 will need $220,000 for health care costs in retirement, in addition to expenses covered by Medicare. The HSA can be a great source of tax-free money to pay those bills.

8. Required Minimum Distribution   If you are age 70.5 or older, remember to take your required minimum distribution to avoid a potential 50% penalty.

9. 529 Plan   Did you contribute to your 529 educational plan for your child/children?   You can contribute $14,000 per year (annual limit) for each parent or you can pre-fund in a single instance up to five years’ worth of contributions, up to $70,000 (5 x $14,000). Together, that means a married couple can open a 529 plan with $140,000.   Money saved in a 529 plan grows tax-free when used for eligible educational expenses, and some states have additional tax benefits for residents who contribute to a plan in that state.

10. Determine your net worth   Add up what you own (home, car, savings, investments…) and subtract what you owe (mortgage, loans, credit cards, …).   This will allow you to track your progress year to year. It may also give you some incentive to save more and create a better budget for next year.

11. Check your credit score Go to annualcreditreport.com and request a free credit report from each of the three nationwide credit reporting agencies. You’re entitled to one free report from each agency every 12 months.

12. Check your beneficiaries   You can check the beneficiaries on your retirement accounts or insurance policies at any time, but it’s a good idea to do this at least annually.

13. Update your estate plan   New baby? Newly married or divorced? Make sure your beneficiary designations reflect any changes. Don’t yet have an estate plan? Make that a new year’s resolution!  Estate planning may include updating or establishing a “will” or trust that can help avoid public disclosure of assets in probate.

14. Spending and automated savings – You want to look ahead   Did you review your budget and set up automated savings?   You may have started the year with a clear budget, but did you to stick to it?    Fall can be a good time of the year for your financial checkup and to reflect on your spending and develop a budget for next year.  It is also a very good time to put whatever you can on automatic. Bills, recurring payments, even savings—the more you can put on auto pay now, the easier your financial life will be next year.   With this year’s facts and figures in front of you, it will be easier to plan and prioritize your expenditures for next year.

Assessment

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Conclusion

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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

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Why we build [business and/or valuation] investment models?

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Qualitatively and quantitatively intensive!

By Vitaliy N. Katsenelson CFA 

vitalyOur investment process at IMA is both qualitatively and quantitatively intensive. Throughout the course of a year we look at hundreds of companies. Most of them receive only a cursory look – we don’t like the business, the valuation is too stretched, or we simply have no insight into the business. We usually glance at them and move on.

But, if we really like the business and/or its valuation, we build a model. Often, just from a cursory look we know that the stock is not cheap enough, but if we really (really!) like the business we’ll invest the time to model it so we can understand it better and set a price at which we want to buy it (and then wait).

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We build models

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We build a lot of models. We built over a hundred models last year (we bought only a handful of stocks). Building models is important for us. Models help us to understand businesses better. They provide insights as to which metrics matter and which don’t. They allow us stress test the business: we don’t just look at the upside but spend a lot of times looking at the downside – we try to “kill” the business. We usually try to drill down to essential operating metrics. If it is a convenience store retailer, we’ll look into gallons of gas sold and profit per gallon. If it is a driller (see our Helmerich & Payne analysis), we look at utilization rates, rigs in service, average revenue per rig per day, etc.

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In the past, when we owned Joseph A. Banks, a model helped us understand the impact maturation of its new stores had on same-store sales (PDF, see slide 49). Half of Joseph A. Banks stores were less than five years old, and their maturation drove significant same-store sales increase for years.

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We looked at American Express before the crisis, which gave us insight into inflated profit margins of the financial sector, and thus we avoided for the most part the carnage in the financials. We thought American Express stock was not cheap enough at the time, but we learned that Amex’s high swipe-fee revenue provided an important buffer to help the company absorb significant loan losses. Amex could have withstood over 10% loan losses on its credit card portfolio and still have remained profitable. This insight gave us the confidence to buy Amex during the crisis.

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Models are important because they help us remain rational. It is only the matter of time before a stock we own will “blow up” (or, in layman’s terms, decline). We can go back to our model and assess whether the decline is warranted. The model then gives us the confidence to make a rational (very key word) decision: buy more, do nothing, or sell.

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Assessment

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Models are frameworks that help us think about the businesses we analyze. We are always aware of John Maynard Keynes’ expression, “I’d rather be vaguely right than precisely wrong.” Models are not a panacea, but they are an important and often invaluable tool. However, models are only as good as their builders and the inputs to them.

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ABOUT

Vitaliy N. Katsenelson, CFA, is Chief Investment Officer at Investment Management Associates in Denver, Colo. He is the author of Active Value Investing (Wiley 2007) and The Little Book of Sideways Markets (Wiley, 2010).  His books have been translated into eight languages.  Forbes called him – the new Benjamin Graham.

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Conclusion

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

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

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More Practitioners, Prognosticators and Portfolio Pain

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 “Altitude Sickness,” or Value Asphyxiation?

vitaly[By Vitaliy N. Katsenelson CFA]

“Asphyxiation is a condition in which the body doesn’t receive enough oxygen.”

That’s how I started another column awhile back , in which I explained how the recent U.S. equity market highs have been creating “altitude sickness,” or value asphyxiation, for investors. If you look down from 30,000 feet, the market is trading at a significant premium to its average long-term valuation, especially if you normalize earnings for sky-high profit margins.

The Trench View

The view from the trenches is not much different. I spend a lot of time looking for new stocks, either by screen or by reading or talking to other value investors. We are all having a hard time finding many stocks of interest. In fact, we’ve been doing a lot more selling than buying.

I often get asked a question: Are we in a bubble? Bubble is a word that has been thrown around a lot lately. There may be an academic definition of what a bubble is — probably something to do with valuations at least a few standard deviations from the mean — but I don’t really care what it is. (Only academics believe in normal distributions.)

The Practitioner’s View

From the practitioner’s perspective, a bubbly valuation occurs when the price-earnings ratio of a company is so high that its earnings will have a hard time growing into investors’ expectations. In other words, the stock is so expensive that investors holding it will find it difficult to realize a positive return for a long time (think of Cisco Systems, Microsoft and Sun Microsystems in 2000). There are some bubbly stocks in the market today. Most years you see some, but today there are probably a few more than usual.

We see a lot of overvalued or fully valued stocks. Expectations (valuations) of those stocks have already more than priced in rosy earnings growth scenarios. If these scenarios play out, investors will likely make very little money, as earnings growth will merely offset P/E compression. But here is where it gets interesting: The line between overvalued and bubbly stocks is often very murky. If the economy’s growth is lower than expected or corporate profit margins revert toward the mean (or, in the situation we have today, decline), the return profiles of these stocks will not be substantially different from those of the bubbly ones. Unfortunately for the value-asphyxiated investor, there are a lot of stocks that fall into this overvalued bucket.

It is very hard for investors to remain disciplined and stick to an investment process. Selling overvalued stocks is hard, because every sell decision brings consequent pain as overvalued stocks that are not aware you’ve sold them keep on marching higher. Just as Pavlov’s dog responded to a bell, the pain of selling teaches us not to sell.

More Pain

If that pain were not enough, cash keeps burning a hole in our portfolios. Cash doesn’t rise in value when everything else is rising; thus investors feel forced to buy. When you are forced into a buy or sell decision, the outcome will usually not be good. Forced buy decisions are usually bad buy decisions. Just because a stock looks less bad than the rest of the market doesn’t make it a good stock. Maybe its peer is trading at 23 times earnings and your pick is trading at “only” 19. Such relative logic is dangerous today, because it anchors you to a transitory environment that may or may not be there for you in the future (most likely not).

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An Annoying Phase

We are in the most annoying phase of the investing calendar: the month when every market strategist and his dog have to make a prediction as to what the market will do next year. To be right in forecasting, you have to predict often. And market strategists do. In fact, they predict so often that no one remembers how often their predictions worked out. I am not knocking the prognosticators: That is their job. They predict and sound smart doing it — just like it’s the barber’s job to cut your hair and pretend he is concentrating on not cutting off your ear.

It is your job, however, not to pay attention to the predictors. They simply don’t know. They may have a gut feeling, but that feeling is worth as much as you pay for it — very little. To time the market, you have to forecast what the economy will do, which is also very difficult. The Fed has 450 economists working full time on that (half of them are Ph.D.s, but I am not going to hold it against them), and they have an amazingly poor track record. Then you have to figure out how other market participants will respond to the economics news — and that is incredibly difficult. Let’s say you nailed both of these tasks. You still need to predict the multitude of random events — a few of which may be very large black swans — that will show up in the next 12 months. There is a reason why they are called “random.”

Assessment

Though it is dangerous to drink the market’s Kool-Aid and celebrate, it is not time to be gloomy either. There is good news for all of us: Cyclical bull markets are here to absolve us from our “buy” sins. Not every stock in your portfolio is marching in rhythm to its fundamentals. Indeed, this market has lifted many stocks while divorcing them from their weak fundamentals. This absolution is temporary: Take advantage of it.

ABOUT

Vitaliy N. Katsenelson, CFA, is Chief Investment Officer at Investment Management Associates in Denver, Colo. He is the author of Active Value Investing (Wiley 2007) and The Little Book of Sideways Markets (Wiley, 2010).  His books have been translated into eight languages.  Forbes called him – the new Benjamin Graham.

Conclusion

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

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

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Discover the Best [Financial Planning and Investing] Practices of Leading Certified Medical Planners®

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Investors are allowed to change their minds

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The Markets
Art

By Arthur Chalekian GEPC

[Financial Consultant]

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They’re investors. They’re allowed to change their minds.
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Just a few weeks ago, on September 17, the Federal Reserve Open Market Committee (FOMC) decided to leave the fed funds rate unchanged. In part, this was because, “Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.”
 
The next day, September 18, stock markets tumbled. By the time September was over, many markets had closed on their worst quarter in four years, according to the BBC. The Dow Jones Industrial Average fell by almost 8 percent, Britain’s FTSE 100 was down 7 percent, Germany’s Dax was off by almost 12 percent, and the Shanghai Composite lost more than 24 percent.
 
Last week, on Thursday, the minutes of the FOMC meeting were released. Investors’ response was quite different. Barron’s reported many believe a rate hike during 2015 is less likely than it once was, and that reinvigorated investor optimism:
 
“Going into Friday’s session, global equity markets’ valuations were enriched by some $2.5 trillion, according to Bloomberg calculations. As for U.S. stocks, Wilshire Associates reckons that they tacked on 3.44 percent, or approximately $800 billion, over the full week, based on the gain in the Wilshire 5000 index, their biggest weekly gain in nearly 12 months.”
 
Why does the same news elicit two very different responses? There are many reasons. Foremost among them is the fact a lot of elements influence markets – investor confidence, company valuations, central bank actions, automated trading, and many others.
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Stock_Market
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Assessment
 
What does last week’s upward push mean? One analyst cited by Barron’s suggested we’re seeing a bear market rally, but only time will tell.
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Conclusion

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

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

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The third quarter for 2015 was a REAL humdinger!

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The Markets – Update
Art

By Arthur Chalekian GEPC

[Financial Consultant]

Well, the third quarter for 2015 was a REAL humdinger!
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It began with the first International Monetary Fund (IMF) default by a developed country (Greece) and finished with Hurricane Joaquin possibly headed toward the east coast. In between, China’s stock market tumbled, the Federal Reserve tried to interpret conflicting signals, and trade growth slowed globally. After such a stressful quarter, we may see an uptick in the quantity of alcoholic beverages consumed per person around the world. That number had declined (along with economic growth in China) between 2012 and 2014, according to The Economist.
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No Grexit – for now
Despite defaulting on its IMF loan, rejecting a multi-billion-euro bailout plan, and closing its banks for more than two weeks, Greece was not forced out of the Eurozone. Instead, Europe cooked up a deal that left the IMF unhappy and analysts shaking their heads. The Economist reported the new deal for Greece was an exercise in wishful thinking. The problem is the deal relies on “the same old recipe of austerity and implausible assumptions. The IMF is supposed to be financing part of the bailout. Even it thinks the deal makes no sense.” It’s a recipe we’re familiar with in the United States: When in doubt, defer the problem to the future.
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A downturn in China
Despite reports from the Chinese government that it hit its economic growth target (7 percent) on the nose during the first two quarters of the year, The Economist was skeptical about the veracity of those claims. During the first quarter.
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“Growth in industrial production was the weakest since the depths of the financial crisis; the property market, a pillar of the economy, crumbled. China reported real growth (i.e., after accounting for inflation) of 7 percent year-on-year in the first quarter, but nominal growth of just 5.8 percent.”
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That statistical sleight of hand implies China experienced deflation early in the year. It did not.
On a related note, from mid-June through the end of the third quarter, the Shenzhen Stock Exchange Composite Index fell from 3,140 to about 1,716, according to BloombergBusiness. That’s about a 45 percent decline in value.
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Red light, green light at the Federal Reserve
Green light: employment numbers. Red light: consumer prices, inflation expectations, wages, and global growth. Late in the quarter, the Federal Reserve decided not to begin tightening monetary policy.
According to Reuters, voting members of the Federal Open Market Committee (FOMC) decided uncertainty in global markets had the potential to negatively affect domestic economic strength. They may have been right. The Wall Street Journal reported, although unemployment remained at 5.1 percent, just 142,000 jobs were added in September. That was significantly below economists’ expectations that 200,000 jobs would be created. The Journal suggested the labor market has downshifted after 18 months of solid jobs creation.
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Global trade in the doldrums
The global economy isn’t as robust as many expected it to be. According to the Business Standard, the World Trade Organization (WTO) lowered its forecast for global trade growth during 2015 from 3.3 percent to 2.8 percent. Falling demand for imports in developing nations and low commodity prices are translating into less global trade. Expectations are trade growth will be 3.9 percent in 2016, which could help support global economic growth.
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Coming Change
America’s share of the global economy is potent. Our country accounts for 16 percent (after being adjusted for currency differences) of the world’s gross domestic product (GDP) and 12 percent of merchandise trade.
Again, according to The Economist, we dominate “the brainiest and most complex parts of the global economy.” Our presence is strong in social media, cloud computing, venture capital, and finance. In addition, the dollar is the world’s dominant currency. While the view from the top is pleasing, we may not be there forever. The Economist explained:
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“In the first change in the world economic order since 1920-45, when America overtook Britain, [America’s] dominance is now being eroded. As a share of world GDP, America and China (including Hong Kong) are neck and neck at 16 percent and 17 percent respectively, measured at purchasing-power parity. At market exchange rates, a fair gap remains with America at 23 percent and China at 14 percent … But any reordering of the world economy’s architecture will not be as fast or decisive as it was last time…the Middle Kingdom is a middle-income country with immature financial markets and without the rule of law. The absence of democracy, too, may be a serious drawback.”
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It may be hard to believe, in light of recent economic and market events in China, but change is on its way. Regardless, the influence of the United States should continue to be powerful well into the future.

Conclusion

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***

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

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Why There Has To Be Occasional Market Corrections

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Why Invest … At all!

DJIA plummets 470 today!

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

Lon JefferiesWhy do we invest in the stock market? To make money so we can improve our standard of living, right?

Notice that we aren’t investing just to get our money back. If we simply wanted our money back, we would place the money in a savings account at a bank where we would likely be able to access it any time and know that we could redeem it at full value.

However, making money is better than simply getting our invested dollars back, so there has to be a trade off for receiving that additional benefit.

Market Corrections

Of course, the trade off is that investing in the market involves more risk than simply depositing money in a bank account. The additional return that is required by investors for investing in an asset that could potentially lose money is called the equity risk premium. There must be a potential downside in exchange for the larger reward that can be obtained by investing in the stock market. Otherwise, no one would ever deposit money into the more secure bank accounts and people would always invest in the stock market generating superior returns. Unfortunately, this would make things too easy, and as we have learned our whole lives, the easier a goal is the less reward we get for achieving that goal. That is why positions that can only be filled by a select few individuals with rare talents (CEOs, doctors, Lebron James) are handsomely compensated.

By now, most people know that over a sufficiently lengthy period of time, the stock market has historically produced returns of approximately 10% per year. This seems like a simple and easy way to make money, so why don’t all investors buy stocks and hold them for extended periods of time? The fact that we aren’t all rich suggests that buying stocks and allowing the market time to do its thing isn’t easy. This is because enduring risk and suffering losses creates negative emotions that get the best of many investors, causing them to sell at the wrong time and stop investing new dollars.

Yet, when we refer back to the concept that the tougher the task the greater the reward, we should be happy that buying and holding stocks isn’t easy because it makes the strategy more profitable.

For this reason, the next time the market goes through a correction or even a crash, wise investors should be grateful. Market volatility causes unsuccessful investors to sell when prices are down and increases the rewards for those who can stick with their investment strategy by holding their assets or even buying new positions.

***

coffee

[Publisher Dr. DE Marcinko’s Grateful Bear Market ReSet and ReLaxation Time]

***

Supply and Demand

Supply and demand suggests that when the markets are decreasing in value, more people are selling assets than buying. The people who are selling their investments at a loss create an equity risk premium for those who can endure market volatility. This increases the reward for successful investors by both providing an opportunity to buy assets when they are inexpensive, and reminding the marketplace that investing in volatile positions is unpleasant. Of course, things that are unpleasant aren’t easy to accomplish, which means there is a large benefit for achieving those things.

Thus, market corrections are great for successful investors because it is volatility and easily-rattled buy-and-sell investors that enable buy-and-hold investors to make significant profits over the long term. In fact, it wouldn’t be possible for stock market investors to make money without periodic intervals of unpleasantness as it is this discomfort which causes some investors to sell and creates an equity risk premium for the rest of us.

***

Japan and world markets tumbling - dollar stronger

[Japanese Markets]

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Great Fall of China

Until the Great Fall of China recently, it has been easy for investors to buy and hold for the last six years as the market has been nothing but accommodating since early 2009.

However, when things get too easy, it reduces our reward for being a long-term investor because everyone can do it. For this reason, we need the market to experience a correction at some point to shake out the unsuccessful investors, causing them to sell assets and create an equity risk premium once more.

Assessment

When the next correction occurs, you can either sell assets and create a risk premium for others, or you can stay invested and take advantage of the money unsuccessful investors leave on the table. Successful investors with a sufficiently lengthy investment time horizon remind themselves of this concept frequently so that when the market experiences a decline they aren’t overcome by fear but grateful for the opportunity provided by the short-sighted. 

Conclusion

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Beware of Sideways Markets

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Are We There … Yet?

By Vitaliy N. Katsenelson CFA

vitaly

NOTE: This article was first written in May 2013, but it is still as relevant today as it was then.

Preface

In early May 2015 I had the pleasure of attending and speaking at the Value Investing Congress in Las Vegas. The last time I had spoken there, it was May 2008 and the market was just coming off its top.  The Standard & Poor’s 500 index was trading at 18 times trailing earnings. Profit margins were at a modern-day high. They subsequently collapsed but came back to set an even higher high. If you normalize profits for high margins and look at ten-year trailing earnings, in 2008 stocks were trading 66 percent above their average. They were at 30 times ten-year trailing earnings.

The Market Repeats

In all honesty, I could do the same presentation today that I did five years ago, since market valuation is not dramatically different from what it was then. A cyclical bear and a cyclical bull market later, the S&P 500 is at (the same) 18 times trailing earnings and 26 times ten-year trailing earnings. Investors who were on the sidelines the past few years and who are now pouring money into stocks, expecting that we are in the midst of a secular bull market, will likely be disappointed. The previous sideways market, of 1966–82, included four cyclical bull markets and five cyclical bear markets. From 1970 to 1973 the Dow went from 700 to 1,000, just to drop again, to 600.

Lost Hope

Sideways markets are there to destroy hope. It is when nobody wants to own stocks ever again, when valuations are below their historical average, that a secular sideways market finally dies (actually, more like goes into hibernation), and the next secular bull market is born. But even that is not enough: Stocks need to spend time at below-average valuations. In the 1966–82 market they spent half of their time at below-average valuations. During the recent crisis we tiptoed into below-average valuations, but we danced right back out.

A present day secular bull market?

To believe we are in the midst of a secular bull market, you have to be very comfortable with three things, starting with profit margins.

  1. Today corporate profit margins are hitting all-time highs. Historically, profit margins have been mean-reverting — high margins were never sustained by corporations over a prolonged period of time because, as legendary value investor Jeremy Grantham puts it, “capitalism works.”  When a company — Apple, for example — starts earning very high margins, its competitors (like Samsung) come in with lower prices. In response, Apple must lower its margins. If margins decline even as the economy grows, earnings growth will be very benign or negative.
  2. Second, even if you are comfortable with high profit margins, you have to make an assumption that economic (revenue) growth will be robust going forward. Given how many headwinds we are facing from Europe, China and Japan, it is hard to develop a high comfort level there.
  3. And finally, you have to believe that price-earnings ratios can expand from their current level. I have news for you: In the past, sideways markets started (bull markets ended) when valuations were at current levels.

Stock returns are driven by two variables, earnings growth and changes in P/Es. Earnings growth for the next five to ten years is unlikely to be exciting and may not even be positive, and P/Es are likely to change for the worse, not the better.

***

silhouettes chart

***

Interest rates

Interest rates were much higher in the ’70s and early ’80s than they are today, and thus stocks may deserve higher valuations than they did then. This applies to all assets. But, the Federal Reserve’s policy may inflate stocks’ valuations for a while. If the Fed succeeds and real growth resumes, then interest rates will rise and (expensive) stocks that were discounting all-time-low rates will get crushed. After all, they — like long-duration bonds — do great when interest rates decline and bite the dust when interest rates rise.

Of course, on many levels things are better now than they were in 2008. The financial crisis and real estate bubble are behind us; we are probably not going to see those again for a while. But their resolution came at a big price: much higher government debt and a command-control interest-rate policy that would have made the Soviets proud.

Today

We’re now living in a Lance Armstrong economy. We’ve consumed so many performance enhancement drugs through endless quantitative easing that it is hard to know how well the economy is really doing. Unfortunately, as Armstrong at some point did, we’ll have an Oprah Winfrey moment when the economy will have to fess up for all the QEs.

We are living through one of the most grandiose and untested lab experiments ever conducted by a central bank: QE Infinity. At the recent Berkshire Hathaway annual meeting, Warren Buffett said, “Watching the economy today is like watching a good movie — you don’t know the ending.” His sidekick Charlie Munger added, “If you are not confused about the economy, you don’t understand it very well.”

The FOMC

The Fed’s unprecedented intervention in the economy has increased the possible range and severity of negative outcomes, from runaway inflation to deflation or a freaky combination of the two (freakflation). Deflation (or freakflation) is not good for stocks or their valuations. Just look at Japan. Over the past 20 years, stock valuations declined despite interest rates being at incredibly low levels. Expensive stocks (as I’ve mentioned, stocks in general are very expensive) discount earnings growth. If growth fails to materialize, these P/Es will decline. Unknowns are simply unknown.

Caution

At a time when the market is making all-time highs, it is easy to become complacent and let your guard down. Don’t. • •

ABOUT 

Vitaliy N. Katsenelson CFA is Chief Investment Officer at Investment Management Associates in Denver, Colo. He is the author of Active Value Investing (Wiley 2007) and The Little Book of Sideways Markets (Wiley, 2010).  His books were translated into eight languages.  Forbes Magazine called him “The new Benjamin Graham”.  

Assessment

Your thoughts and comments on this ME-P are appreciated.

Conclusion

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

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

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***

 

Using Deposits and Withdrawals to Rebalance Your Portfolio

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Benefits of portfolio rebalancing well documented

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

Lon JefferiesThe benefits of rebalancing a portfolio are well documented. Constant and routine rebalancing forces a physician or any investor to lighten the portfolio positions that have recently performed well and use the resulting funds to buy more shares of the assets in the portfolio that have remained flat or even declined in value. In other words, rebalancing causes the investor to sell high and buy low.

Most financial professionals recommend rebalancing your portfolio at least once a year (I rebalance my clients’ portfolios on a semi-annual basis).

However, the tax status of an investment account can have a significant impact on a rebalancing strategy. While investments within a tax-advantaged account like a traditional or Roth IRA can be sold without tax implications, selling appreciated assets in a taxable investment accounts will create a capital gains liability.

Consequently, while rebalancing within a tax-advantaged account should be a no-brainer, investors should carefully consider the tax implications that may result from rebalancing a normal investment account.

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prt_320x212_1397595292

[Routine Portfolio Rebalancing]

***

For this reason, investors should view every deposit to or withdrawal from a taxable investment account as a chance to rebalance. Depositing new money is a free opportunity to buy more of the positions in which the portfolio is underweight.

Example:

For example, suppose an investment account of $100,000 has a target asset allocation of 50% stocks and 50% bonds ($50,000 invested in both). After a year in which stocks made 10% and bonds were flat, the portfolio would consist of $55,000 of stocks and $50,000 of bonds, for a total account balance of $105,000. If at this point the investor would like to invest an additional $5,000, the entire contribution should be placed in bonds, bringing the actual portfolio allocation back to 50% stocks and 50% bonds ($55,000 in each).

Of course, this same strategy can be implemented regardless of the size of the additional contribution. If the investor wanted to contribute $10,000 in year two, the total account value would be $115,000 ($105k current balance + $10k new money). In order to get back to our 50% stock and 50% bond targets, we would want $57,500 in each position. With $55,000 already invested in stocks, we would only want to invest $2,500 of the new money into stocks and place the remaining $7,500 into bonds, bringing both portions of the portfolio up to their targets.

Taking withdrawals from a taxable investment account should also be viewed as an opportunity to rebalance. Rebalancing via withdrawals may not be free as it is when rebalancing is done when new funds are deposited because appreciated assets are likely sold, creating a tax liability. However, when a withdrawal is taken from a taxable account, it is still wise to sell overweight asset categories to produce the funds needed for the distribution.

Example:

Let’s return to our previous example of a 50% stock and 50% bond target portfolio that had grown to $55,000 of stock and $50,000 of bonds. If the investor then wanted to withdraw $10,000, he could take the entire distribution out of bonds which would allow him to free up the amount needed without creating a tax liability. However, the resulting portfolio would consist of $55,000 of stocks and $40,000 of bonds – a ratio of approximately 58% stocks and 42% bonds.

This is a significantly more volatile portfolio than the target 50% / 50% portfolio. For example, in 2008 a portfolio that consisted of 50% large cap stocks and 50% long term government bonds lost -7.16%. Meanwhile, a portfolio of 58% stocks and 42% bonds lost -11.93% over the same period – a 66.6% increase in volatility.

Alternatively, I’d suggest using the $10,000 withdrawal to rebalance the portfolio, bringing the resulting $95,000 portfolio back to 50% stocks and 50% bonds ($47,500 in each). Of course, to do this, the investor would liquidate $7,500 of stocks and $2,500 of bonds. Although this could potentially create a small capital gains tax liability, this is a tax bill that will need to be paid at some point anyhow, and the investor will maintain a portfolio with the target amount of volatility.

Further, remember that the long-term capital gains rate (which applies to any capital assets held for over a year) is a favorable tax rate. For single filers with a taxable income of less than $37,450 and joint filers with a taxable income of less than $74,900, the capital gains tax rate is actually 0%!

Additionally, for single filers with a taxable income of between $37,450 and $406,750 and joint filers with a taxable income of between $74,900 and $457,600, the capital gains tax rate is only 15%. Consequently, the investor can likely rebalance the portfolio back to the target allocation via the withdrawal while incurring only a nominal tax bill.

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healthfinance

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Assessment

While rebalancing provides a significant increase in investment return over long time periods, tax implications should be considered when determining whether or not to rebalance a taxable investment account. However, depositing money to or withdrawing money from these accounts provides a favorable opportunity to obtain the return premium rebalancing creates while minimizing tax implications.

Conclusion

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

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

Physicians are notoriously excellent at diagnosing and treating medical conditions. However, they are also notoriously deficient in managing the business aspects of their medical practices. Most will earn $20-30 million in their medical lifetime, but few know how to create wealth for themselves and their families. This book will help fill the void in physicians’ financial education. I have two recommendations: 1) every physician, young and old, should read this book; and 2) read it a second time!

Dr. Neil Baum MD [Clinical Associate Professor of Urology, Tulane Medical School, New Orleans, Louisiana]

http://www.CertifiedMedicalPlanner.org

Enter the CMPs

Doctors Going Granular on Investment Risk

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It is Not What You Think!

[By Lon Jefferies MBA CMP® CFP®]

Lon JefferiesA new logic has been surfacing amongst the top minds in the financial planning industry.

Many of my favorite financial authors – Warren Buffett, Josh Brown, Nick Murray, Howard Marks, and others – have proposed the need to redefine the word “risk.”

Risk” vs “Volatility”

Most investors and financial advisors tend to utilize the words “risk” and “volatility” interchangeably. We measure how risky a portfolio is by examining its potential downside performance.

For example, we review how much a similar portfolio lost during 2008 or when the tech bubble popped in 2000-2002. When doing this, we are really talking about volatility rather than risk. Volatility – usually measured by standard deviation – reflects how much a portfolio is likely to increase or decrease in value when the market as a whole fluctuates. Risk, however, is quite different.

Two Threats

Josh Brown characterizes risk as the possibility of two threats:

  1. The possibility of not having enough money to fund a specific goal, which includes the possibility of outliving your money
  2. The possibility of a permanent loss of capital.

Example:

In a dramatic example of how volatility is different from risk, consider a retiree with a $10 million portfolio who only spends $50,000 a year. Next, assume the investor experiences a two-year period in which during the first year his portfolio loses 50% of its value and in year two the portfolio earns a 100% return. Thus, after year one the portfolio would only be worth $5 million and after year two it would again be worth $10 million.

Clearly, this is a very volatile portfolio that is subject to a wide range of potential performance outcomes. However, is this portfolio truly risky to the investor? According to Mr. Brown’s first factor, the portfolio is not risky because the investor will have enough money to fund his $50k per year retirement regardless of whether his portfolio is valued at $10 million or $5 million. Additionally, the portfolio is also not risky according to the second factor in that the investor didn’t experience a permanent loss.

Investors tend to view stocks as risky assets because their returns have a large standard deviation (variation from a mean). Similarly, we tend to view money market equivalents such as CDs and savings accounts as very safe investments because their returns have less dispersion, and consequently, are more predictable.

However, rather than considering stocks to be risky and cash equivalents to be safe, it would be more accurate to consider stocks an investment with high volatility and cash to be a holding with low volatility.

***

hacker

***

What is the difference?

Suppose it is determined that you need an average rate of return of 6% over time to achieve your retirement goals. Historically, over a sufficiently significant period of time, stocks have returned an average of about 10% per year while cash equivalents have returned about 3% per year. Consequently, if these averages continue in the future, you actually have a very low chance of reaching your retirement goal of not outliving your money if you place money in the “safe” investment of a cash equivalent, while you would actually have a high probability of reaching your retirement goal if you place money in a more volatile basket of stocks.

By this metric, cash is actually the more risky investment because investing in it would increase the probability of outliving your funds. Meanwhile a basket of stocks, if given enough time to achieve its historically average rate of return, is actually the safer investment as it gives you a higher probability of not outliving your nest egg.  Thus, while a portfolio of stocks will almost certainly experience more short-term volatility, over an extended period of time it very well may be a safer investment for ensuring your retirement goals are met.

Further, Mr. Brown proposes that the muddying of definition between risk and volatility is something a portion of the financial service industry has done on purpose. Brown suggests that the easiest way to sell someone a product is to first convince them they have a need. If hedge fund managers, insurance agents, and annuity salesmen can make consumers believe that volatility is equal to risk, and that since their products minimize volatility they must also minimize risk, they can achieve more sales.

However, even if an annuity can eliminate downside volatility, if it limits potential return to an amount that is insufficient to achieve the investor’s long-term goals, the investment is still more risky than an investment with more short-term volatility but a higher probability of long-term success.

***

Bell Curve

***

Assessment

Next time the market goes through a correction, remember that the drop in your portfolio’s value is a reflection of the potential volatility your portfolio is capable of experiencing. Yet, recall that as long as you don’t sell your assets and suffer a permanent loss of your investment capital, you can allow the market time to recover and achieve its historical rate of return.

Doing so will ultimately make your investment strategy less risky than utilizing investment options that experience less volatility because it maximizes the probability you will eventually achieve your long-term financial goals.

More:

Conclusion

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

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

This book was crafted in response to the frustration felt by doctors who dealt with top financial, brokerage, and accounting firms. These non-fiduciary behemoths often prescribed costly wholesale solutions that were applicable to all, but customized for few, despite ever-changing needs. It is a must-read to learn why brokerage sales pitches or Internet resources will never replace the knowledge and deep advice of a physician-focused financial advisor, medical consultant, or collegial Certified Medical Planner™ financial professional.

Parin Khotari MBA [Whitman School of Management, Syracuse University, New York]

http://www.CertifiedMedicalPlanner.org

Enter the CMPs

About the Institute of Medical Business Advisors, Inc

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Who we are – What we do!

[By Ann Miller RN MHA]

www.MedicalBusinessAdvisors.com

The Institute of Medical Business Advisors, Inc provides a team of experienced, senior level consultants led by iMBA Chief Executive Officer Dr. David Edward Marcinko MBA CMPMBBS [Hon] and President Hope Rachel Hetico RN MHA CMP™ to provide going contact with our clients throughout all phases of each project, with most of the communications between iMBA and the key client participants flowing through this Senior Team.

iMBA Inc., and its skilled staff of certified professionals have many years of significant experience, enjoy a national reputation in the healthcare consulting field, and are supported by an unsurpassed research and support staff of CPAs, MBAs, MPHs, PhDs, CMPs™, CFPs® and JDs to maintain a thorough and extensive knowledge of the healthcare environment.

The iMBA team approach emphasizes providing superior service in a timely, cost-effective manner to our clients by working together to focus on identifying and presenting solutions for our clients’ unique, individual needs.

***

Risk Management and Insurance Foreword for Doctors by Lloyd Krieger MD MBA article-2270211-173CD250000005DC-373_634x447

Financial Planning for Physicians Foreword by Jason Dyken MD MBA

***

Our Team 

The iMBA Inc project team’s exclusive focus on the healthcare industry provides a unique advantage for our clients.  Over the years, our industry specialization has allowed iMBA to maintain instantaneous access to a comprehensive collection of healthcare industry-focused data comprised of both historically-significant resources as well as the most recent information available.

iMBA Inc’s specific, in-depth knowledge and understanding of the “value drivers” in various healthcare markets, in addition to the transaction marketplace for healthcare entities, will provide you with a level of confidence unsurpassed in the public health, health economics, management, administration, and financial planning and consulting fields.

iMBA Inc’s information resources and network of healthcare industry textbook resources enhanced by our professional consultants and research staff, ensure that the iMBA project team will maintain the highest level of knowledge regarding the current and future trends of the specific specialty market related to the project, as well as the healthcare industry overall, which serves as the “foundation” for each of our client engagements.

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The Stock Market Has Been Flat For Six Months

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This is Great News!

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

Lon JefferiesInvestors have experienced a very uneventful 2015.

In fact, for seven months the Dow Jones Industrial Average was at essentially the same value.* This lack of fluctuation has been even more pronounced over the last two months. As of the market close on May 14th, 2015, the S&P 500 has closed between 2,040 and 2,120 for 71 days in a row.

Further, for nearly a full month, the DOW hasn’t experienced a 1-month high OR low and traded within a 2% range the entire time (always between -1% and 1%).** This was the longest streak in over 100 years!

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one-month-return

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Believe it or not, this may be the best pattern possible for the U.S. stock market.

***

Trendline Image

***

History tells us that the market is likely to increase in value over time. If we were to plot the market’s value from the time the market first opened to the current day, a chart of those two points would illustrate a return as such:

Trendline Image

However, we all know that the market doesn’t provide a consistent return. On individual trading days, the market can either increase or decrease in value, and the range of potential gains or losses is wide. Over extended periods of time, the market’s actual value may be above or below the expected trend line. In fact, the market’s actual historical return may look more like:

Historical vs Trendline

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Historical vs Trendline

***

Anyone who is familiar with Net Worth Advisory Group is likely aware that we are not the type to make market predictions. We have no idea whether the market is near a temporary top or is still experiencing the upward trend after hitting the bottom of an S curve in 2008. However, let’s assume the market has reached the top of an S curve and is currently above the trend line that would represent consistent growth (similar to the illustration above).

If that is the case, there are two ways the market could get back in line with the trend line representing consistent long-term growth. The first and most obvious way this could happen is for actual market performance to curve downwards towards the trend line. This would represent a market correction or even crash.

***

crash

***

The second, and perhaps less obvious way that actual returns could become aligned with the long-term trend line is for time to allow the trend line to catch up to the actual returns we have experienced since 2008.

In this scenario, the market doesn’t slump but remains stable while time enables price-to-earnings ratios, valuations, and the economy a chance to catch up.

Time Catch Up

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Time Catch Up

***

Very few investors enjoy or take advantage of a market correction. In fact, most investors lose control of their emotions when the market experiences a drastic downturn, and do exactly the opposite of what they should do: they sell at market lows – hardly a profitable investment strategy.

Consequently, if we are to avoid an over-heated market, it is likely better for most investors if the market realigns itself with the long-term growth rate by remaining flat for awhile and allowing the trend line time to catch up.

Allow me to reemphasize that I am not predicting that the market is in fact at a temporary high and above where it should be. I have no idea what the market will do tomorrow, over the next month, or over the next year. That is why I’m a believer in having a well diversified portfolio that represents your risk tolerance and you stick to it through thick and thin.

However, let’s look at the other side of the coin and assume the market is still at the bottom of an S curve, below the long-term trend line, and needs to experience further growth in order to catch up. Even in this scenario, an extended period of flat market performance is hardly a bad thing – it would simply make the potential upside needed to get back to market norms all the larger.

Market Under Valued

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Market Under Valued

***

Assessment

It turns out that an extended period of flat market performance may very well be a positive for investors in any environment, regardless of whether the market is currently over or under-valued.

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Conclusion

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Living and Dying on Financial Planning Averages

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Too simplest … Too manageable?

By Lon Jeffries MBA CFP CMP®

Lon JeffriesNever forget the story of the six-foot tall man who drowned crossing the stream that was only five feet deep, on average.

We want to abide by averages because they make our lives simple and manageable. A couple on a date night assumes a movie will be an average of two hours long so they know when to schedule dinner with friends.

The entrepreneur wants to think in terms of making an average profit of $100,000 per year so he has a guideline regarding the standard of living he can enjoy.

The 65-year old retiree wants to assume he will live to the average age of 84.3 so he knows at what pace he can enjoy his nest egg.

Planning Gone Awry

However, when we rely too heavily on averages, our planning can go awry. If the movie runs longer than two hours, the couple will be late for their dinner date. If the entrepreneur has a slow year and earns less than $100,000, he may end up taking out short term debt to pay his bills. If the retiree lives past age 84.3, he may outlive his money.

Financial Planning Averages

The use of averages is essential in financial planning. A range of assumptions is required in the development of a financial plan – how long will you live, how much will you spend each year, what rate of return will your investments achieve, how much will you pay in taxes, what will the rate of inflation be, etc. Without these assumptions, retirement projections can’t be constructed. Further, the best method for making these assumptions is to use averages – an average life expectancy, an historical average rate of return, an historical average inflation rate, etc.

So, how do we prevent the use of averages from destroying us? The answer is by allowing enough time and repetitions for the law of averages to come into effect. Just because a basketball player shoots free throw shots at a 90% success rate doesn’t mean he will necessarily make the next free throw he takes. It does, however, mean that if he shoots 100 free throws he is likely to make 90 of them.

Beware Assumptions

A financial plan may assume you achieve an average annual rate of return of 7% per year. Of course, this doesn’t mean it is impossible that your portfolio will actually lose 10% over the next 12 months. It is critical to remember that the financial plan assumes you achieve a 7% return over the entirety of your retirement, which may be 30 years. Consequently, if a loss of 10% occurs in the first year of retirement, your portfolio still has another 29 years to achieve returns that average out to 7% per year. Thus, a 10% loss is far from catastrophic to your retirement projections.

In fact, the primary way a 10% loss could become catastrophic to your portfolio is if it motivates you to make changes to your investments that would prevent the law of averages from applying. If an investor sold their portfolio after suffering the 10% loss, it would essentially guarantee that the anticipated average rate of return won’t be achieved, and consequently, the financial plan would be likely to fail.

***

Bell Curve

***

For this reason, while it is true that over an extended period of time the stock market has averaged an annual return of 10%, we should always remember that there is a significant chance of the market taking a loss during any given year (or three-year) period, and it is possible that the market could endure a decade without any significant gains (similar to the 2000’s).

Still, if the financial plan requires an average investment return over an extended period of time such as a 30-year retirement, even these setbacks are far from certain to dislodge your secure retirement as long as time is granted for the average to work itself out.

Enter Howard Marks

As famed writer and investor Howard Marks said,

“We can’t live by the averages. We can’t say ‘well, I’m happy to survive, on average.’ We gotta survive on the bad days. If you’re a decision maker, you have to survive long enough for the correctness of your decision to become evident. You can’t count on it happening right away.”

Assessment

The use of averages has a purpose in financial planning, and in other aspects of life. We simply need to be confident that the figures we use for our averages are achievable over time, and allow time the opportunity to prove us right.

Pareto’s Law or Principle

The Pareto principle (also known as the 80–20 rule, the law of the vital few, and the principle of factor sparsity) states that, for many events, roughly 80% of the effects come from 20% of the causes Management consultant Joseph M. Juran suggested the principle and named it after Italian economist Vilfredo Pareto, who, while at the University of Lausanne in 1896, published his first paper “Cours d’économie politique.” Essentially, Pareto showed that approximately 80% of the land in Italy was owned by 20% of the population; Pareto developed the principle by observing that 20% of the pea pods in his garden contained 80% of the peas.

It is a common rule of thumb in business; e.g., “80% of your sales come from 20% of your clients.” Mathematically, the 80–20 rule is roughly followed by a power law distribution (also known as a Pareto distribution) for a particular set of parameters, and many natural phenomena have been shown empirically to exhibit such a distribution.[2]

The Pareto principle is only tangentially related to Pareto efficiency. Pareto developed both concepts in the context of the distribution of income and wealth among the population.

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2015 Could Be Rough on Stocks?

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Here’s Why!

Daniel Crosby PhDBy Daniel Crosby, Ph.D.

“In the short run, the market is a voting machine but in the long run, it is a weighing machine.” – Benjamin Graham

***

Believing as I do in the sage advice of Mr. Graham, I recently set out to quantify my growing unease with the heights obtained by the bull market of the last five-plus years. As you read below, please realize that this is not a forecast or prognostication about what will happen – especially not in the short term. Timing the market on any sort of a short-term basis is a fool’s errand, as is deviating from your specific financial plan on the advice of a stranger.

Consider this more of a “Where are we at?” with respect to market valuations, secure in the knowledge that times of sensational highs and lows tend to be fleeting and that the market has a tendency to mean-revert (that is, become a weighing machine) in the long term. Having now sufficiently hemmed and hawed my way through the legal stuff – let me say that I find the market significantly overvalued and think that some sort of defensive measures will be wise for most investors in the year(s) to come.

The Levels

To corroborate this belief, I’d like to present you with four measures of market value, all at historically high levels. They are:

  1. Shiller Cyclically Adjusted Price to Earnings Ratio (CAPE)

What it is – The work of Nobel Prize winning behavioral economist Robert Shiller, the CAPE is the price/earnings ratio based on average, inflation-adjusted earnings for the previous ten years.

What it says – The CAPE currently sits at 27.2, 63.9% higher than its’ historical mean of 16.6. The CAPE has only crested or approached 27 three other times – 1929, 1997-2000, and 2007.

What it means – The CAPE is a poor predictor of short-term market movements (most everything is), but is much more reliable in speaking to the long term return horizon. Using Shiller’s own expected return formula (taken from value investing site GuruFocus), yields an expected return over the next 8 years of .3%. What is much more informative than a single prediction, however, is considering the range of possible distributions for the longer term, which are as follows:

Scenario Returns for next 8 years from today

Really Lucky 5.2%

Lucky 3%

Unlucky -3%

Really Unlucky -7.5%

It is certainly worth noting that even the “Really Lucky” scenario that might play out over the next 8 years vastly underperforms the market average.

  1. S&P 500 Price to Earnings Ratio

What it is – A simple measure of the price paid for every dollar of earnings among some of the best capitalized and most liquid US securities.

What it says – The current P/E ratio of the S&P 500 is 19.96, well above it’s historical mean of 15.53 and median of 14.57.

What it means – As with the Shiller CAPE, greatly elevated levels of price to earnings have signaled a much lower return environment in the years to come. Ned Davis research has done the math on times when the market has been over or undervalued relative to fundamentals and has discovered the following:

Returns of S&P 500 Percentage Over/Under Valued (3-31-1926 to 5-31-2014)

More than 20% Overvalued (parentheses denote negative returns)

6 months – (.2)

1 year – (3.6)

2 years – (1.6)

3 years – 6.8

More than 20% Undervalued

6 months – 14

1 year – 19.4

2 years – 30.1

3 years – 47.3

Market Performance

6 months – 3.9

1 year – 8

2 years – 16

3 years – 23.6

According to Ned Davis and company, we are now well over 30% overvalued, comfortably above the threshold for the paltry “Overvalued” returns you see above.

*** future***

  1. Wilshire 5000/GDP – aka, “Buffett Valuation Indicator”

What it is – A sort of price to sales marker for the broader economy, once mentioned by Buffett as his favorite measure of market valuation.

What it says – The current market cap/GDP ratio sits at 127.3%, which is more than two standard deviations from the mean value of 68.8%.

What it meansGiven historical returns from this significantly elevated level of market cap to GDP, the predicted return for ’15 is .7%, which includes dividends. Drawing on Buffett’s comments, GuruFocus considers a 75 to 90% ratio fair value, with 90 to 115% modestly overvalued and anything over 115% significantly overvalued. The only other time since 1950 that this indicator has broken past two standard deviations of overvaluation is, you guessed it, in the run up to the 2000 crash.

  1. Crosby Irrationality Index

What it is – A measure of market sentiment that is comprised of sub-measures of volatility, valuation, fund flows, momentum and interest rate spreads.

What it says – The CII has spent all of 2014 at a level of elevated optimism just short of mania. While valuations have driven the score up, it has not reached “manic” levels, largely as a result of this having been “the most hated bull run in history.”

What it means – The CII provides one and three year projections based on the current levels of market sentiment. These projections should be understood less as specific predictions and more as headwinds or tailwinds to growth. The current projections are for slightly negative (-1.001) returns this year that persist even three years down the road (-2.6266).

Caveats

As with any measure, those listed above are subject to a number of failings. The CAPE includes data from the Great Recession that skew the results, a number of the measures fail to account for the interest rate environment, and so on. While no single measure is flawless, when so many measures point in the same direction, I believe it is worth taking note.

This information in and of itself is meaningless but should take on meaning as you discuss your individual needs with your advisor (you DO have an advisor, right?).

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For very long-term investors, even profound hiccups in the market may be little more than a contrarian buying opportunity. After all, there are more fun and important things to do in life than obsess over financial footnotes.

Assessment

But for those nearing retirement, an unambiguous picture seems to be emerging that returns for the next 8 to 10 years are likely to be depressed in light of the eye-popping returns of the more recent past. Do not act in haste or deviate from your plan if one is in place, but please accept this gentle warning from a concerned party who knows that “this time is never different.”

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On Hospital Endowment Fund Management

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A Case Model Example

[By Dr. David Edward Marcinko MBA]

http://www.CertifiedMedicalPlanner.org

DEM at Wharton

Just as the field of medicine continuously changes, so too does the field of endowment management.

Endowment managers continue to increase their knowledge of the science and expand their skill in the art.

However, successful endowment managers will continue to focus on the areas that they can control in order to minimize the risk of the areas they cannot.

***

So, here is a case model to show you how it is done.

[Case Model]

Endowment Fund

***

hospital

Invite Dr. Marcinko

***

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***

A Video Presentation by Political Economic Strategist Greg R. Valliere

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Chief Political and Economic Strategist at Potomac Research Group Holdings, LLC

Video Pod-Cast Sponsored By

  • Sharkey, Howes & Javer
  • 720 S Colorado Blvd – So. Tower, Suite 600
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Dear David,

We thoroughly enjoyed our time with those of you who were able to attend our annual Client and Friends Appreciation Event.

Since then, many of you have been requesting to see Greg R. Valliere’s presentation from the event. So, we recently posted the video on our website and would like to invite you, your family and friends to view it. If you missed the event, Greg’s speech was thought provoking, insightful and is well worth a watch.

Enjoy!

SHJ

***

Watch

< Click here to watch now >

SHJ

***

About Greg R. Valliere

Greg R. Valliere is a Chief Political Strategist at Potomac Research Group Holdings, LLC. He coordinates political and economic research. Mr. Valliere focuses on how Congress and the White House shape fiscal policies and monitors the Federal Reserve Board’s interest rate policies. He has over 30 years of experience in covering Washington for institutional investors. 

Prior to joining the firm, Mr. Valliere served as Chief Policy Strategist for Soleil Securities Group Inc. He was also employed at Stanford Group Company, Research Division. He previously held key strategy roles at Charles Schwab’s Washington Research Group and The Washington Forum. 

Mr. Valliere co-founded The Washington Forum in 1974, serving as Chief Political Analyst and Editor of the group’s publications, and ultimately as Research Director. He began his career in 1972 at F-D-C reports, monitoring the pharmaceutical industry. Mr. Valliere is an exclusive commentator for CNBC, appearing regularly on network programs such as ‘Squawk Box,’ ‘Power Lunch,’ ‘The Closing Bell,’ and ‘Kudlow & Company.’ He earned his Bachelor’s degree in Journalism from The George Washington University.

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Financial Planning MDs 2015

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About the INSTITUTE OF MEDICAL BUSINESS ADVISORS, Inc.

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About

INSTITUTE OF MEDICAL BUSINESS ADVISORS, Inc.

  ***

The Institute of Medical Business Advisors, Inc provides a team of experienced, senior level consultants led by iMBA Chief Executive Officer Dr. David Edward Marcinko MBA CMPMBBS [Hon] and President Hope Rachel Hetico RN MHA CMP™ to provide going contact with our clients throughout all phases of each project, with most of the communications between iMBA and the key client participants flowing through this Senior Team.

Product Details

iMBA Inc., and its skilled staff of certified professionals have many years of significant experience, enjoy a national reputation in the healthcare consulting field, and are supported by an unsurpassed research and support staff of CPAs, MBAs, MPHs, PhDs, CMPs™, CFPs® and JDs to maintain a thorough and extensive knowledge of the healthcare environment.

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The iMBA team approach emphasizes providing superior service in a timely, cost-effective manner to our clients by working together to focus on identifying and presenting solutions for our clients’ unique, individual needs.

Product Details

The iMBA Inc project team’s exclusive focus on the healthcare industry provides a unique advantage for our clients.  Over the years, our industry specialization has allowed iMBA to maintain instantaneous access to a comprehensive collection of healthcare industry-focused data comprised of both historically-significant resources as well as the most recent information available.  iMBA Inc’s specific, in-depth knowledge and understanding of the “value drivers” in various healthcare markets, in addition to the transaction marketplace for healthcare entities, will provide you with a level of confidence unsurpassed in the public health, health economics, management, administration, and financial planning and consulting fields.

 Product DetailsProduct DetailsProduct Details

iMBA Inc’s information resources and network of healthcare industry textbook resources enhanced by our professional consultants and research staff, ensure that the iMBA project team will maintain the highest level of knowledge regarding the current and future trends of the specific specialty market related to the project, as well as the healthcare industry overall, which serves as the “foundation” for each of our client engagements.

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Sample iMBA Engagements

iMBA Seminar Topics

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Do You Have a Taxable Investment Account – Doctor?

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Is it Time to Harvest?

[By Lon Jefferies MBA CFP®]

Lon JeffriesTax 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.

***

Portfolio analysis

***

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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Conclusion

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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

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Financial Planning MDs 2015

Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants

The [Negative] Short-Term Implications of Investment Portfolio Diversification

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Delving Deeper into Asset Allocation

By Lon Jefferies MBA CFP® CMP®

Lon JeffriesAsset allocation is one of the key factors contributing to long-term investment success.

When designing a portfolio that represents their risk tolerance, investors should be aware that a portfolio that is 50% stocks is likely to obtain approximately half of the gain when the market advances but suffer only half the loss when the market declines.

This general principle frequently holds true over extended investing cycles, but can waiver during shorter holding periods.

Case Model

For example, a fairly typical physician client of mine who has a 50% stock, 50% bond portfolio has obtained a return of 4.62% over the last 12 months, while the S&P 500 has obtained a return of 14.31% over the same time period (as of 10/30/14).

An investor expecting to obtain half the return of the index would anticipate a return of 7.15%, and by this measuring stick, has underperformed the market by over 2.50% during the last year.

What caused this differential?

Answer

The issue resides in how we define “the market.” In this example, we use the S&P 500 index as a measure for how the market as a whole is performing. As you may know, the S&P 500 (and the Dow Jones Industrial Average, for that matter) consists solely of large company U.S. stocks.

Of course, a diversified portfolio owns a mixture of large, mid, and small cap U.S. stocks, as well as international and emerging market equities. Consequently, comparing the performance of a basket of only large cap stocks to the performance of a diversified portfolio made up of a variety of different asset classes isn’t an apples-to-apples comparison.

***

Stock_Market

***

Frequently, the diversified portfolio will outperform the non-diversified large cap index because several of the components of the diversified portfolio will obtain higher returns than those achieved by large cap holdings.

However, the past 12 months has been a case where a diversified portfolio underperformed the large cap index because large cap stocks were the best performing asset class over the time period. In fact, over the last twelve months, there has been a direct correlation between company size and stock performance (as of 10/30/14):

  • Large Cap Stocks (S&P 500): 14.92%
  • Mid Cap Stocks (Russell Mid Cap): 11.08%
  • Small Cap Stocks (Russell 2000): 4.45%
  • International Stocks (Dow Jones Developed Markets): -1.05%
  • Emerging Market Stocks (iShares MSCI Emerging Markets): -1.04%

Since large cap stocks were the best performing element of a diversified portfolio over the last 12 months, in retrospect, an investor would have obtained a superior return by owning only large cap stocks during the period as opposed to owning a diversified mix of different equities. Does this mean owning only large cap stocks rather than a diversified portfolio is the best investment approach going forward? Of course not.

Year after year, we don’t know which asset category will provide the best return and a diversified portfolio ensures we have exposure to each year’s big winner. Additionally, although large caps were this year’s winner, they could easily be next year’s big loser, and a diversified portfolio ensures we don’t have all our investment eggs in one basket.

Financial Planning MDs 2015

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

Assessment

Don’t be overly concerned if your diversified portfolio is underperforming a non-diversified benchmark over a short period of time. As always, long-term results should be more heavily weighted than short-term swings, and having a diversified portfolio is likely to maximize the probability of coming out ahead over an extended period.

Conclusion

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

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“The Wall Street Casino”

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Am I Scolded?

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

Rick Kahler MS CFPJust recently I heard from an insurance salesman who scolded me for never giving any investment advice except to put all your money into “The Wall Street Casino.”

The impetus for this admonishment was the “up-down”, “buy-sell”, market craziness of this past week; no doubt.

My Story

Over the past 23 years, I’ve penned scores of columns about the benefits of a diversified portfolio of asset classes (Wall Street being just one of them). Still, I would far rather invest 100% of my retirement funds in a diversified portfolio of US stocks than speculate on a roulette wheel. There is a big difference between investing and speculating.

I learned that difference the hard way when I was in my early twenties. I had some money in savings and some mutual funds in an IRA, but they weren’t building wealth fast enough for me. Gold prices were up and going higher, so I took $1000 out of my savings and put it into gold futures. In just a few days, my $1000 had turned into $3000.

My broker suggested putting the $3000 into pork bellies. I didn’t really know what they were, but he seemed to know what he was talking about, so I bought pork bellies. For a few days, everything was fine. Then the price of pork bellies tanked. For five days straight, the price fell so dramatically that trading was stopped at the beginning of the day. I couldn’t even sell. There was nothing to do except watch the losses pile up.

By the time trading resumed, I had a margin call for $12,500 ($50,000 today, adjusted for inflation). To pay it, I had to wipe out my savings and cash in my IRA. At least I had savings, so I didn’t have to go borrow the money.

I had made a classic rookie mistake—speculating instead of investing.

***

blackjack

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The Money Options Triad

There are three things you can do with money you wish to set aside: save, invest, or speculate.

  1. Saving is putting money away for future needs, often in a bank savings account or CDs. The primary purpose isn’t building wealth; it’s having money when you need it for emergencies or large purchases.
  2. Investing is diversifying money into stocks, bonds, real estate, commodities, and other asset classes. The purpose is to build wealth over the long term, so investing is boring. While you will see the value of your money decline as well as increase, it is unlikely that over a long period of time you will actually suffer a permanent loss of capital. Your returns over time will probably be more than you would earn from simple savings.
  3. Speculating is putting money into a high-risk investment in the hope of building wealth quickly. It’s exciting, dramatic, and risky. Examples of speculating include trying to time the markets through day trading, putting everything you have into one investment, and borrowing to buy stocks, real estate, or commodities. True, great fortunes have been made through speculating, but many more fortunes have been lost. Not only can you lose your initial investment, you can—as I did with my pork bellies—lose way more money than you had to begin with.

When novices skip from saving to speculating, chances are good that they’ll lose big. Unfortunately, too many of them learn the wrong lesson. They decide, “Investing is too risky,” never realizing they were speculating rather than investing.

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American Flag

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The Savings Trap

As a result, in the future they may limit themselves to saving. Their money stays safe, but over time they lose in a big way, especially through decreased purchasing power. Investing is not a “casino,” but a way to earn the long-term returns that are so important for building net worth and achieving financial security.

Assessment

So, have I been scolded; my bad?

Conclusion

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Is it Time to Reduce Your Bond Exposure?

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On Investment Portfolio Analysis

By Lon Jefferies MBA CFP®

Lon Jefferies

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.

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healthcare costs

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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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A 2014 Stock Market Mid-Year Review

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What Do We Know?

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

By Lon Jefferies MBA CFP®

Lon JefferiesIf 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?

Managing a Stock Portfolio

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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“Retirement Investors Flock Back to Stocks”

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WSJ Front Page Headlines

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

Rick Kahler CFP“Retirement Investors Flock Back to Stocks” was the front page headline of The Wall Street Journal on May 2, 2014.

I retweeted it to my Twitter feed, adding, “Just In Time to Ride Them to the Bottom Again.”

Introduction

Five years ago some of those same investors were abandoning stocks in sheer panic. In early March 2009, the Dow Jones Industrial Average hit a low of 6700. Many financial advisors spent hours listening to frightened clients wanting to sell out their entire portfolios and go to cash. It was an exhausting and traumatic period for doctors, financial advisors and clients.

Calm and Steady

Those who followed advisors’ recommendations to stay the course certainly came out on top. Their portfolios recovered nicely, with double-digit annualized returns for the past five years. Even over the past 10 years, most diversified portfolios earned very respectable returns far in excess of bank CD’s or bond yields.

Panic and Fear

Unfortunately, those who panicked and sold out paid an incredibly high price for the momentary relief of getting off the market roller coaster. Many of them kept their money on the sidelines until recently, waiting until “things were better” to reinvest.

Today-Bubbles?

Apparently that time has come. Here are some numbers from the WSJ article:

Retirement investors have recently increased their stock holdings by almost 40% from the market lows. Today, bond and money market funds make up only 25% of retirement plans, and 67% of new 401(k) contributions go toward purchasing stocks.

In 2007, bond and money market funds accounted for 21% of retirement plans. At the market top in October 2007, the average new 401(k) contribution going into stocks was 69%. Within 18 months stocks had declined almost 60% from their highs.

Correlations?

Do you see any potential correlations here? I have little doubt these individual investors, mistiming the market once more, are setting themselves up to get slaughtered all over again.

But, what about those who did get out of the markets five years ago and now realize they made a big mistake? Suppose you’ve learned the wisdom of staying in the market with a well-diversified portfolio. How do you get back in without waiting for the next crash?

Three Strategies:

Here are three strategies to rebuild your portfolio.

First, don’t go all in, but move into the market gradually with “dollar cost averaging.” Over the next two years, methodically (monthly or quarterly) buy into a diversified mixture of asset classes. If the market turns downward, which carries a high probability, you will buy into a falling market. You will also reduce the possibility of a huge market drop that might cause you to panic and sell out again.

Second, allocate your purchases to a mixture of US and international stocks, as well as options such as real estate investment trust (REIT) funds, commodity funds, managed futures funds, Treasury Inflation Protected (TIPs) bond funds, high yield bond funds, and high quality bond funds.

Finally, once your two-year dollar cost averaging is done and you are fully invested into your asset classes, rebalance at least once a year to maintain your original allocations as the values of the assets change.

For example, if you have allocated 30% of your portfolio to stocks, purchase more if stocks add up to less than 30% or sell some if they are over 30%.

Bull markets

Assessment

The research suggests there is a high probability that things will end badly for individual investors who try to time the markets. A few will succeed, but will confuse their “skill” with the fact they just got lucky. A methodical approach, however, provides a strategy to help you hold on, even in the face of market ups and downs.

Conclusion

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

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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

David K. LukeThere 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.

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Stock_Market

***

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?

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Bear + A Falling Stock Chart

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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:

  1. The Affordable Care Act may not be so affordable for health consumers
  2. 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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How Much is a Financial Advisor Really Worth?

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And … Can it be Quantified?

Doctors and FAs

[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.

networking advisors

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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On Recent Stock Market Losses

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Should Physician Investors Be Concerned?

Lon JefferiesBy Lon Jefferies MBA CFP®

Many doctors and some investors viewed the end of January and early February as a pretty scary time. Over a period of just 12 trading days (1/15-2/3), the S&P 500 lost -5.76%. This spurred conversations online and in the media about the end of a long bull market run and even the possibility of a bubble. However, since the end of that tough stretch, the market has responded strongly and is again reaching new all time highs.

What’s Up!

So what happened during that short time span to cause such a response? Was it a concern about the health of emerging markets that caused such a scare, or perhaps the threat of rising interest rates? Did the uncertainty of having a new Fed chairman cause a pullback in the market, or maybe the concern of a terrorist attack in Sochi during the Olympics? These are all clearly issues that obtained a good amount of short-term attention, but I’d contend that none of them were the root cause of the market decline.

Historical Review

History illustrates time and again that market volatility leads to memory problems for many investors.  Check out this chart itemizing all market corrections of 5% or more since the bull market began.

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original_19861592

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As you can see, although the S&P 500 index has increased in value from 676.53 on March 9, 2009 to 1,819.75 on February 11, 2014, the S&P 500 has endured nine pullbacks of over 5% during that time frame.

As illustrated by the lengths of the red lines associated with each correction, many of these market declines happened over a similarly short time span.

Consequently, despite the S&P increasing in value by 169% over the last five years, the market has experienced a decline of at least 5% every six and a half months on average.

In fact, nearly a third of the months since the bull market began have seen the market decline, and by an average of 3% per month.  Considering this information, late January and early February wasn’t particularly unusual.

Periodic Pull-Backs

These periodic market pullbacks aren’t specific to the recent strong run. Historically, we typically see three stock market dips of 5% or more every year and one correction of more than 10% every 20 months. Yet, for some reason, the same conversations and concerns are repeated during every market correction. Investors wonder if this is the beginning of an extended market decline or even a crash?

People consider selling their assets and taking their money out of the market. It is so easy to forget that we have seen similar circumstances in the past and that very rarely has anyone benefitted from selling.

Refer back to the chart itemizing all market corrections over the last five years. There wasn’t a single market decline that didn’t recoup all value in a short period of time. Even the 20% decline that occurred in 2011 only took nine months to go from peak to trough to new all time high.

Assessment

As a result, I’d suggest that the January decline in the markets is not only nothing to be concerned about, but it is expected and healthy. In fact, if you have done your homework as an investor and have a well diversified portfolio with a stocks/bonds ratio that matches your risk tolerance, you’ll be hard-pressed to find a market movement that justifies dramatic action.

Of course, there will always be market corrections (even the occasional crash), but as long as your portfolio is built to accurately match your investment time horizon, market values are likely to recover before the pullback is catastrophic to your retirement goals. Next time the market experiences a short-term correction, remember it isn’t anything we haven’t seen before.

Conclusion

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What is Tactical Portfolio Management?

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Re-Thinking Strategic Allocation

[By Dr. David Edward Marcinko MBA]

Dr. David E. Marcinko MBAMany successful physician investors, retirement account managers or endowment fund administrators will establish a “strategic” allocation policy that is intended to guide long-term (greater than one-year) investment decisions.

Thinking Long Term?

This strategic allocation reflects the endowment’s thinking regarding the existence of perceived fundamental shifts in the market. Most endowments will also establish a target range or band for each asset class. The day-to-day managers then have the flexibility to make tactical decisions for a given class so long as they stay within the target range.

Terms

The term “tactical” when used in the context of investment strategy refers to the investor or manager’s ability to take advantage of short-term (under one year) market anomalies such as pricing discrepancies between different sectors or across different styles.

Assessment

Historically, tactical decisions with respect to asset allocation were derided as “market timing.” However, market timing implies moving outside of the target ranges whereas tactical decision making simply addresses the opportunistic deployment of funds within the asset class target range.

So, what do you think?

Online MD investor

Conclusion

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Understanding NYSE / NASD Minimum Credit Requirements

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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:

  1. bring the equity below $ 2,000, or
  2. 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?

  1. the cost of buying back the borrowed property to cover the short sale.
  2. 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:

  1. 30% of the CMV (SRO Minimum Maintenance Requirement)
  2. $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

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.

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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

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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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Should Doctors Collect Treasures?

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On Investing in Art and Collectibles

By Rick Kahler CFP®

Rick Kahler CFPAlmost everyone has a story about a cousin or an aunt who bought a box of junk at an auction and found in it a diamond ring worth several hundred dollars. Every once in a while a valuable painting by a famous artist turns up in someone’s attic. “Antiques Roadshow” sometimes features odd items that have been sitting around in someone’s house for years and that are appraised for thousands of dollars.

This doesn’t mean buying and selling art or collectibles is a good way to make money.

Collectibles

Buying art, antiques, or collectibles is extremely speculative, in part because values are so subjective. What a given item is worth depends entirely on what a collector might be willing to pay at any given time. A piece of pottery or jewelry might fluctuate considerably in value as trends come and go. Yesterday’s hot collectible (think Beanie Babies or Jim Beam bottles) might be tomorrow’s overpriced embarrassment.

Does this mean you should never buy art or antiques in hopes that they’ll increase in value? Not necessarily. I am suggesting, though, that investment shouldn’t be the primary reason for your purchase.

If you’re going to collect Art Deco jewelry or decorate your home with original artwork, do so because you like those things. Choose a painting because you want it hanging on your wall. Buy a carving or a pot because you want it. Collect iron toys or old books because you have fun searching for them at antique stores and garage sales. If your art or collectibles increase in value, consider it a nice bonus.

If you’re hanging onto a piece of art or an antique that you don’t like because you think it’s valuable and you think of it as an investment, why keep it? You could sell it and put the proceeds into your retirement portfolio. Then your investment wouldn’t be taking up space in your house, and you wouldn’t need to worry about maintaining it or insuring it. Another option would be to use the money to buy something you would enjoy owning.

Do the Research

If you do decide to sell an item, do some serious research and try to find out what it’s really worth. Don’t just stick a price on it for a garage sale or walk into an antiques store and take whatever they offer you. Get at least two or three estimates from dealers or other qualified experts. For something that’s potentially quite valuable, paying for an appraisal might be money well spent.

Finding valuable collectibles at rummage-sale prices is almost always sheer luck. Anyone who consistently makes money buying and selling art or collectibles has invested the time and effort to become an expert. Unless you’re willing to do the same—and you would enjoy it—don’t try to fund your retirement this way.

Making Memories

In the interests of full disclosure, I should confess that not all of my own purchases turn out perfectly. One of my travel memories is of the time I bought two hand-woven carpets at bargain prices. What made the purchase memorable was the experience of stuffing the bulky rolled-up rugs into a taxi and hauling them to the airport, only to find that the baggage handlers had gone on strike.

Those carpets still decorate the floors in our house. Are they worth more than I paid for them? After all the effort it took to get them home, I certainly hope so. But I bought them because I liked them and wanted them in my home.

Assessment

But, if my primary goal had been investing, I would have put the purchase price into several well-diversified mutual funds instead.

Conclusion

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.

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

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OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

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