Why the Stock Markets CRASHED TODAY?

Feel Free to Add to the Our Growing List of Reasons!

BUT REMEMBER THAT CORRELATION IS NOT CAUSATION

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BY DR. DAVID E. MARCINKO MBA CMP®

SPONSOR: http://www.CertifiedMedicalPlanner.org

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Chart: The Worst Stock Market Crashes of the 21st Century | Statista

THE LIST GOES ON

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China’s Evergrande Project Giant Contagion Jitters

Global and International Market Meltdowns

Crypto-Currency and Gas Price Tumbles

Depressed Automobile Rentals and Used Car Prices

Lowering US Treasury Bond Yields

US Debt Ceiling Risks and Looming Federal Shutdown

Travel Bans with Mask & Vaccine Debates During the Corono-Virus Pandemic

The $3.5 Trillion Dollar Senate Bill

Politics and Potential Federal Tax Law Changes

The National Park, Pacific North-West and California Wild Fires

The Weather, Flooding, Tornadoes, Hurricanes and Tropical Storms

Southern Border Immigration Crisis

A Dearth of Micro-Chips

Quadruple Witching Friday

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CORRECTION? https://www.msn.com/en-us/money/markets/the-odds-of-a-20-correction-in-stocks-are-rising-as-the-market-transitions-to-the-next-stage-of-its-cycle-morgan-stanley-warns/ar-AAODytg

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YOUR COMMENTS ARE APPRECIATED.

Feel free to add to our list.

Is this the start of a cyclical bear market?

MORE: https://medicalexecutivepost.com/2018/12/22/stocks-and-sectors-in-bear-territory/

RELATED: https://medicalexecutivepost.com/2016/03/18/doctors-and-bull-and-bear-markets/

MORE: https://medicalexecutivepost.com/2007/11/25/of-bull-and-bear-markets/

EVERGRANDE: https://www.msn.com/en-us/money/markets/evergrande-s-debt-crisis-has-jolted-the-stock-market-here-s-why-everyone-s-suddenly-worrying-about-china-s-2nd-largest-property-developer/ar-AAODW0q

Thank You

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FOR DOCTORS ONLY: Secure an Unbiased Second Opinion

Dr. David Edward Marcinko MBA

Certified Medical Planner®

SPONSOR: http://www.CertifiedMedicalPlanner.org

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FINANCIAL PLANNING

CAREER DEVELOPMENT

MEDICAL PRACTICE BUY IN / OUT

INVESTMENT ANALYSIS

PORTFOLIO MANAGEMENT

MERGERS AND ACQUISITIONS

PRACTICE APPRAISALS AND VALUATIONS

RETIREMENT PLANNING

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CONTACT: Ann Miller RN MHA

EMAIL: MarcinkoAdvisors@msn.com

PHONE: 770-448-0769

PODCAST: What is SMART BETA?

REALLY SMART -OR- NOT REALLY

By Dr. David E. Marcinko MBA CMP®

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SPONSOR: http://www.CertifiedMedicalPlanner.org

Smart beta investment portfolios offer the benefits of passive strategies combined with some of the advantages of active ones, placing it at the intersection of efficient-market hypothesis and factor investing.

Offering a blend of active and passive styles of management, a smart beta portfolio is low cost due to the systematic nature of its core philosophy – achieving efficiency by way of tracking an underlying index (e.g., MSCI World Ex US). Combining with optimization techniques traditionally used by active managers, the strategy aims at risk/return potentials that are more attractive than a plain vanilla active or passive product.

An independent voice on smart beta

CITATION: https://www.r2library.com/Resource/Title/0826102549

Originally theorized by Harry Markowitz in his work on Modern Portfolio Theory (MPT), smart beta is a response to a question that forms the basis of MPT – how to best construct the optimally diversified portfolio. Smart beta answers this by allowing a portfolio to expand on the efficient frontier (post-cost) of active and passive. As a typical investor owns both the active and index fund, most would benefit from adding smart beta exposure to their portfolio in addition to their existing allocations.

Financial beta: https://medicalexecutivepost.com/2021/05/12/so-what-is-financial-beta-granularly/

Assessment: The smart beta approach is an arguably perfect intersection between traditional value investing and the efficient market hypothesis. But, is it worth the cost?

More: https://www.bloomberg.com/opinion/articles/2018-06-08/smart-beta-performance-isn-t-worth-the-cost

ALPHA versus BETA Podcast: https://youtu.be/dP_23vKJ3HQ

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The “Mutual” VERSUS “Stock”Company?

QUICK DEFINITIONINVESTING BASICS

MUTUAL COMPANY:  A company that has no capital stock or stockholders.  Rather, it is owned by its policy-owners and managed by a board of directors chosen by the policy-owners. 

Any earnings, in addition to those necessary for the operation of the company and contingency reserves, are returned to the policy-owners in the form of policy dividends.

See the source image

STOCK COMPANY: A joint-stock company is a business entity in which shares of the company’s stock can be bought and sold by shareholders.

Each shareholder owns company stock in proportion, evidenced by their shares (certificates of ownership). Shareholders are able to transfer their shares to others without any effects to the continued existence of the company.

CITE: https://www.r2library.com/Resource/Title/0826102549

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How We INVEST IN INFLATION?

STRATEGIES AND MITIGATION

Finding investments to weather the storm. Strategies and ways to mitigate inflation risk, including investing in businesses with pricing power, capital intensity, and investing abroad.

By Vitaliy Katsenelson CFA

COMMENTS ARE APPRECIATED.

Thank You

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PODCAST: How Modernized Self-Directed IRAs Help Democratize Retirement

In this podcast, host Dara Albright and guest, Eric Satz, Founder and CEO of Alto IRA, discuss how modern Self-Directed IRAs (SDIRAs) are democratizing retirement planning by providing all Americans with the ability to add non-correlated alternative asset classes to tax-advantaged accounts.

The single greatest – and free – investment tool is also disclosed.

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What are the Advantages of Rolling the Money of My Retirement Plan into an  IRA? - Protection Point Advisors, Inc.

Discussion highlights include:

  • How SDIRAs offer wealth building opportunities for “not-yet accredited investors”;
  • How SDIRAs have evolved to accommodate micro-sized alternative investments; 
  • Why alternative assets belong in retirement vehicles;
  • Three reasons most retirement savers are underweighted in non-correlated assets;
  • Trading cryptocurrencies without tax consequences; 
  • Why RIAs are looking to ALTO for clients’ crypto allocation;
  • How to open a cryptoIRA account.

PODCAST: https://dwealthmuse.podbean.com/e/episode-12-how-modernized-selfdirected-iras-help-democratize-retirement-1623424270/

Your comments are appreciated.

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FINANCIAL PLANNING: Strategies for Doctors and Advisors

SPONSOR: http://www.CertifiedMedicalPlanner.org

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FINANCIAL PLANNING: Strategies for Doctors and their Advisors

BY DR. DAVID E. MARCINKO MBA CMP®

SPONSOR: http://www.CertifiedMedicalPlanner.org

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REVIEWS:

Written by doctors and healthcare professionals, this textbook should be mandatory reading for all medical school students—highly recommended for both young and veteran physicians—and an eliminating factor for any financial advisor who has not read it. The book uses jargon like ‘innovative,’ ‘transformational,’ and ‘disruptive’—all rightly so! It is the type of definitive financial lifestyle planning book we often seek, but seldom find.
LeRoy Howard MA CMPTM,Candidate and Financial Advisor, Fayetteville, North Carolina

I taught diagnostic radiology for over a decade. The physician-focused niche information, balanced perspectives, and insider industry transparency in this book may help save your financial life.
Dr. William P. Scherer MS, Barry University, Ft. Lauderdale, Florida

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

In today’s healthcare environment, in order for providers to survive, they need to understand their current and future market trends, finances, operations, and impact of federal and state regulations. As a healthcare consulting professional for over 30 years supporting both the private and public sector, I recommend that providers understand and utilize the wealth of knowledge that is being conveyed in these chapters. Without this guidance providers will have a hard time navigating the supporting system which may impact their future revenue stream. I strongly endorse the contents of this book.
—Carol S. Miller BSN MBA PMP,President, Miller Consulting Group, ACT IAC Executive Committee Vice-Chair at-Large, HIMSS NCA Board Member

This is an excellent book on financial planning for physicians and health professionals. It is all inclusive yet very easy to read with much valuable information. And, I have been expanding my business knowledge with all of Dr. Marcinko’s prior books. I highly recommend this one, too. It is a fine educational tool for all doctors.
—Dr. David B. Lumsden MD MS MA,Orthopedic Surgeon, Baltimore, Maryland

There is no other comprehensive book like it to help doctors, nurses, and other medical providers accumulate and preserve the wealth that their years of education and hard work have earned them.
—Dr. Jason Dyken MD MBA,Dyken Wealth Strategies, Gulf Shores, Alabama

I plan to give a copy of this book written
by doctors and for doctors’ to all my prospects, physician, and nurse clients. It may be the definitive text on this important topic.
—Alexander Naruska CPA,Orlando, Florida

Health professionals are small business owners who need to apply their self-discipline tactics in establishing and operating successful practices. Talented trainees are leaving the medical profession because they fail to balance the cost of attendance against a realistic business and financial plan. Principles like budgeting, saving, and living below one’s means, in order to make future investments for future growth, asset protection, and retirement possible are often lacking. This textbook guides the medical professional in his/her financial planning life journey from start to finish. It ranks a place in all medical school libraries and on each of our bookshelves.
—Dr. Thomas M. DeLauro DPM,Professor and Chairman – Division of Medical Sciences, New York College of Podiatric Medicine

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

I worked with a Certified Medical Planner™ on several occasions in the past, and will do so again in the future. This book codified the vast body of knowledge that helped in all facets of my financial life and professional medical practice.
Dr. James E. Williams DABPS, Foot and Ankle Surgeon, Conyers, Georgia

This is a constantly changing field for rules, regulations, taxes, insurance, compliance, and investments. This book assists readers, and their financial advisors, in keeping up with what’s going on in the healthcare field that all doctors need to know.
Patricia Raskob CFP® EA ATA, Raskob Kambourian Financial Advisors, Tucson, Arizona

I particularly enjoyed reading the specific examples in this book which pointed out the perils of risk … something with which I am too familiar and have learned (the hard way) to avoid like the Black Death. It is a pleasure to come across this kind of wisdom, in print, that other colleagues may learn before it’s too late— many, many years down the road.
Dr. Robert S. Park MD, Robert Park and Associates Insurance, Seattle, Washington

Although this book targets physicians, I was pleased to see that it also addressed the financial planning and employment benefit needs of nurses; physical, respiratory, and occupational therapists; CRNAs, hospitalists, and other members of the health care team….highly readable, practical, and understandable.
Nurse Cecelia T. Perez RN, Hospital Operating Room Manager, Ellicott City, Maryland

Personal financial success in the PP-ACA era will be more difficult to achieve than ever before. It requires the next generation of doctors to rethink frugality, delay gratification, and redefine the very definition of success and work–life balance. And, they will surely need the subject matter medical specificity and new-wave professional guidance offered in this book. This book is a ‘must-read’ for all health care professionals, and their financial advisors, who wish to take an active role in creating a new subset of informed and pioneering professionals known as Certified Medical Planners™.
—Dr. Mark D. Dollard FACFAS, Private Practice, Tyson Corner, Virginia

As healthcare professionals, it is our Hippocratic duty to avoid preventable harm by paying attention. On the other hand, some of us are guilty of being reckless with our own financial health—delaying serious consideration of investments, taxation, retirement income, estate planning, and inheritances until the worry keeps one awake at night. So, if you have avoided planning for the future for far too long, perhaps it is time to take that first step toward preparedness. This in-depth textbook is an excellent starting point—not only because of its readability, but because of his team’s expertise and thoroughness in addressing the intricacies of modern investments—and from the point of view of not only gifted financial experts, but as healthcare providers, as well … a rare combination.
Dr. Darrell K. Pruitt DDS, Private Practice Dentist, Fort Worth, Texas

This text should be on the bookshelf of all contemporary physicians. The book is physician-focused with unique topics applicable to all medical professionals. But, it also offers helpful insights into the new tax and estate laws, fiduciary accountability for advisors and insurance agents, with investing, asset protection and risk management, and retirement planning strategies with updates for the brave new world of global payments of the Patient Protection and Affordable Care Act. Starting out by encouraging readers to examine their personal ‘money blueprint’ beliefs and habits, the book is divided into four sections offering holistic life cycle financial information and economic education directed to new, mid-career, and mature physicians.

This structure permits one to dip into the book based on personal need to find relief, rather than to overwhelm. Given the complexity of modern domestic healthcare, and the daunting challenges faced by physicians who try to stay abreast of clinical medicine and the ever-evolving laws of personal finance, this textbook could not have come at a better time.
—Dr. Philippa Kennealy MD MPH, The Entrepreneurial MD, Los Angeles, California

Physicians have economic concerns unmatched by any other profession, arriving ten years late to the start of their earning years. This textbook goes to the core of how to level the playing field quickly, and efficaciously, by a new breed of dedicated Certified Medical Planners™. With physician-focused financial advice, each chapter is a building block to your financial fortress.
Thomas McKeon, MBA, Pharmaceutical Representative, Philadelphia, Pennsylvania

An excellent resource … this textbook is written in a manner that provides physician practice owners with a comprehensive guide to financial planning and related topics for their professional practice in a way that is easily comprehended. The style in which it breaks down the intricacies of the current physician practice landscape makes it a ‘must-read’ for those physicians (and their advisors) practicing in the volatile era of healthcare reform.
—Robert James Cimasi, MHA ASA FRICS MCBA CVA CM&AA CMP™, CEO-Health Capital Consultants, LLC, St. Louis, Missouri

Rarely can one find a full compendium of information within a single source or text, but this book communicates the new financial realities we are forced to confront; it is full of opportunities for minimizing tax liability and maximizing income potential. We’re recommending it to all our medical practice management clients across the entire healthcare spectrum.
Alan Guinn, The Guinn Consultancy Group, Inc., Cookeville, Tennessee

Dr. David Edward Marcinko MBA CMP™ and his team take a seemingly endless stream of disparate concepts and integrate them into a simple, straightforward, and understandable path to success. And, he codifies them all into a step-by-step algorithm to more efficient investing, risk management, taxation, and enhanced retirement planning for doctors and nurses. His text is a vital read—and must execute—book for all healthcare professionals and physician-focused financial advisors.
Dr. O. Kent Mercado, JD, Private Practitioner and Attorney, Naperville, Illinois

Kudos. The editors and contributing authors have compiled the most comprehensive reference book for the medical community that has ever been attempted. As you review the chapters of interest and hone in on the most important concerns you may have, realize that the best minds have been harvested for you to plan well… Live well.
Martha J. Schilling; AAMS® CRPC® ETSC CSA, Shilling Group Advisors, LLC, Philadelphia, Pennsylvania

I recommend this book to any physician or medical professional that desires an honest no-sales approach to understanding the financial planning and investing world. It is worthwhile to any financial advisor interested in this space, as well.
David K. Luke, MIM MS-PFP CMP™, Net Worth Advisory Group, Sandy, Utah

Although not a substitute for a formal business education, this book will help physicians navigate effectively through the hurdles of day-to-day financial decisions with the help of an accountant, financial and legal advisor. I highly recommend it and commend Dr. Marcinko and the Institute of Medical Business Advisors, Inc. on a job well done.
Ken Yeung MBA CMP™, Tseung Kwan O Hospital, Hong Kong

I’ve seen many ghost-written handbooks, paperbacks, and vanity-published manuals on this topic throughout my career in mental healthcare. Most were poorly written, opinionated, and cheaply produced self-aggrandizing marketing drivel for those agents selling commission-based financial products and expensive advisory services. So, I was pleasantly surprised with this comprehensive peer-reviewed academic textbook, complete with citations, case examples, and real-life integrated strategies by and for medical professionals. Although a bit late for my career, I recommend it highly to all my younger colleagues … It’s credibility and specificity stand alone.
Dr. Clarice Montgomery PhD MA,Retired Clinical Psychologist

In an industry known for one-size-fits-all templates and massively customized books, products, advice, and services, the extreme healthcare specificity of this text is both refreshing and comprehensive.
Dr. James Joseph Bartley, Columbus, Georgia

My brother was my office administrator and accountant. We both feel this is the most comprehensive textbook available on financial planning for healthcare providers.
Dr. Anthony Robert Naruska DC,Winter Park, Florida

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FINANCIAL PLANNING: Strategies for Physicians and their Advisors

A Textbook Review

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STOCKS: A Very Skewed Market “Boom”

PRICES CHANGES FOR THE LAST SEVEN YEARS

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ON THE ROAD AGAIN: Public Speaking, Opining and Assigning

Dr. David Edward Marcinko is Speaking Up

Dr. David Edward Marcinko MBA CMP® 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.

His talks tend to be engaging, iconoclastic, and humorous. His most popular presentations include a diverse variety of topics and typically include those in all iMBA, Inc’s textbooks, handbooks, white-papers and most topics covered on this blog.

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Recognizing the Differences between Healthcare and Other ...

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MarcinkoAdvisors@msn.com

Ph: 770-448-0769

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40 Years – MICROSOFT Corp.

Microsoft's biggest moments throughout the years in a chart

https://images.routledge.com/common/jackets/amazon/978148224/9781482240283.jpg

ASSESSMENT: Your thoughts are appreciated.

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ME-P Speaking Invitations

Dr. David E. Marcinko is at your Service

thumbnail_IMG_1663.edit1

Dr. David Edward Marcinko MBA CMP® 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.

His talks tend to be engaging, iconoclastic, and humorous. His most popular presentations include a diverse variety of topics and typically include those in all iMBA, Inc’s textbooks, handbooks, white-papers and most topics covered on this blog.

CONTACT: Ann Miller RN MHA

MarcinkoAdvisors@msn.com

Ph: 770-448-0769

Abbreviated Topic List: https://healthcarefinancials.files.wordpress.com/2009/02/imba-inc-firm-services.pdf

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PODCAST: What is the “Diluted” Stock Effect?

WHAT IT IS – HOW IT WORKS

BY DR. DAVID E. MARCINKO MBA CMP®

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SPONSOR: http://www.CertifiedMedicalPlanner.org

The lowering of the book or market value of the shares of a company’s stock as a result of more shares outstanding. A company’s initial registration may include more shares than are initially issued when the company goes public for the first time.

Later, an issue of more stock by a company (called a “primary offering,” distinguished from the “initial public offering”) dilutes the existing shares outstanding. 

Also, earnings-per-share calculations are said to be “fully diluted” when all common stock equivalents (convertible securities, rights, and warrants) are included. “Fully diluted” numbers are used in analysis when there is a likelihood of conversion or exercise of rights and warrants.

CITE: https://www.r2library.com/Resource/Title/0826102549

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How does dilution affect my shares? | Startupxplore Blog

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PODCAST: https://duckduckgo.com/?q=Dilutive%22+Stock&t=newext&atb=v275-2&iax=videos&ia=videos&iai=https%3A%2F%2Fwww.youtube.com%2Fwatch%3Fv%3DtjQzJ7GY0GY

ASSESSMENT: Your thoughts are appreciated.

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

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Modern Portfolio Theory and Asset Allocation [Not Correlation]

THE CORRELATION HOT TOPIC

ACADEMIC C.V. | DAVID EDWARD MARCINKO

By Dr. David Edward Marcinko MBA CMP©

SPONSOR: http://www.CertifiedMedicalPlanner.org

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Modern Portfolio Theory approaches investing by examining the complete market and the full economy. MPT places a great emphasis on the correlation between investments. 

DEFINITION:

Correlation is a measure of how frequently one event tends to happen when another event happens. High positive correlation means two events usually happen together – high SAT scores and getting through college for instance. High negative correlation means two events tend not to happen together – high SATs and a poor grade record.

No correlation means the two events are independent of one another. In statistical terms two events that are perfectly correlated have a “correlation coefficient” of 1; two events that are perfectly negatively correlated have a correlation coefficient of -1; and two events that have zero correlation have a coefficient of 0.

Correlation has been used over the past twenty years by institutions and financial advisors to assemble portfolios of moderate risk.  In calculating correlation, a statistician would examine the possibility of two events happening together, namely:

  • If the probability of A happening is 1/X;
  • And the probability of B happening is 1/Y; then
  • The probability of A and B happening together is (1/X) times (1/Y), or 1/(X times Y).

There are several laws of correlation including;

  1. Combining assets with a perfect positive correlation offers no reduction in portfolio risk.  These two assets will simply move in tandem with each other.
  2. Combining assets with zero correlation (statistically independent) reduces the risk of the portfolio.  If more assets with uncorrelated returns are added to the portfolio, significant risk reduction can be achieved.
  3. Combing assets with a perfect negative correlation could eliminate risk entirely.   This is the principle with “hedging strategies”.  These strategies are discussed later in the book.

Citation: https://www.r2library.com/Resource/Title/0826102549

BUT – CORRELATION IS NOT CAUSATION

https://medicalexecutivepost.com/2021/02/05/correlation-is-not-causation/

In the real world, negative correlations are very rare 

Most assets maintain a positive correlation with each other.  The goal of a prudent investor is to assemble a portfolio that contains uncorrelated assets.  When a portfolio contains assets that possess low correlations, the upward movement of one asset class will help offset the downward movement of another.  This is especially important when economic and market conditions change.

As a result, including assets in your portfolio that are not highly correlated will reduce the overall volatility (as measured by standard deviation) and may also increase long-term investment returns. This is the primary argument for including dissimilar asset classes in your portfolio. Keep in mind that this type of diversification does not guarantee you will avoid a loss.  It simply minimizes the chance of loss. 

In the table provided by Ibbotson, the average correlation between the five major asset classes is displayed. The lowest correlation is between the U.S. Treasury Bonds and the EAFE (international stocks).  The highest correlation is between the S&P 500 and the EAFE; 0.77 or 77 percent. This signifies a prominent level of correlation that has grown even larger during this decade.   Low correlations within the table appear most with U.S. Treasury Bills.

Historical Correlation of Asset Classes

Benchmark                             1          2          3         4         5         6            

1 U.S. Treasury Bill                  1.00    

2 U.S. Bonds                          0.73     1.00    

3 S&P 500                               0.03     0.34     1.00    

4 Commodities                         0.15     0.04     0.08      1.00      

5 International Stocks              -0.13    -0.31    0.77      0.14    1.00       

6 Real Estate                           0.11      0.43    0.81     -0.02    0.66     1.00

Table Source: Ibbotson 1980-2012

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

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THE ANATOMIC BASIS OF HUMAN PHYSIOLOGY AND BEHAVIOR?

BRAIN ANATOMY

By Dr. David Edward Marcinko MBA CMP©

SPONSOR: http://www.CertifiedMedicalPlanner.org

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I am not a neurologist, psychologist, or psychiatrist. But, it is well known that emotional and behavioral change involves the human nervous system. And, there are two parts of the nervous system that are especially significant for holistic financial advisor; the first is the limbic system and the second is the autonomic nervous system. 

According to Dr. C. George Boerre of Shippensburg University of Pennsylvania, this is known as the emotional nervous system.

1. The Limbic System

The limbic system is a set of structures that lies on both sides of the thalamus, just under the cerebrum.  It includes the hypothalamus, the hippocampus, the amygdala, and nearby areas.  It is primarily responsible for emotions, memories and recollection. 

Hypothalamus

The small hypothalamus is located just below the thalamus on both sides of the third ventricle (areas within the cerebrum filled with cerebrospinal fluid that connect to spinal fluid). It sits inside both tracts of the optic nerve, and just above the pituitary gland.

The hypothalamus is mainly concerned with homeostasis or the process of returning to some “set point.”  It works like a thermostat:  When the room gets too cold, the thermostat conveys that information to the furnace and turns it on.  As the room warms up and the temperature rises, it sends turns off the furnace.  The hypothalamus is responsible for regulating hunger, thirst, response to pain, levels of pleasure, sexual satisfaction, anger and aggressive behavior, and more.  It also regulates the functioning of the autonomic nervous system, which means it regulates functions like pulse, blood pressure, breathing, and arousal in response to emotional circumstances. In a recent discovery, the protein leptin is released by fat cells with over-eating.  The hypothalamus senses leptin levels in the bloodstream and responds by decreasing appetite.  So, it seems that some people might have a gene mutation which produces leptin, and can’t tell the hypothalamus that it is satiated.   The hypothalamus sends instructions to the rest of the body in two ways.  The first is to the autonomic nervous system.  This allows the hypothalamus to have ultimate control of things like blood pressure, heart rate, breathing, digestion, sweating, and all the sympathetic and parasympathetic functions.

The second way the hypothalamus controls things is via the pituitary gland.  It is neurally and chemically connected to the pituitary, which in turn pumps hormones called releasing factors into the bloodstream.  The pituitary is the so-called “master gland” as these hormones are vitally important in regulating growth and metabolism.

Hippocampus

The hippocampus consists of two “horns” that curve back from the amygdala.  It is important in converting things “in your mind” at the moment (short-term memory) into things that are remembered for the long run (long-term memory).  If the hippocampus is damaged, a patient cannot build new memories and lives in a strange world where everything they experience just fades away; even while older memories from the time before the damage are untouched!  Most patients who suffer from this kind of brain damage are eventually institutionalized.

Amygdala

The amygdalas are two almond-shaped masses of neurons on either side of the thalamus at the lower end of the hippocampus.  When it is stimulated electrically, animals respond with aggression.  And, if the amygdala is removed, animals get very tame and no longer respond to anger that would have caused rage before.  The animals also become indifferent to stimuli that would have otherwise have caused fear and sexual responses.

Related Anatomic Areas

Besides the hypothalamus, hippocampus, and amygdala, there are other areas in the structures near to the limbic system that are intimately connected to it:

  • The cingulate gyrus is the part of the cerebrum that lies closest to the limbic system, just above the corpus collosum.  It provides a pathway from the thalamus to the hippocampus, is responsible for focusing attention on emotionally significant events, and for associating memories to smells and to pain.
  • The ventral tegmental area of the brain stem (just below the thalamus) consists of dopamine pathways responsible for pleasure.  People with damage here tend to have difficulty getting pleasure in life, and often turn to alcohol, drugs, sweets, and gambling.
  • The basal ganglia (including the caudate nucleus, the putamen, the globus pallidus, and the substantia nigra) lie over to the sides of the limbic system, and are connected with the cortex above them.  They are responsible for repetitive behaviors, reward experiences, and focusing attention. 
  • The prefrontal cortex, which is the part of the frontal lobe which lies in front of the motor area, is also closely linked to the limbic system.  Besides apparently being involved in thinking about the future, making plans, and taking action, it also appears to be involved in the same dopamine pathways as the ventral tegmental area, and plays a part in pleasure and addiction.

https://wallpapercave.com/wp/wp3011600.jpg

2. The Autonomic Nervous System

The second part of the nervous system to have a particularly powerful part to play in our emotional life is the autonomic nervous system. 

The autonomic nervous system is composed of two parts, which function primarily in opposition to each other.  The first is the sympathetic nervous system, which starts in the spinal cord and travels to a variety of areas of the body.  Its function appears to be preparing the body for the kinds of vigorous activities associated with “fight or flight,” that is, with running from danger or with preparing for violence.  Activation of the sympathetic nervous system has the following effects:

  • dilates the pupils and opens the eyelids,
  • stimulates the sweat glands and dilates the blood vessels in large muscles,
  • constricts the blood vessels in the rest of the body,
  • increases the heart rate and opens up the bronchial tubes of the lungs, and
  • inhibits the secretions in the digestive system.

One of its most important effects is causing the adrenal glands (which sit on top of the kidneys) to release epinephrine (adrenalin) into the blood stream.  Epinephrine is a powerful hormone that causes various parts of the body to respond in much the same way as the sympathetic nervous system.  Being in the blood stream, it takes a bit longer to stop its effects, and may take some time to calm down again

The sympathetic nervous system also takes in information, mostly concerning pain from internal organs.  Because the nerves that carry information about organ pain often travel along the same paths that carry information about pain from more surface areas of the body, the information sometimes get confused.  This is called referred pain, and the best known example is the pain in the left shoulder and arm when having a heart attack.

The other part of the autonomic nervous system is called the parasympathetic nervoussystem.  It has its roots in the brainstem and in the spinal cord of the lower back.  Its function is to bring the body back from the emergency status that the sympathetic nervous system puts it into.

Some of the details of parasympathetic arousal include some of the following:.

  • pupil constriction and activation of the salivary glands,
  • stimulating the secretions of the stomach and activity of the intestines,
  • stimulating secretions in the lungs and constricting the bronchial tubes, and;
  • decreases heart rate.

The parasympathetic nervous system also has some sensory abilities:  It receives information about blood pressure, levels of carbon dioxide in the blood, etc.

There is actually another part of the autonomic nervous system that is not mentioned too often: the enteric nervous system.  It is a complex of nerves that regulate the activity of the stomach. 

For example, if you get sick to your stomach with a new financial advisory client – or feel nervous butterflies with your first patient encounter as a doctor- you can blame the enteric nervous system.

ASSESSMENT: Your thoughts are appreciated.

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So – What is Financial ALPHA, in Detail?

The measure of a stock’s expected return

By Dr. David Edward Marcinko MBA CMP®

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SPONSOR: http://www.CertifiedMedicalPlanner.org

May 12, 2021

Markets DOW 33,587.66 ▼ -681.50 NASDAQ 13,031.68 ▼ -357.75 S&P 500 4,062.90 ▼ -89.20 Crude Oil 65.85 ▲ +0.57

Alpha:  The measure of the amount of a stock’s expected return that is not related to the stock’s sensitivity to market volatility. It measures the residual non-market influences that contribute to a securities risk unique to each security.

Alpha uses beta as a measure of risk, a benchmark and a risk free rate of return (usually T-bills) to compare actual performance with expected performance.

CITATION: https://www.r2library.com/Resource/Title/0826102549

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For example, a fund with a beta of .80 in a market that rises 10% is expected to rise 8%. If the risk-free return is 3%, the alpha would be –.6%, calculated as follows:

(Fund return – Risk-free return) – (Beta x Excess return) = Alpha   

(8% – 3%) – [.8 × (10% – 3%)]           = – .6%           

A positive alpha indicates out performance while a negative alpha means under-performance.

ENDOWMENT ALPHA: https://medicalexecutivepost.com/2010/07/28/managing-for-endowment-portfolio-alpha/

QUEST FOR ALPHA: https://medicalexecutivepost.com/2011/10/31/%e2%80%9cthe-quest-for-alpha%e2%80%9d/

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My Investing “Sell” Principle

The Renaissance of Pipelines

Vitaliy N. Katsenelson, CFA - YouTube

By Vitaliy N. Katsenelson, CFA

A client recently asked me whether there is a difference in our sell discipline between high and low growth companies.

Selling is one of the hardest parts of investing. I wrote a lot on the subject in the past, but let’s zoom in on how our selling practice differs between high-growth companies with long runways for compounding and slow-growth companies.

LINK: https://contrarianedge.com/our-sell-discipline/

AUDIO: https://investor.fm/the-renaissance-of-pipelines-and-our-sell-discipline-ep-113

Your thoughts are appreciated.

EDITOR’S NOTE: It has been a few years since I spoke with my colleague Vitaliy. But, I read his newsletters and blog regularly and suggest all ME-P readers do the same.

Dr. David E. Marcinko; MBA

[Editor-in-Chief]

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How Stock Markets Operate?

Markets 101: How to Read Stock Indexes and Securities

By Alex Hickey of Morning Brew

Everything you need to know about the 3 top U.S. equities indexes plus gold, oil, and Treasury notes

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LINK:

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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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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.

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TEXTS FOR PHYSICIANS AND ADVISORS

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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.

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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

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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™

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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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.

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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.

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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/

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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

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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

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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

***

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.

1447968781847

[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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idea

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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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[Dr. Cappiello PhD MBA] *** [Foreword Dr. Krieger MD MBA]

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The “Perfect” Holiday Gift for your Favorite Doctor – YES REALLY!

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Now, is the perfect time of year to consider one, or all, of these texts as the perfect holiday gift for your favorite doctor, or allied health care professional.

Also, may be used as a client-prospecting tool for Financial Advisors, Wealth and Practice Managers, and CPAs, etc.

Smile, learn and prosper with iMBA in 2016.

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Last Generation Holiday Gift for MDs

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

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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

198174

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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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

***

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.

***

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.

***

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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value

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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.

***

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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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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investmentcenter5

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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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By Arthur Chalekian GEPC

[Financial Consultant]

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They’re investors. They’re allowed to change their minds.
*** 
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.
***
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!
                                            ***
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.
***
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.
***
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.
***
“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.”
***
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.
***
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.
***
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.
***
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:
***
“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.”
***
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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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)

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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]

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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.

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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.

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silhouettes chart

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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:

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

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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]

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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.

***

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

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