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A Value Investing Metaphor for Doctors

Posted on January 14, 2013 by Dr. David Edward Marcinko MBA MEd CMP™

Via a Cats and Dogs Allegory

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

“I’d really like a Maine Coon cat, but they cost around $800. I’m not going to pay that much for a cat.”

The man who said this paid $500 for his purebred Lab. Obviously, he’s willing to spend money on things he enjoys, like hunting dogs. Yet when it comes to paying cold hard cash for a cat, he draws the line.

So, apparently, do a lot of other people. I have quite a few clients who are happy to spend hundreds of dollars for a particular breed of dog. I don’t know of a single client who has ever spent that much for a particular breed of cat.

Utility

Except my wife. Marcia has just begun breeding and selling Balinese cats, worth $1,000 each. She asked me why people are so much more willing to write checks for purebred dogs than they are for cats.

She didn’t buy my argument that dogs are inherently more intelligent, friendly, and worthwhile than cats.

If that isn’t the explanation, what is? Maybe it’s because the basic reason people buy purebred dogs or cats is to get specific looks and personality traits. Most dog breeds are quite distinct; anyone can tell a Great Dane from a Bichon Frise. Yet the only cat many people even recognize as a separate breed is probably the Siamese.

Maybe dogs are seen as more useful. I don’t know of any hunting cats, Seeing Eye cats, or watch cats. Still, that doesn’t explain all those Chihuahuas and tiny terriers that sell for hundreds of bucks a pound.

Value?

The point here is that whether a given commodity is seen as valuable depends on a variety of factors. Utility is one. In early Deadwood, Dakota Territory, an enterprising freighter brought in a load of cats and sold them at a premium to pioneers desperate for mouse and rat control. In that case, cats were more valuable than dogs.

Supply and Demand Economics

Supply and demand is another factor. A house that’s worth $150,000 in Box Elder, South Dakota, might be worth $600,000 in San Francisco, where unarguably more people would like to live. When there’s an over-abundance of cheap goods in the form of unwanted kittens flooding the market, people may be less likely to pay real cash for even purebred cats.

Commodity

Another reason people value one commodity over another is that they have been persuaded to see it as worth more. In Biblical times, frankincense and myrrh were highly prized and worth their weight in gold. Today, one pound of frankincense and myrrh goes for $13.95 on Amazon, while one pound of gold sells for around $24,000.

###

Gold

Fifteen times more gold is mined each year than platinum, the rarest of all precious metals, yet gold sells for more per ounce. Why? Gold has a long history of being perceived as the world’s most precious metal.

Designer Clothes

For much the same reason, people will pay a hundred bucks or more for a pair of designer blue jeans when they could get essentially the same thing for $19.99 at a discount store. The brand name jeans are seen as more valuable.

Marketing and Perceived Value

The simple reason for this is marketing.

When it comes to perceived value, dogs have benefitted from better marketing than cats. Just think of heroic military dogs, hard-working Seeing Eye dogs, and screen stars like Lassie rescuing people from burning buildings. Even the Taco Bell Chihuahua gets to advertise fast food. Cats get to advertise kitty litter and cat food.

Assessment

Cats just need to find a better advertising agency. They have some work to do if they want to come up with a slogan to top “Man’s Best Friend.”

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

Filed under: Alternative Investments, Investing | Tagged: A Value Investing Metaphor, commodities, Commodity Futures Trading Commission, gold, rick kahler | 1 Comment »

Another Property-Casualty Insurance Claims Experience

Posted on December 11, 2012 by Dr. David Edward Marcinko MBA MEd CMP™

A Personal Scenario

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

Hurricane Sandy attacked the East Coast, did her worst, and disappeared. Yet cleaning up the mess she left behind will take months and even years. And, even dealing with damage from much smaller disasters can take a long time.

As an example, in July 2011 a severe storm with baseball-sized hail moved through southern Rapid City. It only took nature a few minutes to flatten gardens, beat up vehicles, and damage buildings. It will probably take until the second anniversary of the storm to repair all the damage to our house.

Such a delay isn’t unusual. The most common reasons are finding a contractor and negotiating with your insurance company.

Reporting Claims

Moving quickly to report a claim after a disaster is important. In fact, you should probably call a contractor even before you call your insurance agent. Insurance companies are fast to respond to disasters and easily move adjusters in from other areas. Local, credible contractors, on the other hand, fill their schedules fast. We spent hours on the phone to get bids from beleaguered roofers, painters, and carpenters.

These bids were worth our time, because they showed us that the initial repair estimates from our insurance company were low—usually by 50% to 66%.

For example, our roof had cedar shake shingles. The company’s replacement estimate was for much cheaper asphalt shingles. Estimates to repair our siding and deck were also low. It took us 15 months to come to an agreement on the cost of replacing the deck. The work probably won’t be done until summer of 2013.

Switching Companies?

Does this difficulty in getting a full settlement mean it’s time to switch insurance companies? Certainly, I thought so more than once during the negotiating process. However, that isn’t necessarily the case. It’s important to remember that getting compensation from an insurance company is just business. And good business means not necessarily accepting the first offer. Negotiating will take time and effort, but it eventually should get you full compensation.

When you file a claim, you and your insurance company have competing interests. The company is not your advocate. You want as much money as possible from them for repairs, while they want to repair your damage for the lowest cost. There’s nothing out of place with either motivation.

Once I understood that the insurance company and I were natural adversaries, not friends, it helped me feel less victimized and more empowered. While getting the money we needed to make the repairs certainly took time and perseverance, the company readily acquiesced when we presented the facts. After all, their best interest also included keeping us as customers. We did not have to threaten a lawsuit or go to court.

Certainly, when it’s time to renew my home insurance I will ask my agent to investigate other companies. That’s just business. However, I won’t change companies just because I had to argue with this one.

The [Doctor’s] Claimant Role

Understanding your role in negotiating an insurance claim helps bring a healthy perspective to your relationship with any service provider. Unless they are a fiduciary to you (like an attorney, a doctor, or a fee-only financial planner), they have no responsibility to look out for you. Someone selling you something has no duty to put your interests before theirs. Protecting your interests is your duty and yours alone.

Assessment

When a natural disaster strikes, whether it’s a hail storm or a hurricane, we are certainly victims of nature’s whims. When it’s time to clean up the mess, though, we’re not victims. We’re our own advocates, with the responsibility and ability to look out for our own best interests.

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

Physician Advisors: www.CertifiedMedicalPlanner.org

Filed under: Insurance Matters | Tagged: Allstate, home owner's insurance, Hurricane Sandy, p&c insurance, property casualty insurance, rick kahler | 2 Comments »

What the Presidential Election Means to [Physician] Investors

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

Understanding the Fiscal Cliff

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

Whether you’re pleased or disappointed with the outcome of the Presidential election, the question to ask now is, “What does this mean to me?” It’s an especially important question if you own a business, are a medical professional, or are investing for retirement.

Wealth Implications Not Good

If you have wealth, the implications are not good. Keeping the current tax code would take some type of lame duck session compromise in Congress, which Speaker Boehner has said is improbable. It’s wise to expect a reversion to the old tax code on January 1, 2013, which means higher taxes on income, capital gains, and dividends.

Tax Code

Even if Congress revises the tax code, the changes will probably not include lowering taxes for “the rich.” This is the first Presidential election I remember where both candidates promised not to taxes on “the rich,” defined by the current administration as individuals with an adjusted gross income of over $200,000 and couples with $250,000.

Small Businesses [Medical Practices]

If you are a small business person, like a doctor with a private practice, with retained earnings held in a C corporation, you need to move now to take dividends in 2012 and pay the 15% tax. Waiting until next year may mean you pay up to triple that amount, based on comments made by the President. You also need to consider accelerating profit-taking into 2012 to take advantage of the 15% capital gains rate that is sure to increase in 2013 and will possibly double. The large market drop right after Election Day was probably a result of investors harvesting gains.

A Sea Change Regarding Wealth

The fact that a sitting President overcame so many negative economic issues to win reelection is almost unprecedented. It’s a sign of a fundamental change in this country. There is a growing disdain for people who have wealth and a notion that they “owe” society for their success. If you have wealth, you don’t want to appear as if you do. Now is a good time to get serious about good asset protection planning to provide a firewall against those who feel they deserve your wealth more than you.

More Regulations

We can also expect the President and Congress to continue on the path of creating more regulations for all business owners. Not only does this make it harder for those wanting to pursue the old American dream of starting new businesses, it will drive up costs on everything while it drives productivity down.

More regulations will affect your pocketbook in many ways.

For example, while investors and their independent financial advisors need a healthier, more business-friendly regulatory environment, they are not going to get it anytime soon. One study suggests that proposed legislation aimed at independent advisors would raise our costs over $50,000 a year to comply with a plethora of new regulations. Some of those restrictions would even make it illegal for me to publish a blog.

Investing Fundamentals

When it comes to investments, it’s time to rely on the fundamentals we’ve preached forever: you must be globally diversified in many asset classes. You do not want a majority of your assets to be invested disproportionately in any one country, including the US. If more than half of your assets are in US securities, you need to consider better diversification sooner rather than later.

Assessment

This election made it very clear that our movement toward a more government controlled economy will not abate anytime soon. Rather than bemoaning this new economic climate, free-market proponents and capitalists will be wiser to focus on working within it. This includes taking appropriate action to protect themselves, their families, and their investments.

As always, wise physician investors will avoid knee-jerk responses to political and economic shifts, remembering to focus on the long term.

Conclusion

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Physician Advisors: www.CertifiedMedicalPlanner.org

Filed under: Investing | Tagged: Fiscal Cliff, rick kahler, Speaker Boehner | 2 Comments »

Understanding the Domestic Unemployment Numbers

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

How Can Unemployment Be Going Down?

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

In an economy that isn’t exactly robust, how can unemployment be going down? The recent drop in the unemployment rate from 8.1% to 7.8% caught almost everyone, including me, by surprise. The GDP grew by only 1.5% in the first quarter, and its growth was under 2% for the last 12 years. To get the economy moving again we will need growth of 3% a year.

It isn’t surprising that many pundits were questioning the timing within minutes after the latest unemployment numbers were announced. After all, unemployment is one of the major issues in the Presidential election. Former General Electric CEO Jack Welch and several Fox News commentators even suggested the administration was cooking the books.

The BLS

I don’t believe the Bureau of Labor Statistics is manipulating unemployment data. The process of computing the data is straightforward and transparent. Two surveys go into projecting the unemployment rate, one covering 400,000 businesses and the other questioning 60,000 households. The surveys ask about the number of full-time and part-time employees, whether the part-time employees really want full-time employment, and whether those without a job have looked for a job within the last month.

Cooked Books?

But that doesn’t mean the books aren’t cooked. They are.

“The way the government derives the unemployment numbers has changed significantly over the last 30 years,” writes John Mauldin, editor of the economic newsletter Thoughts from the Frontline, in the October 8, 2012, issue. “Whatever administration is involved, the new equations for determining unemployment result in a lower unemployment rate than they would have if the 1980’s methodology were still in place.”

The Changes

One of the more bizarre changes in the unemployment rate calculation is that people are not considered unemployed unless they have looked for a job in the last 30 days, even if they currently receive unemployment benefits. Mauldin says there are probably many people who haven’t looked for a job in the last 30 days and that most, if not all, of them would consider themselves unemployed. “If you’re not disabled and you’re receiving unemployment or welfare benefits I think you should be counted as unemployed,” he says. He estimates our actual unemployment rate is well over 12%, which doesn’t take into account the 50% of college graduates who are underemployed.

Don’t Blame Obama

Before you blame the Obama administration for the dumbing down of the unemployment rate, this is the same way the Bush administration calculated unemployment.

It’s the same story with the Consumer Price Index, which the government has continually tweaked to give the illusion of a lower CPI than if the 1980’s formula was used.

ShadowStats.com, run by John Williams, calculates the current unemployment and inflation rates using the formulas from the 1980’s. According to that methodology, Williams calculates the unemployment rate (U-6) is 15% and the CPI is 9%.

Regaining Jobs?

The economy has currently regained about half of the jobs lost in the Great Recession of 2008-2009. According to the Liscio Report, it will take another 40 months to reach the level of employment we had prior to the recession. That is if we don’t have another recession, which is doubtful. If all the tax increases slated for January 1 go into effect, the Congressional Budget Office says GDP will shrink 2.9%, which guarantees a recession.

Assessment

So, what was behind the fall in the unemployment rate this month? According to Mauldin, the entire drop came from an increase in part-time workers. He says, “That such significant numbers of people can only find part-time work is not a sign of a strong and growing economy.”

When we look a little deeper, maybe the latest unemployment numbers aren’t such a surprise after all.

Conclusion

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

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

Filed under: Career Development, Funding Basics | Tagged: Bureau of Labor Statistics, CBO, Consumer Price Index, CPA, Domestic Unemployment Numbers, GDP, John Mauldin, John Williams, rick kahler, ShadowStats.com, unemployment rates | 2 Comments »

Gold as an Investment Option for Medical Professionals?

Posted on October 2, 2012 by Dr. David Edward Marcinko MBA MEd CMP™

Gold in That There IRA

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

Here in the Black Hills, home of the historic Homestake Mine, we know a gold rush when we see one. The last few years have tempted investors to take part in a modern gold rush. The precious metal is thought of as a safe harbor for investment capital during times of economic and political unrest and chaos.

Holding Gold

There are many ways to own gold, including holding an interest in it via a financial medium like a mutual fund or an Exchange Traded Fund (ETF). Those who want gold as protection against political or economic turmoil, though, probably are thinking of owning physical gold.

Since Americans’ savings and investing rates are so low, most folks don’t have any extra funds to put into gold. Their only investment vehicle may be an IRA. Yet IRAs are specifically excluded from owning collectibles, metals, and coins.

There are exceptions, however: U.S. gold coins minted by the U.S. Treasury, or bullion bars or coins of a fineness of 995 parts per 1,000. Several non-U.S. minted gold coins meet that standard. The key here is that the coins or bars must be in the physical possession of a qualified trustee. That means gold you stash in a safe or bury in the back yard does not qualify.

Most banks, brokerage firms, or mutual fund companies are not interested in holding physical gold, so finding a qualified trustee can be difficult. You must do a reasonable amount of due diligence to be sure the trustee you find is really trustworthy.

The Trustee

A trustee needs to arrange for the shipping, handling, and storage of your gold. For this reason, you will certainly pay much higher fees than you would for normal stock, bond, and cash investments. The fees can amount to hundreds or thousands of dollars annually.

Even if you are willing to pay the high fees, first ask yourself, “What’s the point?” The reason most folks want to own physical gold or silver is to have “real” money available in case of an economic crisis or political uprising. How does owning physical gold in an unknown location that may be thousands of miles from you fulfill that requirement? Wouldn’t owning an ETF like GLD actually accomplish the same thing, only without the high costs? Yes, it would.

If you want to own gold, my strong suggestion is to own the GLD ETF and avoid all the high fees. The total cost of purchasing GLD is probably about $10.

Other Options

Other options are mutual funds that purchase gold mining stocks, which is probably a better way to participate in the gold market. This is because of the leverage factor. In a rising market, the cost of mining gold is much lower relative to the market value of the gold. So if a mining company pays $1,000 to mine an ounce of gold and can sell it for $1,500, the company—and you, as an owner of its stock—make $500 per ounce. Gold could stay at that same price for a year and your company would continue to make a 33% gross profit.

However, if you owned the physical gold and it stayed at the same price for a year, your profit would be 0%. You would only make that same $500 profit if the gold appreciated from $1,500 to $2,000 an ounce.

Assessment

Of course, the reverse is also true. If gold turns downward, you will stand to lose much more owning the mining company than the physical gold. That’s why I recommend owning gold, like any other asset, only as part of a diversified portfolio of investments.

Conclusion

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Filed under: Investing | Tagged: Gold as an Investment Option for Medical Professionals?, gold asset class, gold ETFs, gold mutual funds, IRA, rick kahler | 13 Comments »

On Vacation Cruises for Doctors

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

Something for Everyone

By Rick Kahler MS CFP® ChFC CCIM

www.KahlerFinancial.com

My family and I recently took our 20th cruise-ship vacation. Obviously, we’ve found that cruising offers something for each of us. Perhaps more medical professionals can too?

First Time

I was reluctant to go on my first cruise, both because I’m prone to motion sickness and because I couldn’t see why anyone would want to spend a vacation cooped up on a boat. I quickly learned two things that changed my mind. First, a number of drugs, patches, and shots are available to prevent or cure seasickness. Second, if you get bored on a cruise ship, it’s only because you choose to.

Benefits

A major asset of cruising is the 18 hours a day of tailor-made, supervised activities available for kids of various ages, even when the ship is in port. This allows parents plenty of time to tour ports of call unencumbered by cranky kids who couldn’t care less about museums or ancient ruins. Our kids are now old enough that they enjoy most of the shore excursions, but this still leaves them the option to opt out of any port that doesn’t call to them.

Bargains

Most people assume cruising with a family must be prohibitively expensive. We’ve found it to be a highly affordable way to vacation if you follow a few rules.

You can get some incredible cruising bargains, but it does take a little legwork. You will want to get on the email lists of the major cruise lines; my top picks are Cunard, Celebrity, Holland America, and Princess. They send out sales and last-minute offers continuously.

One of the best places to shop and compare deals is Cruise.com. However, when I’ve run into issues like an incorrect booking or an issue with the cruise company, Cruise.com wasn’t much help. I was left pretty much on my own to resolve the problems. I’ve found it’s better to shop the deals online with sites like Cruise.com or Cruisecritic.com, but to place the order with my local travel agent or directly with the cruise company.

Food

It will come as no surprise that one of the main features I look for in a ship is really good food. Many of the newer ships offer alternative dining rooms, where for an additional $25 to $40 per person, you can dine in true gourmet fashion. Some of the best specialty dining is found on Cunard and Celebrity.

Cost Balance

To balance the cost of my specialty dining habit, I select the least expensive stateroom, typically an inside cabin. It’s the same size as 80% of the cabins on the ship; it just doesn’t have a window. You can enjoy the same view—water and sky—from a lounge on deck while you relax with a cool drink. And the cheaper cabin leaves several hundred extra dollars to spend on food and shore excursions. For our latest 12-day cruise, our inside cabin cost $800 per person.

Rates

You typically get the best rates by booking the cruise as far in advance as possible. A small deposit is due upon booking but is totally refundable until about 60 days prior to the cruise date. Often, the prices rise the closer you get to that 60-day deadline, when the cruise must be paid in full and your deposit becomes non-refundable. If you are flexible, another great time to shop for cruises is about 30 to 60 days prior to sailing.

Assessment

A cruise isn’t what we typically think of as a middle-class family vacation. Yet when you figure in lodging, food, and admission fees for visiting major US vacation destinations, cruising can be just as affordable and just as much fun.

Conclusion

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Our Other Print Books and Related Information Sources:

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

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

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

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

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

Physician Advisors: www.CertifiedMedicalPlanner.org

Filed under: iMBA, Inc., LifeStyle | Tagged: Cruses for Doctors, rick kahler, vacations, www.KahlerFinancial.com | 1 Comment »

Selling into a House Poor Market

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

When the Local Real-Estate Market is Challenging

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

An exciting new medical practice opportunity in another state …. Health problems that make one-level living an urgent necessity …. The need to downsize quickly because of a hospitalist job loss ….

These are just a few of the reasons medical professionals might need to sell a home sooner rather than later. The real problem arises when the local real estate market is a challenging one. Here are a few suggestions for anyone looking to sell a house under difficult conditions.

1. Evaluate the urgency of your situation. If you can wait a few months without harming your career, your finances, or your health, that may be the wiser choice. If you can’t make payments, or you need to relocate right away and can’t buy a new house until you sell the current one, waiting to sell is usually a losing proposition.

2. Take a hard look at the costs of waiting. You often can cut your overall housing costs significantly by biting the bullet and selling, rather than paying for two homes until you get the price you want. In addition to mortgage payments, add up expenses like property taxes, maintenance, utilities, and commuting costs.

Example:

For example, suppose you paid $400,000 for a house that’s worth $300,000 in the current market. Selling it now would mean a loss of $100,000, but holding onto it costs $3000 a month. Suppose the market improves by 33% in three years, which of course is not something you can count on. You sell the house then for $400,000. In the meantime, keeping it has cost you $108,000. If you keep the house on the market for a year, then give up and sell at $300,000, you’ve added $10,800 to the original $100,000 loss. You’re often better off to cut your losses and sell.

3. Grit your teeth, hold your nose, and be realistic about the market value of the home you are selling. Your original purchase price has NOTHING to do with current reality. The market is the market, and buyers couldn’t care less about what you paid for the home. They only care about the competition and getting the most home for their money, just as you did when you bought the property.

You need to research the housing market in your area or hire competent help (like an appraiser) to help you determine the market value of your property. Real estate agents can help with pricing, but you must proceed carefully. Some agents practice a technique of “tell them what they want to hear, get the house listed, and then work on getting them to reduce the price.”

4. Think like a buyer as well as a seller. Many sellers forget that the pain of selling at a loss is eased if the replacement home they buy is also valued less than it was several years ago. The loss in the home being sold can often be offset by the bargain price of the home being purchased.

5. Do your best to negotiate with your lender. If your mortgage is more than the sale price of the house, you’ll owe money to the lender at closing. Depending on the circumstances, it may be possible to get the lender to accept a lower payoff. Before the closing date, find out exactly how much you’ll need to pay and know where you’re going to get it.

Assessment

Our reluctance to sell a property for less than the amount we’ve put into it is described as “sunk cost fallacy.” Holding on until we get our money back sometimes works. More often, though, all it does is sink us deeper into a financial hole.

Conclusion

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Our Other Print Books and Related Information Sources:

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

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

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

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

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

Physician Advisors: www.CertifiedMedicalPlanner.org

Filed under: Career Development, iMBA, Inc., LifeStyle, Mortgage Electronic Registry System | Tagged: home selling, house market, mortgages, real-estate, rick kahler, Rick Kahler CFP® | 1 Comment »

Why the Government is Not-Like Medical Professionals

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

An Endless Supply of US Dollars

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

Is the United States in danger of bankruptcy? Contrary to what you may read in the media or hear from many politicians, no, it isn’t. The US Treasury will never run out of dollars. Unlike doctors and medical professionals, it’s impossible.

Reasons Why?

The reason is relatively simple. The US government owns a printing press. As long as goods, services, or obligations are priced in US dollars, the supply of dollars to our government to buy those goods and services is unlimited. This is not true of individual physicians, corporations, cities, states, and countries that don’t issue their own currency.

For most people, this is a hard concept to grasp, with good reason. The capacity of our government to create an unconstrained supply of dollars is a relatively new phenomenon.

The Gold Standard

Until 1971, all US currency was theoretically redeemable in gold. This was known as the gold standard. In the early decades of the 20th century, you could actually go to a bank and change your dollars for gold. That ability was terminated in 1933, but the dollar’s value was still tied to gold. This basically meant the only way the US government could create new dollars was by obtaining more gold, the supply of which only increases by the new amount of gold mined.

Nixon

In 1971 we had a paradigm change in monetary policy that many still don’t understand. President Nixon decoupled the dollar from the gold standard [Nixon also wanted to flood the country with MDs, and drive down physician income, by opening up medical school admissions]. It became a fiat currency, which is used as a medium of exchange but has no intrinsic value. Suddenly, the US government was no longer constrained by solvency issues and could never run out of money. It could create as many dollars as it wished ie; inflation].

Constraints

This didn’t mean it had no constraints. The major constraint to an issuer of fiat currency is inflation. However, creating money does not guarantee inflation if the newly created money is not spent. Japan, for example, is still fighting deflation even though they’ve been pumping money into reserves like crazy for 20 years.

What should have caused a massive rethinking and reeducating of the financial sector went relatively unnoticed. Text books, professors, economists, and politicians largely continued to follow many pre-1971 monetary principles that became irrelevant overnight.

Unlike the federal government, US states, cities, and other government entities cannot print money. They have to get it the old-fashioned way—from taxes, fees, or borrowing. It’s entirely possible for these entities to go bankrupt, just like individuals and corporations, if their outflow exceeds their inflow.

Europe

Interestingly, the same is true for member countries of the European Union. When in 1999 they adopted the Euro and gave up their sovereign right to print their own money, they took on the same status as states. Therefore, a country like Greece, which is a user of currency as a member of the European Union, can involuntarily default on its obligations.

This is a significant difference between the United States and Greece. While Greece can (and most likely will) go bankrupt because it doesn’t have an unlimited supply of Euros, the US can’t go bankrupt because it does have an unlimited supply of dollars.

The major threat that sovereign countries face is not running out of money, but devaluing their currency through inflation. A devalued currency is one that loses its purchasing power and often results in a lower standard of living.

Assessment

Just because the US can’t involuntarily default on its obligations doesn’t mean we can keep on over spending and pretend we don’t have any money worries. As a nation, we still need to acknowledge and deal with our serious financial problems. So should our doctors, financial planners and financial advisors.

Conclusion

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Filed under: Funding Basics, Op-Editorials | Tagged: bankruptcy, European Union, fiat currency, GDP, gold standard, inflation, Nixon gold standard, rick kahler | 1 Comment »

Physicians as “Dr. Money Waster”

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

Paging … Doctor Money Waster?

By Rick Kahler MS CFP® ChFC CCIM

www.KahlerFinancial.com

Be frugal. Live on less than you make. Save for the future. It’s my message, and I’m sticking to it.

Just in case you’re getting tired of that message, though, let’s take a look at thrift from a slightly different perspective.

And so, for any medical professional who wants to throw cash around, here are some effective ways to waste your money:

How to Waste Money on Travel:

Buy package vacation deals.
Buy a vacation home.
Get an RV and only use it one or two weeks a year.
Buy a timeshare unit.
Pay for hotel Internet packages.
Eat at hotel restaurants.
Use room service.
Over-pack and pay checked airline baggage fees.
Don’t bother to use a travel credit card that gives you frequent flyer credits.
Stay at full-service hotels with amenities you don’t use.

How to Waste Money on Big-Ticket Items:

Buy a new car every three years.
Buy hybrid cars.
Pay for extended warranties.
Fail to compare prices and check product reviews.
Pay full price for furniture.

How to Waste Money on Insurance:

Get a cancer or accidental death policy.
Buy credit life insurance.
Buy variable universal life insurance.
Have life insurance if you don’t need it.
Keep your deductibles low.
Purchase the cruise line’s trip insurance.
Purchase car rental insurance.

How to Waste Money on Investing:

Don’t take advantage of a retirement plan with employer matching that doubles your money.
Invest outside of a retirement plan instead of fully funding the plan first.
Buy variable and fixed annuities that charge you big commissions and high fees.
Buy load mutual funds and trade them often.
Cash in your 401(k) or 403(b) plan when you leave your job instead of rolling it to an IRA.
Cash in your IRA when money gets tight.

How to Waste Money on Health and Fitness:

Buy home fitness equipment and use it to hang clothes on.
Pay for a fitness center membership but rarely or never use it.
Be a sucker for the latest “cure-all de jour” supplement or multi-level marketing product.
Pay more for specialized brand-name vitamins even though store brands are just as good.
Buy junk food instead of stuff that’s good for you.
Skip those regular visits to the doctor and the dentist.

How to Waste Money with Your Everyday Habits:

Drive across town to save two or three cents on gas.
Buy grocery name brands instead of cheaper store brands.
Pay full retail price for clothes, furnishings, or other items instead of waiting for sales.
Buy bottled water.
Disregard ATM fees.
Pay hefty overdraft fees because you don’t bother to keep track of your bank balance.
Forget to change your furnace filter.
Don’t bother to maintain your car or house.
Be disorganized about taking care of bills on time, so you pay late fees.
Pay for premium cable TV packages with channels you rarely watch.
If you can’t afford something now, pull out the plastic. When you don’t pay a credit card bill in full at the end of the month, high interest rates can quickly double or triple the price of anything you buy.
Gamble. Online gambling, slot machines, gaming tables, and lottery tickets are all good ways to get rid of extra cash.
Speed. This is a three-for-one deal. You’ll use extra gas, pay $100 or more for a speeding ticket, and end up with higher car insurance premiums.

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Assessment

Even practicing a few of these overspending habits will give you more financial stress and less financial security. Just observing half of them will give you an interesting life full of financial chaos.

Follow more than half and you, too, can qualify as a first-class Dr. Money Waster.

Conclusion

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Filed under: Financial Planning, Op-Editorials | Tagged: "Dr. Money Waster", budgeting, Financial Planning, Personal Budgetings Guidelines, rick kahler | 1 Comment »

On the Emotional and Financial Returns of Paying Off the Mortgage

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

The ROI of Sudden Money

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

Suppose you’ve come into some extra cash, doctor. You decide to use it prudently in one of three ways: keeping it in cash, putting it into your retirement plan, or paying off your home mortgage. Which is the better option?

A Personal Decision

I usually find the answer, for most medical professioanls, isn’t just about the money. Paul Thorstenson, an accountant with Ketel Thorstenson, agrees. He calls paying off a home loan “as much a personal decision as an investment one.”

Factors for Doctors to Consider

The first factor to consider is investment return. Thorstenson suggests you think of paying off debt as a risk-free investment. “Because the interest is fully deductible if you itemize, your paydown of the debt is exactly equivalent to making a risk-free investment (like a CD) that pays you a taxable yield equivalent to your interest rate.”

If your interest rate is 4.5%, that’s the return you will earn on the money you invest in paying off your mortgage. If this is difficult to visualize, think of it this way. When you pay off your debt, you are actually buying your loan from your bank much like banks sell loans to one another. You continue to make payments, only now the payments go to you instead of the bank. The money you invested in “buying” (paying off) the mortgage is now earning 4.5% for you instead of your bank.

Paying down (investing) your own debt – for most medical professionals – is usually much better than keeping your funds in a money market, savings account, or certificate of deposit where they earn .5% to 2%.

Invest or Pay Off Debt?

A trickier decision is whether to invest the funds rather than pay debt. While investing always carries some risk, a diversified portfolio with 60% stocks and alternative investments (real estate, commodities, managed futures) and 40% bonds will typically return 6% to 8% over ten or more years.

If you can use your extra cash to maximize a contribution to a retirement account like an IRA or 401(k) or 403(b), you will earn 6% to 8% tax deferred (or tax free with a Roth IRA) which is better than paying off a debt yielding 4.5%. The younger you are, the more sense it makes to contribute the funds to a retirement account.

Non-Retirement Accounts

If the investments are not in a retirement account, then you must compare the after-tax return to get an equivalent comparison. For example, if you are in a 25% tax bracket and will earn 6% on your investment, your after-tax return is 4.5%, exactly equal to what you would earn in our example of paying down the debt. In this case, I would usually take the “guaranteed” investment of paying down the debt.

Mortgage Reduction Tax Benefits

In deciding whether to pay off a home mortgage, there are some additional tax and emotional considerations. Thorstenson notes that there are currently no limitations on the deductibility of loan interest, even by high income taxpayers. The “phaseouts” which expired two years ago will come back again in 2013 when (and if) the Bush tax cuts expire. “With the phaseout you will lose 3% of every dollar of deduction for every dollar of income that exceeds about $150,000.” For most taxpayers, this won’t be a major factor.

Emotional Benefits

Probably more important than the investment and tax considerations are the emotional benefits of paying off home mortgage debt. Thorstenson says, “It gives one a sense of freedom in that you are not handcuffed to a mortgage. I’ve never once seen a client -or doctor- who had a paid off house leverage it back up and buy a mutual fund.”

Assessment

Like finishing medical school, paying off a home is a great emotional accomplishment. And, that sense of accomplishment may be the most important investment return you can have.

Conclusion

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Filed under: Financial Planning, Funding Basics | Tagged: behavioral economics, mortgage pay off, On the Emotional and Financial Returns of Paying Off the Mortgage, Paul Thorstenson, rick kahler, sudden money | 2 Comments »

Will Retirement Be a Bust for [Doctor] Boomers?

Posted on May 11, 2012 by Dr. David Edward Marcinko MBA MEd CMP™

Are Doctors Different?

By Rick Kahler MS CFP® ChFC CCIM

www.KahlerFinancial.com

If you’re a lay or medical professional Baby Boomer, or your parents are, here’s a ray of sunshine to brighten your day: Boomers have so severely underfunded their retirements that Congress may turn to their children to bail them out.

Dr. Basu Speaks

This is the gist of an article in the April issue of Financial Advisor magazine, by ME-P “thought-leader” Dr. Somnath Basu PhD, professor of finance at California Lutheran University. He notes, “The problem could be as big, if not bigger, than the 2008 financial crisis.”

The Study

A new study by the Center For Retirement Research, Boston College, detailed on CNBC.com, finds the retirement years for Boomers will be much leaner than for their parents. An estimated 51% of them will be unable to maintain their current lifestyles in retirement.

Ironically, one major contributor to this bleak picture is the Boomer generation’s own optimism and positive thinking. Raised in a society of abundance with expectations of prosperity, Boomers have over-spent and under-saved for decades. Many of them assume they will receive ample inheritances. They see increased life expectancy as a wonderful thing, forgetting to factor in the higher medical costs that will come with it. They expect to work well into their 70′s, disregarding statistics that show many of them will be forced to retire sooner due to health problems or job layoffs.

The Numbers

Let’s look at some decidedly pessimistic numbers from the Center For Retirement Research study. The median 401(k) and IRA balance for Boomers nearing retirement is $78,000. Only around half can expect to inherit from their parents, with the median inheritance amount $40,000. That adds up to a total nest egg of $118,000, which at a 4% withdrawal rate provides less than $400 a month for life. Combining that with the average Social Security check of $1,077 means retiring on an income just above the poverty level.

What’s the Solution?

Many Boomers say they plan to never quit working. Unfortunately, this is delusional. According to a new survey by the Society of Actuaries, “The 2011 Risks and Process of Retirement Survey,” over one-third of Boomers think they will never retire and only 10% say they will retire by 60. Statistics show, however, that 50% have actually retired before age 60. The main reasons are health and downsizing, which boomers discount. Well over 90% of them maintain they have a healthy lifestyle and won’t get sick. Boomers are so out of touch with reality I wonder how many, if asked, “Will you ever die?” would answer, “No,” or “Maybe.”

Sadly, only one-third of Boomers have a plan for financing their retirement, other than planning to work until the day they die. What’s the solution for the remaining two-thirds who are unprepared?

Unfortunately, for many older Boomers it is already too late. Their lack of planning for their retirement years may mean forcing their children and grandchildren to decide whether taxpayers can afford to pick up the tab.

Assessment

Younger Boomers can take control of their retirement by radically downsizing their lifestyles and increasing their income. This means selling expensive homes, cars, and toys and living as frugally as possible. The resulting savings should first go to pay off high-interest debt, then to fund to the max every available retirement plan. Another possibility is to consider various employment options, including government jobs which offer pension plans unavailable in most private sector jobs.

Conclusion

Wise Boomers will also encourage their own children to emulate the frugality and money skills of their grandparents. The kids will need those skills for their own futures—especially if they have to help their Boomer parents pay the bills.

But, are doctors the same as the rest of us – or do they differ on this issue?

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Filed under: Retirement and Benefits | Tagged: california lutheran university, Center For Retirement Research, CNBC.com, retirement planning, rick kahler, Somnath Basu | 2 Comments »

How to Avoid Whitney Houston’s Estate Planning Mistakes

Posted on May 2, 2012 by Dr. David Edward Marcinko MBA MEd CMP™

Look at Money Scripts

By Rick Kahler MS CFP® ChFC CCIM

Since the death of singer Whitney Houston, I’ve seen several articles from attorneys and financial advisors about the errors in her estate planning. They have summarized three areas where it was badly flawed:

1. Lack of privacy. Ms. Houston had a simple will that was subject to public probate, rather than a living trust that would have kept her affairs private. Anyone with thumbs and access to the Internet can see a copy of her will.

2. Lack of protection from claims, con artists, and circumstances. The estate, estimated to be worth over 20 million dollars, was left to Ms. Houston’s daughter, Bobbi Kristina Brown. A vulnerable young woman just barely of legal age will receive three huge payouts over the next decade and become a multi-millionaire by the time she’s 30. A trust could have given her some limits and structure, as well as providing for advisors to help her learn how to manage her wealth and protect herself from predators.

3. Lack of tax planning. The federal estate tax of 35% on anything over $5,120,000 will apply to the estate, so Uncle Sam will take around a third of it off the top.

Estate Planning – How Time Flys By

Unfortunately, this lack of skilled estate planning isn’t all that rare among wealthy people; or even some medical professionals. So, here are a few of the money beliefs that may be behind inadequate estate planning:

“Complicated estate planning is for rich people, and I’m not rich.” This may especially apply to owners of small businesses – like some doctors – who don’t have a particularly high income or lifestyle but whose land or businesses may be worth several million dollars. Yet good estate planning advice is especially important for them, because their heirs aren’t necessarily aware of or prepared for a substantial inheritance.
“The financial advice that was good enough when I was just starting out is good enough now that I’m successful.” A tax preparer, accountant, or financial advisor who is highly competent with small individual or business matters may not have the knowledge necessary for more complex estate planning. Seeking out different financial advisors as your income and net worth grow is no different from consulting a specialist rather than a general practitioner if you have specific medical needs.
“When you can afford the best, you’ll get the best.” Trying to save money by hiring bargain-basement financial advisors is almost always a mistake. It can also be a mistake to assume that someone who charges top-tier fees will always have top-tier skills and integrity. Even if a financial planner or other professional has a reputation as an advisor to the wealthy, it’s still essential to verify that the person or firm is right for you. Ask for references and be willing to ask hard questions about compensation, investment philosophy, and services. Make sure you are a client, not a customer. Work only with financial advisors who, like accountants or attorneys, have a fiduciary duty to put your interests first.
“I know how to make money, so of course I know how to manage money.” Many highly educated and skilled professionals are high earners but don’t necessarily have the knowledge to manage their earnings well. In order to know whether the advisors you hire are competent, it’s important to learn the basics of investing and money management. Look for advisors who don’t set themselves up as “gurus” but are willing to teach and to work in partnership with you.

Assessment

When it comes to financial advice, it isn’t enough to find someone who will “make you feel like a million dollar bill.” It’s more important to find advisors who will help you take good care of all your dollars.

Conclusion

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Physician Advisors: www.CertifiedMedicalPlanner.org

Filed under: Estate Planning, iMBA, Inc., Taxation | Tagged: death tax, estate tax, How to Avoid Whitney Houston Estate Planning Mistakes, probate, rick kahler, trusts, wills | 3 Comments »

Some Physicians are Tenants, Too!

Posted on April 23, 2012 by Dr. David Edward Marcinko MBA MEd CMP™

Tenant Improvements Can Be Good Investment

By Rick Kahler MS, CFP®, ChFC, CCIM

Recently I read a news story about a physician [small business owner] whose landlord was not renewing her lease. A chain restaurant was buying the building and intended to raze it. The doctor [business owner] was distraught, as she had recently spent $30,000 to remodel the property.

Dual Perspectives

One common reaction to stories like this is anger at a landlord for unfairly selling a building out from under a tenant.

Another is, “Why would tenants spend so much money remodeling a building they didn’t own?”

Neither response sees the whole story.

I empathized with this doctor’s loss as a result of a bad business decision. The bad decision wasn’t spending $30,000 to remodel a space she didn’t own. Business owners make such “tenant improvements” all the time. Every tenant or doctor’s office you see in a mall has poured thousands of dollars into fixing up and customizing their space. Tenant improvements can range from repainting a space to building a fast food restaurant on leased land.

Poor Decisions

The poor business decision this owner made was not being sure the lease term ran for long enough to recoup the cost of the tenant improvements. The cost of any tenant improvement is a pure expense that needs to be factored in as part of rent and amortized over the life of the lease. This is because when the lease expires, both parties have the right to not renegotiate a new lease. Any tenant improvements become the property of the owner. Landlords who choose to use property for something different when a lease expires aren’t abusing or taking advantage of tenants—they are simply exercising the contractual rights agreed to by both parties.

Mall Shells – Not Sea Shells

Most new strip centers or malls lease relatively unimproved spaces, sometimes called shells. Tenants get four walls, a cement floor, and bare girders above. It’s the tenants’ responsibility to finish the spaces in the manner they want. This makes a lot of sense, as usually each retailer is very specific about the floor plan, colors, and building materials they use in their spaces. At the end of the lease the relinquished tenant improvements, with years of wear and tear, are typically worth very little. New tenants will rip them out and finish the space according to their needs.

Example

Let’s take an example of a 5,000-square-foot shell that rents for $8 a square foot annually. Let’s say it will cost $100 a square foot for the retailer to finish the space. If the lease extends for 20 years, the annual cost of the tenant improvements is $5 a square foot ($100 divided by 20 years). This brings the total cost for the leased space to $13 a square foot ($8 shell rent plus $5 for improvements).

With a four-year lease, however, the amortized cost would be $27 a square foot. A one-year lease would cost $108 a square foot. Either one would make the space too expensive. A doctor business owner unable to get a longer term would either substantially reduce the cost of the tenant office improvements, or look elsewhere.

Sometimes a tenant needs to spend a lot to improve a space, but doesn’t want to commit to a long-term lease. In this case the tenant’s best strategy is to get the landlord to improve the space so the tenant isn’t left losing a substantial amount of money if either party doesn’t renew the lease.

Assessment

Medical provides who are business owners need to understand their rights and responsibilities as tenants. They also need to be sure the costs of rent and tenant improvements are reasonable over the life of the lease. It’s a good idea to consult both an attorney and an accountant before signing any lease.

Conclusion

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Physician Advisors: www.CertifiedMedicalPlanner.org

Filed under: "Doctors Only", Practice Management | Tagged: doctor tenants, leases, rick kahler, Some Physicians are Tenants, tenant leases, tenant rights | Leave a comment »

What Type of Automobile Should Future Physician Millionaires Drive?

Posted on March 27, 2012 by Dr. David Edward Marcinko MBA MEd CMP™

Re-Thinking Previously Owned [Used] Vehicles

By Rick Kahler CFP® MS ChFC CCIM

www.KahlerFinancial.com

Have you ever seen a Super Bowl ad touting how much money you could save if you bought something second-hand? Of course not! There’s not a lot of encouragement in our culture to buy used stuff. Even the one exception, a used home, is described as “existing.”

Badge of Honor

Buying used just isn’t cool—that is, unless you’re a wealth builder. Many of them look upon buying used as more of a badge of honor than an embarrassment. Certainly, there are many items that are best purchased new. Toothbrushes, toilet paper, and underwear come to mind. Yet there’s one thing that’s almost always better to buy used—a vehicle.

The Myths

Let’s look at a few common myths around buying a new [previously owned] car.

“Buying a used car is just buying someone else’s problem.” That can certainly be true if you don’t do your homework. When shopping for a used car, be sure you research the model’s repair record. The best place for this is Consumer Reports. An inexpensive online subscription will give you loads of detailed information about every year, make, and model. Narrowing your search to the top used car values will significantly increase your odds of buying a great used car. Before writing a check for even a top-rated used car, take it to a trusted mechanic for an evaluation. The money you spend will be well worth the future headaches you save.

“Never own a car that is out of warranty.” This is a good idea only if your heart is set on owning one of the many cars ranked as the least reliable. The warranty will come in handy because the car will spend a significant amount of time in the shop. Also, the value of a new car drops rapidly in the first few years. If instead you buy a used vehicle with a high reliability rating the warranty become less important, especially when you consider you’ll be getting a third to half off the sticker price. If you buy a low-mileage, late model car, your savings will be enough to more than pay for the few times you may need to take it into the shop.

“When a car hits 80,000 miles it’s time to get a new one because it will start costing an arm and a leg to maintain.” Once again, a top-rated used car will often run reliably for well over 120,000 miles if it’s maintained. Yes, the maintenance will increase, but the rapid depreciation of a new car will cost much more than maintaining an older car. Wealth builders routinely buy late model cars with low mileage and own them for 10 years or more.

“I can get a lower interest rate and longer term loan on a new car.” Here’s my rule of thumb: If you need a loan to buy a new car you are probably buying too much car. Those who manage money well create a savings account for replacing their vehicles. That way they can pay cash for a car and drive the best deal. If you must get a loan, borrow as little as possible and pay off the loan quickly. A higher interest rate on a shorter term loan on a used car is still a much better deal than what you would lose in depreciation on a new vehicle.

Assessment

Americans, especially doctors, have a love affair with their cars. Still, for most of us a new car is a luxury, a big splurge best purchased after we’ve attained financial independence. The best way to travel the road to that financial independence is in a used car.

Conclusion

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Public Misconceptions of Private Equity

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

A Political Season Review

By Rick Kahler CFP® MS ChFC CCIM

www.kahlerfinancial.com

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

The Negative Impressions

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

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

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

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

An Asset Class

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

Why Invest Privately?

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

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

Goals of Private Equity Firms

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

Assessment

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

Conclusion

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

Rethinking the Reverse Mortgage Paradigm

Posted on March 7, 2012 by Dr. David Edward Marcinko MBA MEd CMP™

Option of Last Resort -OR- Something Else?

By Rick Kahler CFP® MS ChFC CCIM

www.KahlerFinancial.com

Like most financial planners, I generally recommend not thinking of your home as a part of an investment portfolio or a source of retirement income. One possible exception to this rule, for medical professionals to consider, is a reverse mortgage.

Lenders

Lenders which are FHA-approved can offer Home Equity Conversion Mortgages, or HECM’s. These are insured by the U.S. government and allow homeowners age 62 and older to borrow against the equity in their homes. When the homeowner dies or moves out, the property is sold to repay the loan. Any equity left over belongs to the owners or their heirs. Any outstanding loan balance must be forgiven by the lender.

Reverse mortgages may be useful for elderly people in good health who have limited income or assets but who are living in paid-for homes.

Until now, I have viewed them as options of last resort. But, a new report by financial planner Michael Kitces CFP® has given me some cause to re-evaluate that position.

Link: http://www.kitces.com/index.php

Disadvantages

One major disadvantage of reverse mortgages is that the income uses up the equity in the house. Seniors who take out reverse mortgages too early risk spending most of their home equity to cover living expenses. As long as they can stay in the house, that’s no problem. If they have to move, however, they will have to pay rent or long-term care costs. Without income from the sale of their house, they may be left with little except Social Security to pay their bills.
A second disadvantage has been high upfront fees. A new option described by Kitces, however, significantly lowers those costs. The HECM Saver option eliminates the upfront mortgage insurance premium of 2%. This would drop the costs of a reverse mortgage on a $500,000 home from $17,000 to $7,000. The tradeoff is a lower lump-sum or monthly payment.

Typical Uses

The most typical use of a reverse mortgage is to tap into home equity to pay the bills when all other means of support become exhausted. Instead of selling or refinancing, the homeowners can choose to stay in the home and receive monthly payments for life. They don’t have to sell the property until they can no longer continue to live in it.
Another way to use a reverse mortgage is to refinance an existing mortgage. This can not only eliminate the monthly payment, but if there is enough equity in the home it can also provide a monthly income or a lump sum payment.

Example

Kitces uses the example of a 70-year old couple paying $1000 a month for a $175,000 traditional mortgage on a $450,000 property. A $175,000 reverse mortgage would eliminate the $1,000 payment. Assuming the net principal limit for the borrower was $250,000 on the property, they could use the reverse mortgage to extract an additional $75,000 of equity. They could receive this in a lump sum payment, create a $75,000 line of credit, or receive lifetime monthly payments based on the $75,000.

Let’s assume this couple’s monthly expenses, including the mortgage payment, are $5,000. They receive $1,500 a month from Social Security and withdraw $3,500 a month from their $600,000 investments. The total $42,000 annual withdrawal is an unsustainably high 7% of their portfolio.

The reverse mortgage would eliminate the $1,000 mortgage payment and reduce the investment withdrawal to $2,500 a month. This totals $30,000 annually, a more sustainable withdrawal rate of 5%. Investing the $75,000 of excess proceeds would produce additional monthly income and reduce the withdrawal rate even further. Using a reverse mortgage in this way makes sense if the lost home equity is offset by an increase in investment assets.

Assessment

We’ll look at some other reverse mortgage options another time, so stay tuned to this ME-P, and subscribe today!

Conclusion

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Filed under: Financial Planning, Mortgage Electronic Registry System, Retirement and Benefits | Tagged: FHA, HECMs, Home Equity Conversion Mortgages, Michael Kitces, Rethinking the Reverse Mortgage Paradigm, reverse mortgages, rick kahler | 10 Comments »

Investing Behaviors That Leave Money on the Table

Posted on December 6, 2011 by Dr. David Edward Marcinko MBA MEd CMP™

Are Physicians Guilty, Too?

By Rick Kahler, CFP®, MS, ChFC, CCIM

If you had half a million dollars for your retirement fund, and invested it in mutual funds, chances are you would leave $25,000 a year of potential income on the table. Over 20 years, that underperformance could cost you over $1,000,000 when you include reinvestment.

The Dalbar Study

This conclusion is based on a recent study by Dalbar, Inc. It found that mutual fund investors (individuals and investment advisors) consistently earn below-average rates of return. This group’s average annual rate of return for 20 years underperformed the average by over 5%.

The Results

The study concluded most of this underperformance has little to do with sound investment strategy and everything to do with psychological factors. It outlined several behaviors that contribute to poor investment decisions such as badly-timed buying and selling.

Lack of Diversification – Many investors try to reduce risk through diversification, but very few do it properly. They try to diversify by having several advisors, many brokerage companies, or different mutual funds. Using these strategies creates a false sense of security that one’s portfolio is diversified. Real diversification is having investments in many different asset classes, i.e., stocks, bonds, real estate, cash, commodities, absolute return, and international equivalents.

Anchoring – This is relating something to a familiar experience that isn’t necessarily true. For example, a financial salesperson may compare investing in an equity mutual fund to growing a tomato plant. You put in a little seed and watch your plant grow and grow, until one day you have a bushel basket of luscious tomatoes. It’s an appealing image, but it sets an unrealistic expectation of an equity mutual fund. Neither stocks nor tomato plants grow that steadily. Some don’t grow at all. Others grow overnight and then die just as suddenly. Some get wiped out by hail. And some thrive.

Media Reporting – Reacting to the financial news without a more in-depth examination can ruin the most sound investment strategy. Very few financial reporters have degrees in economics or finance. Most financial reporting is faddish, trendy, sensational, and shallow. Research suggests investors who shun or limit their intake of financial news do better than those who don’t.

Herding – This is the concept that the herd knows best. Few people want to be going east when the whole herd is heading west. This is especially true when the herd is panicking: selling out of fear that their investments are going to nothing or buying out of fear of being left behind. The most successful investors avoid stampedes.

Loss Aversion – This is placing more emphasis on avoiding loss than on the possibility of gain. It results in investors wanting their cake and eating it too by searching for an investment with a high return and low or no risk. Such investments don’t exist. When they discover this, many investors don’t invest at all. Others go into an investment expecting it won’t go down, then sell out at precisely the wrong time when it does.

Delusion – This is an attitude that “bad things only happen to others, but not me.” A deluded investor is one who holds onto an investment even when it’s apparent that it’s never coming back.

Narrow Framing – This is making a quick decision without gathering or being aware of all the facts and considering the implications. Usually, the investor doesn’t uncover “the rest of the story” until it’s too late and the financial damage is done.

Assessment

And so, are you guilty of any of the above investing behaviors? No one – not even doctors and medical professionals – wants to leave a sizeable amount of potential retirement income on the table.

The best tool for getting more of that income into your pocket isn’t necessarily studying investment philosophy. It may be more important to learn more about your own behavior.

The Author

Rick Kahler, Certified Financial Planner®, MS, ChFC, CCIM, is the founder and president of Kahler Financial Group in Rapid City, South Dakota. In 2009 his firm was named by Wealth Manager as the largest financial planning firm in a seven-state area. A pioneer in the evolution of integrating financial psychology with traditional financial planning profession, Rick is a co-founder of the five-day intensive Healing Money Issues Workshop offered by Onsite Workshops of Nashville, Tennessee. He is one of only a handful of planners nationwide who partner with professional coaches and financial therapists to deliver financial coaching and therapy to his clients. Learn more at KahlerFinancial.com

Conclusion

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Filed under: Investing, Retirement and Benefits | Tagged: behavioral finance, Dalbar, Investing, Mutual Funds, retirement planning, rick kahler | Leave a comment »

How Doctors Can [Legally] Lower their Investment Taxes

Posted on October 27, 2011 by Dr. David Edward Marcinko MBA MEd CMP™

Strategies all Medical Professionals Can Use to Out-Smart the Tax Man

By Rick Kahler MS CFP® ChFC CCIM

Maybe Warren Buffett, the second richest man on the planet, doesn’t care how much he pays in taxes.

For medical professionals and the rest of us however, what our investments earn after taxes is much more important than what they earn before taxes. Federal and state income taxes, capital gains taxes, and alternative minimum taxes can reduce your investment earnings by up to 50%.

How so?

It doesn’t take much to substantially reduce your nest egg. If Dr. Smith earned an average of 8% and was taxed at 28%, his after-tax rate of return is 5.76%. A $50,000 investment earning 5.76% grows to $87,536 in 10 years. If that same $50,000 investment isn’t subject to taxes, it grows to $107,946. The higher tax bracket he is in, the more important it is for him to seek out ways to lower his tax bill.

Tax Free Growth

One of the best tax maneuvers is to invest your money where it will grow tax-free, meaning you will never pay any taxes on the income or accumulation.

One way to do this is via a Roth IRA or a Roth 401k plan. All earnings compound tax-free and are not subject to tax or penalties when you take them out of the Roth after age 59½. The downside is that your contribution is not deductible from current earnings.

Another tax-free investment is interest from municipal bonds. The higher income bracket a person is in, the more an investment in municipal bonds makes sense.

For a doctor in the 33% tax bracket, a 5% interest rate on a municipal bond is equivalent to a 7.46% rate on a taxable bond. But, for a new practitioner in the 15% tax bracket, it’s only equivalent to a taxable rate of 5.88%. Don’t make the mistake of investing in municipal bonds only because they have tax free income. Be sure the investment makes sense for you.

Tax Deferred Investing

After tax-free investing comes tax-deferred investing. This includes traditional retirement vehicles like IRA’s, 401k’s, 403b’s, pension plans, and annuities. Contributions to these plans are pre-tax, while contributions to annuities are after-tax. The earnings are not taxed until taken out, usually after retirement when you may be in a lower tax bracket.

Retirement Tax Rates

If you anticipate your overall tax rate (the average percentage of income taxes you pay for the year) in retirement to be over 15%, you’ll want to evaluate whether investments that earn most of their returns in the form of long-term capital gains might be better held outside of a tax-deferred account. That’s because withdrawals from tax-deferred accounts generally are taxed at your ordinary income tax rate, which may be higher than your capitals gains tax rate (currently 15%).

Get Advice

Look for advice from accountants and investment advisors who manage investments in ways that can help reduce the taxable distributions. Investment managers can employ a combination of tactics, such as investing in stocks that don’t pay dividends, counterbalancing the sale of stocks with gains against those with losses, tax harvesting, and minimizing portfolio turnover.

As important as minimizing tax is, be careful not to let the tax tail wag the dog. A poor investment doesn’t become a good one just because it’s tax-free.

Records

Finally, keep good records of purchases, sales, and distributions so you can accurately calculate the tax basis of your investments. Not keeping good records could mean paying more tax than you should when you eventually sell.

Assessment

While you can’t control the direction of the economy and markets, you can have a lot of control over where you invest your retirement funds, the taxes you will pay, and the costs. The tax consequences of investment choices matter to the rich. They matter even more to smaller investors; like doctors and nurses.

The Author

Conclusion

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Filed under: Investing, Taxation | Tagged: lowering taxes, Retirement Tax Rates, rick kahler, Tax Deferred Investing, Tax Free Growth, tax records | 2 Comments »

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