STOCKS: A Very Skewed Market “Boom”




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Financial Planning MDs 2015


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“Medical Management and Health Economics Education for Financial Advisors”


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Mature Company Stocks Are Not Bonds

Dividends bring tangible and intangible benefits


By Vitaliy Katsenelson CFA


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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



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

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

On Stock Investing Fear!


By Vitaliy Katsenelson CFA

Stock Investors: You Have Nothing to Fear but Fear Itself


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

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


The “Life Cycle Investment Hypothesis”

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Physicians Returning to Zero?

[By Somnath Basu PhD, MBA] 

How have your investments done over the last three years? If you were to ask doctors, or the myriads of people who are or even pose as professional financial advisors, they would generally say that it would depend on how well your portfolio was diversified. By this jargon, they would mean how your money (in what proportions) was invested among various asset classes such as stocks, bonds, commodities, cash etc. The more it was spread out around various asset classes, the safer they would have been.

To see how safe (or how risky) your portfolio was over the last few years, it’s useful to view how these asset classes themselves fared over this time period. That is what is shown in the next chart where the following asset class performances over the last few years are shown. The chart shows the performances of stocks (S&P 500 shown by the symbol ^GPSC, in red), bonds (symbol IEI, Barclay’s 3-7 Year Treasury Bond index etf, in light green), Commodities (DBC, Powershares etf, in dark green), Long dollar (UUP, Powershares long dollar etf, in orange; this fund allows speculating on the dollar going up against a basket of important currencies; whenever the world financial markets are in turmoil, this index generally goes up as investors around the world seek the “safe haven” status of the dollar.

Alternately, note that this index value will also typically rise when the domestic economy is in a sound condition and both domestic and international investors favor the U.S. financial markets) and the short dollar (UDN, the Powershares inverse of UUP). Note that the “Cash” asset class has been left out and returns on cash (or money market funds) have been close to zero the whole time.

There are a few startling observations from this period. The first part that arrests the eye is how commodities performed over this time period. If your portfolio was heavy in this sector, you had a heck of a ride these last three years. If you had a lot of stocks as well, heck, your ride just got wilder. As can also be seen from the picture, healthy doses of bonds and currencies would have made your ride that much smoother.

On the other hand, what is additionally startling to observe is that we all started this period close to zero returns in the beginning of 2007 (around March 2007) and in June 2010, we are all converging back to zero returns. No matter how you were diversified, you either took a smooth ride (well diversified portfolio) from a zero return environment to a zero return environment or a wilder ride. That is why diversification is so important. Another way to gauge your diversification benefit is to use a two-pronged system.

The first is what I refer to as the “monthly statement effect”. When your monthly financial statements come in, you first observe the current month’s ending balance, then the previous month’s ending balance and then have a great day, a lousy day or an uneventful day. Depending on how good or bad (how volatile the ride) the monthly effect is, it may last for much more than just a day, maybe days. The second piece is your age.

Life Cycle Investment Hypothesis

As you grow older, you ask yourself how wild a ride can you tolerate at this point in your life? Hopefully, as you age, this tolerance level should show significant declines. If it does, you are then joining a rational investment group practicing a “lifecycle-investment hypothesis” style. Finally, did anything do well during this time? Yes, and surprisingly from an asset class whose underlying asset is shaped too like a zero – mother earth and real estate. Having some real estate in your investment basket (another important diversification asset) would not only have smoothed your ride but would have made your financial life so much more pleasurable. Just take a look at this picture below (FRESX, an old Fidelity’s real estate index fund) which says it all.


Even in the darkest days of falling real estate markets of 2008, this fund produced a positive return. Of course many other real estate indexes lost their bottoms; thus finding these stable indexes in all asset classes are well worth their salt. That is, if it is time for you to diversify.


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Tax Efficient Investing

Friends and ME-P Readers,

By Sean G. Todd; Esq, M.Tax, CPA, CFP®

Summer is here for sure in Atlanta—90 degrees plus day after day. I’ve been enjoying the fresh sweet corn, a BLT and a large glass of sweet tea at dinner—now that is a fine meal. Why do I share this with you — because at mid-year, I think from time to time we have to step back from all that we are involved in, concerned with, and what we think is important to actually appreciate all that we have and not overlook the small things. Which brings me to the topic of this Medical Executive-Post and not overlooking the small things—like taxes. As a physician-investor, you have to keep an eye on the impact taxes have on your investment portfolio because it is what you keep after taxes that counts.

Of the Markets

During my last post—I indicated that I was not sure if the recent reprieve in the markets was sustainable. And, we did experience a mild reversal recently. But, did you know that doing nothing is actually doing something? I’m pretty certain that the past investment strategies are not going to work going forward and I share these with ME-P readers as to why I believe this is true; and how best to position your portfolio going forward. Other professionals agree—the rules have changed — have you changed anything? Let’s move on to the real reason you continue to read our posts: To be able to make the right long-term decision during these difficult times. In this post we need to focus on the importance of tax-efficient investing.  We are confident that you and your friends and colleagues whom you choose to share this ME-P will benefit from the information discussed, as well.

Why Tax Efficient Investing is Important

Physicians and all investors have experienced some turbulent times over the last 12 months and it appears more rough waters lie ahead. As a physician-investor, you are unable to control the markets but there are certainly things you can control and should. One of these is taxes. Given the level of government spending, additional tax revenues will be needed which equates to higher taxes. You cannot plan your taxes on April 15th but you have to implement a tax strategy plan during the year so you can capture the benefit on April 15th. With increased taxes on the horizon, tax-efficient investment is going to be more important than ever. Brokers or the 1-800 do-it-yourself brokerage firms are not licensed to give you tax advice, but CPAs and EAs, are. The old saying goes, “It’s not what you make, but what you keep after taxes that counts”. This statement will become even more important going forward.

Returns Lost to Taxes

Have you thought of the impact on your portfolio that taxes have on your investment returns? Good financial advisors should as these are still some of the most important decisions you face as an investor.

Take for example a physician-investor in the top tax bracket earned an average return of 15% on actively managed mutual funds in a taxable account from 1981 to 2001. After taxes, average return dwindled to roughly 12% – which means our investor lost an average of 2.4% in return to taxes (the numbers reflect a compound rate of return). Investment return lost to taxes don’t just affect mutual fund investors — you have to look at your entire holdings in your taxable accounts and how you manage your investments, because, investors in individual stocks and bonds are vulnerable too. Like I indicated, you do have a lot of control over your taxes and should actively control them given the significant impact on your total investment return. Something for consideration: Diversification and asset allocation are great tools for helping to reduce portfolio volatility, but we’re still going to be subject to the short-term whims of the market, no matter how diligent we might be in setting up our portfolios and selecting our individual investments. One of the areas that we have the greatest degree of control is the area of tax-efficient implementations. Doesn’t it make sense that where we can exercise the most control, we do so?

Tax-Efficient Investing is More Important than Ever

Work with me here. If we assume that over the next 20 years annual compound returns for the broad stock market average between 8% and 10%, and bonds average about half that, then average portfolio returns would be less than what we enjoyed over the last 20 years. What this actually means is that any return lost to taxes will be a much bigger deal. In other words, losing 2.4% per year to taxes may not have seemed like much if you were making 15-20% annual returns. But if you only expect to make 9% on your investments, keeping as much of that return as possible, can be vital to achieving your long-term goals. The real impact– 2.4% tax impact will cause you to lose 26% of your 9% gain. Thinking you got a 9% gain but your real after-tax gain is only 6.6%. This is a big annual difference and a significant compound difference.

The second reason tax efficiency is more important than ever is because of the changes to the tax rules in 2003. A notable provision: the 15% tax rate on qualified dividend income. Often a missed opportunity! Previously it might have made sense to hold dividend-paying stocks in a tax-deferred account such as an IRA instead of a taxable account. Either way, dividends were taxed at your ordinary income tax rate between 28% and 39.6% prior to 2001. The thought was the IRA offered tax-deferred potential growth.

Currently, qualified dividends in a taxable account are taxed at a maximum rate of 15%. Those save dividends would be taxed at the ordinary rate—currently as high as 35% when withdrawn from your tax-deferred account. As a result, the value of putting dividend-paying stocks in taxable accounts has grown significantly.

What Investments Go Where?

I need to speak in general terms here, investment that tend to lose less of their return to income taxes are good selections to go into taxable accounts. With that said the opposite should be true: Investments that lose more of their return to taxes could go into tax-deferred accounts. Here’s where tax-smart investors might want to place their investments.

Taxable Accounts Tax-Deferred accounts – Traditional IRAs, 401(k)s and deferred annuities
Ideally place…
Individual Stocks you plan to hold more than one year Individual stocks you plan to hold one year or less
Tax-managed stock funds, index funds, low turnover stock funds Actively managed funds that generate significant short-term capital gains
Stocks or mutual funds that pay qualified dividends Taxable bond funds, zero-coupon bonds, inflation protected bonds or high yield bond funds
Municipal bonds, I bonds Reits

DISCLOSURE: This assumes you hold investments in both types of accounts. A different set of rules would apply if you held all your investments in a taxable account or a tax-deferred account.

In general, holding tax-efficient investment in taxable account and less tax-efficient investment in tax-advantaged account should add value over time. It appears that the above serves as a simple set of guidelines to go by but there are additional considerations before making the above allocation.

Additional Considerations

Reallocation of your Portfolio

To maintain your strategic asset allocation will cause additional tax drag on return, to the extent you rebalance in taxable accounts. You may want to focus on your rebalancing efforts on your tax-advantaged accounts, including your taxable accounts only when necessary. Keep in mind, adding new money to underweighted asset classes in also a tax-efficient way to help keep your portfolio allocation in balance.

Active Trading

Active trading by individuals or by mutual funds, when successful tends to be less tax efficient and better suited for tax-advantaged accounts. A caveat: Realized losses in your tax-advantaged accounts cannot be recognized to offset realized gains on your tax return.

Liquidity Preference

If an investor wanted liquidity, then they might be holding bonds in their taxable accounts, even if it makes more sense to form a tax perspective to hold them in tax advantaged accounts. In other situations, it may be impractical to implement all of your portfolio’s fixed income allocation using taxable bonds in tax-advantaged accounts. If so, compare the after-tax return on taxable bonds to the tax-exempt return on municipal bonds to see which makes the most sense on an after-tax basis.

Estate Planning Issues

One cannot overlook the estate planning issues in deciding which account will hold a given type of investment. Also, what is the philanthropic intent of the doctor or investor? Stocks held in taxable accounts receive a step-up in cost basis at death (something heirs greatly appreciate) which is not the same for tax-advantaged accounts. Additionally, highly appreciated stocks held in taxable accounts more than a year might be well-suited for charitable giving.

Roth IRA

This type of account might just be an exception to all of the above. The rules are different when investors involve a Roth IRA. Since qualified distributions are tax free, assets you believe will have the greatest potential for higher return are best placed inside a Roth IRA, when possible.


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