Investing For Doctors

Investing - Where to put your money now

You make more money than you spend. It’s the right problem to have, but it’s a problem nonetheless. In fact, every new dollar of savings seems to call for a new investment strategy, but you don’t know where to begin.

When you ignore the problem, cash piles up in your checking account—first $40,000, then six figures. Now you’re getting nervous. If it was hard to invest a smaller sum, it seems impossible to invest more than $100,000.

Then one day, you stumble upon the headline that brought you here, hoping to find the answer. And if this were any ordinary article, you might be well on your way to making the same mistake that most of your colleagues have made at least once in their careers: they pile their money into a hot investment touted at the time.

First they buy it. Then they watch it drop like a rock. And months later, when the promised results fail to materialize, they sell everything and feel foolish.

It gets worse as the cash continues to pile up and your question goes unanswered: “Where do I put my money, now?”

The best investment strategies have nothing new about them and they work. Here are three investment strategies you can use over and over again, decade after decade, to make your savings last.

1. Stop trading stocks. Start owning markets. 

I know you’ve heard stories in the break room about how your colleague’s latest stock pick shot up 147 percent or how he nabbed a tax-free bond paying five full percentage points above average.

Sounds like he’s making a killing, right?

Not exactly. Chances are good he’s gotten killed on plenty of trades, but physician culture won’t allow him to tell you about his blunders. I’ve seen plenty of doctors who stock-picked their way to a small fortune, but most started out with a much larger one.

Instead of taking a bunch of risk by betting on one stock, keep risk in check by owning a whole bunch of them—the easy way. Single stocks can go bankrupt and single bonds can go into default, wiping you out completely. Index funds, which represent ownership in hundreds if not thousands of companies, make it easy to gain instant diversification, diluting the uncompensated or “bad” risk while retaining the “good” risk that leads to rewards over the long haul.

Index funds are cheap. With carrying costs (a.k.a. “operating expense ratios”) as low as 0.05 percent, you can buy an index fund and gain exposure to bonds or stocks around the world for a pittance. That tiny carrying cost also buys you the freedom to stop acting like a stockbroker and get back to serving as a healthcare provider.

Savvy physicians prefer mutual funds for their tax efficiency. Since they follow a buy-and-hold approach to investing, index funds are more likely to realize tax-favored capital gains and tax-qualified dividends than more highly taxed short term gains. This keeps your tax bill in check.

2. Stop timing the markets. Start owning them (all). 

If you have heard about index investing, you probably know about the SP 500, a basket of stocks that represents the 500 biggest companies in the U.S. The index was made famous in the ‘80s and ‘90s as it ran up to the dotcom bubble, then vilified in the ensuing “lost decade” when the ten year return on that index was close to zero.

What index hecklers fail to realize, even to this day, is that there’s more than one index. In fact, you can gain exposure to practically all the stocks and bonds on the planet by owning as few as four mutual funds. Had investors done this during the past ten years, they would have avoided some of the tech wreck, found the lost decade and enjoyed very decent returns after all.

Unfortunately, the average investor seldom receives average returns. According to a recent study by mutual fund data company Morningstar, “the typical investor gained only 4.8 percent annualized over the ten years ended December 2013 versus 7.3 percent for the typical fund.” That’s a yawning 2.5 percent gap.

Why did investors miss out on fully one-third of the market returns? It’s simple. They did the same thing with their funds that your colleague did with his stocks: they traded in and out of the market. To garner the returns advertised over the past decade, or even the last three decades, you would have to own them through thick and thin, no matter how dramatic nor dire the news.

3. Invest like a Nobel Prize winner. 

The main argument against an index-only strategy is exactly that it generates merely average returns in the best case scenario. This logic appeals to doctors who have never once settled for things that are merely average, and that’s pretty much all the physicians I’ve met.

Thanks to the research of Nobel laureate Eugene Fama, we now know it’s possible to reliably beat the averages over the long run—but it’s not free.

Fama, a financial luminary who founded the first small cap index mutual fund way back when fax machines were the size of washing machines, discovered that the smaller a company is, the more likely it is to outperform a larger one. This is known as the “small cap effect,” and it’s robust, having been observed in U.S. market history as well as the return series of developed foreign stock markets and even emerging markets.

Fama and colleague Kenneth French, both researchers who hail from the University of Chicago’s renowned Booth School of Business, also found that the stocks of cheap companies, known as “value stocks,” tend to outperform their more expensive “growth stock” peers in what is known as the “value effect.” This effect is also robust in markets domestic and foreign, and is available to investors using index funds.

While a small cap value tilt may add up to four percentage points more than the average untilted portfolio over long periods of time, it brings more volatility, too. When equity markets decline, those index funds filled with cheap little stocks take it hard, and you may wish you had never owned them. The only way to reliably garner the higher expected returns from small cap value stocks is to remain fully invested and stay the course, even when times are tough.

This too is old news. Even though Fama won the Nobel Prize in economics in 2013, his research on the small cap and value effects has been public knowledge since the 1980s.

These perfectly decent strategies are so mundane—so incredibly boring—that you and your colleagues may never have heard of them. After all, words like “diversified,” “tax-efficient” and “cost-effective” make wimpy headlines. The good news is that you can start using a solid investment strategy and keep using it year after year, decade after decade, secure in the knowledge that you have found a permanent answer to a nagging question. Remember, the answer to good investing is more than where you put your money now. It’s where you keep it over the long haul.

 This article originally appeared in Orthopreneur with the same title "Investing - Where to Put Your Money Now".

 

007 Questions Physicians are Asking About Bonds

Bonds are supposed to be boring. In fact, best-selling author and former British intelligence officer Ian Fleming—the man behind British Secret Service Agent James Bond, code-named 007—thought “bond” was one of the most boring words in the English language.

In his 1962 interview with The New Yorker, Fleming said, “I wanted Bond to be an extremely dull, uninteresting man to whom things happened; I wanted him to be a blunt instrument ... when I was casting around for a name for my protagonist I thought by God, (James Bond) is the dullest name I ever heard.” He lifted the name from an American ornithologist named James Bond.

Ornithology, huh? Big yawn.

Now, I’m no bird watcher, but as a fee-only financial planner for physicians, I also manage more than $50 million dollars for about 40 families and a couple of pension plans, and I happen to believe that bonds are anything but boring.

I think bonds are fascinating, functional and fun, so I’m excited to share some questions clients have asked about them, along with my oh-so exciting answers:

  1. “What is a bond? I mean, how does it work?” A bond is nothing more than a loan. When you buy a bond, you’re basically making a loan to whoever issued the bond. So if you buy a US Treasury bond (the most common kind of bond here in the United States), then you’re making a loan to Uncle Sam. When you own the bond, you can collect interest from it, which is mostly how people make money in bonds.
     
  2. “Can I lose money in bonds?” Yes, you can. Most bonds are sensitive to changes in interest rates. When interest rates rise, bond prices drop, and vice versa.
     
  3. “If I can lose money in bonds, why would I want to own them?” Well, you can make money in bonds, too. When interest rates fall (as they have for several years now), bond prices rise. And regardless of the direction of interest rates, you can still gain interest by owning bonds or bond mutual funds.
     
  4. “What about the Bond Bubble?” Ah yes, the Bond Bubble. Pundits and soothsayers argue that bonds are doomed to lose money because interest rates are at historic lows and “interest rates have nowhere to go but up.” I wish the argument were this simple. It’s true that interest rates on US Treasury bonds are very low, and that these bonds are sensitive to interest rate changes. But it’s also true that you cannot predict the future, not even the future of interest rates. I mean, look at Japan: they've had super-low interest rates for decades now. Calling the future is a fool’s game."
     
  5. “So, should I dump all my US Treasuries?” If you ONLY own Treasuries, then maybe you should lighten up a tad. But before you go off and sell all your Treasuries, you have to remember that Treasuries are a special kind of bond because they are backed by the full faith and credit of the US government. This gives them a special status in the world, and they are seen by US investors and non-US investors alike as a “safe haven” during hard times. For instance, when all hell broke loose back in 2008, US Treasuries were just about the only kind of bond that actually gained value. This makes US Treasuries a good diversifier for an all-stock portfolio.
     
  6. “What kinds of bonds are there besides Treasuries?” Well, it’s a great big bond world out there. According to the Barclays Capital Global Aggregate Bond Index, there are about $32 trillion worth of debt outstanding from 12,000 issuers worldwide, making the global bond market twice as big as the global stock market. There are government bonds and corporate bonds; developed market bonds and emerging market bonds; high yield “junk” bonds and high quality “investment grade” bonds; short term, intermediate term and long term bonds; inflation-adjusted and “nominal” bonds, dollar-hedged and un-hedged foreign bond funds, and just to spice things up, there are floating rate bonds too. (If there is a Bond Bubble brewing, I find it hard to believe that it would impact every one of these at the same time.)
     
  7. “With so many choices, what kind of bonds should I own?” To thrill my compliance attorney and all the regulators who read my blog, I’ll say that you should consider your own personal financial situation, investment objectives and tolerance for risk before you invest in any bond or bond fund. But to address the question head on, I’ll tell you that diversification is a very, very good thing, and it might not be a bad idea to own a wide variety of bonds… a task made far easier these days by the proliferation of bond index funds from Vanguard and DFA.

Bonds may not be as gutsy as guns, as giddy as gadgets, or as glamorous as Bond's babes, but they’re an important part of a balanced investment strategy and they just might help your portfolio be stirred, not shaken, the next time it looks like the world is coming to an end.

Investing: What if Trump wins? What if Hillary wins?

It’s natural to run from danger, and if you have strong feelings about presidential politics, this year’s choice probably looks pretty dangerous to you, no matter which side you’re on. You might even be tempted to do something about it… something that involves your retirement account or your college funds. To put things in perspective, you need to know the stock market has favored Republicans in the past over Democrats but wins by the Incumbent Party (which would be the Democrats in this election) have delivered returns that are almost the same.

Presidential Election Stock Market Performance History

While this may seem straight forward, “It’s really hard to predict the outcome of politics, and even if you get the outcome right, it’s even harder to predict the market reaction,” says Eric Veiel, head of equity management at the T. Rowe Price family of mutual funds.

In fact, getting an “edge” in your investments is so hard as to be impossible. If it were possible, some whiz kid techie out there would have built a data mining algorithm to sift through social media, find the winner in advance, and arbitrage away all the extra profits that one could have garnered.

“It may be tempting for investors to try to link presidential election results to market outcomes, but there are really no consistent relationships between party affiliation and long-term investment success,” says Veiel. That’s why we caution clients not to make investment decisions based on expected election outcomes.

The reason that investing offers a prospective return at all is precisely because of the perceived danger or “risk.” If it weren’t risky, everyone would be doing it and they would have sopped up all the excess returns already. That’s why fundamental factors, such as oil prices, corporate earnings, and monetary policy usually outweigh political developments. While sectors such as health care and energy could be affected by proposals of leading candidates, Congress, the Federal Reserve and the commodities markets tend to have more power over these factors than any one man or woman in the White House.

Remember, this is only one election among many you will see and hopefully vote in during the course of your life. Investing for retirement and saving for college are long term goals, so the best thing you can do between now and November 8 is to make a plan for your future and vote with your ballot—not your investment account.

3 Ways to Save Taxes While You Invest | Oncology Practice Management

Physicians pay more than their fair share of taxes, so when it comes to your investments, why would you pay more than you absolutely have to? While it may be too late to save taxes on investments you made last year, itís the perfect time to focus on saving money this year, so we want to share some tax tactics to keep your tax bill for 2016 in check.

1. Slip Contributions in Through the Back Door

If you are a physician who is covered by a retirement plan at work, your accountant may have told you that you do not qualify to contribute to an Individual Retirement Account (IRA). That is simply false. Physicians who have earned income can indeed contribute to an IRA, even if they cannot deduct the contribution from their taxable income.

This may leave you wondering why you should make an effort to contribute if you donít receive any immediate tax benefit. The answer is that your nondeductible contribution puts you in an ideal position to convert your traditional IRA to a Roth IRA, using a strategy known as a ìbackdoor Roth IRA. This lets the balance in your Roth IRA grow tax-deferred indefinitely, with no requirement for mandatory distributions at age 70Ω years, and no taxes due on qualified withdrawals.

To make a backdoor Roth IRA contribution, you need 2 accounts – a traditional IRA (preferably an empty account) and a Roth IRA. To do that, start by contributing the maximum allowed amount to your traditional IRA ($5500 for 2016, or $6500 if you are age 50 years or older). Next, you can instruct your financial institution to convert your traditional IRA balance to a Roth IRA account. The institution will distribute the balance from your traditional IRA and then deposit that amount to your Roth IRA, generating a Form 1099-R that is sent to you in January of the following year.

If you are taking advantage of this strategy, however, you must be careful. It is simple if the entire balance in your traditional IRA hails from nondeductible contributions, and if the account has not gained value. If that is the case, you should owe no taxes on this transaction; however, if you have any other IRA accounts (including SEP-IRAs, SIMPLE IRAs, and/or rollover IRAs) that were funded with pretax dollars, the taxable portion of any conversion made from these accounts will be prorated over all your IRA accounts.

Therefore, to truly benefit from the backdoor Roth IRA and avoid the ìpro-rata rule,î you must either convert your other IRA accounts as well, or you must transfer your IRA contributions that were funded with pretax dollars to an employer-sponsored plan that accepts IRA rollovers, so all that remains are IRA accounts funded with posttax dollars.

2. Put Taxable Income in Its Place

Although veteran investors know that a taxable bond fund generates ordinary income that is fully taxable, for some reason we continue to see physicians, even those who are under the care of financial advisors who should know better, owning taxable bond funds in taxable accounts.

For example, an oncologist earning $700,000 owns a joint account with her husband that holds $1.2 million in mutual funds, including $400,000 invested in corporate bonds. Those bonds yield dividends of approximately $13,000 this year. Since this couple is in the top marginal income tax bracket (39.6% for federal income), their tax bill for these dividends is approximately $5000, so only $8000 remains in the account after the taxes are paid.

Had this couple purchased a tax-exempt bond fund that pays dividends of $11,000, they may owe no taxes. As a result, this couple would have an additional $3000 this year, and every year thereafter.

It is easy to understand why this mistake happens. Investors routinely focus on the yield or the income from the securities they buy, while ignoring the after-tax total return that the security generates.

3. Save Your Health Savings Account

While Health Savings Accounts (HSAs) were signed into law more than a decade ago, physicians are just now beginning to take advantage of the sizable tax deduction that contributions to these accounts provide. If your family is covered by a qualifying high-deductible health insurance plan (HDHP), you can contribute $6750 to an HSA this year (or up to $3350 if you are covered individually). If you are a physician in the top marginal tax bracket of 39.6%, this contribution can provide you approximately $2700 in tax-savings income.

Having made your contribution and deducted it from your income, now you are in the right position to do the wrong thing: spend the money. Although many physicians will use their HSA balances to cover out-ofpocket healthcare expenses, a better strategy is to leave the balance in the HSA account for as long as you can. Here, the balance can be invested and allowed to grow tax-deferred until retirement. At that time it can be withdrawn tax-free to cover one of the biggest expenses we will all face in our old ageóthe cost of healthcare.

Conclusion

When you understand the ins and outs of tax-advantaged investing, you can stop paying unnecessary taxes and start putting more money toward your retirement, your kidsí college, and anything else money can buy. In fact, Judge Billings Learned Hand once said, 'Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the Treasury. There is not even a patriotic duty to increase oneís taxes.'

W. Ben Utley, CFP, is the lead advisor with Physician Family Financial Advisors, a fee-only financial planning firm helping doctors throughout the United States to save for college, retirement or other financial goals. He can be reached at 541-463-0899 or by e-mail at ben@physicianfamily.com.

Lawrence B. Keller, CFP, CLU, ChFC, RHU, LUTCF, is the founder of Physician Financial Services, a New Yorkñbased firm specializing in income protection and wealth accumulation strategies for physicians. He can be reached at 516-677-6211 or by e-mail at Lkeller@physicianfinancialservices.com with comments or questions.

This article originally appeared in page 48 of the March 2016 print edition of Oncology Practice Management.

Thinking *inside* the box [Certain Times]

Have you ever felt like there’s more to this financial security thing than meets the eye? Yesterday I spoke with a cardiologist—a smart, hard working, pillar of the community kind of guy—who had spent the better part of the last two decades building a nice seven-figure retirement nest egg out of nothing more than garden variety Vanguard funds.

And do you know what he wanted?

He wanted me to manage his investments.

I gotta tell you: I was stunned.

I told you he was smart. In fact, he had read almost all the same investing books I had. (And I say *almost* because he had, in fact, read more than me.)

Yet no matter how I tried, I could not convince him that he was doing the right thing. I got the impression that he believed that there might be something wrong with what he was doing.

Then I talked with a nephrologist last week who did hire me to put together a financial plan for him.

He’s a family-first kind of guy with a reasonable standard of living, so he can afford to save modestly and invest moderately BUT he was certain that there must be something more to getting on track than simply saving into good old-fashioned mutual funds for the long haul.

And finally, I spoke with a physician family—a married coupe of primary care docs—who have done very well for themselves over all these years BUT every now and then they ask me if they shouldn’t get more aggressive or do “something different”.

I’m beginning to get the impression that you think you need to “think outside the box” to become financially secure.

Nothing could be further from the truth.

Let me tell you: this financial security thing… this “having enough money to last a lifetime” thing that I’m talking about all the time… It’s not hard. It’s not new. And there’s nothing out-of-the box about it.

In fact, the tried and true way to become financially secure is way, Way, WAY *inside* the box.

Want to see what’s inside?

First you set a goal. Then you make a plan. Then you get on track.

And if you ever find yourself “outside the box” then you run like you’re hair is on fire until you get back inside that box.

Sure, some of your colleagues are venturing outside the box with their brother-in-law’s new restaurant chain or their partner’s latest and greatest get rich quick scheme. And yes, they might make a killing... or just get killed.

But you—If you’re smart—will look around you and see that there’ simply no substitute for hard work, steady saving and wise investing.

And when you gain this perspective, you’ll stand a much better chance of building financial security that can last a lifetime.