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Investments. Thomas E. Nolan, MD, MBA Abe Mickal Professor and Chair of Obstetrics and Gynecology Director, Women’s and Newborn Services LSU-Health Science Center New Orleans. Objectives. Understand the relationship of risk and reward of different financial vehicles

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Thomas E. Nolan, MD, MBA

Abe Mickal Professor and Chair

of Obstetrics and Gynecology

Director, Women’s and Newborn Services

LSU-Health Science Center

New Orleans

  • Understand the relationship of risk and reward of different financial vehicles
  • Have fundamental appreciation of why and how to diversify a portfolio
  • Considerations to take when saving for college, retirement
  • Taxation and estate planning (and impact of divorce)
  • Understand different investment vehicles
  • Pitfalls
starting out
Starting Out
  • Debt management
    • School loans
    • Automobiles
    • House
  • Cash reserves
    • 3-6 months of net income in cash, money market or short term bond fund
school loans
School Loans
  • Consolidate high interest loans
    • Most banks will provide the service
    • Consider a 10 year time period to pay off loans so that other funds can be vested in retirement plans
    • Make sure there is no penalty to prepay the loans
  • Look for “forgiveness” programs
    • Rural and minority programs
starting out5
Starting Out
  • Level of debt that bankers and lenders use as a benchmark
    • Monthly housing costs (principal, interest, taxes, fees and insurance) should be no more than 28% of gross income
    • 20% of net income (after tax)
starting out6
Starting Out
  • The good old days of banks giving doctors big breaks is essentially gone, except in rural areas
  • Debt pitfalls early in career
    • Too much house (you may move!!!)
    • Too much car (you don’t deserve it)
    • Too much credit card debt (restaurant, vacation, furniture)
smart debt
Smart Debt
  • Mortgage debt is tax deductible and hopefully your home will appreciate
  • Once the mortgage debt is establish-ed, then home equity debt, if available in your state, (also tax deductible) can be used for large ticket purchases such as cars, furniture and collectables
  • Equities
  • Bonds
  • Cash
  • Real Estate
  • Collectibles
  • Precious Metals
  • Where doctors have traditionally made mistakes
    • Live off cash flow or “pay as you go” rather than saving for goals
    • Love tax schemes and limited partnerships
    • Recent trends—Offshore trusts—The IRS never lets an American Dollar loose
investments equities slide from 2 14 2000
Investments-EquitiesSlide from 2/14/2000
  • Primarily common stock
  • In past 18 years, it has been the place to be (especially in a low inflationary environment)
  • Dividends have become less important
  • Is the most volatile investment (greatest risk, greatest rewards)
investments equities
  • Primarily common stock
  • From 1982-2001 the market was returning ~ 14.5% (Dow >11,000, NASDAQ >5000), but after bubble burst, returned to ~11%
  • Delayed many retirements, need consistent long term view
investments equities13
  • Dividends have become more important because of tax consequences (15%)
  • Is the most volatile investment (greatest risk, greatest rewards)
investments equities14
  • Is where the young physician should be, because there is time to “ride out” down markets
  • Problem: the market has was too good for too long. Remember 1929 1987 and 2001—They are real (and I have very vivid memories of 1987 and 2001)
investments equities15
  • Types of Stocks
    • Growth—fast growing companies, may have limited equity, but rapidly increasing cash. Amazon, Google, Sirius radio
    • Value—older companies, may have dividends, not currently in favor. General Electric
    • Equity income—Usually have good dividends, stable companies. Altria (do you know the company?), Utilities
investments equities16
  • Mid cap funds: Primarily companies found in the Fortune 100-500. Definitions may change, but not at the level of GE, Microsoft, Dell, etc.
  • Small cap funds: Usually defined as having market capitalization of < 2 billion dollars, usually more volatile, but may have longer term growth
investments equities 2 14 2000
  • Best performance over the past decade have been large capitalization growth stocks (lagged since 2001)
  • Historically they have returned ~11% annually
  • Overtime small caps have done better ~12.5%, but have done poorly last decade (outperformed since 2001)
investments equities18
  • Hedge funds: Use exotic instruments for investments, tend to short markets and use leverage to increase return
  • Did very well during the bubble bursting, but can be “squeezed” if markets turn against them
  • High net worth individuals that can afford loss and expense (managers take first 20% of profit)
  • Historically have returned ~5.5-6%
  • May be more volatile than common stock if less than investment grade or in rapidly changing interest markets
  • Credit grade affects price and return (i.e., Treasury have highest grade and traditionally lower return, while start up companies have low grade and highest return—Junk bonds (i.e., risk)
  • Are affected by multiple risks (interest rate risk, reinvestment rate risk, default risk and purchasing power risk, i.e., inflation risk)
  • Trading bonds can be more risky than stocks (remember, a stock usually has a product or service, not a promise to repay!)
  • Most bonds are in one of three categories:
    • Short term: 1 year or less
    • Intermediate: 2-10 years
    • Long term: > 10 years
  • Common bond strategy is to “ladder bonds,” a portfolio of bonds with varying maturities or “duration”
  • The higher yield for the longer bond is because of default risk, inflation risk and general time value of money (TVM)
  • TVM is the erosion of purchasing power over time and is important in rating bonds, considering retirement and general money management
municipal bonds
Municipal Bonds
  • Primarily issued by local authorities for projects
  • Are tax free at the Federal Level (except for individuals at the Alternative Minimum Tax level)
  • If you live in the state of issue, they are probably tax free at state level. These are called “double tax free”
municipal bonds26
Municipal Bonds
  • Tax effective yield:
    • Divide the yield of the bond by 1 minus your marginal (highest tax rate) tax rate
    • 6% / (1-.28) = 6% / .72 = 8.34%
    • 6% / (1-.35) = 6% / .61 = 9.23%
  • Primarily used by investors in high tax brackets
money markets
Money Markets
  • Return is low (currently ~2.2%) but the risk is negligible
  • Most funds consist of U.S. treasury issues and AAA corporate securities
  • Have a maturity < 270 days
  • Considered as liquid as cash
real estate
Real Estate
  • Your home (usually a first investment)
  • Rental property (can be a real headache unless professionally managed)
  • Limited partnerships (watch out unless you know the market well)
  • REIT (Real estate investment trusts)
    • May be equity or mortgage based
real estate29
Real Estate
  • REIT can be used to diversify a portfolio
  • By definition, they must pay out 90% of the annual income
  • Can be a dividend play (current cash) or capital gain (long term appreciation)
  • Vanguard and others have indexes and mutual fund options (the mutual funds, however, may be in common stock, etc.)
  • Limited market, hence “spread” (difference between what you pay and what it cost to dealer)
  • Markets can be extremely volatile
  • Requires special knowledge (antiques, art, coins, etc.)
  • Probably should be a hobby and not retirement planning (barred from 401 (k)’s etc.)
precious metals
Precious Metals
  • Prior to 1974 (Brenton Woods agreement), gold was a significant factor in international currency stability
  • Free global markets have replaced the gold standard. Many countries have been dumping their gold in response
  • Other metals (platinum and silver) are commodities rather investment vehicles
how to invest
How to Invest?
  • Depends on the level of involvement and level of sophistication
    • Internet has changed investing forever
    • Individual accounts (on-line investors)
    • Stock brokers (individual funds, family of load mutual funds)
    • Mutual funds, self directed
    • Trust companies, banks, etc.
how to invest33
How to invest
  • Level of involvement is key concept
    • Individual stocks, bonds, etc.
    • ETF (baskets of fixed stocks) that can be traded
    • Broker—family of vehicles
    • On line trading, etc.
mutual funds
Mutual Funds
  • Have professional full time managers
  • Professional diversification
  • Have numerous vehicles for investment (stock, bonds, money market, international, emerging market, REITs and annuities)
  • Low cost to get started
mutual funds35
Mutual Funds
  • Evaluating funds:
    • Morningstar, New York Times, Forbes
    • Consider companies that have mutual ownership rather than company
    • Look at families of funds (able to transfer to different funds easily)
    • Consider long term returns rather than the hottest at the moment
mutual funds36
Mutual Funds
  • Different types:
    • Load funds: charge a “load” or expense when buying (front load or A class), selling (back load or B class, usually decreases by 1% annually, starting at 6%) and 12-1(b) (C Class) which is assessed annually
    • Mostly sold by stock brokers, a source of income for them. Average load is 5.75%, decreases with amount invested
mutual funds37
Mutual Funds
  • B funds have come under very close scrutiny because brokers make the most money on them (SEC consider eliminating them as vehicle)
  • Make sure you know the “break” points (load drops to 0 at 1,000,000)
  • Also evaluate turnover, expenses
mutual funds38
Mutual Funds
  • Low load funds:
    • Usually front loads and average 3%.
    • Also sold by brokers
    • May be used by certain mutual fund companies for “hot funds”—Fidelity
  • No load funds: no up front costs, usually distributed by mail or internet, have become increasingly popular
mutual funds39
Mutual Funds
  • Load versus no load:
    • Arguments abound on this issue—may depend on investor comfort level
    • Management fees for some no loads may be as high as 2% annually, while load funds may be <1%
    • Most experts prefer no load funds, but there are some sound arguments on both sides
mutual funds40
Mutual Funds
  • Probably the most important aspect of investing is to have a reasonable mix of funds (index, large cap, mid cap, small cap, growth, international and bonds) and to invest for the long term. Stay away from trends, and keep your discipline
  • The sun don’t shine on the same dog all day long
mutual funds41
Mutual Funds
  • Young investor
    • Invest primarily in growth and small cap stocks and if closely involved consider speculative areas—sector funds
    • Income generation is not important, but long term growth of capital
    • Key concept: Keep the long view!!!!
    • Don’t over react
mutual funds42
Mutual Funds
  • After a good base is funded
    • Add other investments such as large cap value, mid-caps, international stocks and bonds
    • The concept is that not all markets move together and diversification decreases overall volatility
mutual funds43
Mutual Funds
  • Older investor: usually defined as 5 or less years to retirement
    • Increase fixed income such as bonds and mortgage backed securities
    • Lots of controversy to “equity risk”
    • 100 – age = Equity exposure
    • Does not factor in risk tolerance, income needs
mutual funds44
Mutual Funds
  • Latest products are so-called lifestyle funds
  • You select either an age or year of retirement and the fund company will alter the mix as you get older (stock: bond: international stock: money markets)
  • Companies vary greatly on the mix and investment vehicles
exchange traded funds etf
Exchange Traded Funds (ETF)
  • Similar to mutual funds—basket of securities, but traded on exchanges
  • Bundled into a single “stock” that is traded on an exchange as any equity
  • Maybe wave of the future—debates rage in WSJ, etc. on suitability for long term investing vs. mutual funds
  • Know your risk tolerance and needs
  • Investment advice and advisors come in all flavors
  • Recognize the limitations that any one group have to offer
  • Do something!! And monitor results!