Credit Cards in a Medical Practice

04. February 2013 · Write a comment · Categories: Starting a Medical Practice · Tags: credit cards for medical practices, physician contract attorney, starting a medical practice

If you are starting a medical practice, you obviously will NEED to accept credit cards. Many consumers put their entire lives on credit cards, and will be slightly more willing to accept a co-pay if it is “on the card”.

Fees and expenses for accepting credit cards in a medical practices are hard to compare – sometimes the lowest percentage fees are combined with other fees that make the processor more expensive.

I can’t do the research for you, but I can tell what works for me. I’m on my third credit card processor, but I think I’m going to stick with PowerPay. I like their HIPAA compliance, and, most of all, I like their customer service.

By all means, do your own research. But take a look at PowerPay.

Hursh & Hursh, P.C. is a law firm for physicians.

Cumulative Wealth Records were Broken in 2012

15. January 2013 · Write a comment · Categories: investments for physicians · Tags: investments, physician investments, physician investors

It took nearly 4½ years, but the cumulative wealth of an S&P 500 strategy with dividends reinvested finally reached an all-time record (measured on a month-end basis) in March 2012, and finished the year 3.3% above the previous high-water mark set in October 2007. Results were slightly better for a small-company Russell 2000 strategy: As of December 2012, cumulative wealth was 8.5% higher than the previous peak in May 2007.

The table below shows how many years were required to achieve a new high in terminal wealth during some of the major market cycles in the past. Although many investors have expressed frustration with stock market fluctuations in recent years, the time required to recover losses from the peak in October 2007 appears broadly consistent with past cycles. We can draw some measure of solace in acknowledging that past generations of investors often found their patience sorely tested, as well.

Market Cycles Based on Month-End Value of S&P 500 Index with Reinvested Dividends

Peak Month	Trough Month	Loss at Trough	Recovery Month	Years to Recovery
Oct 2007	Feb 2009	–50.9%	Mar 2012	4.4
Mar 2000	Sep 2002	–43.8%	Oct 2006	6.6
Aug 1987	Nov 1987	–29.5%	May 1989	1.8
Dec 1972	Dec 1974	–37.2%	Jun 1976	3.5
Dec 1961	Jun 1962	–22.3%	Apr 1963	1.3
Feb 1937	Mar 1938	–50.0%	Mar 1944	7.1
Aug 1929	Jun 1932	–83.4%	Jan 1945	15.4

Every year brings its share of surprises. Perhaps the biggest surprise of 2012 was the strength in stock and bond prices around the world despite a steady stream of discouraging news events. Individual investors and professionals alike were often flummoxed by markets that failed to behave in accordance with their pessimistic assessment of the future. A few examples are listed below.

(Index performance data represents total return for each respective three-month period.)

First Quarter 2012

S&P 500 Index: 12.59%

MSCI World ex-USA Index: 11.34%

“Investors go into 2012 hunkered down, frustrated, and skeptical. … If there is a common theme among analysts’ forecasts for stocks, commodities, and currencies, it is to brace for more of the wild swings that were the hallmark of 2011.”

Tom Lauricella, “World’s Woes Leave Lasting Scars,” Wall Street Journal, January 3, 2012.

“Morgan Stanley’s chief US equity strategist is the most bearish market strategist at any major Wall Street firm when it comes to forecasting the outlook for stocks in 2012. He took the same pessimistic view last year—and it turned out to be the most accurate.”

Jonathan Cheng, “A New Year But the Same Ol’ Pessimism,” Wall Street Journal, January 7, 2012.

“Clearly we are in a cycle of reaching pinnacle earnings, and at some point we are going to drop.”

Quotation attributed to John Butters, senior analyst, FactSet. Michael Mackenzie and Ed Crooks, “Earnings Growth Falters for S&P 500,” Financial Times, January 9, 2012.

“The world economy will experience a brutal slowdown. … Every European country will be in recession in 2012, and probably in 2013. … Equity markets around the world will top out during this quarter and then enter the next down leg in the cyclical bear market that started last spring.”

Quotation attributed to Felix Zulauf, Zulauf Asset Management. Lauren R. Rublin, “Barron’s 2012 Roundtable, Part One,”Barron’s, January 16, 2012.

“Unemployment in the euro zone jumped to a 15-year high Thursday, while inflation unexpectedly accelerated.”

Brian Blackstone, “Poor Economic Data Slam Europe,” Wall Street Journal, March 2, 2012.

Second Quarter 2012

S&P 500 Index: -2.75%

MSCI World ex-USA Index: -7.38%

“Nearly one Spaniard in four is unemployed, according to data released yesterday, as the country’s financial predicament prompted a government minister to talk of a ‘crisis of enormous proportions.’ ”

Victor Mallet and Robin Wigglesworth, “Spain Jobless Rate Nears One in Four,” Financial Times, April 28, 2012.

“Suddenly it has become easy to see how the euro—that grand, flawed experiment in monetary union without political union—could come apart at the seams. We’re not talking about a distant prospect, either. Things could fall apart with stunning speed in a matter of months, not years.”

Paul Krugman, “Apocalypse Soon,” New York Times, May 18, 2012.

“Feeble hiring by US employers in May roiled markets and dimmed the already cloudy outlook for an economy that appears to be following Europe and Asia into a slowdown.”

Josh Mitchell, “Grim Jobs Report Sinks Markets,” Wall Street Journal, June 2, 2012.

“Greece will be forced to return to the drachma and devalue, and the default will cause bank runs and money flowing into Germany and the United States as the only viable safe haven bet.”

Quotation attributed to Mark J. Grant, managing director, Southwest Securities. Andrew Ross Sorkin, “One Wall Street Seer Says the Greek Tragedy Is Near,” New York Times, June 18, 2012.

“With leading investors shunning shares, a six-decade passion for equities has come to an end—leading to a less flexible, more conservative model of corporate financing.”

John Authers and Kate Burgess, “Out of Stock,” Financial Times, June 24, 2012.

“There is no natural flow into equities for the next five to 10 years. The rules of the game have changed.”

Quotation attributed to Andreas Uttermann, Allianz Investment Management. John Authers and Kate Burgess, “Out of Stock,”Financial Times, June 24, 2012.

“The quarterly rite known as earnings ‘preannouncement’ season is under way—and so far it isn’t boding well for stocks. … The downward revision in [earnings] guidance could portend a long slog for stocks and the overall economy, say analysts.”

Joe Light, “Earnings Bode Ill for Stocks,” Wall Street Journal, June 30, 2012.

Third Quarter 2012

S&P 500 Index: 6.35%

MSCI World ex-USA Index: 7.49%

“Investors already fretting about the health of the world’s biggest economies now face another worry: disappointing earnings. ‘The pillar of strength is US corporate earnings, and now we’re seeing signs that that is cracking,’ [says Morgan Stanley’s chief stock analyst].”

Jonathan Cheng, “New Jolt Looms for Investors: Earnings,” Wall Street Journal, July 9, 2012.

“The US economy slowed sharply in the second quarter, growing just 1.5% as consumers slashed spending and businesses grew more cautious about hiring and investing, underscoring that an already wobbly recovery is losing even more steam.”

Neil Shah, “Weak Economy Heads Lower,” Wall Street Journal, July 28, 2012.

“If small investors needed any more reason to be disgusted with the stock market, they got it Wednesday.”

Neil Shah, “Weak Economy Heads Lower,” Wall Street Journal, July 28, 2012.

“Wednesday’s tumble wasn’t quite as scary as the nearly $1 trillion drop of May 6, 2010, but it conveyed the same sense of markets spinning out of control and trading machinery gone mad.”

Jason Zweig, “When Will Retail Investors Call it Quits?” Wall Street Journal, August 2, 2012.

“The global slowdown in demand is hitting the manufacturing sector in the world’s largest economies, with activity sinking to its lowest level since June 2009, when most industrialized countries were mired in recession.”

Norma Cohen, “Manufacturing Hits Three-Year Low,” Financial Times, August 2, 2012.

“Activity in China’s manufacturing sector—the engine for much of Asia’s economy—shrank at the fastest pace since the depth of the global financial crisis.”

Arran Scott and Alex Brittain, “Manufacturing Downturn Spreads Gloom across Asia, Europe,” Wall Street Journal, September 4, 2012.

Fourth Quarter 2012

S&P 500 Index: -0.38%

MSCI World ex-USA Index: 5.89%

“The slowdown in the global economy and anemic US recovery are expected to result in one of the worst US quarterly earnings seasons since late 2009.”

Mahmudova and Michael Mackenzie, “Slowdown Set to Take Toll on US Earnings,” Financial Times, October 8, 2012.

“This is unquestionably the worst earnings season relative to expectations that we’ve had in two or three years.”

Quotation attributed to Chris Jones, J.P. Morgan Asset Management. Jonathan Cheng and Kate Linebaugh, “Weak Earnings Spark Selloff,” Wall Street Journal, October 24, 2012.

“Wall Street’s post-election stupor is turning into a real headache for some stocks, as many well-known and even ballyhooed names fall into bear market territory. … Nearly a quarter of the stocks in the Standard & Poor’s 500—122—are in a bear market, unofficially defined as a 20% decline from a recent high.”

Matt Krantz, “Big Name Stocks Hit Bear Markets,” USA Today, November 9, 2012.

“China’s main stock index closed at its lowest level in almost four years Tuesday and slipped below a key psychological level, indicating investor worries over the health of the nation’s public equity market.”

Shen Hong, “Shares Hit 4-Year Low in China,” Wall Street Journal, November 11, 2012.

“Fears that Washington will prove unable to avoid looming tax increases and spending cuts have eclipsed concerns about Europe’s debt crisis, top business executives said Tuesday, and they worry that political gridlock might tip the economy into recession next year.”

Damian Palette and Sudeep Reddy, “Business Leaders Spooked by Fiscal Cliff,” Wall Street Journal, November 14, 2012.

“Moody’s downgrades France sovereign debt rating, citing its ‘persistent structural economic challenges.’ ”

William Horobin, “France Loses Another Top Rating,” Wall Street Journal, November 20, 2012.

2012 Review: Economy & Markets

08. January 2013 · Write a comment · Categories: investments for physicians · Tags: fixed income investments for physicians, investments, physician investments, physician investors

Throughout 2012, nervous investors did not have to look hard for reasons to avoid the financial markets. The daily headlines provided abundant gloom to feed their doubts, but investors who acted on impulse could have missed a potential opportunity to participate in strong returns across the global financial markets.

The year opened with lingering concern about the weak US recovery, the debt crisis in Europe, and political uncertainty around the world. Many financial pundits had predicted another lackluster year for stocks and more market volatility. Some predicted a euro zone breakup triggered by impending debt defaults in Greece and Portugal. The global economy was showing early signs of a slowdown, and many investors were weighing the potential economic impact of the US elections and so-called “fiscal cliff.”

Despite a steady diet of bad news, most markets around the world climbed the proverbial “wall of worry” to log strong returns. Major market indices around the globe delivered double-digit total returns, and as a group, the non-US developed and emerging markets outperformed the US equity market. The total market value of global equities, as measured by the MSCI All-Country World Index, increased by an estimated $6.5 trillion in 2012, while market-wide volatility fell to its lowest level in six years.

See the full-sized chart

The above graph highlights some of the year’s prominent headlines in context of broad US market performance, as measured by the Russell 3000 Index. These headlines are not offered to explain market returns. Instead, they serve as a reminder that investors should view daily news events from a longer-term perspective, and avoid making investment decisions based solely on the news.

The world stock market performance chart below offers a snapshot of global stock market performance, as measured by the MSCI All Country World Index. The global headlines show that despite an abundance of negative news during the year, global stocks had an exceptional year.

See the full-sized chart

Economic Backdrop

Sluggish US Recovery

The current expansion, which started in mid-2009, has been deemed the weakest in postwar history. In past cycles, strong recessions were followed by strong recoveries. But the current rebound has produced economic growth of just 2.4%, compared with a 3.4% postwar average. In 2012, investors watched eagerly for signs that the US recovery was gaining steam. The weak economy was the central focus in the presidential election, and the debate raged over what combination of fiscal, tax, and regulatory policies would lead to higher growth and job gains.

Overall, there was continued weakness in job growth, real wages, consumer confidence, and spending. Positive news also surfaced throughout the year, including healthy corporate earnings and strong balance sheets, continued low inflation, falling oil prices, historically low mortgage rates, a strengthening housing market, and upticks in auto sales and manufacturing activity late in the year.

Continued European Debt Troubles

The euro zone continued its struggle to contain the sovereign debt problems of several member nations, including Spain, Italy, and Greece. The inability of these governments to pay interest on their debt has impacted the banks in stronger European countries, notably France and Germany, which have large exposure to the sovereign bonds. The European recession prompted banks that are holding the troubled assets to reduce lending, which contributed to lower growth across the region.

During 2012, the euro finance ministers agreed on a second bailout package for Greece, which included a 53% write-down for investors in Greek bonds. In May, concern grew over Spain’s fiscal health when a major bank requested a massive bailout and disclosed troubled assets. Following the Greek election in June, the European central bank pledged to provide monetary support to protect the euro, triggering a rally in stocks and bonds.

Rising Global Economic Worries

According to International Monetary Fund estimates, the global economy grew 3.3% in 2012—down from 3.8% in 2011 and 5.1% in 2010. There was concern that the worsening euro debt crisis would spread to other economies and markets. Europe accounts for a large portion of global demand, especially for export-dependent China. Germany’s economy is the fourth largest in the world, followed closely by France. Together, the combined economies of all 17 euro-area countries are nearly equal to that of the US, in GDP terms.

During the first half of 2012, China’s economy showed signs of weakening, with growth expected to fall to around 8%—a significant drop from its historical growth rate. China exports heavily to the euro zone. The crisis also threatened to reduce China’s exports to poorer emerging economies in Africa and Latin America, where nations rely heavily on European banks for trade financing. In the latter part of 2012, concerns over slowing growth in emerging markets had begun to ease as economies appeared to bottom out.

Stabilizing Actions by Central Banks

Many investors did not appear to anticipate the degree to which markets would positively respond to central bank actions. Many analysts credit the US and European central banks with boosting investor confidence in both markets, and in the case of the European Union, helping avert a euro breakup. The injection of liquidity into the respective economies also helped mute volatility between currencies. In September and October, the Bank of Japan announced measures to provide monetary stimulus through 2013 in response to slowing economic activity.

A Search for Higher Yield

Interest rates dropped slightly to near-record lows during the year. The rate move drove up bond market prices and total returns. But with the Fed and other central banks committing to keeping the financial markets liquid for an indefinite period, some investors found appeal in riskier fixed income securities, such as junk bonds, emerging market debt, and collateralized loan obligations that offer higher yields.

Wall Street responded to rising demand with new offerings. Junk bond issuance hit a record $350 billion in 2012, with many of the issues carrying fewer protections for bondholders. Investors also flocked to high-yielding alternative investments, such as energy partnerships and venture capital funds. Observers warned that the combination of unchecked risk appetites, low interest rates, and high bond prices may present danger for investors who are pursuing yield in markets they do not understand.

2012 Investment Overview

Highlights

After a flat 2011, the US stock market posted a strong first quarter as the US economy showed signs of improvement and perceptions of the European debt crisis improved. The S&P 500 had its best first-quarter rally in 14 years, closing near a four-year high and a 12.6% total return. When the second quarter began, markets retreated as Europe’s debt crisis returned to center stage and signs of slowing global growth emerged—especially in China, where lower world demand had begun to affect exports.

By June, US stocks had surrendered all of the year’s gains as markets weighed how credit problems in Spain and the anticipated Greek elections would affect the euro zone’s sovereign debt problems. The US economy showed more signs of weakness. Stock markets around the globe stumbled in the second quarter, with non-US stocks suffering the most. During the summer, the markets improved, as European tensions eased on increased European Central Bank loans to Spain and Italy. There was also rising speculation that the Federal Reserve was prepared to deliver additional monetary stimulus to the US economy. Throughout the summer, analysts reduced their estimates of expected corporate earnings growth as an economic slowdown threatened to reduce profits.

In September, the Fed announced its third round of quantitative easing to push long-term interest rates lower and encourage more borrowing and investment. The Bank of Japan also announced an ambitious plan to stimulate its economy. These central bank actions helped drive the markets during the third quarter. The S&P 500 surged 14% from its June 1 low and reached a five-year high on September 14. US economic indicators sent mixed signals, but the economy reportedly expanded at a 3.1% rate for the quarter—the fastest pace since late 2011. Mortgage rates reached historical lows, and year-over-year home prices rose for the first time since the 2007 financial crisis. Heightened inflation fears led to a modest decline in Treasury prices, while gold and most other commodities rallied.

In the fourth quarter, investor attention turned to the close US election and the prospect of gaining certainty regarding future government spending, taxes, growth policy, and regulation. Stocks fell in the weeks following the election as investors gauged the prospects of continued political gridlock and the economic impact of spending cuts and tax hikes, known as the “fiscal cliff.” The S&P recovered its earlier losses by late December, however, and as the year ended, lawmakers scrambled to reach a compromise.

Market Summary

All major US market indices were up substantially for 2012. The S&P 500 gained 13.4%, and with dividends included, logged a total return of 16%. The NASDAQ Composite Index gained 15.9% for the year, and the Russell 2000, a popular benchmark for small company US stocks, returned 16.3%. The Dow Jones Industrial Average gained 7.3%. The market’s strong performance came with lower volatility, as gauged by the CBOE Volatility Index, which had its largest annual decrease since 2009.

Non-US developed market indices performed even better. The MSCI World ex USA Index, a benchmark for large cap stocks in developed markets outside the US, returned 16.4%. The MSCI Emerging Markets Index returned 18.2%.

Most country market returns were positive, although the dispersion of returns was broad. Among the 45 equity markets tracked by MSCI, only three—Chile (–0.1%), Israel (–6.2%), and Morocco (–12.6%)—posted negative total returns (gross dividends) in their local currency. Turkey, Egypt, and Belgium were the top three performers, with returns of 55.8%, 54.6%, and 38.5%, respectively. Greece (4.1%), Portugal (3.3%), Spain (3.1%), and the Czech Republic (0.2%) had the lowest positive total returns (gross dividends; local currency).

The currency markets were relatively stable for the year due to the offsetting effect of US, European, and Japanese central banks. The US dollar lost ground against the euro and many emerging market currencies, which boosted equity returns for US investors. The dollar gained against the yen as a result of Bank of Japan’s monetary easing.

Small cap and large cap stocks had similar performance in the US, but small cap substantially outperformed large cap in both the non-US developed and emerging markets. Along the price dimension, value stocks outperformed growth stocks in the US and non-US developed markets, while slightly underperforming growth in emerging markets.

In the fixed income arena, US TIPS performed exceptionally well, returning 6.9%, and short-term government bonds returned 2.1%. Investors seeking a safe haven from global market uncertainty poured money into US Treasury securities, which pushed down yields.

Real estate securities in the US also had a strong 2012, returning 17.1%. Global real estate had a banner year, with a total return of 31.9%, which was the highest-ranked return of major world asset classes. Commodities were the only group to show negative returns for the year, at -1.06%. The decline was their second annual drop, which had not occurred since the late 1990s.

Russell data copyright © Russell Investment Group 1995-2013, all rights reserved. Dow Jones data provided by Dow Jones Indexes. MSCI data copyright MSCI 2013, all rights reserved. S&P data provided by Standard & Poor’s Index Services Group. The BofA Merrill Lynch Indices are used with permission; copyright 2013 Merrill Lynch, Pierce, Fenner & Smith Inc.; all rights reserved. Citigroup bond indices copyright 2013 by Citigroup. Barclays data provided by Barclays Bank PLC. Indices are not available for direct investment; their performance does not reflect the expenses associated with the management of an actual portfolio.

Past performance is no guarantee of future results. This information is provided for educational purposes only and should not be considered investment advice or a solicitation to buy or sell securities.

2012: The Year It Didn’t Happen

07. January 2013 · Write a comment · Categories: investments for physicians · Tags: investments, physician investments, physician investors

Judging by the headlines in the financial press, investors spent much of the past year anxiously awaiting one calamity after another that failed to occur. The plunge off the so-called fiscal cliff was averted. The euro zone did not fall apart. China’s economy and stock market did not crash. The bond market did not implode. The re-election of President Barack Obama did not derail the US market. The “flash glitch” in early August did not lead to further trading disruptions. Doomsday did not arrive on December 21, as some interpreters of the Mayan calendar suggested it would.

Instead, the belief that owning a share of the world’s businesses is a sensible idea appears to be alive and well, despite suggestions from some observers that the “cult of equity” is dead. For the year, total return was 16.42% for the MSCI World Index in local currency, and 16.00% for the S&P 500 Index. Among forty-five global stock markets tracked by MSCI, only three posted negative results in local currency (Chile, Israel, and Morocco), and twelve markets had total returns in excess of 25%, with Turkey leading the pack at 55.8%. Although much of the financial news over the past year highlighted Europe’s fragile financial health, most of the region’s equity markets outperformed the US, including Austria, Belgium, Denmark, France, Germany, the Netherlands, Sweden, and Switzerland. For US dollar-based investors, results were further enhanced by a modest decline in the US dollar relative to the euro, the Danish krone, and the Swiss franc.

As is so often the case, earning the rewards offered by the world’s capital markets may have required a combination of discipline and detachment that eluded many investors.

2012 Index and Country Performance

Total return (gross dividends) for 12-month period ending December 31, 2012.

MSCI Index	Local Currency	USD
WORLD	16.42%	16.54%
WORLD ex USA	16.73	17.02
EAFE	17.89	17.90
EMERGING MARKETS	17.39	18.63
EMERGING + FRONTIER MARKETS	17.15	18.35
TURKEY	55.80	64.87
EGYPT	54.66	47.10
BELGIUM	38.56	40.72
PHILIPPINES	38.16	47.56
THAILAND	30.84	34.94
DENMARK	30.37	31.89
GERMANY	30.07	32.10
INDIA	29.96	25.97
HONG KONG	28.01	28.27
POLAND	27.05	40.97
AUSTRIA	25.07	27.02
SOUTH AFRICA	25.07	19.01
COLOMBIA	23.87	35.89
SINGAPORE	23.54	30.99
NEW ZEALAND	23.28	30.38
CHINA	22.85	23.10
JAPAN	21.78	8.36
FRANCE	20.93	22.82
AUSTRALIA	20.77	22.30
MEXICO	20.09	29.06
PERU	19.73	20.24
THE NETHERLANDS	19.35	21.21
SWITZERLAND	18.91	21.47
SWEDEN	17.11	23.41
USA	16.13	16.13
FINLAND	14.71	16.50
KOREA	12.89	21.48
TAIWAN	12.84	17.66
HUNGARY	11.86	22.79
INDONESIA	11.83	5.22
ITALY	11.72	13.46
NORWAY	11.63	19.70
UNITED KINGDOM	10.24	15.30
MALAYSIA	10.23	14.27
BRAZIL	10.14	0.34
RUSSIA	9.73	14.39
CANADA	7.46	9.90
IRELAND	4.66	6.29
GREECE	4.11	5.73
PORTUGAL	3.36	4.98
SPAIN	3.12	4.73
CZECH REPUBLIC	0.26	3.48
CHILE	–0.14	8.34
ISRAEL	–6.24	–3.91
MOROCCO	–12.63	–11.48

Physician investments shouldn’t be based on current events

21. December 2012 · Write a comment · Categories: investments for physicians · Tags: active management, investments, physician investments, physician investors

The holiday season encourages media retrospectives about financial markets. It’s fun to match these up with what people were saying a year before.

In December 2011, Barron’s told investors to “buckle up.” The consensus prediction of its panel of ten stock market strategists and investment managers was for the S&P 500 to end 2012 some 11.5% higher, at about 1,360.¹

“That sounds like a big gain, but a lot of things have to go right for the market to make such impressive headway,” the writer said. “Even the most bullish of these Street seers fears stocks could be more wobbly in the next six months than in the six months past.”

There was so much for forecasters to get right—the negotiation of the euro zone crisis, uncertainties over the growth of earnings, the roadblock of the US presidential election, and the challenge for emerging economies to sustain high economic growth rates.

Twelve months later, markets are still grappling with many of the same issues, though from different angles. Much of Europe is either in recession or growing only modestly, unemployment is high, and a number of countries that use the euro are unable to pay their debts. The US presidential election gave way to worries over the “fiscal cliff,” while Chinese exports have been hit by the slowdown elsewhere.

In the meantime, however, there have been solid gains in many equity markets, including parts of Europe and Asia, as well as North America. That Barron’s panel forecast of the S&P 500 reaching 1,360, which the magazine said was ambitious, now looks conservative. The index was 4% above that level by mid-December. What’s more, some of the strongest performances have been in emerging and frontier markets.

The table below shows performances for 2012 (through November 30) and annualized returns for the past three years for twenty developed and twenty emerging markets, using MSCI country indices. Returns are ranked on a year-to-date basis and expressed in US dollars.

TOP PERFORMERS IN 2012

Developed Markets (USD)
Country	YTD	3YR
Belgium	36.8%	6.7%
Denmark	28.1%	10.9%
Singapore	27.1%	10.4%
Hong Kong	27.1%	10.3%
New Zealand	26.8%	14.7%
Germany	25.8%	4.2%
Austria	19.0%	-7.8%
Switzerland	18.8%	8.0%
Australia	18.6%	7.1%
Netherlands	17.4%	2.9%
France	17.1%	-1.5%
Sweden	17.0%	9.2%
Norway	16.8%	7.0%
United States	14.3%	10.7%
United Kingdom	12.9%	7.1%
Finland	9.7%	-6.0%
Italy	8.6%	-10.5%
Canada	7.4%	5.2%
Japan	2.7%	0.8%
Greece	2.0%	-42.5%

Emerging Markets (USD)
Country	YTD	3YR
Turkey	53.6%	12.8%
Philippines	42.4%	24.8%
Egypt	36.0%	-4.5%
Pakistan	28.9%	13.3%
Poland	28.3%	0.3%
Thailand	26.8%	27.3%
Hungary	26.7%	-9.1%
Colombia	26.1%	21.0%
India	26.0%	-0.3%
Mexico	24.0%	12.6%
China	17.1%	0.1%
Taiwan	15.6%	6.6%
Korea	15.3%	11.7%
Peru	13.4%	8.5%
Malaysia	9.8%	14.9%
South Africa	7.9%	9.2%
Russia	7.1%	1.9%
Chile	3.3%	8.8%
Indonesia	2.9%	15.6%
Jordan	-1.7%	-9.0%

Source: MSCI country indices through November 30, 2012.

Among developed markets, three members of the seventeen-nation euro zone—Belgium, Germany, and Austria—were among the top ten best-performing equity markets this year. Leading the way among emerging markets was Turkey, which regained its investment grade ranking from agency Fitch in November.

While not one of the top performers, the US market still delivered positive returns in what many observers judged as a highly uncertain economic and political climate.

And while much of the media focus has been on the so-called BRIC emerging economies of Brazil, Russia, India, and China, the real stars in the emerging market space the past three years have been the Southeast Asian markets of the Philippines, Thailand, and Indonesia.

There are a few lessons here. First, while the ongoing news headlines can be worrying for many people, it’s important to remember that markets are forward-looking and absorb information very quickly. By the time you read about it in the newspaper, the markets have usually gone on to worrying about something else.

Second, the economy and the market are different things. Bad or good economic news is important to stock prices only if it is different from the information that the market has already priced in.

Third, if you are going to invest via forecasts, you need to realize that it is not just about predicting what will happen around the globe, but it is also about predicting correctly how markets will react to those events. That’s a tough challenge for the best of us.

Fourth, you can see there is variation in the market performance of different countries. That’s not surprising given the differences in each market in sectoral composition, economic influences, and market dynamics. That variation provides the rationale for diversification—spreading your risk to smooth the performance of your portfolio.

So it’s fine to take an interest in what is happening in the world. But care needs to be taken in extrapolating the headlines into your investment choices. It’s far better to let the market do the worrying for you and diversify around risks you are willing to take.

In the meantime, many happy returns!

Balancing Physician Fixed Income Decisions

06. November 2012 · 1 comment · Categories: investments for physicians · Tags: active management, fixed income investments for physicians, investments, physician investments, physician investors

Fixed income can play an important role in a portfolio. But its role may vary according to a physician investor’s financial needs and concerns. For example, many physician investors look to fixed income for safety, income, and more stability in their portfolios. They must weigh these priorities against their concerns over future interest rates, inflation, government debt, and other factors that might affect fixed income returns.

Striking this balance can be a challenge in any market environment, but especially now, as low interest rates have sent many physician investors on a quest for higher-yield bonds or alternative investments. Depending on your approach, this pursuit of yield may invite more risk—some of which may be hard to see or understand.¹

So, what’s an investor to do? How can you make prudent fixed income decisions while also addressing today’s low interest rates? Consider these principles:

Remember How Markets Work

The same core investment principles apply in any market environment. One key principle is that in a well-functioning capital market, securities prices reflect all available information. Today’s bond values reflect everything the market knows about current economic conditions, growth expectations, inflation, Fed monetary policy, and the like. So, according to this principle, the possibility of rising interest rates is already factored into fixed income prices.

This is one reason investors should view future interest rate movements as unpredictable. Even the market experts who have access to vast amounts of research have a hard time predicting the direction of interest rates. For instance, despite regular predictions of rising interest rates over the past two years, nominal yields on US Treasuries and longer-term bonds have continued falling and now are at historic lows.

Rather than trying to predict macroeconomic forces that are difficult to foresee, investors can look to the market to set prices and focus on the variables within their control.

Start with a Clearly Defined Goal

Fixed income choices should follow a broader investment strategy that defines the role of fixed income in a portfolio. The portfolio can then be customized to meet those specific goals while managing tradeoffs.

The chart below illustrates how portfolio objectives can influence a fixed income approach. An investor who wants to seek to avoid losing market value might have a different fixed income allocation from someone who wants to take a balanced approach, needs immediate income, or is seeking higher returns. Investors with different objectives typically have different tradeoffs regarding risk, expected return, and costs.

Know What You Own

Strive for transparency in a portfolio. This means understanding an investment manager’s basic strategy and knowing how the instruments held in the portfolio might respond in different economic, market, and interest rate scenarios.

Unfortunately, investors who chase performance often make their investment decisions based on the past performance and perceived popularity of the strategy. For example, some of the mutual fund categories experiencing the heaviest inflows of cash in the industry are in asset groups that have recently experienced higher than average yields. Higher yields are typically accompanied by higher risks. But do investors know what risks their managers are taking to deliver those attractive yields?

Understand the Tradeoffs

When reaching for higher yield, investors should carefully consider the potential effects of their decisions on expected portfolio performance and risk. In the fixed income arena, investors have two primary ways to increase expected yield and returns on bonds. They can:

Extend the overall maturity of their bond portfolio (take more term risk).
Hold bonds of lower credit quality (take more credit risk).

These may be reasonable actions. But pursuing higher income means accepting more risk, as measured by interest rate movements, price volatility, or greater odds of losing value if the issuer defaults.

As shown in the graph below, higher yield can also bring potentially higher volatility. Note that high-yield bonds (as represented by the Barclays Capital US Corporate High Yield Index) have exhibited more volatility relative to other bonds.

Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Barclays Capital data provided by Barclays Bank PLC. CRSP data provided by the Center for Research in Security Prices, University of Chicago. BofA Merrill Lynch indices are used with permission; copyright 2012 Merrill Lynch, Pierce, Fenner & Smith Incorporated; all rights reserved. Merrill Lynch, Pierce, Fenner & Smith Incorporated is a wholly owned subsidiary of Bank of America Corporation.²

Pay Attention to Costs

Investors typically do not realize that investment-related costs determine a large part of a portfolio’s yield and return. This applies especially to fixed income securities. In fact, research has shown that a bond mutual fund’s expense ratio helps explain much of its net performance—and funds with the highest expenses tended to have the lowest performance within their peer group.³

Consider a Global Fixed Income Strategy

Investors have other tools to enhance risk and expected returns in fixed income. You can expand your opportunity set by moving beyond your domestic fixed income market to access yield curves in other country markets. By owning bonds issued by governments and companies from around the world, investors can enhance diversification in their fixed income portfolios. After hedging against currency risk, bond markets around the world have only modest correlations. (Correlation refers to how similarly two investments perform in the same period.) As a result, a global hedged portfolio should exhibit lower volatility than a single-country portfolio or a global portfolio that does not hedge currency risk, and offer the opportunity to take advantage of more attractive yield curves abroad.

Summary

No one really knows when and by how much interest rates will change. Many market pundits have forecasted an upward move for several years now. Investors looking for higher bond yields should understand the higher risks tied to their decisions. Most investors might be best-served by building a fixed income strategy to complement their broader portfolio objectives, understanding the sources of risk and expected return, paying attention to fees, and looking beyond their own country to capture yields in other countries’ markets.

1. When interest rates rise, the value of an existing bond declines; when rates fall, existing bond values rise. The market adjusts a bond’s price to match the yield available on a new instrument. Investors who hold fixed income securities with longer maturities are exposed to the amplified effects of term risk. A long-term bond is more exposed to rate changes than a short-term instrument, and usually (but not always) offers a higher yield to compensate investors for the extra risk. Also, lower-coupon bonds are more affected by interest rate changes than higher-coupon bonds. For example, if rates move 1%, a bond that pays 3% will experience a greater gain or loss than one paying 5%.

2. CRSP data includes indices of securities in each decile as well as other segments of NYSE securities (plus AMEX equivalents since July 1962 and NASDAQ equivalents since 1973). The Barclays Capital US Corporate High Yield index measures the performance of fixed-rate, non-investment grade debt. The Barclays Capital US Aggregate Bond Index measures the performance of the investment grade, US dollar-denominated, fixed-rate taxable bond market. The BofA Merrill Lynch One-Year Treasury Note Index measures the performance of US Treasury notes. The index is representative of the universe of fixed-rate, non-investment grade debt. Indices are not investment products available for purchase.

3. The study examined monthly alpha and expense ratios for bond funds in the CRSP survivorship-bias-free mutual fund database from January 1992 to December 2011. Source: Dimensional Fund Advisors.

The Top Ten Physician Money Excuses

17. October 2012 · Write a comment · Categories: investments for physicians · Tags: active management, investments, physician investments, physician investors

Physicians, like all human beings, have an astounding facility for self-deception when it comes to their own money.

We tend to rationalize our own fears. So instead of just recognizing how we feel and reflecting on the thoughts that creates, we cut out the middle man and construct the facade of a logical-sounding argument over a vague feeling.

These arguments are often elaborate, short-term excuses that we use to justify behavior that runs counter to our own long-term interests.

Here are ten of these excuses:

1) “I just want to wait till things become clearer.”

It’s understandable to feel unnerved by volatile markets. But waiting for volatility to “clear” before investing often results in missing the return that can accompany the risk.

2) “I just can’t take the risk anymore.”

By focusing exclusively on the risk of losing money and paying a premium for safety, we can end up with insufficient funds for retirement. Avoiding risk can also mean missing an upside.

3) “I want to live today. Tomorrow can look after itself.”

Often used to justify a reckless purchase, it’s not either-or. You can live today and mind your savings. You just need to keep to your budget.

4) “I don’t care about capital gain. I just need the income.”

Income is fine. But making income your sole focus can lead you down a dangerous road. Just ask anyone who recently invested in collateralized debt obligations.

5) “I want to get some of those losses back.”

It’s human nature to be emotionally attached to past bets, even losing ones. But, as the song says, you have to know when to fold ‘em.

6) “But this stock/fund/strategy has been good to me.”

We all have a tendency to hold on to winners too long. But without disciplined rebalancing, your portfolio can end up carrying much more risk than you bargained for.

7) “But the newspaper said…”

Investing by the headlines is like dressing based on yesterday’s weather report. The news might be accurate, but the market usually has reacted already and moved on to worrying about something else.

8) “The guy at the bar/my uncle/my boss told me…”

The world is full of experts, many who recycle stuff they’ve heard elsewhere. But even if their tips are right, this kind of advice rarely takes your circumstances into account.

9) “I just want certainty.”

Wanting confidence in your investments is fine. But certainty? You can spend a lot of money trying to insure yourself against every possible outcome. While it cannot guard against every risk or possible outcome, it’s cheaper to diversify your investments.

10) “I’m too busy to think about this.”

We often try to control things we can’t change—like market and media noise—and neglect areas where our actions can make a difference—like the costs of investments. That’s worth the effort.

Given how easy it is to pull the wool over our own eyes, it can pay to seek independent advice from someone who understands your needs and circumstances and who holds you to the promises you made to yourself in your most lucid moments.

Call it the “no more excuses” strategy.

Another Wall of Worry

03. October 2012 · Write a comment · Categories: investments for physicians

Stock prices rallied sharply around the world in the third quarter, with 42 out of 45 countries tracked by MSCI showing positive returns in US dollar terms. Total return exceeded 10% in 19 different markets, while Ireland, Japan, and Morocco registered minor losses.

For the twelve-month period ending September 30, 2012, 40 markets had positive returns, with six countries—including the US—delivering a total return in excess of 30%, according to MSCI.

Physician investors have been confronted with a steady drumbeat of discouraging news over the past year—a feeble economic recovery here and abroad, staggering budget deficits with no solution in sight, the prospect of a Eurozone breakup, an acrimonious presidential election campaign, banking scandals, and a punishing drought across the US. Considering all the uncertainty, it’s not difficult to explain why physician mutual fund investors have generally favored fixed income strategies rather than equities over this past twelve-month period.

Many physician investors are easily persuaded that successful investing requires constant attention to current events and frequent adjustment of their equity exposure. The news excerpts below represent just a small sample of the issues physician investors might have dwelled on. We suspect that many physician investors not only failed to achieve their respective market rate of return over the past twelve months but would be surprised to learn how well stock prices have done in many markets over that period.

“Unless politicians act more boldly, the world economy will keep heading toward a black hole… At a time of enormous problems, the politicians seem Lilliputian. That’s the real reason to be afraid.”

“The World Economy: Be Afraid,” Economist, October 1, 2011.

“Investors also are nervous because October historically has been one of the more volatile months for stocks.”

E.S. Browning. “Market Nears Bear Territory,” Wall Street Journal, October 4, 2011.

“The Dow Jones Industrial Average turned in its worst Thanksgiving-week performance since markets began to observe the holiday in 1942.”

Steven Russolillo. “Investors Go Shopping—Just Not for Stocks,” Wall Street Journal, November 26, 2011.

“Over the past three months, investor uncertainty about the soundness of bank balance sheets, manifested in the daily volatility of stock prices, is back up to levels seen historically only in advance of two great crises… This dynamic has played out twice before in the past 85 years—in the Great Depression and the panic of 2008-09—with devastating consequences for the broader economy.”

Andrew Atkeson and William E. Simon, Jr. “The Rising Fear in Bank Stock Prices,” Wall Street Journal, November 28, 2011.

“The managing director of the International Monetary Fund has raised fears that the world faces the risk of economic retraction, rising protectionism, isolation, and… what happened in the ’30s (Depression).”

Hugh Carnegy and George Parker. “IMF Chief Warns over 1930s-Style Threats,” Financial Times, December 16, 2011.

“It is hard to avoid the conclusion that stock prices are levitating at over-inflated values, thanks to the herd-like behavior and collective fear of investment institutions.”

Financial Times, December 30, 2011.

“An escalation of the crisis would spare no one. Developed and developing country growth rates could fall by as much or more than in 2008-09.”

Quotation attributed to Andrew Burns, head of macroeconomics, World Bank. Chris Giles. “World Bank Warns on the Risk of Global Economic Meltdown,” Financial Times, January 18, 2012.

“This may be the unhappiest bull market ever. We love to hate it, but that may be just egging it on.”

Tom Petruno. “The Unhappiest Bull Market Ever,” Los Angeles Times, February 12, 2012.

“US companies are more uncertain about the future than at any point since the financial crisis, with just one in five of the biggest corporations making any predictions as they published quarterly results.”

Ajay Makan. “Doubt Haunts US Company Results,” Financial Times, February 21, 2012.

“For nearly a decade, it turns out, the most accurate forecasts have come from the fringe. So it’s upsetting to learn that many of these Cassandras now believe, for different reasons, that we are on the brink of another catastrophe that may be far worse.”

Adam Davidson. “Sorry to Break It to You,” New York Times, February 5, 2012.

“It remains clear that this almost uninterrupted equity market lacks substance and conviction. The rally’s volume has been very weak, and institutional operators have been absent from the market. There has been very little participation from the retail investor, based on data from Lipper, a provider of information and ratings on mutual funds. Corporate insiders have been big sellers of stock, exceeding $6 billion last month (with the ratio of selling to buying hitting the astronomical 13-to-1 mark).”

David Rosenberg, chief economist and strategist, Gluskin Sheff. “The World is Not Fixed and This Equity Rally Lacks Conviction,” Financial Times, March 15, 2012.

“No one sees a growth rate fast enough for the American economy to return to full employment any time soon.”

Joseph Stiglitz, Nobel laureate 2001. “The American Labour Market Remains a Shambles,” Financial Times, March 13, 2012.

“We think that most of the US market is just not worth investing in… And it’s our belief that profitability will have to come down and the market isn’t priced for it.”

Quotation attributed to Ben Inker, head of asset-allocation group, Grantham, Mayo, Van Otterloo. Jonathan Cheng. “Two Pros Weigh In on US Stocks,” Wall Street Journal, April 2, 2012.

“It’s simple arithmetic and it leads to a simple yet alarming conclusion that unless current law is amended before year-end, the stock market has to fall by at least 30%.”

Donald J. Luskin. “The 2013 Fiscal Cliff Could Crush Stocks,” Wall Street Journal, May 4, 2012.

“Stocks have not been so far out of favor for half a century. Many declare the ‘cult of the equity’ dead.”

John Authers and Kate Burgess. “Out of Stock,” Financial Times, May 24, 2012.

“The US economy is continuing to lose momentum just as global events that could derail the recovery gather steam… The downshift couldn’t come at a worse time. Experts warn that a breakup of the euro zone could spark the worst credit freeze since the collapse of Lehman Brothers in 2008.”

Ben Casselmann and Phil Izzo. “Recovery Slows as Global Risks Rise,” Wall Street Journal, June 16, 2012.

“‘Dr. Doom’, Nouriel Roubini, says the ‘perfect storm’ scenario he forecast for the global economy earlier this year is unfolding right now as growth slows in the US, Europe, as well as China.”

Ansuya Harjani. “Roubini: My ‘Perfect Storm’ Is Unfolding Now,” CNBC, July 9, 2012.

“Bill Gross, co-founder and co-chief investment officer of Pacific Investment Management Co., says stock investors should rethink the age-old investing mantra of buying and holding stocks for the long run… Stocks, he says, operate much like a Ponzi scheme, showing returns that have no real bearing on reality.”

Steven Russolillo and Kirsten Grind. “Bill Gross: Stocks Are Dead and Operate Like a Ponzi Scheme,” Wall Street Journal, August 1, 2012.

Physician Investment Quiz

11. July 2012 · 1 comment · Categories: investments for physicians · Tags: active management, investments, physician investments, physician investors

Question:

The twenty-two prominent firms listed below share a common characteristic. What is it?

AT&T Inc.
Abbott Laboratories
Allstate Corp.
Altria Group
Amgen Inc.
Berkshire Hathaway ‘A’
Bristol-Myers Squibb
Coca-Cola Co.
Colgate-Palmolive
Costco Wholesale
Hershey Co.
Hormel Foods
Johnson & Johnson
Kimberly-Clark
Eli Lilly & Co.
Merck & Co.
Monsanto Co.
PepsiCo Inc.
Union Pacific
Verizon Communications
Wal-Mart Stores
Weyerhaeuser Co.

Answer:

If you guessed each firm is a constituent of the S&P 500 Index, you would have been close—but wrong. (Weyerhaeuser is not included.) If you guessed that each firm pays a dividend, you were close again—but still wrong. (Berkshire Hathaway has not paid a dividend since 1967.) The correct answer is that the stock price of every firm on the list (and dozens of others) hit a fifty-two-week new high last week.

It is also intriguing to see a long list of homebuilding and building materials firms on the new high list, including nine of the eleven stocks in the Standard & Poor’s Supercomposite Homebuilding Sub-Industry Index. If we cheat and include the previous week, M.D.C. Holdings also makes the list, making it ten out of eleven. KB Home is the lone holdout.

D.R. Horton¹
Hovnanian Enterprises Cl ‘A’
Lennar Corp ‘A’¹
Louisiana-Pacific
Lennox Intl. Inc.
M.D.C. Holdings¹
M/I Homes¹
Meritage Homes¹
NVR Inc.¹
Pulte Group¹
Ryland Group¹
Standard Pacific¹
Smith (A.O.)
Toll Brothers¹
USG Corp.

We don’t want to read too much into this exercise lest we get tempted to start predicting market trends by studying the squiggles in stock price charts. But we suspect many physician investors would be surprised to learn how many widely held stocks are quietly inching their way higher despite unsettling news from unemployment numbers, European finance ministers, or the presidential campaign trail. Physicians waiting for a more opportune time to purchase stocks may discover that, by the time cheerier news headlines appear, the price tags on a wide range of businesses are sharply higher.

1. S&P Supercomposite constituent

References:

New Highs & Lows, Wall Street Journal, www.wsj.com/newhighs (accessed July 9, 2012).

Standard & Poor’s Stock Guide, June 2012.

The Cost of Safety – Thinking about Risk and Reward

18. June 2012 · 1 comment · Categories: investments for physicians · Tags: investments, physician investments

Investors are now so risk averse they are willing to pay the German government to look after their money; not a risk-free return, but a return-free risk.

Yields on two-year German notes sank to an all-time low of -0.005% on June 1. Looked at another way, anxious investors were prepared to accept a negative return for the comfort afforded them by parking their cash with the German government. And this was even before taking inflation into account.

This isn’t the first time this has happened. Back at the height of the financial crisis in late 2008, negative yields were observed in US Treasuries—a consequence of investors at that time being willing to pay to park money in a safe asset.¹

The extreme state of risk aversion in global markets is reflected not only in German bunds. In the US, Treasury bond yields have hit record lows, as have their equivalents in Australia, the UK, France, Austria, Finland, and the Netherlands.

The causes of this mass shying away from risk are well documented: worries that the Eurozone will break up, concern that the US economic recovery is stalling, signs of a slowdown in China, and a loss of momentum in emerging markets. Anyone who takes note of media and market commentary will know that there are a wide range of opinions about the likely outcomes of these issues. The important point for the ordinary investor is that all those opinions and uncertainties are already reflected in current prices.

Here’s how this process works: Security prices are an expression of the market’s aggregate view of future expected cash flows divided by a discount rate (or risk premium) that investors demand for putting their money into risky assets.

When the price of a security falls, it can be due to lower expected cash flows, a higher discount rate, or a combination of the two. While we don’t know the exact mix of these influences, we do know that if lower prices are wholly due to lower expected cash flows, expected returns will be unaffected. On the other hand, if lower prices are due to the application of a higher discount rate because of higher risk aversion, we can say expected returns for the risky assets are higher.

Investors’ willingness to pay to park their money in German bunds is an indication of higher risk aversion. Higher risk aversion should be linked to higher discount rates, so the probability is that expected return premiums on risky assets have gone up.

Think back to what we saw coming out of the first stage of the financial crisis in March 2009. Risks were high, and prices of risky assets went down. Many investors, overcome by the uncertainty at that time, sought refuge in government bonds. Due to this generalized increase in risk aversion, investors demanded a higher premium before putting their money into equities and corporate bonds. But as risk appetites revived that year, those risky assets paid a very substantial return. Share prices rebounded, and the spread of corporate over government bonds narrowed sharply.

The takeaway is that sheltering in what are perceived as the safest government bonds may provide certainty for a time, but also comes at the cost of forgoing the significant increase in risk premiums that may be available.

This is not to argue, by the way, that increasing one’s allocation to risk-free assets is never a legitimate decision. Such a course may well be appropriate for the individual investor, based on his or her own tastes, circumstances, liquidity needs, and investment objectives. If possible, however, it is best to develop appropriate asset allocations for individuals based on their risk tolerances outside these periods of distress. That’s because selling risky assets at such times can be expensive.

In summary, it is worth reflecting on the fact that record-low yields on government bonds, and in particular negative yields on the safest assets, may be an indication of extreme risk aversion and high discount rates on risky assets. This higher discount rate would have been partly responsible for their recent price decline and will probably be reflected in higher expected returns.

When risk appetites return—and we don’t know when or if that will happen—those risky assets may stage an equally dramatic recovery. Seeking to time those changes can be a very, very expensive exercise. So at times like these, it’s worth reminding ourselves that safety comes at a cost.

The worrying events of recent weeks and months are incorporated into prices. But remember that future events, unknown to us today, can always affect prices in positive or negative ways beyond the expectations built into the market today.

Pennsylvania Physician Advisors, Inc. are financial advisors to physicians.

1.At the Berkshire Hathaway annual meeting in May, 2009, a slide depicted a trade ticket from December 19, 2008, showing a Berkshire sale of $5 million of Treasury bills. They were coming due on April 29, 2009. Berkshire sold the bills for $5,000,090.70. If that buyer had instead put their money in a mattress, by April 29 they would have been $90.70 better off. Buffett said: “We may never see that again in our lifetimes.”