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Investments: Sound tips for your situation


Financial pros provide strategies geared to help investors at different stages of life get back on track.



Sound tips for your situation

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Choose article section... If you're just starting out If you're in the mid-life years If you're heading toward retirement

Financial pros provide strategies geared to help investors at different stages of life get back on track.

By Leslie Kane
Senior Editor

Like so many other bruised investors, you're probably scratching your head, wondering whether to put money into the sputtering market, keep it in cash, or resign yourself to working forever.

"Many people are facing a financial future that's different from what they expected," says Gene Price, a senior partner with Price and Rosenberg, an accounting firm in Bardonia, NY. "Nest eggs have evaporated. People who based their retirement goals on annualized returns of 12 to 14 percent have to rethink their next moves."

No one knows for certain what the market will do, and the right course of action depends on your individual situation. We've asked financial planners to come up with advice tailored for your stage in life—whether you're new in practice or are counting down to retirement. Check out the sections following for recommendations that suit your time frame and goals.

If you're just starting out

You may not have stockpiled much in these early years of practice, but losing a huge chunk of any sum is crushing.

"Don't beat yourself up about your investing mistakes; find a more effective way to go forward," says Kent Kramer, a financial analyst with Foster Group in West Des Moines, IA.

Now's the time to create a financial plan, or to re-evaluate the one you have. Estimate how much money you'll need at retirement and for more imminent goals, such as buying a new house, a car, or funding a child's college education sometime down the road.

It's best to use a financial software program such as Quicken or Microsoft Money, which can factor the effects of inflation into your calculations, or have an adviser do the figuring. You'll use different investment strategies, depending on whether you'll need that money in, say, two years or 20.

Invest money you won't need for five or more years in the stock and bond markets, says Kramer. The later you'll need the money, the greater the percentage of equities you can go for. If you bailed out when the market started tanking and you're still waiting on the sidelines, get back in now, while prices are down, he advises.

"The economy is still healthy, and the market's just going through one of its down cycles," says Kramer. "Young doctors have time to ride out the ups and downs." Kramer recommends dollar cost averaging, which means investing the same amount each month. That gets you more shares when the market's down, and fewer shares when it's up.

You also need to consider your risk tolerance, however. "If you're likely to panic and sell out at the bottom the next time the market slumps, you don't want to develop an aggressive portfolio," says Kramer. The more aggressive you get, the larger your potential losses.

Most financial planners have their clients fill out a questionnaire that identifies their risk tolerance. If you want to gauge your own level, you can complete the risk-tolerance questionnaire at the Web site of AIG Valic, an insurance and financial services organization (www.valic.com/valic/risktol.nsf ).

If your risk level is conservative, consider a long-term investment portfolio of 50 percent stocks and 50 percent bonds, which could bring 6 to 7 percent returns over a 20-year time frame. If you're comfortable with moderate risk, you could shoot for 8 to 10 percent returns over 20 years with a 60/40 stocks-to-bonds ratio; if you're aggressive, your portfolio could be a 70/30 percent mix, which may give you the chance to earn better than 10 percent annualized. "Because people under 40 have a long enough time horizon to survive market volatility, they can reasonably take on the additional risk of investing 70 or 80 percent in stocks," says Kramer.

But forget your dreams of 14 percent-plus, he advises. "Although small-cap stocks and value stocks may do better than the overall market, they do involve risk," he says. The Wilshire 5000 Total Market Index, which reflects how the US market as a whole is performing, had returns of –10.6 percent over 3 years. The Wilshire All Value Index lost 4.9 percent, and the Wilshire Small Cap 1750 Index lost 2.4 percent.*

It's best to stick with mutual funds rather than individual stocks. That way if any one company—like Enron or Cisco—collapses, it won't destroy your savings. Mutual funds spread the risk among many companies.

Include six to 12 mutual funds in your portfolio, says Price. Choose funds covering domestic large-cap, small-cap, and mid-cap companies. Also select an international fund, and a short- and a long-term bond fund.

Within the large- and small-cap stock categories, you could include a growth and a value fund, says Price. Growth funds emphasize companies with rapid earnings growth. Value funds focus on low-priced stocks of companies that are currently out of favor or experiencing temporary problems but have the potential to recover and regain profitability. Over the past five and 10 years, US growth funds have had returns of –0.2 and 7.6 percent, respectively; US value funds have returned 2.0 percent and 10.0 percent, respectively.

If you don't want separate growth and value funds, consider a fund that is a blend of both styles of investing; the manager can invest in growth companies, value companies, or both, depending on which class is doing better.

Kramer also recommends keeping 5 to 10 percent of your long-term holdings in international funds, particularly international small-cap value funds. "They can be very volatile, but for investors with a long time horizon, that's not a big problem," he says.

Make sure to add a real estate mutual fund to your portfolio, too. Real estate mutual funds have been the bright spot in a dismal market; they've returned 5.8 percent in the past 12 months and 14.0 percent over the past three years.

You'll need to minimize the risk you take with money you'll need sooner than five years. You might keep a portion of it in balanced (also called hybrid) funds, which include both stocks and bonds, says Price. They generally offer stability and low volatility. When choosing a balanced fund, make sure the manager's goal is to keep the bulk of assets in bonds rather than growth stocks, when necessary.

The sooner you'll need the money, the greater the proportion of bonds you should have. For an even less volatile alternative, you might want to consider short-term bond funds.

Keep money that you'll need in two years or less in money-market funds or CDs, to ensure that you won't lose any capital.

If you haven't bought a house yet, consider doing so now, says Price, since interest rates are so low. True, prices are wildly inflated. Still, if you're young and are prepared to keep your house for at least 10 years, you're likely to benefit in the long run.

If you're in the mid-life years

You'd just begun to reap the rewards of success. Then, wham!

"Some doctors had a double hit: The market destroyed a chunk of their net worth, and at the same time they saw reimbursements decrease," says Greg Galecki, a financial planner with Galecki Financial Management in Ft. Wayne, IN.

If you've lost much of your savings, you may need to do some serious catching up. Re-evaluate your financial plan; if you never had one, now's the time to create one.

First, assess the damage. You can meet with a planner or use a financial planning software program such as Quicken or Microsoft Money, which includes a retirement calculator. Look at your current stash, and see what savings rate you need to get you to your retirement goal. If your plan relied on earning more than 10 percent annualized returns, recalculate using 8 or 9 percent, says Galecki. Chances are you'll see a gaping chasm between your former numbers and the current ones.

Figure out a realistic estimate of your retirement expenses, warns Galecki. "The old rule of thumb that you can retire on 70 to 90 percent of your current income rarely works. Most people actually increase their spending in the first few years of retirement. They travel more and incur greater entertainment costs."

Calculate your "critical mass," which is the sum you'll need to get you from the beginning of retirement until age 90 (earning 5 percent interest annually), Galecki says. That's the savings goal to shoot for.

You may need to work longer, reduce your current expenses in order to save more, or both.

To boost savings, track your spending and look for ways to cut down. If you increase your work hours, be certain to save or invest the extra income, says Galecki. "Some doctors add weekend calls or work a longer day. Then they feel stressed or guilty about neglecting the family, so they take everyone to Disney World and blow the money meant for savings."

You probably need to rebalance your portfolio, too. Take a fresh look at the proportion of stocks and bonds you have, and get them back to a proportion that will help you accomplish your investing goals, says Price.

Before the market decline, you might have invested 70 percent of your long-term savings in equities, and 30 percent in bonds. If your equities plummeted, the proportions now might be 50/50 or even 40/60. That mix might bring returns of 5 percent or less—far short of what you'll need.

"You have to be in equities if you want your money to grow," says Galecki. "The market will recover. Baby boomers have not yet reached their peak earnings and savings, and they'll put much of it into the stock market. If Social Security is privatized in the next few years, a substantial portion of that money will go into the market and help lift stock prices."

To restore your portfolio balance, take money from your fixed income mutual funds and put it into the stock portion of your portfolio. You want to restore a mix that suits your risk tolerance and brings appropriate returns.

To decide which stocks or funds to sell, look at performance over the past one and five years. Most funds have suffered recently, but what's more important is how your fund has done relative to its benchmark index. A fund that has beaten the benchmark is probably a keeper; if it has consistently underperformed, consider it a candidate for liquidation. To find this information, ask your adviser or use Morningstar Mutual Funds, which provides mutual fund ratings and analysis. The print edition may be available at your local library, or you can go to www.morningstar.com.

Don't stew over stocks that have tanked. Bite the bullet and move on, advises Price. "Some people tell themselves that as long as they don't sell, they've only incurred a 'paper loss.' A loss is a loss. Don't expect dead equities to revive."

Be especially tough with your tech holdings, says Galecki. The sector has long-term potential to perform moderately well over the long run, but it's not likely to repeat the last decade's spectacular returns.

"You don't have to sell every technology holding. I still hold Microsoft and Intel in some clients' accounts," says Galecki. "You can keep up to 15 percent of your portfolio in technology stocks or funds. Pare tech stocks that are way past their prime. Keep the industry leader as opposed to the more speculative companies."

When choosing funds for the equity portion of your portfolio, make sure you diversify among different asset classes. Include large-, mid-, and small-cap growth and value funds. Also include international and real estate funds and bond funds to provide diversity for your portfolio.

If you yanked your money out of the market, ease back in slowly. "The market may still be volatile," says Galecki.

"Invest the same amount each month, regardless of what the market does. That way you'll buy more shares when they're reasonably priced, and fewer when their prices rise."

If you're heading toward retirement

The market drop may have destroyed much of your lifetime stash. You need to replenish the storehouse, but you don't have much time to do so.

"You can increase your rate of return goal within reasonable targets, which may mean putting a greater percentage of money into stocks," says James Casey, a financial adviser with Physicians' Asset Management in Marina Del Rey, CA. "Or you can work more years to save for retirement. In either case, you may have to change your expectations about your future lifestyle."

The magic investment that will recoup your losses doesn't exist, says Casey. A diversified portfolio and a steady influx of savings is your only route to recovery.

"Figure out the amount of annual income you'll need after you retire," says Casey. Then calculate the amount required to fund that annual retirement income, which will drive the rate of return required of your current investments.

Be realistic about your future lifestyle. "If you now have a smaller nest egg than you had expected, you'll have to work longer. If you want to retire at the age you chose prior to the market drop, you'll have to spend less in retirement," says Casey.

"If you decide, based on your retirement spending plan and the value of your existing portfolio, that you need a 10 percent rate of return annually, you'll have to invest about 90 percent in equities and 10 percent in fixed income, and the market might not cooperate," says Casey. If your nerves can't take that, reassess your goals.

Chances are, your portfolio needs revamping. First you need to see how your existing assets fit your plan. Consider the assets in all of your accounts; you may have money in old IRAs, a 401(k) plan from a previous employer, or taxable accounts. Identify the amount you need for emergencies and upcoming expenses. Evaluate the remaining assets, to see how they add to your portfolio.

Another point to consider is whether your overall holdings suit your risk tolerance. Take only the amount of risk necessary to achieve the desired returns. "If you require only 8 or 9 percent annualized returns to reach your goal, don't load up on speculative funds in the hope of earning higher returns," Casey says.

Diversifying among asset classes and industries is one way to cut risk. Casey recommends that you divide the stock portion of your portfolio among large-, mid-, and small-cap domestic equities funds, as well as an international fund and a real estate mutual fund.

To further reduce risk, divide each equity segment into value holdings—those that are overlooked and are in a temporary slump—and growth stocks. If several of your funds have the same objective, such as aggressive growth, change one or more of them.

Then check to see whether you still have the desired percentage of assets invested in each market sector. You can do this at www.morningstar.com, where you'll find mutual fund ratings and analysis. Or check the print version of Morningstar Mutual Funds, which may be available at your local library.

If one industry has soared and the amount you have invested in it through various funds has become too big—or if the reverse has happened—move some of your money around to restore your initial proportions.

"But stay away from funds that focus only on one sector, such as health care or technology," says Casey. "They're too restrictive. Broader-based funds cover those companies but don't give you too high a concentration in one area."

You may want to add a REIT fund to your portfolio, however. A REIT, which stands for real estate investment trust, is an investment company that specializes in real estate or mortgage investments. Mortgage REITS make loans to firms that develop and manage real estate; equity REITS own and lease property.

For the bond portion of your portfolio, stick with bond funds whose average duration of holding is around two years, says Gene Price, senior partner with Price and Rosenberg accountants, in Bardonia, NY. As the economy recovers and interest rates head back up, portfolio managers with short-term holdings that are maturing well will be able to buy bonds that pay higher interest. Also, shorter maturities mean less price volatility.

Taxes can be a big factor in helping you replenish your retirement nest egg, says Casey. While there's no way to put a pretty face on big market losses, at least you can use them to offset other gains.

"Capture losses within your taxable portfolio," he says. "If one fund is way down, sell it and buy a similar fund, so you still own that asset class." For example, sell one large-cap growth stock fund and buy another. "If you lock in the losses, you can use them to offset capital gains, and then against up to $3,000 of ordinary income," says Casey. "You can carry forward any unused losses each year."

Many doctors are tempted to reduce expenses by paying off their mortgages. Bad idea, says Casey. "You'll lose the tax write-off, which can be very valuable."

To be safe, keep an eye out for future part-time work that can bring in some retirement income. "Physicians can often generate part-time income through locum tenens, consulting, or other activities," he says. "Start now to develop future additional income sources."

* All returns as of Nov. 30, 2002.


Leslie Kane. Investments: Sound tips for your situation. Medical Economics 2003;2:25.

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