EyeWorld is the official news magazine of the American Society of Cataract & Refractive Surgery.
Issue link: https://digital.eyeworld.org/i/357599
62 August 2014 OPHTHALMOLOGY BUSINESS by W. Ben Utley, CFP® Index funds are cheap. With carrying costs (aka, "operating expense ratios") as low as 0.05%, 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 S&P 500, a basket of stocks that represents the 500 biggest compa- nies in the United States. The index was made famous in the 80s and 90s as it ran up to the dot com bubble, then vilified in the ensuing "lost decade" when the 10-year return on that index was very close to zero. What index hecklers fail to re- alize, 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 10 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% annualized over the 10 years ended December 2013 versus 7.3% for the typical fund." That's a yawning 2.5% 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 mar- ket. To garner the returns advertised over the past decade, or even three decades, you would have to own them through thick and thin, no matter how dramatic or dire the news. 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 diversifica- tion, diluting the uncompensated or "bad" risk while retaining the "good" risk that leads to rewards over the long haul. 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 stupid. It gets worse as the cash con- tinues to pile up and your question goes unanswered: "Where do I put my money now?" The best headlines and the best investment strategies have two things in common: There's nothing new about them, and they work. Keep reading and I will share three investment strategies you can use over and over again, decade after decade, to make your savings last, and make this the last time you fall for a tricky headline. 1. Stop trading stocks. Start owning markets. I know you've heard stories in the breakroom about how your col- league's latest stock pick shot up 147% or how he nabbed a tax-free Y ou 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 prob- lem, cash piles up in your checking account—40,000, 80,000, 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 into a hot investment touted by the media. Investing: Where to put your money now