Choosing a basic stock-bond mix is an important first step in portfolio design. Although the decision may appear simple, it can have a profound impact on your wealth. 

Portfolio theory explains the value of making a deliberate, strategic decision about the proportion of stocks versus bonds to hold in a portfolio. This decision has roots in the “separation theorem,” which was proposed by Nobel laureate James Tobin in the late 1950s.¹ The separation theorem proposes that all investors face two important decisions: (1) deciding how much risk to take, and then (2) forming a portfolio of “risky” assets (equities) and “less risky” assets (fixed income) to achieve this risk exposure.  

Your stock-bond decision implements this risk position. 

The Rationale

The theorem proposes that all investors who are willing to take stock risk should begin with a diversified market portfolio. Each investor then can dial down total risk in the portfolio by adding fixed income to the mix. The greater the bond allocation relative to stocks, the less risky the portfolio and the lower the total expected return; the greater the stock allocation relative to bonds, the higher the portfolio’s expected return and risk.  

Investors who want to take even more risk than the market can increase exposure through borrowing on margin and/or tilting the stock portfolio toward asset groups that offer higher expected returns for higher risk. 

So, how does one confidently allocate between stocks and bonds? A common method is to evaluate model portfolios along the risk-return spectrum. A riskier portfolio holds 100% stocks, and the least volatile portfolio holds 100% bonds. Between these extremes lie standard stock-bond allocations, such as 80%-20%, 60%-40%, 40%-60%, and 20%-80%.² Then you compare the average annualized return and volatility (standard deviation) of each model portfolio for different periods, such as one, three, five, ten, and twenty years. Volatility is one of several risk measures investors may want to consider. With this in mind, the analysis should feature average returns, as well as best- and worst-case returns for the various periods. 

While this technique relies on historical performance that may not repeat in the future, and does not consider various investment costs, it may help you think about the risk-return tradeoff and visualize the range of potential outcomes based on the aggressiveness of your strategy. 

Refining Your Stock Allocation

After establishing the basic stock-bond mix, investors turn their attention to refining the stock allocation, which is where the best opportunities to refine the risk-return tradeoff are found.  Investors who are comfortable with higher doses of equity risk can overweight or “tilt” their allocation toward riskier asset classes that have a history of offering average returns above the market. Research published by Eugene Fama and Kenneth French found that small cap stocks have had higher average returns than large cap stocks, and value stocks have had higher average returns than growth stocks. By holding a larger portion of small cap and value stocks in a portfolio, an investor increases the potential to earn higher returns for the additional risk taken.  

The final step in refining the stock component is to diversify globally. By holding an array of equity asset classes across domestic and international markets, investors can reduce the impact of underperformance in a single market or region of the world. Although the markets may experience varying levels of return correlation, this diversification can further reduce volatility in a portfolio, which translates into higher compounded returns over time. 

Fixed Income Strategies

Research shows that two risk factors—maturity and credit quality—account for most of the average return differences in diversified bond portfolios. Long-term bonds and lower-quality corporate bonds typically offer higher average yields to compensate investors for taking more risk. But keep in mind that these premiums are considerably lower than the market, size, and value premiums documented in the equity world. 

Investors generally hold fixed income to either (1) reduce overall portfolio volatility, or (2) generate a reliable income stream. These objectives typically lead to different investment decisions. The first approach, volatility reduction, is an application of separation theorem (i.e., hold equities for higher return and use fixed income to temper portfolio volatility). Rather than increasing risk to maximize yield, these investors want to hold fixed income securities that are lower risk. Certain fixed income asset groups are better suited for this strategy. 

With this in mind, some long-term investors may seek to earn higher expected returns by shifting risk to the equity side of their portfolio. With an eye to minimize maturity and credit risk, they hold short-term, high-quality debt instruments that have historically offered lower yields with much lower volatility. 

The second purpose for holding bonds is to generate reliable cash flow. Income-oriented investors, including retirees, pension plans, and endowments, may not worry as much about short-term volatility in their bond portfolio. Their priority is to meet a specific funding obligation in the future. Consequently, they design a portfolio around bonds and accept more volatility in hope of earning higher yields, which they pursue by holding bonds with longer maturities and/or lower credit quality. 

Whether investing for total long-term return or for income, a portfolio should be diversified across issues and global markets to avoid uncompensated risk from specific issuers and to capture differences in yield curves around the world.  

Summary

The stock-bond decision drives a large part of your portfolio’s long-term performance. During portfolio design, evaluating different stock-bond combinations can help you visualize the risk-return tradeoff as you consider the range of potential outcomes over time. Once you determine a mix, it can guide more detailed choices of asset classes to hold in the portfolio. And as your appetite for risk shifts over time, you can revisit the mix to estimate how shifting your portfolio mix may impact your wealth accumulation goals in the future.  

Endnotes

¹ James Tobin, “Liquidity Preference as Behavior Towards Risk,” The Review of Economic Studies 25, no. 2 (February 1958): 65-86.  

² The basic stock component may be reflected by the S&P 500 Index, or preferably, by a broader market proxy, such as the CRSP 1-10 Index. The CRSP 1-10 Index is a market capitalization weighted index of all stocks listed on the NYSE, Amex, NASDAQ, and NYSE Arca exchanges. The S&P 500 Index offers a proxy of the large cap US equities market. The fixed income component may be represented by an index of short-term US government securities or government and corporate bonds.   

The information presented above was prepared by Dimensional Fund Advisors, a non-affiliated third party.

 Disclosures

Stock is the capital raised by a corporation through the issue of shares entitling holders to an ownership interest of the corporation. A bond is a loan that an investor makes to a corporation, government, federal agency, or other organization. Also known as debt or fixed income securities, most types of bonds pay interest based on a regular, predetermined coupon rate that is set when the bond is issued. 

Although investors may form their expectations from the past, there is no assurance that future investment results will model historical performance.  

Indexes are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. 

Stocks offer a higher potential return as compensation for bearing higher risk. However, this premium is not a certainty and investors should not expect to consistently receive higher returns from stocks. In fact, market history shows extended periods when stocks did not outperform bonds.  

Diversification neither assures a profit nor guarantees against loss in a declining market. 

A bond portfolio designed for income also carries significant risks, including default and term risk, call risk, and purchasing power (inflation) risk. Foreign securities also are exposed to currency movements.  

As the capital markets have improved, more investors have shifted their concern from weathering the financial crisis to anticipating the inflationary effects of rising federal spending and debt. Many people are asking how they can prepare for potentially higher inflation. This article explores two basic ways to address inflation uncertainty and highlights asset groups that may prove useful. 

As you consider strategies, remember the difference between expected and unexpected inflation. Asset prices already reflect the market’s expectations about future inflation, given all available information. Inflation may turn out to be worse than expected, and this risk of unexpected inflation is what some investors may want to manage. 

Hedging vs. Total Return Strategies

Investors can prepare for unexpected inflation by following one of two basic strategies—hedging the immediate effects of inflation or earning a total return that outpaces inflation over time. 

Hedging involves choosing assets whose value tends to rise with inflation. Although holding these assets may reduce the total return of a portfolio, the positive correlation with inflation can help an investor keep up with rising consumer prices, at least over the short term. (Correlation refers to the co-movement of asset returns. When two assets are positively correlated, their returns tend to move together; when negatively correlated, their returns are dissimilar.)  

Candidates for hedging include retirees, fixed income investors, and others who would experience a diminished living standard during an inflationary period. These investors are willing to forfeit long-term growth potential for more immediate inflation protection. 

In a total return strategy, an investor attempts to outpace inflation by holding assets that are expected to earn higher real (inflation-adjusted) returns. This investor is willing to give up short-term inflation protection for an opportunity to grow real wealth. Younger investors are typically well suited for this strategy because they have many years until retirement and expect their earnings to advance faster than the inflation rate. As they save and invest for the future, they can accept more risk through greater exposure to higher-return assets, such as stocks. 

To insulate a portfolio from unexpected inflation risk, both strategies may employ some combination of stocks, short-term fixed income, and Treasury Inflation-Protected Securities (TIPS). Let’s consider each of these: 

Stocks

Equity securities have provided a positive inflation-adjusted return over the long term. From 1926 through 2008, the total US stock market, as measured by the CRSP 1-10 Index, outpaced inflation by an average of 6.16% per year.¹ To achieve this higher expected real return in stocks, however, an investor had to accept more risk, as measured by greater volatility in returns, and endure periods when stocks did not outpace inflation. As a result, stocks may be less effective for hedging short-term inflation and more suitable for investors who want to beat long-term inflation by earning a higher total return. 

Some investors assume that high inflation leads to lower stock market performance, while low inflation fuels higher stock returns. In reality, inflation is just one of many factors driving stock performance. US market history since 1926 shows that nominal annual stock returns are unrelated to inflation.  

Fixed Income (Bonds)

Higher inflation can hurt bondholders in two ways—through falling bond market values triggered by rising interest rates, and through erosion in the real value of interest payments and principal at maturity. This inflation exposure tends to impact the prices of long-term bonds more than those of short-term bonds, and investors can mitigate the effects of rising interest rates by holding shorter-term instruments.  

Many types of investors may benefit from holding short-term bonds. When interest rates are climbing, a portfolio with shorter-term maturities enables an investor to more frequently roll over principal at a higher interest rate. This can help inflation-sensitive investors keep up with short-term inflation and enable total return investors to reduce portfolio volatility, which can lead to higher compounded returns and growth of real wealth. 

Treasury Inflation-Protected Securities (TIPS)

Issued by the US government, TIPS are fixed income securities whose principal is adjusted to reflect changes in the Consumer Price Index (CPI). When the CPI rises, the principal increases, which results in higher interest payments. At maturity, an investor receives the greater of the inflation-adjusted or original principal. The inflation provision enables TIPS to preserve real purchasing power and hedge against unexpected inflation. 

TIPS are generally a good short-term inflation hedge since principal is adjusted for changes in the CPI. They are also a good portfolio diversifier for some long-term investors due to their negative correlation with equities and relatively low correlation with most types of fixed income assets. TIPS were introduced in 1997, so these correlations are based on a relatively short sample period.  

However, keep in mind that TIPS prices also have been affected by changes in real interest rates, so TIPS may not track inflation one-to-one in the short term or over longer periods of time. In fact, TIPS can lose market value if real interest rates increase. 

Commodities

Commodity futures, as well as gold and oil, are perceived as effective inflation hedges because their returns are positively correlated with inflation. But commodities are more volatile than stocks, and their returns do not always rise with inflation because of this significant volatility. So adding these assets to a portfolio may increase real return volatility, which could offset the benefits of hedging. 

Investors should also consider the economic argument against holding commodities. Unlike stocks, commodity futures do not generate earnings or create business value. They are essentially a speculative bet in which there is a winner and loser at the end of each trade. Moreover, a broad-based stock portfolio already has significant commodity exposure through ownership of companies involved in energy, mining, agriculture, natural resources, and refined products.  

Summary

While the media have featured divergent opinions and theories about the effects of recent government actions on inflation, no one really knows how consumer prices will respond to the complex forces at work in the economy and markets. Investors should carefully review their financial circumstances and investment goals before making changes to their portfolio.  

As you assess your exposure to a high-inflation scenario and form a strategy that reflects your financial goals and risk tolerance, consider that:

 ·         Expected inflation is built into asset prices. In our view, markets efficiently integrate all known information into prices. Thus, current prices already reflect expectations of future inflation. Only unexpected news will affect the inflation outlook.

·         Hedging unexpected inflation has a cost. Investments traditionally regarded as effective short-term inflation hedges have lower historical returns than stocks—and some have much higher volatility.

·         Volatility matters. Evaluating assets solely on their ability to track inflation disregards the effect of volatility on returns and risk. Some assets that are positively correlated with inflation have large return variances, and adding these to a stock and bond portfolio may increase overall volatility. 

Even with the prospect for higher inflation, investors who take a total return approach may be better served than those who choose assets based on correlation with the CPI. By choosing assets with higher expected long-term returns and maintaining broad diversification, investors can seek to grow real wealth and preserve the purchasing power of their dollars.  

 Endnotes

¹ Real return calculation:  (1+CRSP 1-10 Index return)/(1 + US CPI)-1. The CRSP 1-10 Index is a market capitalization weighted index of all stocks listed on the NYSE, Amex, NASDAQ, and NYSE Arca stock exchanges. CRSP data provided by the Center for Research in Security Prices, University of Chicago.     

The information presented above was prepared by Dimensional Fund Advisors, a non-affiliated third party.

 Disclosures

Inflation is typically defined as the change in the non-seasonally adjusted, all-items Consumer Price Index (CPI) for all urban consumers. CPI data are available from the US Bureau of Labor Statistics. 

Stock is the capital raised by a corporation through the issue of shares entitling holders to an ownership interest of the corporation. Treasury securities are negotiable debt issued by the United States Department of the Treasury. They are backed by the government’s full faith and credit and are exempt from state and local taxes. 

CRSP is a non-profit center that also functions as a vendor of historical data. CRSP end-of-day historical data covers roughly 26,500 stocks, both active and inactive. OTC bulletin board stocks are not included. 

The 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 no guarantee of future results, and there is always the risk that an investor may lose money. 

Diversification neither assures a profit nor guarantees against loss in a declining market.

Helpful information from the American Health Lawyers Association 

President Obama Signs Into Law a Temporary Fix
to Physicians' Medicare Reimbursement
By Jeffrey Moore**

On December 19, 2009, President Barack Obama signed the Department of Defense Appropriations Act, 2010 (H.R. 3326), into law, which freezes Medicare physician payments for two months, avoiding a 21% payment cut to physicians' Medicare reimbursement scheduled to go into effect
on January 1, 2010. The House previously approved H.R. 3326 on December 16, 2009, while the United States Senate passed H.R. 3326 on December 19, 2009.

Because the Department of Defense Appropriations Act, 2010, is only a temporary fix to the Medicare physician payment issue, Congress will be forced to address this payment issue in early 2010, as the Medicare physician payment cuts are set to go back into effect on March 1, 2010.

**We would like to thank Jeffrey S. Moore, Esquire (Phelps Dunbar LLP, Tupelo, MS), for providing this email alert, and the Regulation, Accreditation, and Payment Practice Group for sharing this email alert with the Physician Organizations Practice Group.

Thanks to the American Health Lawyers for this piece. 

Requirement For Americans To Get Insurance Is Central To Health Overhaul
But past experience suggests government mandates don't necessarily ensure compliance
By Phil Galewitz

If Congress passes a law that requires Americans to buy health insurance, Rebecca Antonelli already knows what she'll do: Just say no and pay a penalty instead.

"It comes down to an economic decision, and I'd be more inclined to save the money and take a risk of getting sick," says Antonelli, 46, a marketing consultant in Raleigh, N.C., who dropped her insurance policy last year when her business slumped.

Both the House and Senate health care overhaul bills require most Americans to carry health insurance or pay a penalty. Yet government mandates don't necessarily ensure compliance: Not all Americans buckle up, or get their children vaccinated.

Some health experts worry the proposed penalties are too low and that many younger, healthier people may agree with Antonelli, opting to pay the fee and gamble on their health. That could drive up the costs of covering older and sicker people.

"If you get too many young and healthy people who slip through, all the insurance market reforms start to unravel and the whole health bill unravels," says John Holahan, director of the Urban Institute's Health Policy Research Center.

Yet Congress risks a political backlash if penalties are too steep, particularly among those who earn too much to qualify for subsidies, Holahan says. Under the Senate bill, people who don't buy coverage would face a maximum penalty of $95 beginning in 2014. That would jump in 2016 to $750 or two percent of their annual income up to the cost of the cheapest health plan, whichever is greater. In the House bill, violators would pay as much as 2.5 percent of their annual income up to the cost of the cheapest plan beginning in 2013.

When people buy health insurance on their own rather than through employers, the average cost in 2016 is projected to be $5,500 for an individual policy and $13,100 for family coverage, according to the Congressional Budget Office.

Both health bills would provide a sliding scale of subsidies to individuals who earn less than $43,320 or families of four who earn less than $88,200. The bills also exempt millions of people from the mandate, including for religious reasons and financial hardship.

Massachusetts' example

White House budget director Peter Orszag says penalty size isn't the only factor in determining whether people buy coverage. He predicts the mandate will help create societal expectations that everyone gets health insurance, just as most people feel obligated to buckle their seat belts.

He points to Massachusetts, which in 2007 became the first state to require that most residents have insurance. Since then, the percentage of uninsured has declined to four percent from about seven percent.

The Massachusetts penalty for failing to buy insurance this year is $1,068--about half the cost of the lowest annual premium. About
96 percent of tax filers in the state in 2008 reported they had coverage; only one percent paid a penalty.

The nonpartisan Congressional Budget Office, which assesses the impact of legislation, says the number of people opting to pay the penalty instead of buying coverage would be "limited."

Others aren't so sanguine.

"Engineering social norms is hard," says Jeffrey Munn, a principal with the consulting firm Hewitt in Washington. "We may need to temper our expectations around what an individual mandate can actually accomplish."

A recent CBO report provides a few examples of Americans who don't follow existing mandates:

Most states have required seat belt use for about two decades, yet 18 percent of Americans still don't buckle up.

Schools have required children to get immunized for chickenpox since the 1990s, but 15 percent don't get vaccinated.

Nearly every state requires drivers to have car insurance, but 15 percent don't comply.

Views of the uninsured

The promise of health benefits could convince some of the uninsured to buy coverage, including Dulsi Beaslin.

Beaslin, 39, owns a nail salon in Holladay, Utah, and has gone without insurance for four years. She says she'd likely buy coverage under the mandate, particularly if it's subsidized. "These new benefits will take the sting out of the mandate and help me to purchase coverage that I will want to have," says Beaslin, who hasn't been able to pay for insurance on her $30,000 annual income.

Others say they'll defy the mandate.

"I will not purchase the health insurance, and I will not pay the penalty," says Charles Moore, who does database programming in Houston and leads jeep tours in the Rocky Mountains. Moore, 54, hasn't had health insurance since leaving the Air Force in 1984.

"Everyone succumbs to some major illness at some point," Moore says, "and if I can't pay for it, then I don't want to stick my hand in someone else's pocket."

Thanks to the American Bar Association’s Physician Interest Group for the following summary of the “final” Medicare Fee Schedule issued today.   

Unless Congress acts, the 21.2% statutorily mandated reduction of overall physician fees will be implemented effective January 1, 2010.  The “final” regulation contains the following provisions of particular interest to physicians:

 *          Eliminates the use of all consultation codes (inpatient andoffice/outpatient codes for various places of service except for telehealth consultation G-codes) on a budget neutral basis by increasing the work relative value units (RVUs) for new and established office visits, increasing the work RVUs for initial hospital and initial nursing facility visits, and incorporating the increased use of these visits into practice expense (PE) and malpractice RVU calculations.

*          Finalizes the proposal to remove physician-administered drugs from the definition of "physician services" for purposes of computing the physician update formula.  This long-awaited administrative step mitigates the size of future Medicare Part B reductions.

*          Phases in new PE RVUs over four years using revised survey data that will result in significant increases and decreases to the PE values of many codes.

*          Establishes a Physician Quality Reporting Initiative (PQRI) reporting mechanism via qualified electronic health records.

*          Defines the size of a group practice as at least 200 providers for purposes of the new PQRI group-practice reporting option.

 *          Increases the utilization assumption for diagnostic equipment priced at more than $1 million, which will decrease the technical component payment for services performed on this equipment.  This change will be phased in over 4 years.    

Thanks to NPR for this summary, which was reproduced by the American Health Lawyers Association

Congress is at an impasse over how to fix a perennial problem in Medicare.

Just about every year a formula glitch threatens to cut payments to doctors who treat seniors and the disabled. And just about every year Congress cancels the cut. This year lawmakers are complaining about the bill because it's not paid for. But, despite what both Republicans and Democrats are claiming, that's nothing new.

Permanent Fix Falls Short

Rather than do another one or two year patch for the Medicare doctor pay cut problem, Senate Democrats had wanted to fix the problem permanently. But their bill couldn't even make it to the Senate floor--it fell short on its first procedural test last Wednesday by 13 votes. The reason cited by virtually every opponent was that the bill's $250 billion, ten-year cost wasn't paid for with other spending cuts or increased taxes.

New Hampshire Republican Senator Judd Gregg is among the opponents of the bill. "We've only done yearly fixes in this area, the doctor fix, because it's a pretty difficult number to always pay for, but we have always paid for it," he said on CNN last Sunday.

Except that Congress hasn't always paid for it. In fact, when Republicans were in charge, they did cancel the Medicare cuts to doctors, but rarely paid for them. Just before turning control of Congress back to the Democrats at the end of 2006, Republicans actually tucked legislation to cancel the next year's doctor pay cut into a catch-all tax bill that wasn't paid for either. And then-Senate Budget Committee Chairman Judd Gregg was one of the people who complained the loudest.

"You just have to ask yourself how we, as a party, got to this point, where we have a leadership which is going to ram down the throats of our party the biggest budget buster in the history of the Congress under Republican leadership," said Gregg back in 2006.

Bipartisan Memory Loss

But Republicans don't have a lock on short-term memory problems. Here's how White House Press Secretary Robert Gibbs responded when he was asked about the issue last Thursday: "The cut in payments to doctors is something that is to be implemented every year; and gets fixed every year for the past six years. The president included in his budget fixing for and paying for that fix," said Gibbs.

Except Gibbs was only half-right. President Obama's budget does propose to fix the payment problem in that it would cancel next year's Medicare cut for doctors and cuts into the future. But it doesn't propose to pay for the added costs.

In fact, back in March, White House Budget Director Peter Orszag testified before a House Committee that the proposed fix could cause the federal deficit to be as much as $400 billion higher over the next decade.

The uneasy alliance between the AMA and Senate Democrats is starting to look a bit frayed.  Apparently, Senator Reid took the “doc fix” legislation to a vote based on what he understood to be assurances from the AMA that there were enough Republican votes to get it through.

Oops.  Apparently, the AMA thought it made it clear that there were Republican votes for general health care reform legislation, NOT that particular piece of legislation.  The “doc fix” legislation went down in flames.

Stay tuned as the sitcom continues.

All About Strips                                               Stewart Farnell, Ph.D, CFP®   Boulder, CO  

Bonds called Treasury Strips have buttressed many portfolios during the recent stock market downturn. As fear replaces greed as the driving force in the market, panicked investors are seeking safety, and one of the safest investments is a U.S. Treasury bond. Investors compete to buy these bonds, driving up their price. This is normal when the economy is moving toward deflation. A key reason for owning Treasury Strips is to protect portfolios in deflationary times. 

Strips are modifications of regular Treasury bonds. Regular Treasuries consist of two components. The principal component is a promise to pay a fixed sum at a fixed maturity date (e.g., to pay the bond’s owner $10,000 on May 15, 2024). The interest component is a promise to pay a fixed amount of interest every six months until the bond matures. Treasury Strips are regular Treasuries whose principal and interest components have been split and sold separately. For example, if you want a $10,000 Treasury Strip, you can buy just the principal component of a regular $10,000 Treasury bond. The interest components will be sold to other investors. Think of a Treasury Strip as a regular Treasury bond with its interest components “stripped” away. 

Thus Treasury Strips pay no interest. The buyer of a $10,000 Treasury Strip gets only a promise of $10,000 at a certain date, backed by the full faith and credit of the U.S. Treasury. In the absence of interest payments, buyers of Strips benefit from a reduced purchase price. You might buy a $10,000 Treasury Strip maturing in 2024 and pay only about $6,200.  

Treasury Strips provide safety of principal: the U.S. Treasury has never defaulted on a bond obligation, and Treasury securities are generally considered safer than AAA-rated corporate bonds. They are inexpensive to buy, and once bought, there is no further cost, assuming you hold the Strip to maturity. 

For retirees, Treasury Strips can fill the gap between expected income and expected expenses. If you expect to retire in 2014 with annual expenses of $52,000, along with Social Security and pension income of $42,000 per year, you can buy Treasury Strips maturing every year for 15 years, each with a maturity value of $10,000. The $10,000 per year from your maturing Strips, plus the $42,000 from your Social Security and pension, will cover your expenses. 

Because Treasury Strips pay just the principal amount at maturity, covering this income gap costs less with Strips than with regular Treasuries. Strips sell at a discount to their value at maturity so a portfolio of 15 Strips, one maturing in each of the next 15 years for $10,000 each, would currently cost about $119,000. A ladder of regular Treasury securities with the same maturity dates would cost far more because they pay periodic interest as well as the return of principal. 

Strips can pose one tax complication. Although they don’t pay interest, the IRS treats them as if they do. According to the tax code, the spread between what you pay for the Strip and what you receive at maturity—your profit—is really interest in disguise. So each year you must report a portion of that profit as if it were income. For this reason, many ACA members advise their clients to hold Treasury Strips in retirement plans like traditional IRAs and 401(k)s, which shelters the income received from taxation every year. The tax is payable on the taxable value only when it is withdrawn from the account. 

U.S. Treasury Strips aren’t right for everybody. But for many clients of ACA members, Strips can be a reliable way to close the income gap in retirement. And with enough years of Treasury Strips in their portfolio, investors can afford to wait for their equity investments to recover, reducing the chance of having to sell them at a loss.

                   It has been a long time coming, but I have finally completed my training, and have registered with the State as a Registered Investment Advisor.  My new firm, Pennsylvania Physician Advisors, Inc., will focus on the unique financial issues faced by Pennsylvania physicians.  I feel that personal financial planning for physicians will mesh very nicely with my law practice, which concentrates on the legal representation of physicians.

          Physicians are working harder to make less.  They are exposed to increasingly aggressive plaintiffs’ attorneys, diminishing returns from health insurers, and mounting demands from bottom-line oriented hospital administrators.  Because of the time constraints they work under, they frequently do not have adequate time to assure that their financial health is protected.

With an appropriate financial plan, physicians can rest assured that their income and assets are protected, and that their financial goals will be met.

Physicians simply do not have time to educate themselves about the intricacies of tax planning or asset protection.  They frequently fall prey to commissioned salespeople eager to sell products, who do not have their best interests at heart.  Because of the rapidly evolving health care environment and their advisors’ general lack of knowledge about their specific problems, the financial health of physicians is rarely as good as it should be or could be.

Physicians need a trusted advisor with all relevant information about them.  In this way, a holistic approach to their financial health can give them peace of mind and allow them to focus on the practice of medicine.

          I will meet extensively with each physician to understand his or her individual situation, and to review insurance, taxes, estate planning, and investments on a holistic basis. 

          To learn more about this process, please visit www.PaPhysicianAdvisors.com