My $1,000,000 Wharton Education

Had someone warned me that my 2-year business school education would ultimately cost me more than a million dollars, I might have thought twice about enrolling at Wharton. But, as my corporate finance professor, the late Isik Inselbag, was fond of reminding us, “a sunk cost is sunk.” And so, instead of regretting the possibility of early retirement, I’ll continue to reflect on my initial forays into investing as an instrumental part of my secondary education. Expensive yes, but probably worth every penny.

Within months of picking up my undergraduate degree in mechanical engineering in 1985 I was at the Dayton offices of Merrill Lynch opening up my first CMA account. I still chuckle at the thought of running into a friend’s father, a local big producer at the firm, who inquired as to whether I was running an errand for my father.

Like many things, profitable investing is a skill acquired through trial and error. Over the next few years I was all over the board - dabbling in stocks and mutual funds, writing covered calls on high-growth tech and biotech stocks, adding margin to the mix to leverage my insights. In hindsight I didn’t make a lot, but learned a few key lessons that stick with me still. Among them, covered call option strategies are “win a little…win a little…lose a lot” propositions – especially when paying pre-discount broker commissions!

When Black Monday reared its ugly head on October 19^th, 1987 I sunk with the rest of the go-go crowd, down a whopping $20,000 plus in one day. Fortunately I had the wherewithal to hold steady and recoup a good portion of those yet-unrealized losses over the coming year. Still, it became clear to me that investing was best viewed as a long-term proposition – there are no “free lunches”. I regrouped and dedicated myself to looking for companies with great growth prospects that I could hold for years, not months, and set my sights on getting a business education that would teach me how to better evaluate stocks.

About this time, Dell Computer was filing for their Initial Public Offering (IPO). I knew their business model was head and shoulders above those of IBM and Compaq and became quite comfortable that the company’s price advantage coupled with the quality of their products should allow them to continue taking market share. Valuation? Couldn’t tell you, as without formal financial education, it was impossible for me to compare apples (or should I say IBMs – with their steady-state profit margins) with oranges (Dell’s money-losing, yet high-growth venture). Still, the offering looked intriguing and I decided to invest, not at the IPO, but in the secondary market after the stock had a chance to settle down. After all, this was still soon after Black Friday, investors remained skittish, and the prospect of a company’s stock doubling during its debut was remote.

I finally took the plunge in June of 1988 (see trade confirm above), plucking down about $3,000 for 300 shares. Happy camper that I was, I was determined to hold for the long-term. I entered grad school in the fall and continued to follow the company’s escalating battles with IBM, Compaq and Gateway and recognized the company’s stagnant profits to be a growing pain.

Alas, even the best laid plans go astray. While a fool and his money may soon be parted, a full-time grad student and his money likely parts quicker. In my last semester of business school I found myself down to my last few thousand dollars and needing to pay tuition. Looking back on things, I should’ve hit my parents up for a loan…pleaded, begged, whatever. Instead I reluctantly sold my Dell shares, took a small loss and remained solvent throughout the remainder of my education.

Those shares – I didn’t really follow them closely over the next few years, but somewhere around 1997, I checked in again. Suffice it to say, they did alright without me. Went on to split a few times – alright more than a few…

Shoulda’, coulda’, woulda’…c’est la vie.

Lessons Learned
While I didn’t pocket the big change on this investment, it did provide a fertile learning opportunity. A few thoughts to ponder -

1. Common sense is not so common. What I viewed as obvious – that Dell’s business model was far superior to those of IBM and Compaq – wasn’t so obvious to most investors in the early days of the company. Instead, as is often the case, public shareholders focused their attention primarily on earnings growth, largely missing the long-term, industry changing, implications of a superior business model. In my opinion, the same is true of Google today, though I would hazard it’s pretty well reflected in the GOOG’s price.
2. When investing in an early stage company and, though public I’d suggest that Dell was early stage in 1988, look for the fundamental difference that’s going to drive success and remember that investing in growth stocks is about patience and letting the concept play out over long, long periods of time. Buy a small stake and hold, hold, hold.
3. It’s really, really tough to resist the temptation to sell as an opportunity unfolds, especially when the initial investment is substantial. In my opinion, this is another argument in favor of small initial positions. You’ll sleep better as the psychological factors associated with short-term price swings should be much more manageable.
4. For mature companies, earnings and free cash-flow growth are key metrics for gauging value. Not so for early stage, renegade companies capitalizing on new business models or concepts. Instead keep your eyes on top-line revenue growth. If the concept takes hold, the explosion in revenues will signal it and more likely than not, management will find a way to turn that revenue growth into profits.
5. Stock splits are extremely powerful compounding tools, let them work for you.

What Are Some Of The Things You Should Look For When Considering Buying A Specific Practice?

The Balance Sheet should be clean. You shouldn’t buy the seller’s debt.Cash Flow should cover dividends, if any (if incorporated), in addition to your salary, and capital expenditures. If it doesn’t, a practice would have to "dip-in" to an operating line of credit, which is not a sign of good health.Operating Profit Margin or "overhead", is calculated by dividing earnings before interest, taxes and depreciation, (EBITDA), by Gross Revenues, and should not be greater than 60 - 65% in a non-incorporated practice, (one that does not include the Dentist ‘s Salary) or 85 – 90% in an incorporated practice, (where dentist’s salary is included at 25% of Gross Revenues).

If a practice stands out from competing practices by being different, i.e. it has carved a niche market for itself, such as a focus on prevention, restorative, cosmetic, walk-in emergency treatment, extended hours, esthetics etc., then that practice is potentially more attractive than others. A practice that has something special or unique that sets it apart from the crowd should make it more valuable than another.

What Has The Attitude Of Management Been In Regards To Expansion With The Practice You Are Considering To Buy?

One should monitor the Cash Flow from Investing Activities (CFI), to get an impression of how money has been invested into the practice. This information should clue you into the style of management you are dealing with and indicates one of the more difficult to quantify attributes of practice value. You would find your CFI information on your Cash Flow Statement or the Statement of Financial Position. The value identified represents the change of investment funds from one year to the next.

Cash Flow from Investing (CFI) activities include the purchase of assets that are productive, like a digital x-ray and the sale of assets that are no longer productive. This also includes the buying and selling of shares in the stock market as an example of an investment the is run outside the practice, but still run through the practice's business structure. Investing activities are a good indicator of management attitude towards growth, of the dentist's attitude towards growth.

What Is "Working Capital" And Why Is It Important?

Working capital, (Current Assets - Current Liabilities) is a measurement of the availability of cash to meet current expenses. If the practice you are considering buying is borrowing money to meet its expenses every month, then the reason for this should be investigated. Working capital is also a measure of short-term internal liquidity that many short-term lenders are concerned with if you want to borrow money for one year or less.


If the Current Assets are more than two times what the Current Liabilities are, then this indicates "excess" cash, like found money that is not actively working for you. You could use this "excess" money identified to help pay for the financing of the practice. You might wonder, why would you want to do that? Ask me.

What Is The Profitability Of The Practice After You Consider The Cost Of Borrowed Money (assuming the investment is made with borrowed money)?

You simply take your Return on Investment (ROI) and subtract the interest rate percentage attached to the cost of borrowed money. If the ROI is 13% and the cost of borrowed money is 5% then the profitability before taxes would be 8%, approximately.

What is your Required Rate of Return on your money? Well, certainly it has to me more than the cost of borrowed money because if wasn't, why would you borrow in the first place. Borrowed money is cheaper thatn your equity capital, your money, that's why you would use borrowed money in the first place. If you don't know how to figure our your Required Rate of Return, ask me.

How Do I Compare The Profitability Of One Practice To Another?

You can compare their Operating Profit Margins, that is, EBITDA, or earnings before interest, tax, depreciation and amortization expenses are considered. This creates a level playing field to examine raw profitability without all the accounting choices to be made between two different practices with respect to interest and depreciation/amortization expenses.

What Is Your Debt Repayment Capacity Or How Much Money Can You Borrow?

To answer this question it comes down to what is your ability to make your payments or your ability to generate extra Cash Flow and what amount of security or assets can you claim to borrow against?

Lenders are interested in your liquidity and solvency, your present financial leverage and your elements of risk, e.g. stability of cash flow. All lenders have certain formulas that they use to determine how much money they will let you borrow, for example: they may let your borrow against some asset that can be resold, like your home or they may let you borrow a certain percentage of your earned income.

It is important to shop around because all lenders are competitive and even if you only save a ¼%, it’s worth it!

How do you know if you have "excess" cash available for financing new equipment, leasehold improvements, etc.?

Look at your Current Assets and ask yourself how easily they can be converted into cash. If your Current Assets are two times greater than your Current Liabilities, then this would be defined as "excess" cash in your practice that could be used to finance new equipment, leasehold improvements, etc.

How do you know if you will have enough cash flow to service your needs when you buy a practice?

With respect to Cash Flow, it is wise to know what the Cash Flow is from Operations (CFO), how many days does it take for the Accounts Receivable to be collected and what percentage of the accounts are aged 0-30 days, 30-60 days and 60-90 days.

It may also be valuable for you to have your accountant do a Projected Income Statement (Profit and Loss Statement) and a Projected Cash Flow Statement, (Pro Forma), of the practiceyou're considering buying, before you commit to the purchase. Remember, though, that anything that is "projected" is subject to the accuracy of the information going into the analysis. Often it is somewhat biased therefore it is used to "guess" at best-case and worst-case scenarios.

In order to know whether you will have enough cash to run the practice and make a profit, you should "run" the numbers, taking into account that they may be biased to some degree.

Roth IRA - Good For Many Retirement Savers

Are you considering your retirement savings options for 2006? Which should you choose – a Roth, or a Traditional IRA? In this entry we outline the features of each plan and analyze subtle distinctions between the two that lead us to the opinion that the Roth IRA is likely to prove the better option for a majority of today’s retirement savers.

Background
As most investors know, the U.S. government provides individual taxpayers the opportunity to tuck away a limited amount of tax-advantaged savings each year through Individual Retirement Accounts (IRAs). For 2006 this amount remains fixed at $4,000. Added “catch-up” contributions (maximum of $500 in 2005 and $1,000 in 2006) are also available for savers aged 50 and older in the calendar year for which they make the contribution.

For most non self-employed savers, the Internal Revenue Service recognizes two distinct tax-advantaged savings options - the Traditional IRA and the Roth IRA. Savers can open Traditional and Roth plans at most financial institutions and the investment options and fees available through each are generally identical. Yet, there are distinct differences between Traditional and Roth IRAs that merit further attention. Let’s look at each in turn.

Traditional IRA
In most cases, savers contribute pre-tax money to traditional IRAs. In effect, contributions lower the saver’s taxable income in the tax year for which the money is contributed so that the saver realizes a tax benefit by making the contribution. These tax benefits are of greater value to higher income taxpayers than lower income taxpayers and can be calculated as the difference between what one would pay in taxes without making a contribution minus what one would pay in taxes by making a contribution.

All individuals under the age of 70 ½ with compensation are free to contribute up to the lesser of $4,000 or 100% of their compensation. Non-working spouses are free to contribute up to the maximum as well, though the combined contribution cannot exceed the couple’s combined compensation.

On the negative side, the deductibility of Traditional IRA contributions is limited as follows:

Individuals: For individuals covered by an employer’s retirement savings plan, Traditional IRA contributions are fully deductible for those with modified adjusted gross incomes (MAGI) up to $50,000. For MAGI of between $50,000 and $60,000, they’re partially deductible and for MAGI over $60,000 there is no tax deduction.

For individuals not covered by an employer’s retirement savings plan IRA deductibility is not limited by the saver’s modified adjusted gross income.

Married Filing Jointly: For couples filing jointly where one spouse is covered by an employer’s retirement plan, IRAs are fully deductible for modified adjusted gross income up to $150,000. MAGI of between $150,000 and $160,000 receives a partial tax deduction and MAGI over $160,000 renders IRA contribution non tax-deductible.

For couples where both spouses are covered under employer retirement plans, contributions to Traditional IRAs are fully deductible for MAGI up to $70,000, partially deductible between $70,000 and $80,000 and non-deductible for MAGI over $80,000.

For couples where neither is covered by an employer’s retirement plan, IRAs are fully deductible for all levels of MAGI.

From a practical perspective, modified adjusted gross income restrictions limit the economic benefit savers are likely to receive in the contribution year to a maximum of about 25% of their contribution. So, a contribution of $4,000 in 2005 will likely reduce your taxes by $1,000 at most.

Savers who withdraw funds prior to 59 ½ are subject to a penalty of 10% of the amount withdrawn as well as ordinary income taxes.

After the age of 59 ½ Traditional IRA savers are free to withdraw any, or all, funds from their account(s) without penalty, but all distributions are taxed as ordinary income in the year they are received. As such, most account holders attempt to postpone taking taxable distributions from their traditional IRAs for as long as possible. To limit this deferral, the U.S. government mandates that all Traditional IRA account-holders begin taking minimum required distributions from their accounts in the year in which they reach 70 ½. Initial mandatory minimum withdrawals amount to between 3.65% and 3.77% of the IRA prior-year balance and are based on the account value at the end of the prior year and actuarial life expectancy assumptions. Subsequent minimum required distributions increase in percentage terms, but may differ in absolute dollar amounts depending on the accounts prior-year balance.

Upon the death of the owner, Traditional IRAs pass to their appointed beneficiaries, typically outside the instructions of a will. Beneficiaries have an opportunity to stretch the tax-deferral aspects of the IRA as the minimum required distributions are re-calibrated based on their, typically longer.

Roth IRA
Unlike the Traditional IRA, contributions to a Roth IRA are not tax-deductible. Savers in these plans use after-tax money to fund their accounts, missing out on the upfront tax benefits accruing to those saving through Traditional IRAs. The benefit of the Roth IRA however is that not only does the principal grow tax-free during the life of the investment, but all withdrawals after age 59 ½ that have been invested at least five years are tax-free as well. From a practical perspective Traditional IRAs are tax-deferred assets while Roth IRAs are tax-free assets.

Furthermore, the fact that Roth assets have been taxed prior to contribution, benefits Roth IRA holders in two ways. First, there is no minimum distribution requirement imposed by the government, at any age. Second, contributions (though not gains on these contributions) can be withdrawn after 5 years without penalty, regardless of the saver’s age.

Individuals of any age with compensation (subject to income limits) can invest up to the minimum of $4,000 or 100% of their compensation in Roth IRAs and, like Traditional IRAs, non-working spouses can contribute an amount such that the couple’s total contribution does not exceed the lesser of $8,000 or their combined compensation. .

Of course, with any deal this good there have to be stipulations. The first is that single tax filers with adjusted gross incomes of between $95,000 and $115,000 and joint filers with AGIs between $150,000 and $160,000 are only eligible for partial contributions. Filers above these amounts are completely ineligible.

Second, to the extent contributions are withdrawn prior to the five year investment window, they will be assessed a 10% penalty. Also, to the extent investment gains are removed prior to age 59 1/2, they will be assessed a 10% penalty and taxed as ordinary income in the year they are withdrawn.

Exceptions to the 10% Penalty
There are a number of exceptions to the 10% penalty for early withdrawals from either Traditional or Roth IRAs. Specifically, the early withdrawal penalty does not apply to distributions that:
Occur because of the owner’s disability (see IRS Publication 590 for definitions and further details).

1. Occur because of the owner’s disability (see IRS Publication 590 for definitions and further details).


2. Occur because of the owner’s death.


3. Are a series of “substantially equal periodic payments” made over the life expectancy of the owner.


4. Are used to pay for un-reimbursed medical expenses that exceed 7 ½% of the owners adjusted gross income.


5. Are used to pay medical insurance premiums, after the owner has received unemployment compensation for more than 12 weeks.


6. Are used to pay the costs of a first-time home purchase (subject to a $10,000 lifetime limit).


7. Are used to pay for qualified higher education expenses for the owner and/or eligible family members.


8. Are used to pay back taxes due to an Internal Revenue Service levy placed against the IRA.
   

Before considering an early withdrawal however, we recommend you research these exceptions more carefully.

Traditional or Roth – Which is Right for You?
Assuming you’re eligible to invest in either plan, the decision on which is right for you hinges on a number of personal factors including your current and expected future tax rates, fluctuations in annual income, and overall ability to save. Additionally one should give thought to likely future tax rate changes and the value of implicit “options” afforded savers using the Roth plan. Let’s look at each factor in turn.

Current & Future Tax Rates: Assuming no changes to the tax code, it can be shown mathematically that if a saver’s current all-in tax rate is higher than his realized future tax rate, the Traditional IRA will yield a higher after-tax return, and conversely if a saver’s ordinary income tax rates are lower today than in the future, the Roth IRA will generate higher after-tax returns.

Given this, the question one needs to answer are as follows: “How much will I need to withdraw from my IRA annually in retirement to maintain the lifestyle I wish to live?” and “Assuming no changes to the tax code and inflationary trends of arguably 3% per year, what will my tax rate be in retirement?”

Many professionals argue that one needs 70%-80% of their pre-retirement income to sustain an equivalent lifestyle in retirement. If so, and you’re in you’re peak earnings years and closing in on retirement, a strong argument can be made for the Traditional IRA, as lower living expenses would drop you into lower tax rates in retirement. Yet, there are also many who argue that post-retirement income will need to be closer to 100% of pre-retirement income in order to afford ever-escalating healthcare costs and a more active retirement lifestyle than has historically been the norm.

One thing seems certain to us however; owing to inflation, the further out your retirement horizon, the more likely you’ll be pushed into a higher, not lower, tax bracket. This supports a Roth IRA as the preferred vehicle for younger savers.

Fluctuations in Annual Income: Job changes - some planned, some not - occur much more frequently today than they did just 15 years ago. With these disruptions most workers will likely experience significant fluctuations in their annual incomes before retirement. We advise savers to remain flexible over the years. When your tax rate is relatively low, take advantage of the Roth plan and when income is easier to come by shift to the Traditional IRA.

Ability to Save: While savers can choose to make contributions to either plan, recognize that a dollar saved in a Traditional IRA is not the same as a dollar saved in a Roth. In order to compare plans side-by-side, one must look at each from an “after-tax perspective” – and when this is done the Roth plan comes out as the more generous of the two.

Why? Think of it like this. Say you decide to maximize your IRA contribution with a $4,000 deposit. If you fund a Traditional IRA and you’re in the 25% tax bracket, you’re annual after-tax costs are $3,000. If instead you choose the Roth and invest $4,000 after-taxes, your out-of-pocket cost is an additional $1,000.

Then, at age 70 ½, you begin to draw down your IRA by $40,000 annually. Assuming you’re in an identical 25% tax bracket at that time, the Traditional IRA provides you with after-tax funds of $30,000 while the Roth IRA allows you to keep the entire $40,000.

The chart below presents a hypothetical case showing the lifetime after-tax cash-flows for two investors – one who contributes $4,000 each year to a Traditional IRA and one who contributes the same amount to a Roth. Both are assumed to invest in identical portfolios throughout their lives.

Though each contributed a nominal $4,000 annually prior to retirement, the Roth IRA holder contributed 33% more after-tax. In retirement she receives 33% more after-tax income each year and ends life with a residual value 33% higher as well. In short, The Roth allows those who have the resources to build a larger pool of after-tax savings for retirement.

Likely Future Tax Rates: It’s almost certain the U.S. (and state) tax codes will change over the coming decades and, in our opinion, an aging baby-boomer generation and ever-increasing government deficit spending imply that changes to tax rates will be up, not down. If so, the better savings option, as noted above, is the Roth plan.

Some financial professionals argue that investors should retain funds in both types of plan as a “hedge” against future rate changes. In our opinion, this is probably not a bad idea, especially if you already have a sufficiently funded Traditional or Rollover IRA.

Implicit Options within the Roth IRA: We believe one of the most appealing, but often overlooked, aspects of the Roth IRA is that it provides the saver with an “option” to partially withdraw funds from the plan prior to retirement without penalty. Recall that after 5 years of investment the saver can withdraw up to the original contribution amount (though not earnings on those contributions) without penalty. This is an attractive option to have, and one not afforded Traditional IRA investors.

Conversions to a Roth IRA
As you’ve probably guessed, our view is that the Roth IRA is likely to be the preferred tax-advantaged investment vehicle for most retirement savers. In fact, Roth IRAs have become extremely popular savings vehicles over the first seven years of their existence and many individuals have taken an opportunity to convert all, or a part, of their existing Traditional IRAs to Roths.

Here’s what you need to know if you’d like to convert an existing Traditional or Rollover IRA to a Roth. First, you can only do a conversion in a year where your adjusted gross income (AGI), before the conversion amount is less than $100,000. This limitation is regardless of whether you’re filing taxes as “single”, “married filing jointly” or “head-of-household”. Those “married filing separately” are not allowed to undertake a conversion at all.

Second, if you choose to undertake a conversion the 10% penalty for early withdrawal from a Traditional IRA will be waived, but your conversion will be treated as ordinary income for tax purposes in the year of the conversion.

Third, if part of your conversion is of prior non-deductible contributions (after-tax) they will not be taxed on conversion, as they’re already after-tax assets.

Fourth, if you choose to use part of your existing IRA to pay taxes on the conversion, you’ll likely do so by making a withdrawal from your existing IRA prior to converting the remainder. These funds will be assessed the 10% early-withdrawal penalty (in the case of withdrawal of non-deductible contributions) and ordinary income taxes (in the case of withdrawal of deductible contributions).

Finally, once a Traditional IRA has been converted none of these funds can be withdrawn from the Roth IRA within the first five years without a 10% penalty. After five years, any or all of these contributed funds can be withdrawn without penalty.

Feel free to contact us at Pariveda Investment Management (1-888-688-5780) if you have any questions.

What do you need to know about the Practice Sale Agreement?

If the practice were a proprietorship or partnership, then the purchaser would be buying the assets and goodwill of the practice. In Canada, it is important to know that if the buyer were purchasing an incorporated practice, then the sale should be structured so that he or she would be buying the seller's shares of the practice (which is an advantage to the seller as the tax implications are less).The purchaser and the seller have to be aware of the pros and cons of how the practice sale agreement is structured. It is always advantageous to seek professional help in these matters.

In fact, there are three methods to the valuation of a dental practice:

• The Market Approach
• The Asset Approach
• The Income Approach

The truth is that all three of these approaches contribute useful perspectives to value. Most of you are already familiar with the Market and Asset Approaches, with their Rules of Thumb, and commonly used by practice brokers and written about in the dental literature.

If not, then, we can discuss this further when you post your questions.

What exactly are you "buying" when you buy a Practice?

When you buy a Practice, you are buying the Net Income and Cash Flow of the Practice, autonomy and job security, as well as any subjective attributes that have attracted you to the Practice in the first place. Of course Goodwill always plays a key role and the hope for the buyer is that the Practice is a going-concern with lots of ongoing patient treatment plan momentum.

Ultimately both buyer and seller are investors and to arrive at investment value one needs to use the Capitalization of Earning Method within the Income Approach to valuation. Comparing this value to the market price value of recently sold comparable practices in your geographic area is the only way for you to know if the return your were hoping to get from your investment into your practice was realistic and for the buyer, whether or not the asking price represents a good deal when seen from an investment perspective.

The income approach to valuation is the best way to understand you practice from an investment perspective.

Is a Fed Easing Cycle Worth Buying Into?

Wall Street teems with folklore surrounding appropriate trading strategies at various points in the economic cycle, election calendar, and calendar year. There’s the annual “Sell in May and go away” advice which dictates that profit opportunities in the broad market are typically subdued from May until the Labor Day. There’s the presidential cycle phenomenon, where stocks generally perform poorly in the first two years of a presidential cycle and well during the second two years. (Further analysis by William Hester of Hussman Funds points to some interesting sub-trends likely playing into this year’s final quarter.)

Today, with long-term interest rates low, commodity prices collapsing, and economists envisioning a slowdown on the horizon due to a cooling housing market, the idea that the next Fed move is more likely an easing than a tightening is gaining credence amongst market participants.

More often than not, discussion of possible Federal Reserve interest rate easing is coupled with seemingly boilerplate market commentary noting that lower interest rates provide a positive catalyst for market returns and prodding investors to front-run the Fed and gain exposure to a stock market that’s poised to move higher.

Nice story. Clean, intuitive. A “feel-good” outlook that’s always appealing.

But what does the data show. We examined market returns during both Fed easing and tightening cycles to unearth the reality behind the myth. Specifically, using S&P 500 price returns from 1954 through this month along with historic Fed funds rates, we look at how the broad market performed 2-months before a shift in Fed policy through 36-months after the initial move took place. We note the following upfront:

• market returns for the S&P 500 series we used didn’t include dividends, so they’re a bit lower than investors would have realized


• due to the small number of sample points, eleven easing and tightening cycles, the averages aren’t statistically significant.

That said we’re after general trends, not detailed statistics, so we’re comfortable with the limitations of our analysis.

Fed Easing
Contrary to popular opinion, average returns realized following the commencement of a Federal Reserve easing cycle have been abnormally weak for the first year after the change in policy took effect. Through the first thirteen months the stock market has generated price returns of slightly less than 1% cumulatively with a maximum of 30% (April 1995 easing cycle) and a minimum of -20% (July 2000 cycle).

Interestingly, cumulative market returns from two months prior to the beginning of a Fed easing cycle were uninspiring as well; down roughly 0.70% cumulatively.

Beyond thirteen months into a Fed easing cycle the market has generally fared well, rising 22.5% in year two (months 12-24) and 12.9% in year three.


Fed Tightening
Perhaps paradoxically stock market returns leading up to, and during, the early stages of a Fed tightening cycle have been quite robust. From two months prior to the first Fed tightening to the start of the cycle, the market gained an average 3.8%.

More interestingly, from the start through the first ten months of the tightening campaign the market averaged gains of an additional 10.85%, with a maximum of 35% (October 1986 tightening cycle) and a minimum of -10.7% (July 1961 campaign). Only in the 1961 cycle did stocks post a negative cumulative return during the first ten months.

Beyond ten months into historic tightening cycles, stock market returns began to suffer. The average second year returns (months 12-24) weighed in at -4.6%, while returns in year three recovered by 9%. The maximum drawdown occurred between months ten and twenty-four; a cumulative -8.5%.

Easing vs. Tightening
While we stress that the numbers presented aren’t statistically significant the stock market return trends displayed in Fed easing vs. tightening campaigns is insightful nonetheless. Investor’s would be wise to keep a few ideas in mind with regards to tight versus loose money environments.

Since 1954, stock market returns have lagged the beginning of Federal Reserve monetary campaigns by between ten and thirteen months on average

The first thirteen months of Federal Reserve easing campaigns have been associated with abnormally weak stock market returns.

Our conjecture - The monetary authority typically begins an easing cycle only when the economy has shown clear signs of faltering. In the early stages of an easing campaign the economic benefits of future expected rate cuts are more than offset by the effects of a slowing economy, leading to sub-par stock returns.

• Historically, stock market returns have remained robust up to ten months after the beginning of a Federal Reserve tightening campaign.

Our conjecture - The monetary authority typically begins a tightening cycle only when the economy has shown clear signs of overheating. In the early stages of a tightening campaign the strength of the underlying economy more than outweigh the future effects of higher interest rates, leading to continued strong gains in equity valuations.

While common wisdom holds that investing in stocks at the beginning of a Fed easing cycle provides investors a fantastic opportunity to capture equity market returns, it’s not clear to us that this is an optimal strategy. More appropriate may be a strategy of maintaining an overweight in the long-end of the government bond market twelve months into an easing campaign before switching to stocks.

What Are The Benefits of Owning A Practice?

Owning a Practice has many advantages: job security, a sense of autonomy, salary (or your draw) and corporate income (if incorporated) or your profit after you’ve paid yourself. Of course another benefit of ownership is that you can "sell" at which time you will receive the difference between your purchase price and the selling price i.e. the after tax sale proceeds. Hopefully you will realize a substantial profit. Buying a practice is a major decision, hopefully you will base that decision on more than hope and a prayer. Do you know how to read financial statements? Do you know what a cash flow projection is? Do you know the difference between servicing the loan, paying the overhead and providing yourself with a resonable salary? Stay tuned...

Frontline’s – Can You Afford to Retire?: Catch it if You Can

For better or worse, U.S.- based employees are bearing greater risk for their well-being in retirement than ever before. At company after company, employee pension plans have either been scaled back, frozen, or liquidated in favor of employer sponsored defined contribution programs such as 401(k)s and 403(b)s. The fact is that defined contribution programs were never designed to be a primary retirement savings vehicle for the masses – and for many the reality hasn’t met expectations. A few excerpts lifted from Frontline’s website:

"I think this is a crisis in the making," says Alicia Munnell, director of the Boston College Center for Retirement Research. "I think 10 or 15 years from now, people who approach their early 60s are simply not going to have enough money to retire on."

"I would say, unless you're fortunate to be in the upper-income quartiles, that you're probably going to be in for a very rough ride," adds Jack VanDerhei of the Employee Benefit Research Institute (EBRI). You're not going to have sufficient monies to pay the predictable expenses - your housing, your utilities, your food -- plus the potential catastrophic medical care costs."

Half of America's private sector workforce has no employer-sponsored retirement plan; among the half that does, twice as many workers have contribution plans like 401(k)s than have lifetime pensions, a complete reversal from 25 years ago. The move from lifetime pensions to 401(k) plans has meant that employees now bear much more of the cost -- and risk -- for saving for retirement. According to the U.S. Department of Labor, in 1978 workers put in only 11 percent of total contributions to retirement plans, while corporations put in 89 percent; by 2000, the employee share had leapt to 51 percent and the company share had fallen to 49 percent.

This is a must-see show for anyone saving for retirement. The issues are well-developed, the messages straight-forward. We see these issues first-hand each and every week – so we can assure you they are valid.

• Maybe 50% of the working population saves nothing.


• Those who do save simply aren’t saving enough. By the show’s expert’s estimates on average those who save only put away about 4% of pre-tax income. Yet one needs to put away between 15% and 20% of pre-tax income each year to have a good chance of meeting their post-retirement needs. We’ve come to similar conclusions independently.


• Most retirement savers make inappropriate investment decisions with their savings. Either keeping too much in money market funds or taking on too much risk through employer company stock.
  

You can view it online here. Let us know your thoughts.