Portfolio CHECK-UP

Physician's Money Digest, May 31 2004, Volume 11, Issue 10

Name: Paul Block, MD

Residence: Florida

Age: 60

Family: Married; three children

Years in practice: 28

Type of practice: Family practice

Annual income: $240,000

Savings: No savings specified

His question:

Financial concern: Dr. Block has recently sold his home, where he andhis wife, Alice, have lived for the past 10 years. On the sale they realized again of nearly $400,000. At present, he is not sure what he is going to do—buy another home, rent, or build a new home. Consequently, he is thinkingabout investing the proceeds from the sale during the interim and is consideringbonds as a viable investment alternative. He does not desire toexpose himself to the risk inherent in the stock market, and CDs and moneymarket funds are yielding virtually nothing. Does investing inbonds at the current time make sense?

The Finance Professor's Solution

Even though CDs and money market funds are yielding very little, Dr.Block should probably park the money earmarked for his anticipated residencein such instruments. The problem with fixed-income and bond instrumentsis that interest rates will more than likely begin to rise later this year.If Dr. Block were to invest in bonds with maturities of more than a couple ofyears, interest rates rose, and he needed these monies, he would more thanlikely lose some of his principal.

You must remember that there is an inverse relationship between interestrates and bond prices. In other words, when interest rates increase, bondprices decrease, and vice versa.

Bottom line:

If Dr. Block wants to consider fixed-income investments such as bonds, heshould only consider bonds or bond funds that are very short in durationand have maturities of only a few years. Granted, the yields will be modest,but he will also minimize his chances of losing principal should interest ratesincrease. He should leave the proceeds from the sale of his residencein investments such as short-term CDs and money market accounts tomaintain liquidity and minimize the loss of principal.

For more information, call Mr. Kosky at 800-953-5508or visit www.assetplanning.net.

Thomas R. Kosky and his partner, Harris L. Kerker, are principals of the AssetPlanning Group in Miami, Fla, specializing in investment, retirement, and estateplanning. Mr. Kosky teaches corporate finance in the Saturday Executive andHealth Care Executive MBA Programs at the University of Miami.