Imitations Can Mean More Than Flattery

September 16, 2008
Joel G. Block

Greg B. Simon, CPA

Physician's Money Digest, February15 2003, Volume 10, Issue 3

In general, most people have their own way ofdoing things. You may enjoy waking up earlyon Saturday morning before the sun rises,while your colleague finds sleeping in more satisfying.As the popular phrase says: To each their own.However, in the case of successful investors, similarityseems to be the key to success.The following is a list of 5 practices thatthe best investors participating in themarket today have in common:

• Start early. There is simply nosubstitute for time. To better understandthis fact, let's look at 2 investors:investor A and investor B. Investor Ainvests $2000 in an IRA from age 18through 31, and then stops investing.Investor B invests $2000 in an IRA fromage 31 through 65. As you can see,investor A contributed to the IRA foronly 13 years, while investor B contributedfor 34 years. Since investor Bcontributed to the IRA for 21 moreyears than investor A, one would probablyassume that investor B accumulatedmore money. But that's not the case.

The contributions made by investorA had 34-plus years to compound, andthat's the key. Assuming a 7% annualrate of return for both parties, investor Awill have accumulated $485,240 in an IRA by age65, while investor B will have accumulated$338,546, nearly one third less. In addition, startingearly also allows for adjustments in an investmentstrategy and gives an investor time to regroupif necessary. It also allows for an investor to reap thebenefits of at least 1 true bull market during theirinvestment lifetime.

• Maximize tax-deferred contributions.Invest fully in tax-deferred plans including: pensionplans, profit sharing plans, cash balance plans,Keoghs, and 401(k)s. These amplify thevalue of compounding, since the untaxedamount is compounded at an acceleratedrate. Once tax-deferred plans offeredthrough employment are fully exploited,other avenues for tax deferral or avoidanceinclude annuities and life insurance.With annuities, investments provide asteady flow of cash upon retirement, andwill generally be taxed at a lower rate duringretirement years. Life insuranceinvestments can be passed on to a spouseor children without tax consequences.

Real estate investments offer depreciationover a 27 1/2-year period, and cashflow is protected from taxation. Also,capital gains with investment propertiesare avoided entirely if the real estate ispassed on to a spouse or childrenthrough an estate. When making investmentsinside or outside of tax-protectedvehicles, base your decisions on the taximplications. Tax-free government bondsand growth stocks don't need tax protection.Dividend-producing stocks and taxable bonds,however, are best suited for tax-protected plans.

• Diversify instruments and investmentsectors. Don't put all your eggs in 1 basket. If therecent Enron debacle taught investors anything, it'sthat there are heavy risks associated with not diversifyinga portfolio. And it's important that allinvestors realize that diversification applies both todifferent investment instruments and differentinvestment sectors. Thorough diversification meansdiversifying by industry and diversifying throughboth equities and bonds in various industries.

• Protect against downside risk. It's onlyhuman to sidestep thinking about death or disability.Nonetheless, every investment plan shouldinclude both life insurance and disability insurance.Life insurance companies are reluctant to underwriteinsurance of more than 18 to 20 timesincome, but for a physician, 30 times income isoptimal if it can be obtained. Disability insurancemay be even more important, since disability duringa working career is 5 to 8 times more likely thandeath. Finally, gambling is not investing. Investmentswith significant downside risks, such as optionsand futures, are best left to specialists.

• Set goals, define risk tolerance, andreevaluate often. Remember to set goals. Goalscan include retirement, maintenance of a certainincome level for your spouse, education for children,lifestyle enhancements, or an inheritancefor heirs. After you set goals, it's imperative thatyou define your tolerance for risk, taking intoaccount life factors: Do you have children? Areyou single or married? How close to retirementare you? These variables impact financial needsand goals. In addition, based on your goals,reevaluate and regroup often. Take profits fromhigh performers to keep a portfolio balanced.

Joel G. Block is president of Growth-Logic, Inc, in Agoura

Hills, Calif, which provides

financial planning,

insurance, and investment

services for medical

and business professionals.

For more information,

call 818-597-2990 or visit Greg B.

Simon is a partner in the accounting firm Belinkoff

and Simon in Los Angeles, Calif. He welcomes

questions at 310-479-1990, or visit