How HENRYs Can Insure Sound Investing

Physician's Money Digest, September 2006, Volume 13, Issue 9

Many young doctors areconsidered a HENRY(High Earner, NotRich Yet). HENRY—or HENRYETTA—isalso under age 50, earns over $100,000per year, and has a secure job.

Though HENRY has longevity aheadof him, he doesn't have much time tothink about his future. He is too busyworking, raising a family, and accumulatingdollars. As a result, most HENRYswant a simple, no-fuss approach to preservingand growing their nest eggs.

The Simple Investment

Pro:

Con:

The easiest way for HENRY to participatein the stock market is to buy anindex fund. The Vanguard 5000 IndexFund, for example, includes large andsmall plus value and growth stocks. Thelure of this approach is that expenses aresmall and the return will ideally mirrorthe entire market. Because stocks havetraditionally outpaced bonds over longtime periods, HENRY's accumulatedmoney can be expected to keep up withinflation. This approach is simple,and the cost is low. There is nochance to beat the market. Without investingin bonds and internationalstocks, asset allocation is not achieved.

Another concept is to use whatCharles Schwab coined as "Core andExplore." Your core would be a majorityof holdings placed in index funds, andyou would explore by also carefullyselecting managed funds to improve theoverall return. You outperform the marketby increasing total returns with thegains on the chosen mutual funds.

The managed mutual funds thatgleaned higher returns over their comparableindex vehicles were scientificallystudied over 15 years.

A large cap blend (ie, growth andvalue) index fund did better than themanaged equivalent 78% of the time.Thus, an index fund is suggested for thelarge cap component in Core andExplore. This is traditionally a hefty partof the portfolio—around 40% to 60%.Similarly, small and mid cap value indexfunds outperformed managed fundswith the same purpose 71% of the time.They usually comprise a smaller part ofthe portfolio, 10% to 20% of it, and canalso be economically purchased.

Only the managed small and mid capgrowth plus international funds earnedtheir higher expenses compared to indexfunds. A small cap growth manager outperformedits equivalent index 100% ofthe time, a mid cap growth fund, 60%of the time, and an international fund,80% of the time. This means picking amanaged fund in these areas couldincrease total results.

Pro:

Con:

By combining index with selectedmanaged funds, the total results can historicallyoutperform the Vanguard 5000index. You have a chance to beatthe market, and stock asset allocation isachieved. Though this has workedhistorically, past history is no guaranteeof future success. Because bonds are notincluded, asset allocation is incomplete.

Seeking Out an Advisor

Pro:

Con:

An advisor can also help you invest.However, sometimes money managersare only able to help your investmentsoutperform the market for a short periodof time—sustaining that success is almostimpossible. Some managers acknowledgethis and sell their services to clientsby suggesting that they can save themmoney in other ways, such as by doing afinancial plan, helping with estate planning,insurance issues, etc. Whether ornot these extra services are worth themoney management fee is somethingonly you can decide. Older people withsubstantial assets receive more benefitfrom the comprehensive package thanyounger doctors just starting out. On theother hand, the financial planning can beaccomplished for a fixed fee and the suggestionscan be acted upon individuallyat any age. This saves money, but itrequires effort. A professional portfolioand wealth management plan isobtained. The cost is high and thelong-term gain on the portfolio may notbe above market.

Shirley M. Mueller dissects barriers toeffective monetary decisions so they becomemanageable. Her unique training andexperience as a practicing physician boardcertified in neurology and psychiatry, combinedwith her 7-year investment advisor career, contributeto her expertise. She welcomes questions andcomments at MyMoneyMD@aol.com.