A Panoply of Investing Tips

September 8, 2009
Jeff Brown

Back from the snail mail, glossy version of Physician's Money Digest, comes Jeff Brown's melange of facts and ideas gathered from who knows where, passed on for your enjoyment and, hopefully, profit.

For those of you who remember the snail mail, glossy version of Physician's Money Digest, you might recall that in my column there, I would break down from time to time and issue a melange of facts and ideas gathered from who knows where. Each of these was (probably) worth passing on, but there wasn't quite enough meat on the bone to generate a whole column. My file is bulging again, being an inveterate scribbler and clipper, so here is a new collection for your enjoyment and, hopefully, profit.

The best predictor of a mutual fund's return is below-average expenses. Studies show (and we like studies, don't we?), on average, each 1% increase in expenses reduces performance by 1.6%. So don't focus solely on recent returns alone as you know you are tempted to do.

And while we're at it, for your mutual fund to beat an ordinary ETF, the fund will have to do 10 times it's expense ratio (ef 1.5% x 10 = 15%) over the ETF's return to cover the extra fees involved in the mutual fund.

Finally, if you want to do the math, a mere 1% drop in expenses in a mutual fund based tax-deferred vehicle such as an IRA, SEP or 401k over your investing career is worth at least 6 figures. That's free money, folks.

Over time, the market declines one out of every 3-4 years and even in an up market, 3-5 months out of the year. Following the market too closely will both make you crazy and too cautious, what ever your temperament and goals. Have a plan and relax.

If evidence-based medicine makes sense, why not follow evidence-based investing, instead of tips gleaned from the hospital lunchroom.

Basic Review - To find out how long it takes to double an investment at a given rate of return, divide it into 72. eg; An 8% return will double your return in 9 years.

Rule of Thumb - In retirement you can spend about 4% of your nest egg per year to maintain your inflation-adjusted lifestyle for the (likely) rest of your life.

Basic Math - To find out what your average income per hour is, divide your income in half and drop the last 3 zeros, based upon a 40 hour (hah!) week.

When the market takes a dive, that day put some extra money into your dollar-averaged fund. That morphs the downturn into an opportunity and you won't feel so badly about your losses.

Not to be a downer, but aside from our actual paper losses over the last year, there is the opportunity cost. That's what you would have made if you had been even in a small interest paying account. And anytime you lose, say, 10%, it means the next year you have to make 11.1% just to break even. And it's even worse if you are retired and drawing down your seed corn because you have less upon which to gain your loss back and therefore need an even higher rate of return. Fortunately over time, if you have a diversified portfolio (and we hope that you do) you will tend to get back to the market's 8% return average.

The reason that predictions often fail is that important events sometimes come from nowhere; the "black swan" event. And sometimes it's not the big stuff, but the little stuff, the details that are under the radar. Go figure.

Tell Me Something I Don't Know: the pain from losing $1000 is greater than the pleasure upon gaining $1000.

Action Step - The fastest way to get over something is to put it on paper. Make a list of your financial "if onlys." Saved more, spent less, whatever. Then tear it up and toss it. If you don't already know it, you will learn that nothing moves you forward like letting go of the past. Start today, learn from your list and then do something differently.

To close, a list of old-saw financial adages:

• Don't just buy low and sell high, but buy only those stocks that are going to go up!

• If you ever have a choice between lucky and smart, pick lucky.

• Responsibility belongs to bad luck. Hmmm...

• Retirement is about managing transitions.

• 21% of Americans surveyed said that winning the lottery is the most practical strategy for accumulating wealth. I hope none of 'em were docs reading this column.

Until next time, keep your money folded and be grateful.