acts of terrorism or political demo-graphics. Consider the clinician from New Orleans who planned to sell his/her practice and retire around the time that Hurricane Katrina blew through. Imagine if you had planned on cashing in your portfolio in order to retire in late September 2001 or late September 2008. While most clinicians will gener-ate a respectable income over their careers, many of us leave the management of our investments to “professionals” who run mutual funds or to stock brokers who have befriended us over the years. It is not terribly heartening to learn that most index funds have outper-formed all professionally managed stock funds over any 10-year period. It is probably wise to hire the best professional managers available, but take control over our own diversified portfolio. Investment Goals: Creating A Personal Pension Plan Our first goal should be to limit risk. This risk comes in many forms: market risk, tax risk, human risk and political risk. Health risk can be mitigated with health and life insur-ance. Life insurance comes in two basic forms: the kind you rent (term) and the kind you own (whole life). Since everyone has a little different family structure, both or either type of insurance could be right for any individual situation. For an in-depth look at the advan-tages of whole life insurance, Pamela Yellen’s “Bank on Yourself” book might be helpful.2 Limiting Risk Market risk can be ameliorated with a diversified mix of ownership in various companies (stock certifi-cates), loans to companies (bonds), hard asset class ownership (commodities), real-estate, and of course cash. Stock ownership can be in the form of mutual funds, closed end funds (CEF’s), exchange traded funds (ETF’s), annuities or outright ownership of the shares. There are benefits and risks in all forms of ownership; our job is to minimize these risks through diversification and careful selection for hard earned capital. Monetary risk can be somewhat lessened with a balance of gold, silver and cash liquidity, along with income-generating foreign or global companies. Closed End Funds One idea for boosting monthly income lies in a security with which many investors might not be familiar. Closed-end funds have more than 1,250 of these securities traded on U.S. exchanges. They invest in almost every possible sector and niche of the market (from stocks and bonds to real-estate investment trusts, master limited partnerships, municipal bonds, preferred stocks, and more). However, what these funds are best known for is income generation. Closed-end funds are publicly traded companies that raise capi-tal through an initial public offer-ing and then use the proceeds to invest in securities. These CEF’s therefore the volatility in prices reflect these risks. The CEF’s structure lends itself to paying out high income because they do not have to keep money set aside for redemptions and can invest all of their assets. A quick scan (from QuantumOnLine.com), shows there are 487 CEF’s currently yielding more that 7%; 187 yield more than 10%. Today, there are 897 CEF’s that pay dividends (distri-butions) on a monthly basis. Selecting a CEF requires some dili-gence from the investor: past perfor-mance in different market environ-ments will help predict its future performance. Avoid CEF’s that have “managed distribution policies.” These distributions are classified as return of capital. These payments are simply a return of your principal and erode the value of the fund. Many of these funds, like their close rela-tives ETF’s, can also be used for sell-ing covered calls against assets in order to additionally increase monthly income. The American economy, once the world’s dominant creditor, has now become the world’s largest debtor. Unless all of us take steps now to avoid a credit collapse, dollar-denominated assets are going to severely decline in value and our standard of living will be painfully lowered.1 usually trade on one of the major U.S. exchanges. However, unlike regular stocks, they represent an interest in a portfolio managed by professional managers. This also helps the dentist investor control risk. These CEF’s do not have cash going in and out of the fund. If one wants to buy into the fund, investors purchase shares from another investor, just like a stock. It is important to note, that a closed-end fund can trade at a significant premium or discount to the intrinsic (or actual) value of the portfolio. Investors must be careful to understand that closed end shares are exposed to market risk (supply and demand), and The ETF Advantage Mutual funds may be effective for the investor who cannot take the time or has no specific interest in how his investments are doing in comparison with inflation or the market in general. However, mutual funds have some traits that the active, knowledgeable investor finds hard to tolerate: Limited Liquidity: You can only buy or sell mutual funds at whatever the price is at the end of the day. Even worse, you have no idea at what price you will get until you have already committed to the purchase or sale! www.orthodontics.com July/August 2010 27
Journal of the American Orthodontic Society July-August 2010/Buyer's Guide: Page 27
