First & Foremost: Do No Harm - Finance is a tool—not an end unto itself.
- Most “Financial Advisors” are selling something—your interests are not in mind.
- Develop a plan of conservative management, and stick with it.
Congratulations! - By becoming an MD you have already made the best investment I know of: education (human capital).
- The returns on this investment far outweigh any risks, and I encourage you to support education throughout your lives. Make this an on-going investment.
- (Can you tell I’m a university administrator?)
What’s Easiest - Avoid debt!
- Credit Card debt is worst. Never use credit card for borrowing.
- Interest Paid is not tax deductible, interest earned is. If you’re in a 40% tax bracket, consider the effect of paying off 12% credit card debt. It’s equivalent to earning 20% on a risk free investment. (Not bad when 2-Year Treasury Bills are yielding 2%.)
The Easy Stuff 2. - Payoff student loans as soon as possible.
- Never speculate. A reporter asked me the other day: “With the stock market so low, shouldn’t we borrow as much as we can and buy stocks?”
- I was aghast.
- Avoid hedge funds.
The Easy Stuff 3. - Fully insure. (This is a corollary of the last point.)
- Try to diversify. This is often violated:
- Dentists investing in equipment.
- Farmer buying Caterpillar stock.
- You buying Merck (you’ve heard about a promising new drug, . . .)
The Easy Stuff 4. - Buying a house has been historically an excellent investment.
- Mortgage interest and property taxes are deductible expenses.
- Mortgage is a collateralized, standard loan so rates are reasonable.
- 30 year mortgage is paid off before retirement—affording reduced housing costs at a good time.
Buying a house? (Cont’d.) - Housing prices have risen steadily over time.
- But:
- House is an illiquid asset.
- Current concern about asset price bubble.
- So: I prefer to think of buying a house as more of a consumption decision rather than an investment decision. (Buy a house if you want to. Don’t blame me when you figure out the maintenance costs!)
The Easy Stuff 5. - Start saving for retirement.
- Probably don’t want to count on social security.
- Contributions to (qualifying) retirement plan are pre-tax (i.e., you can avoid paying taxes on that income).
- Compounding has big effect over time.
- Base case: $200,000 annual income, 4% earning on portfolio (My recommendation TIPS), monthly contributions of 14% of gross salary.
- Amount in account on retirement:
- This would require a lump sum of $533,000 today under the same market conditions.
Retirement - Don’t count on partnership value to insure your retirement:
- Arthur Andersen.
How to Contact Me. - Chris Lamoureux
- Head of Finance and Estes/Neill Professor of Finance
- Eller College of Business
- University of Arizona
- Tucson, AZ 85721-0108
- www.bpa.arizona.edu/~finhome/lam/lamhome.html
- (520) 621-7488
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