Madoff fallout

Mr. Madoff, as we already know, might have ran a criminal enterprise. I don't believe, though, that he started his fund in the 60's having a Ponzi scheme in mind. It's just when the things started to get bad, he wanted to keep up the play.
What is interesting, though, that people were lining up to give him their money without questioning his investment strategy. It was the "in" thing, only for well-connected. On the other side, however, Mr. Madoff was almost as Alan Greenspan as far as his reputation ( before the collapse, of course) and credentials were concerned-who could possibly question him? This is what we called "eminence-based practice"!

Yet another confirmation of the fact that few financial advisers keep their clients' interest at heart. The issue is that of financial education. Yet again!
I wonder how many doctors were among Mr. Madoff's unfortunate investors....

What we thought we know about financial safe haven

There's an interesting article on Marketwatch.com about municipal bond funds once considered to be a safe haven for people who don't want to take too much risk and yet enjoy tax-free dividends. Municipal bonds once were this safe haven, benefiting people in higher tax brackets(doctors?)
No more, no more... Munis took a whopping hit- 30% decline this year.

http://www.marketwatch.com/news/story/Muni-bond-fund-investors-face/story.aspx?guid=%7B72B8F338%2D452A%2D4DE0%2D891C%2DF683B8DF213B%7D

Safe heaven... Does one truly exist these days?

Market troubles: part 2

Now that the Dow took a bit of a nose dive, and panic is widespread, the question is: what is an average investor to do? Convert all your holdings in cash? Withdraw all the cash and keep it in a safe deposit box, knowing that, as banks start to fail en masse, FDIC will not be able to cover all the deposits(it's my uneducated guess) and will have to impose a withdrawal limit on your deposits? I certainly felt this way yesterday.

Nevertheless, despite all this doom and gloom and threats from the Wall Street that economy will collapse if they are not given those $700 bln, I thought to myself: where would all global investors invest their money if not in the US? Will it be China? China is a rising giant, but still almost completely dependent on exports. The rest of the emergent markets are very volatile, unpredictable, and subject to political turmoil( Eastern Europe)).What about Western Europe? Economically speaking, they don't have the same prowess as American economy due to over regulation and big shadow of their governments cast on their economy.
So it seems that the American economy is something those investors cannot live without.
And after that bloodletting on Wall St. on 09/29, they flocked to... US Treasury bills!

Besides, even there will be a massive collapse of the current financial institutions, there will be fast growth of the new type of financial industry, which is not burdened by the collective "sins" of the old good boys. That will happen just because the American economy is the most flexible and resilient in the world, and no banker would want to pass the opportunity of a lifetime.

Therefore, we probably should continue staying the course and even consider getting into a buying mode (I can't believe I'm saying this..). But will see in, say, 5 years, what will be going on

Market troubles. What next?

After recent tumultuous days of bankruptcies, forced sales, mergers and nationalizations I have 2 questions: first, what does this all mean for a long term market outlook (this is a question from an amateur investor in me), and, second, is it possible that health insurance companies are facing the same grim prospective as their cousin AIG?
I suspect that the answer to my first question is that , eventually (maybe after years of trouble and stagnant growth) market will rectify itself. Then again, after so much governmental intervention, would government play a much, much larger role in the market?
Now, the second question: is it possible that at least some health insurance companies which had a misfortune of investing their collected premiums into anything that is mortgage-related are also on the brink of insolvency? Would then they be bailed out, effectively bringing us to a one-payer model? And what would that mean for doctors?

Do you have 401k?

Most of us who work for a salary have (or should have) 401k's. Now, obviously, the old advise was to contribute to it as much as you can. And I think it's still a valid advise. The problem I always had with my 401k is that is so overpriced. Even index mutual funds in it had an expense ratio of at least 0.25%, while the same can be had for 0.17% if you would go to, say, Vanguard. Oh well, I thought, that's a price of having a 401k with the 401k provider (which is one of the bigger ones, too).
However, recently several big players started offering( gulp..) ETF-based 401k. ShareBuilder, for example (which merged with ING not long ago). With ETF-based 401k potential savings on expense ratios, 12b-1 fees etc. etc. are just mind-boggling.
So if switching from traditional mutual fund-based 401k provider to ETF-based one is a possibility, I would grab it!

End of conspicuous consumption?

I could not believe my eyes when I saw this article about people becoming frugal all of a sudden. There was even a mention of a Great Depression mentality of extreme frugality (rhyme unintended)
http://www.chicagotribune.com/business/sns-ap-consumers-changing-habits,0,5126139.story

People trying to get rid of their gas-guzzlers. Discounters see brisk business. Bicycling to work. Will we see the death of conspicuous consumption and see the dawn of ...living within one's means( and maybe even below those means)?
It was 30 years overdue but better late than never.

Lessons of IndyMac

Now that the big banks started to fold, the word FDIC came up. It is a federal entity insuring your bank deposits. Insurance is up to $100k PER DEPOSITOR. That is , if you had multiple accounts within the same bank, only $100k out of all of them will be returned to you ( the limit for bank IRA is $250k- I guess, some people still have those). By the way, it is said that by bailing out IndyMac depositors, FDIC used 10% of its reserves. Is it possible for FDIC to run out of money while bailing out banks that will be folding in the near future?

Now, with some brokerage houses potential to fold, I did some investigation about their insurance. They don't have FDIC, but they are insured by SIPC (Securities Investor Protection Corporation) It has a website www.SIPC.org Brokerage accounts are protected for up to $500k in case of a broker-dealer insolvency( limited to $100k for claims for cash) Also, a brokerage might have some extra insurance from private sources (say, Lloyd of London)
That, to me, means you shouldn't really hold more than $500k( hats off to those who have that much in retirement funds) at any particular broker-dealer, no matter how reputable and old that broker is.
Market forces have no regard to reputation

Morningstar study: Do fund managers invest their own money in the funds they manage?

Another interesting article from Marketwatch.com:

http://www.marketwatch.com/news/story/most-funds-managers-have-none/story.aspx?guid=%7B907D8FC0%2DA948%2D415A%2D8133%2DF57A365CC367%7D

Yep, those fund managers won't invest their own money into the funds they manage. And that's taking into consideration life-cycle funds ( suppose, those managers are very young and they happen to manage the fund designed for people about to retire) and state-specific bond funds.
I can think of only 2 reasons: either they have an access to much better investment options (such us private equity) than the people investing in their funds, or they know something about the funds they manage the rest of the investing public don't know.
I won't eat at a restaurant where its chef doesn't want to eat its famous entree.

Graduating residents and fellows: financial challenges

Now when the old academic year is over (and the new one just begun with the influx of freshly baked interns), the newly baked attendings, after being "institutionalized" for so many years, face financial challenges they never dealt with before: making on their own.
No more resident's salary. No more ignorance of the issues of one's health or malpractice insurance. Maybe moving to the new place. All of these issues can be tackled successfully based on their previous experience of moving from a college to a med. school and on to the residency, often in another part of the country.
What our residents are utterly unprepared for is what to do with their sudddenly (and seemingly) larger paycheck. The theme I hear over and over again is " What should i get now when my old Honda gave up the ghost: Lexus or Infiniti?" All these years of semi-voluntary and semi-imposed from outside financial self-restraint are catching up with our residents... er, attendings. And it is hard not to go on a spending spree with your first real paycheck in 11-12-13 years. And it's fine , I guess, to get some stuff you're really craving, as long as you keep the bigger goal in mind: financial freedom.

Who's watching over your money: here we go again

As the collapse of once mighty financial system unravels, we again see the unpleasant truth: financial professionals do not have your financial well-being as their primary objective. These two hedge fund managers started moving their money out of their hedge funds while reassuring the investors(I doubt that there were any doctors among them, though) that everything is great.

Lesson learned(or , rather, confirmed): investors should watch out for themselves, without much reliance on "professional" help http://money.cnn.com/news/newsfeeds/articles/djf500/200806191633DOWJONESDJONLINE000932_FORTUNE5.htm

And yet another hedge fund manager, this one faking his own suicide to avoid going to jail:

http://www.iht.com/articles/2008/06/16/business/16fugitive.php

Breakfast: go out or eat at home?

We liked to go out for breakfast: there is something in it that going out to, say, dinner doesn't have. The atmosphere of the breakfast places, their pace and the crowd is quite different from any other setting. We usually ordered some muffins or pancakes or eggs-just typical breakfast food, nothing fancy. The total bill for us amounted to something like $12-14. Recently, I've gotten into a habit of making our weekend breakfasts at home. I got the whole grain pancake mix from Trader Joe's (cost $2.29) and Betty Crocker muffin mix( cost $3.00) from Target.

By using 1/3 of the pack of a pancake mix, I produced 10 medium-sized, fluffy and (at least to me!) delicious pancakes enough for a full breakfast. That's 76 cents for a family breakfast! Now, the recipe called for 2 tablespoons of vegetable oil and 2 eggs, that add to overall cost, depending on your local costs of eggs. Then syrup- how much is for 2 tablespoons?Coffee, too, but home -made coffee cost much, much less than any cheapest prepared coffee. I estimate the price of home-brewed coffee to be anywhere from 10 to 20 cents a cup( for the most expensive brands like Kona) So overall cost of such breakfast is probably less than 2 dollars for a small family, 6 times less than at breakfast place. Probably more delicious, because you use high quality products (incl. coffee) Time investment: 15 minutes.

Now, for muffins:(that's for another day, since you'll be too full from pancakes) the whole pack would yield 12 medium sized muffins- again, very yummy.

So, at the end, the cost savings, if not grandiose in absolute terms, are enormous percentage wise.

Educate thyself, part 10 : Technical analysis

Technical analysis has to do with the trends in the market (or segments thereof). By analyzing the chart some professionals say they can predict the troughing(peaking) of a given security or a segment of the market.
That is clearly not my choice of investing, since it's very time-consuming and of questionable long-term profitability.

Educate thyself, part 9 : Efficient market theory

According to efficient market theory (EMT), markets, you guessed it right, are efficient. That is, the news about favorable and unfavorable developments (we've been getting more of the latter lately) spread so fast that over- and undervalued securities would rectify themselves in price as they would be sold or bought by the investors armed with their newly acquired knowledge. As the popular joke about EMT goes- a professor and a student walk down the street and student sees a $10 bill. Professor says "Don't bother picking it up, for if it was indeed a $10 bill, it wouldn't be there"
But we all know that there are wild swings in the market, they happen all the time. So the markets cannot be efficient, right? The real question is not whether or not the markets are truly efficient or inefficient- it doesn't matter. What matters is whether or not there are EXPLOITABLE inefficiencies in the market allowing us to make money.
So, thinking about the joke above, the question is not whether to pick up a $10 bill, the question is whether walking around looking for scattered $10 bills is the way to make money in the market.

Educate thyself, part 8: Value investing

Most of what I know about value investing comes from Warren Buffett's article The Superinvestors of Graham-and Doddsville,which is based on his speech at Columbia Business School in May of 1984, celebrating 50th anniversary of publication of Security Analysis by Graham and Dodd. ( I have a PDF version of it, but don't know how to upload it, for those who're interested, i can e-mail it to them).
The message is rather simple: find the undervalued (by the market) securities, and buy them.Then sell those that are overvalued. He shows the track record of many students of Graham ( like himself), which speaks for itself: most of them beat S&P 500 returns by 60-80% annually, on average. The point Buffett is making is that all these people are buying the business, not its stock.
You just have to find those undervalued but strong businesses, and profit from it.
Some authors (for instance, Burton Malkiel in his A Random Walk Down Wall Street) argue, however, that the information investors( even the professional ones) have to evaluate businesses is far from accurate and include "creative" accounting and other gimmicks to inflate the stated earnings. ( memories of Enron are too fresh in our minds...)
However, Buffett has his record- can't argue with the facts.

Educate thyself, part 7. Investment theory

Depending on what investment theory you're subscribe to, you can either immerse yourself in so-called fundamental analysis of each company you might buy (and be the next Graham or Buffett), do a technical analysis ( has to do with the prevailing trends in the market), or believe in Efficient Market Theory, stipulating that by en large, the markets are efficient, and there are almost no exploitable opportunities to get rich quick off of. Then there's this Modern Portfolio Theory , described by Harry Markowitz (and he got a Nobel Prize for it), according to which you can't really make anything over and above of what market return is, but you can reduce the risk (fluctuations in the value of your portfolio) by proper diversification(at least, that's my understanding of his theory).

Dizzying choices... And all these theories has strong arguments on their side. For instance, fundamental analysis- Warren Buffett made a fortune sticking to this theory.
What an amateur investor to do?
It reminds me of a common issue we all face almost every day- out of multitude of studies, what would we take as a new guideline for our practice? And if in medicine we have a benefit of a prior experience, in investing we're left on our own devices.
I guess, just like in our everyday practice, if we don't know the exact answer, we do what we think is right.

Educate thyself, part 6. Trades are free. Now what?

In my previous post this month I described my quest for inexpensive investing. What I actually arrived at was free trades. Now, what to do with them?

I decided to stick with ETF's as opposed to mutual funds for reasons of lower costs, and somewhat better tax efficiency. Also, there's no minimum initital purchase for ETF's -you just have to have enough money to buy in whole shares (rarely more than $150-$200 a share, and most of the time much less) in contrast with mutual funds, where initial investment might be anywhere from $2000 and more.

By reading the books of financial academicians (those that have nothing to sell to you), I started to understand that it's kind of hard to beat the market in terms of your real returns. It's very difficult even for professionals to do it. So to get a broad exposure to the markets, I decided to go with index ETF's. They provide as broad an exposure as the index allows it, at the same time, it's not actively managed, i.e, they don't constantly buying and selling underlying securities. They do that only if the proportion of such securities or the securities themselves change within the index. All this would keep the expenses low.
Besides, you can buy and sell ETF's throughout the day. For mutual funds, it's only once a day at the closing.
So, will go with index ETF's.

My article on Kevin, MD blog

On June 01, 2008, Kevin,MD blog was kind enough to post my article as his Reader Take.
Most comments were positive, giving different doctors' prospective on money and general public and doctors' perception of their"wealth" and showing genuine interest to money matters for doctors.
Only one comment was oddly amusing- the one stating that financial basics should've been taught by one's family as we were growing up. So, I guess, those of us who didn't have the luxury of such comprehensive financial education has no one to blame but ourselves...

http://www.kevinmd.com/blog/2008/06/docblogger-doctors-and-their-money.html

Conferences: where's the money talk?

I just returned from a conference. This is an annual conference of a well-respected association.What keeps we amazed that out of multitudes of workshops, abstract sessions and posters there's not one dedicated to business/ money aspect!
Yes, we'd rather talk about utility of ultrasound vs. CT, time to cath and patient satisfaction, but not how to deal with money, break our dependence from paychecks or those often delayed checks from insurers ( or at least diminish it) and maybe then lead more fulfilling life because we don't have to do it for money.
Money continue to be that elephant in the room full of doctors that no one notices.

Educate thyself, part 5: Quest for inexpensive investing

In the early 2000's I had an account with one of the big brokerage houses (now gobbled up by even bigger brokerage house). It was a full-service brokerage. I could not trade by just clicking a mouse. The problem was that my significant other was working for that brokerage house, and we couldn't have a brokerage account anywhere else due to "compliance".I had to call my broker and ask him to buy or sell something for me. Usual cost of such 30-sec. conversation was $49-$53. Not that he did anything special. He would just say: "Lemme see what the ask is..." and then declared that he "put it in". That was it. He never bothered me with his sales pitches, probably because I had a minuscule account balance. But even back then I wasn't that naive to think that this broker thinks about my financial well-being first before his own.

Now, immediately after my significant other changed jobs I closed that account and moved whatever was in it into a discount brokerage house ( back then it was Ameritrade). Now the trades were $9.99. Customer service was bad, transaction cost was much better but still way too high for regular investing. I was still better off just having an account with, say, Vanguard or T. Rowe Price and buy an broad-based index fund a little bit at a time without having to pay for a transaction (those big mutual fund companies even provide postage-paid envelopes for those sending their contributions in form of checks). So I was going the mutual fund way for a while.Then I learned about ShareBuilder. It allowed you to buy regularly for about $4 per buy. ( and I think, more for sells).Better, I thought, but for some reason I didn't open an account with them.



The real opportunity came when Wells Fargo announced ( about 2 years ago) that if you hold $25,000 in combined assets with them (even including 10% of your outstanding mortgage), then they'll give you 100 trades per year free through their so-called PMA account. They also waived the IRA custodial fees and the yearly fees for maintaining the HELOC with them.Yea, that's what I'm talking about. Now I could buy very inexpensive index ETF's for free!
Then bank of America started offering something similar. Also, there's this Zecco website-they also give free trades. Now I minimized my investment expenses as much as I could. Good.

Perfect Cosmo

As a doctor, I know perfectly well and encourage everyone to enjoy alcoholic beverages in moderation.

However, if you do decide to have a drink, let it be a high quality drink, which is not necessarily obtained in an overpriced bar or restaurant. It can be prepared at home.

I, for one, enjoy an occasional Cosmopolitan.
For making it, you'll need:
1. 2 oz. of vodka. Don't believe those who said that the more expensive the vodka, the better your Cosmo. Price of vodka in your Cosmo has almost no bearing on the quality of your Cosmo. I select grain vodkas, though, for I never tried potato-based vodkas. You can go light on vodka and use only 1 oz. of it.
2. 1 oz. of cranberry juice. It has to be a pure cranberry juice, not those Ocean Spray cocktails.You can get it in any health food stores or Trader Joe's.
3. 1 oz. or Triple Sec or Cointreau/Grand Marnier . The latter is usually much more expensive than the former. I use Triple Sec.
4. 1/2 oz. of lime juice.- fresh is always better, but concentrate will do, too.

These ingredients needs to be shaken in a ... yes, a shaker with broken ice. You don't have to shell out a lot for a shaker- most liquor stores sell them for $5-10 ( I think they take them out of the liquor gift boxes and just sell them separately)
I take 4-5 cubes of ice and split them in halves using an ice pick (which always invokes the images from "Basic Instinct")
The whole mixture is to be shaken 10-15 times ( an English bartender guide suggests shaking until you hands are cold)
Pour it into a martini glass (again, can be obtained for a liquor store for cheap), straining the ice either through a built-in strainer, or through a separate strainer.
Enjoy!
You'll be amazed at how different this drink tastes from an $8 drink from that hip cocktail lounge.
I think it's because a bartender has a plastic jug under the counter with all the ingredients (except vodka) premixed in it. When the day (er..night!) is over, this jug goes into a fridge, until the next night.

Educate thyself, part 4: Expenses of investing

Now, there are all kinds of expenses when it comes to investing, expenses that you have to pay no matter whether you're up or down.
Here's an incomplete list of them:
1. Expense ratios of mutual funds and ETF's- these are percentages of the money invested that are deducted by mutual fund companies to compensate themselves ( from 0.18% for Vanguard S&P 500 Index Fund to 2-3% for actively managed mutual funds, and from 0.09% for S&P 500 ETF's to... I don't really know what is the highest)
3. Additional fees on certain mutual funds ( 12b-1 fee, for instance, is paid by a mutual fund to whatever organization is selling this fund to an investor, but these fees are coming out of investor's pocket)
2. Brokerage fees. These are paid for a transaction (buy/sell) only if you have a real brokerage account.If you invest directly into certain mutual fund , those fees are not paid. ( these brokerage fees can be as low as zero, yes, nil with certain discount brokerages, esp. on a limited number of trades and as high as $50 with so-called "full -service" brokerage.)
4. Custodial fees for IRA accounts. Sometimes they're waived for accounts with higher balances.
All of the above mentioned fees are going to financial industry.
5. Taxes for taxable accounts. Sometimes taxes are due on mutual funds even though you as an investor didn't sell your shares. These are , obviously, Uncle Sam's cut.

So the easiest and the surest thing in investing is to minimize all these multiple fees so it will be more left for us to really invest.
In the next posts I'll try to describe what I did to cut these costs.

Building wealth part 4: educate thyself, part 3

Now, since the stock market is the way to go if I was to achieve my goal of being financially independent, while learning basics of investing, i came across the book of renowned John Bogle ( I quoted him and provided a link to his interview in one of my previous posts) called The Little Book of Commonsense Investing. The first most interesting thing I learned is that, per John Bogle, it's close to impossible to control your rate of return on your investments, since you can't control the market. But what you CAN do is to control your expenses, that is, the expense ratios of your mutual funds, if you have them, brokers' commissions, annual custodial fees for IRA's etc.
That made sense to me since if fell into this frugality category, which can bring substantial benefits whether you're investing or simply saving.
So I embarked on the search for minimum expenditures while investing, which I'll try to describe in my next posts.

Living rich without BEING rich

Now, foreclosures hit the Hamptons' properties. People face foreclosures on their $1-10 million houses. As it turns out, these people are (or were?) living like rich without being rich.
The Wall Streeters mentioned in the article might not have any wealth built during all these years of financial boom( the same Wall Streeters serve as financial advisers for lots and lots of people!)
Instead, they had a lifestyle of the rich.
http://www.nypost.com/seven/05122008/news/regionalnews/trouble_in_li_paradise_110497.htm

Educate thyself: mutual fund mechanics

Mutual fund was first created back in 1924, 5 years prior to the worst stock market crash (so far) in history. The idea was truly ingenuous- collect the money from investors, invest them in all kinds of securities, and issue the mutual fund shares to those investors in exchange for their money. What securities the investors' money will be invested into is entirely up to the management team of the mutual fund.

The upside of this idea was that all of a sudden, the average investor gained access to the very broad spectrum of securities-stocks, bonds, real estate etc., and all for a relatively small initial investment. Before this invention, you've got to buy individual securities to achieve diversification of this kind.
Now, the downside: the expenses. In an actively managed mutual fund, the expense ratio (percentage of the money under management that is deducted each year) can be as high as 2% annually (we're talking about mutual funds bought outside retirement vehicles like 401k, where you can find even more "expensive" funds). It means that no matter whether your investment goes up or goes down in price, you've got to keep paying these percentages to the mutual fund company. Billions of dollars each year are collected that way from investors.

How do they use all these money collected from investors? At least 70% of it goes toward managers’ salaries.

Taxpayers are likely to pick up the tab for bad mortgages

In my post from May 5 I stated that private debt of banks, mortgage companies etc. will likely become socialized, i.e. will become that of taxpayers. This is the confirmation of this statement:http://www.connpost.com/localnews/ci_9199245
Federal Housing Administration will guarantee( if this bill becomes a law) $300 billion in highly risky mortgages, those that no private institution in the right state of mind would guarantee.

Building wealth part 4: educate thyself

Complete lack of even basic financial knowledge among doctors is nothing new. There's no better way of killing an otherwise lively conversation than mentioning the choices of mutual funds by a particular 401k provider.
However, what truly amazes me that despite of adverse economic conditions, increasing pressures from insurance companies and HMO's, diminishing wages and growing pessimism and dissatisfaction among many doctors and other professionals ( here's a link to a recent NY Times article titled "The Falling Down Professions" to illustrate the matter)http://www.nytimes.com/2008/01/06/fashion/06professions.html?_r=1&oref=slogin, they continue to be oblivious about their own financial matters. And we're talking about some of the most educated people in our society!
So for me, my journey to financial freedom started with education. Surprisingly, the good literature on the matter is not advertised on TV or radio. I had to really search for books, articles and blogs that would be useful for my financial knowledge.(I forgone the glossy booklets from major brokerage houses and 401k providers.)
Since the mutual funds are the main investment vehicle created for the middle class ( and we are the new middle class), I decided first to look into the mechanics of an average mutual fund. I'll describe my understanding of it in my next post.

Building wealth part 3: got some money saved,now what?

My savings started to accumulate bit by bit. But without some more powerful money growth solution financial independence was nowhere in sight. I did some "investing" in 2000-01( I use parentheses here because it was far from real investing-investing as I understand now) during the Internet stocks' boom(and bust!), and , sure enough, lost money . Back then, I was still in the fellowship, so by virtue of being a "subspecialty resident" I didn't have enough money to lose. However, stock market returns are about 8-10% annually( that is, obviously, over long stretches of time), so I saw it as a main vehicle to get to my financial independence, regardless of my prior painful experience.
Back then I was enrolled in the Master's of Science program in biostatistics. So as I was learning all these bivariate, multivariate and survival analyses , I was getting better at my recognition of quality from junk research papers and articles. But I needed financial education 101, too! Little by little I started using my new statistical knowledge to help me distinguish what I call a "financial propaganda" (the bulk of financial info unloaded into our ears/eyes every day) from the statements based on some real scientific financial studies.

Wealth ≠ earnings: vivid example

This is sort of a follow up post on current real estate problems, but not only that: it illustrates that your true wealth has very little to do with how much you make.
This very well known professional athlete who made millions of dollars a year had to foreclose on his $2.5 mil. house. Unbelievable? Well, how about some well compensated doctors ( orthopedic and plastic surgeons, some ENT docs, etc.) who despite their OK income are in debt (credit cards, HELOCs) up to their eyes? How do you explain that?
All the usual evils are to blame, it seems: complete lack of even basic financial education, conspicuous consumption (I'm sure that above mentioned professional athlete didn't really lead a frugal life) and mental substitution of true wealth by high income. Very much applicable to all of us.

Here's a link to this article
http://ap.google.com/article/ALeqM5iXHQ2UrDf4uDtCVTVo85dGcxrjqQD90D82101

Media vs. my take on current mortgage problems

CNN yesterday broadcasted their Special Investigations Unit program on mortgage meltdown.I'm not a big fan of all those TV "talking heads" and self-proclaimed financial (or, like in this case, mortgage) experts, but one thing I couldn't help noticing: CNN, like many other major media outlets, portrayed the borrowers posed to lose their houses in foreclosures as unquestionable victims, and financial institutions as , obviously, villains.
It seems to me that these somewhat simplistic views are quite far from reality( although, as a doctor and a researcher I should now better that it's close to impossible to define reality!)
Sure enough, financial institutions (banks, brokerages, mortgage companies etc.) are there only with one thing in mind: profit. They'll try to extract it from whatever they do.They couldn't care less about all those political promises of affordable housing. Left unchecked, this drive for profit ( or "greed" as per Gordon Gecco, the famous character of Michael Douglas from "Wall Street") can wreck a havoc on everyone and everything.

Now, the borrowers' part: their greed, it seems , was in trying to obtain what they could not possibly have. It was hard to comprehend how a lady, a truck driver, interviewed for this program, was realistically planning to afford a 6-bedroom house for $180,000 when our family with 2 relatively high income earners couldn't afford an apartment for more than $280,000( on the emotional level, I sympathize people like her) Now her house is in foreclosure, and , obviously , there was no equity in that house, and the bank has to take losses when they auctioned off her house. So the people left holding the bag at this point, in my view, are this bank's investors (which included our own 401k, our own pension funds and IRA's, so the taxpayer started getting hit at this stage), who took possession of a lot of loans like this, thinking that they're high grade because their rating by those bond insurance agencies.

Now, the fun part: we are now entering the era of socializing the private debt. Institutions like Countrywide are about to collapse without federal government bailing them out for the sake of the "economy at large". So their(now almost worthless) private debt will now become a public debt. Taxpayers, at this point, will get another punch in the form of high taxes-overt and hidden to pay for this debt.

The only people left holding the bag at the end will be taxpayers.

So at the end, we have conspicuous consumerism (desire to possess, "everyone has it so I deserve it, too" etc.) on one hand, and greed of financial institutions who couldn't care less about true interests of their clients, having their interest as the only thing to be considered.

Both of these forces are equally destructive.

Building wealth part 2: tiny bit of money

So now I had maybe $250 or $300 dollars a month that we were not using. Back then I discovered ING( which was giving $25 for just opening an account, I don't think they're doing it anymore). I started transferring these money into savings account, thinking that I always can get them if I needed. Funny thing was I DID NOT need them. Whatever purchases we were making, I was able to pay for at the end of the month. ( after ING dropped their interest rate, I found other internet banks, like igobanking.com, countrywide.com and a few others)
Good, I thought, but these savings don't really bring you that much in terms of real appreciation.I saw gallon of milk ( and ,obviously, a gallon of gas!) going up steadily in price without interst rate increases in my savings account.

Building wealth part 1: my humble beginnings

After working for a while as an attending and making an OK salary, I started realizing that I'm not getting any richer as the days/months/years went by. We were still renting a small 2-bedroom apartment. Yes, we finally got rid of that clunker and bought 2 new mid-priced cars(one American made, and another Japanese). No, we haven't gone on those expensive vacations. And yes, we were maxing out our 401k's. But we had no savings or investments outside of our 401k to speak of.
So the only thing I was noticing was that I was getting older. And I didn't like that. Well, there's nothing you can do about flow of time. But I thought I should be getting richer while getting older and I wasn't. So, where did all that money go? We started monitoring our spending. Turned out, we didn't spend them on anything big. That was it, NOTHING BIG, but everything small. Expensive gifts for our friends' and relatives' birthdays. Nice dining out. Starbucks 3 to 4 times a week. And so on and so forth. So we started thinking every time we were about to swipe them credit cards: do we really need this? and if yes, how log do we envision using it? Would it really improve our quality of life?
Since we started doing that, I stared noticing more money left in our checking account at the end of each month. Still far from the riches, but it was a start.

You might be a prime target!

There's this nice article from Bankrate.com about our "class system" about the financial industry targeting so-called" mass-affluent" with investable assets from $200k to $1mil.( and ,obviously, above). Sure, the more you give them to invest "on your behalf", the more money they'll be able to make off of you in fees!!

http://www.bankrate.com/brm/news/retirement/20071101_American_wealth_a1.asp

Who is looking after our money

In general, in a relationship between a professional and a client (such as in doctor-patient, or lawyer-client), it is a known that the clients interests are supposed to be put first.
In an interview with Bill Moyers, John Bogle, the founder of Vanguard Funds, gives his view of a current state of financial industry.(the interview was given before the fall of Bear Stearns, by the way). Especially interesting to me was the last partof his interview, when he states that nowdays, the corporations are run in the way to maximize the profits for its managers and NOT
for its stockholders. He calls it "manager's capitalism" It's not about creating value anymore, it's about the most efficient way of extracting the value for its managers.
In addition, he talks about that gargantuan debt we racked up in the past decade.

http://www.pbs.org/moyers/journal/09282007/profile.html

Financial independence

For me, the true definition of wealth is financial independence.What does this mean? Well, if I can stop working for money (and may as well continue working just because I love medicine-taking care of patients-academic pursuits etc.), then I'll be truly financially independent.
Which means that whatever collateral income I have (retirement funds, savings, real estate etc.) should bring me exactly what I spend each month. How achievable this goal is depends on my financial needs and expenditures.
Therefore, I don't look at high income as a mesure of wealth. You can be poor even with the high income if you have no savings/investments and assets to your name. Stuff you might be acquiring with your high income (and that incudes nice cars and big houses, in addition to flat screen TV's and titanium golf clubs) does not bring you any closer to true wealth.

Food and doctors

One of the major money wastes that I encounter in everyday life is related to food: I don't see too many hospital workers, including doctors, bothering themselves by bringing luch to work. Even as simple as having breakfast at home is too big of a deal, it seems.
Most of my coworkers drink coffee bought from the hospital cafeteria, which is a branch of a nation-wide of above-the-average(in terms of prices) fast food chain. Also most of them order breakfasts and lunches from the take-out places.
The daily expenditures for this can easily amount to $10-15 a day ( $3 for breakfast, and at least $7 for lunch, and a cup or two of coffee in between).
NPR today had a nice program about teaching doctors to cook healthy meals in less than 20minutes, titled" Doctors Get a Crash Course in Healthful Cooking"
http://www.npr.org/templates/story/story.php?storyId=89883788

Conspicuous consumption

Conspicuous consumption pervades our society. You can see poor people wearing brand name clothing, listening to iPods and playing hand-held video games. You can see middle class people driving expensive cars, living in big houses in swanky suburbs.

Neither group can really afford those luxury items.Nevertheless, the message from the society at large is to maintain your status, to show(mostly to others, but to themselves too) that you've made it. This notion is what makes people to spend, spend at all costs. Take on those ARMs, consumer credits, HELOCs etc. Max out those credit cards. We live only once, you know.
70% of our GDP comes from consumer consumption. That is, our economy is totally dependent on it.

It's a small wonder that a notion of building of true wealth is more of a counterculture.
In a way, the beautifully wrapped box becomes in and of itself a goal instead of its contents.

Who is rich?

Who can be called "rich"("affluent", "wealthy")?

Most people would define this category by income ( and I don't). With the median annual US household income of around $47,000, are those making more should be considered wealthy?

Would making $100,000 a year make a person wealthy? Maybe $200,000? The prevailing societal notion of wealth = high income. Even more so, as I stated in my previous post, certain professions by default are considered to be wealthy. And with wealth, conspicuous consumption should follow( I hope to add on conspicuous consuption among professionals later).

Not all agree with such definition, however.

Big income- and still no money?

One of the reasons I wanted to start writing this blog was the fact that most of the doctors I know(and some other professionals, such as lawyers and engineers) are struggling financially.



Readers who are not doctors themselves or don't have a family member who is a doctor can be very cynical about such statement. "Yea, right!.." "Poor doctors!" " With a six-figure income, they are struggling"

The notion of a wealthy doctor is ingrained in our society .If you ask 100 random people who the wealthy people are, most would name doctors and lawyers.(in big cities, responces will include investment bankers and stock brokers). Mothers still dream of their child becoming a doctor or at least marrying one.



Doctors themselves, especially the younger ones, would probably disagree.
And not necessarily because they know what their outstanding student loan balance is ( for college and med.school). And not necessarily because of all those years of delayed gratification ( 3 to 8 years after med. school in residencies and fellowships).
It's probably because when they are finally done with all their training and become attending physicians with a better salary they do not feel any richer that when they were residents or fellows. And most of them ARE not any richer.

In my posts that are (hopefully!) to follow, I'll try to explore this seeming paradox.

Blog created

Welcome to my newly created blog.

I'd like to dedicate it to hard-working doctors of all specialties .However, those personal financial matters I'd like to share with my readers apply to everyone-doctors or not.