THE FINANCIAL TICKLER

By

Bro. Dr. Ferdinand Lyndon Q. Magno

 

BONDS ARE BEAUTIFUL

  

Credit is the pavement along which production travels.

 - John Maynard Keynes

 

Most financial advisers that I have come in contact with often cringe when I mention the word 'bonds.' For them there is no reason for a young physician like me to be invested in fixed income. I should have all my assets in equities that have the highest potential for growth. I cannot disagree with them more.

 Once again we need to look at recent stock market history and learn from it. During the bull market run of the late nineties most investors shunned bonds as the NASDAQ and S&P 500 were averaging double-digit returns. Bonds with their measly returns were considered boring. We all know what has happened since then.

 From March of 2000 until late 2002 the NASDAQ and the S&P 500 have lost almost 70 and 50% of its value while the Lehman Brothers Aggregate Bond Index has returned positive results. Chances are you have lost a lot of money if you were 100% in stocks during that time. But if you had a certain percentage of your portfolio in bonds then the slide would not have hurt so much.

 One key ingredient in achieving investment success is having the discipline to stick with a plan through thick and thin. Most investors though abandon their plan once the going gets rough, making snap decisions base on emotions. 

 In my opinion having bonds in a well-constructed and diversified portfolio reduces risk and keeps me disciplined enough to stick with my plan assuring success in the long run. Although bonds are considered safe instruments one can lose money by investing in them.

To reduce risk further, invest only in short or intermediate term bonds as long term maturities are more inclined to lose value when interest rates rise. Also keep in mind to invest only in bonds with investment grade ratings of AAA or at least A to reduce corporate risk of companies defaulting on their obligations. Lastly avoid junk bonds as their returns closely correlate with equities thus you do not achieve true diversification.

 Even though the stock market had rosy gains last year it is still as volatile as ever. Stocks are still your best bet of achieving financial independence someday but by having a healthy chunk of bonds one can weather any storm or bear market.   

 NOVEMBER 2004

 

THE FINANCIAL TICKLER

By

Bro. Dr. Ferdinand Lyndon Q. Magno

  

ACTIVE VS. PASSIVE

  

‘We are not afraid to follow the truth wherever it may lead,

nor to tolerate any error as long as reason is left free to combat it.’

 

-Thomas Jefferson 

 

Active is a state of being that all Tauans strive for. Being labeled one means that for that particular member the initiations work and that the sacrifices and effort made by masters were all worth it. By participating in fraternity activities, active members are looked upon to someday lead the brotherhood to greater heights.   

On the other hand being deemed an inactive brod who disappears after initiations or the freshman year has placed some members in an awkward position throughout their school years. As far as Tau Mu is concerned active is better but is active investing superior over passive? What is the difference? 

By choosing to put money in active mutual funds and/or individual stocks, an investor believes that he/she can achieve higher returns than the stock market. Active mutual funds are managed by professionals who study the market, the economy, and all the companies that are traded with the hope of beating a particular index, mainly the S&P 500, the DOW or the NASDAQ. 

Passive investments on the other hand are mutual funds that invest in a representative index. There are different indices that track different market sectors but the most famous ones are the S&P 500, which tracks the stocks of the 500 largest traded companies, and the Wilshire 5000, which tracks the entire US stock market.  By choosing to invest in these funds, an investor puts his trust in US style capitalism and on stock market returns.

Studies have shown that during the bull market of the late 1990s, only about 10% of active mutual funds have beaten the S&P 500. If you take taxes and costs into consideration, the number drops to 5%. This has led some financial experts, including billionaire Warren Buffet of Berkshire Hathaway, to claim that investors will be best served by investing in index funds. Why is it so? 

The main reason is cost. It is far more expensive to invest in active funds than passive ones. The average expense ratio (annual percentage of assets that goes to the managers) of an active fund is 1.5% while that of a passive one is only 0.6%. The Vanguard S&P 500 Index Fund's expense ratio is a measly 0.18%! Hypothetically, an investor who puts $100,000 in an active fund will pay $150.00 annually while investing the same amount in Vanguard's S&P 500 index, one pays only $18 a year! Compound the difference several years and decades, one can see why passive always wins. 

The Wall Street crowd and their cohorts in the financial press have labeled index funds as boring, conservative and even un-American. A mutual fund manager that has consistently beaten the index is put on a pedestal and bestowed guru status. Time and time again though this out performance does not last. Unfortunately most investors put money in these funds after an impressive streak. This way of investing is the loser's game. 

Tau Mu Sigma Phi has benefited a lot from active members, both from the student's ranks and the alumnae. To paraphrase a line from the book 'The Millionaire in You' by Michael LeBouef, invest your life actively and invest money passively. Investing in index funds is a sure way of winning the loser's game.

 

OCTOBER 2004

 

   

THE FINANCIAL TICKLER

by

Bro. Dr. Ferdinand Lyndon Q. Magno

   

THE LURE OF PAST RETURNS

 

Wise men profit more from fools than fools from wise men;

for the wise men shun the mistakes of fools,

but fools do not imitate the successes of the wise.

 ---Cato the Elder

 

In today's investment climate, most families turn to the mutual fund industry in order to invest in the stock market.   The industry in turn markets their services aggressively by placing pricey ads in leading finance journals and newspapers touting impressive 1,3 & 5 year returns.  Unfortunately, most of us make investment decisions base on past performance and this strategy is doomed to fail.

 As the saying goes, past performance is not a guarantee of future returns.  The fund industry knows this as most studies show that last year's top ranked funds almost always fall to the bottom 20% the following year.  As evidenced by the recent scandals that have rocked the mutual fund industry, their interests are not aligned with yours, the investors.  So what are we to do?

 All is not lost though as there are companies that serve the interest of their shareholders first.  One such company is the Vanguard Group of Valley Forge, PA.  This company's corporate structure is different in that shareholders actually own the company.  Their ads do not tout past performance but rather emphasize on the provision of low cost funds as part of a long term portfolio.

 Choosing a mutual fund company is unlike choosing a fraternity.  During freshman year at the UST Faculty of Medicine and Surgery,  I decided to join Tau Mu Sigma Phi because of its past history and distinguished faculty members.  As a member, I am able to influence its course and destiny. 

 To be a successful investor though one needs to keep mistakes to a minimum and one way of doing this is to avoid the lure of past returns with the hope that it will continue in the future.  Construct a globally diversified portfolio of low cost index funds and hold it for life.  Just like being a Tauan, it is forever.

 

JULY 2004

 

 

      

THE FINANCIAL TICKLER

by

Bro. Dr. Ferdinand Lyndon Q. Magno

   

NOSTALGIA

 

Take a music bath once or twice a week for a few seasons,

And you will find that it is to the soul 

 

what the water bath is to the body

 

---Oliver Wendell Holmes

 

I often get nostalgic whenever I hear of brods getting matched to residency programs.  It usually takes me back to my own unique experience during winter of 1995 when I crisscrossed the Midwest and Northeast looking for the perfect fit.  My journey was made more memorable by the music of Hootie and the Blowfish blaring from my Walkman as the Amtrak chugged its way along the Allegheny forest and through the banks of the Hudson.

 

One step...and tomorrow comes

Two steps...and she's off with someone

Three steps...and its all you know...

 

This young physician's travails actually started back home after taking and passing the USMLE Steps 1 & 2, a grueling 4 day exam which literally makes our own medical boards like a walk in the park.  It was difficult but I knew I aced it because I was well prepared.  Nothing beats confidence and diligence.  I'm on my way.

 

I was captivated by the orderliness and cleanliness of Northern Virginia where I will spend the next 3-4 years of my life.  With a little over 200 dollars in my pocket, I charted my plan of attack with help from my family and of course brods.  Fortunately, base on a tip from Bro. Nelson DLR, I was able to procure an affordable Amtrak fare that will take me from Washington DC to Chicago, then on to NYC, Philadelphia, back to NYC then finally returning to DC.  It cost me a measly 80 dollars.

 

 Hold my hand…Want you to hold my hand...

Hold my hand...I'll take you to the promised land...

Maybe we can’t change the world but…

I want to love you the best that I can…

 

During those days, most residency applicants pass through the Big Apple.  New York City hospitals are supposed to be the best in the world and tend to be more receptive and accommodating to foreign graduates.  Being a newcomer though I must admit the big city with its complex subway system and rude citizenry intimidated me at first.

 

I was fortunate though as brods like Ricky Mallo, Nelson dela Rosa, Ed Tanhui welcomed me, offered their suggestions and took me under their wings.  Kyryx who hails from Pampanga prepared kare-kare and adobo while Nelson DLR hosted a welcome party complete with beer, music and laughter.  A frathouse like atmosphere in the middle of Queens.  Somehow my fear is gone and I am no longer afraid.

 

Yeah I'm tangled up in blue…

Only wanna be with you...

You can call me your fool...

Only wanna be with you...

 

If memory serves me right, I had a total of 10 interviews from NYC, DC, New Jersey, Chicago, Michigan and Hawaii.  I had to forgo the latter two as funds have dwindled to a few dollars.  The process itself was equally tiresome and complex.

 

Each program had its strengths and weaknesses.  While most hospitals did shine and piqued my interest there are a few that stunk.  There was one program in the Bronx that stood out and I have decided to rank it first.  I badly wanted to get in and I personally believed that the interview went well.

 

Let her cry...If the tears fall down like rain

Let her sing...If it eases all her pain...

Let her go...Let her walk right out of me...

And if the sun comes up tomorrow...

Let her be...

 

Match day was during late winter and in the Metro DC area where I stayed, most of the snow has dissipated.  Time was spent strolling the mall, the tidal basin and the museums of the Smithsonian.  I was captivated by the cherry blossoms which literally blanketed the banks of the Potomac. 

 

The mid-nineties was a transition period for the internet as a means of communication and repository of information.   I scrambled that morning to the nearest 7-11 to buy USA Today.  With my personal PIN in my ice cold hands I fumbled to the page where the data was posted.  Yes, I got matched.  I received my acceptance letter the next day stating that Howard University Hospital accepted me in their Family Medicine program.  

 

I was in! 

 

 

JUNE 2004

 

 

 

 

THE FINANCIAL TICKLER

by

Bro. Dr. Ferdinand Lyndon Q. Magno

 

THRIVING IN DIVERSITY  

 

 

We must learn to live together as brothers or perish together as fools.  

 

 ---Martin Luther King Jr.

 

One thing that makes Tau Mu stand out from the rest is our diversity.  We are a microcosm of Philippine society with members coming from all walks of life.  This variety permits a healthy exchange of ideas resulting in almost 60 years of excellence, prosperity and pride.

 The same holds true for investing.  By having assets that have low correlation with each other not only assures a smooth ride but reduces risk as well.  Most experts recommend spreading money among large caps, small caps, value stocks, international and real estate investment trusts.

 During the bull market of the late nineties, most investors were in tech stocks and large cap stocks, both of which were returning almost 20-50% annually.  From March of 2000 until October of 2002, a brutal bear market caused a 70% decline in the NASDAQ and a 50% loss for the S&P 500 index.

 At the same time, returns for small caps, value stocks, REITS, international and bonds were positive.  The past 5 years show that diversification works so keep this piece of stock market history in mind and learn from it going forward.

 Our fraternity will celebrate its 60th year of existence in 2 years amid tremendous pressure and adversity.  I believe diversity has a lot to do with our success and longevity.  The business and investment world also faces multiple charges of fraud and scandal, things that we do not have control over.  One sure way of protecting our assets from uncertainty is by holding a globally diversified portfolio.

 MAY 2004  

 

THE FINANCIAL TICKLER

by

Bro. Dr. Ferdinand Lyndon Q. Magno

 

PARALLELISMS

 

You always pass failure on the way to success.

---Mickey Rooney

 

The road to financial independence has a lot of similarities to the Tauan initiations. The goals and objectives are definitely worth it, the paths are winding and have a lot of ups and downs and not everyone crosses the finish line. Sure there are more to this world than being a Tauan and money can not buy happiness, but for me there is nothing better than having your cake and eating it too.

To be a successful investor, one has to have clearly defined objectives and goals. These goals should be reasonable whether it maybe early retirement, college fund for the kids or a down payment for a house. As neophytes, our masters define these goals for us. Many a nights were spent delivering flowers to pretty lasses while mornings were reserved for waking up masters with hot pan de sal, coffee and the daily paper. Whatever goals you might have it is best to have them laid out and known.

No goals can ever be met without having a sound plan. Devising an investment strategy that is base on your own goals, needs and risk tolerance is the financial blueprint for wealth accumulation. Once a plan is in place, it will take courage to implement it and discipline to stick to it. I must admit that at times I set out to accomplish missions with my batch mates without having a plan at all. This definitely cost more time and effort which led to tensions and failures. Roadblocks and detours are part of the process but having a good plan can lead you back to the correct path.

The words 'Let there be light' still echo in my ears even after all these years. I can still see the glare of the flashing headlights as the blindfold was removed and a whole new world beckoned. The initiations are finished and we made it! The stark reality though is that some of my closest friends did not make it. In today's climate of credit card debt, low savings rate and ignorance of stock market history, most families will never achieve financial independence.

It took a lot of hard work, determination and courage to finish the initiations and become a Tauan but it will take more hard work, more determination and more courage to remain one. If one has what it takes to be a Tauan then one has what it takes to become financially independent. All it takes is having a dream, a plan and the guts to go for it.

 

APRIL 2004

 

 

THE FINANCIAL TICKLER

 by

 Bro. Dr. Ferdinand Lyndon Q. Magno

 

TRUE WEALTH

 

If you would be wealthy, 

think of saving, as well as of getting.  

Away, then, with your expensive follies, 

and you will not have then so much reason 

to complain of hard times.

 

----From The Way to Wealth,

 Benjamin Franklin, 1758  

       We physicians have a lot to complain about these days, from too much paperwork to managed care and Medicare hassles.  But the main thing that most of us whine about is the fact that annual compensation have not kept up with inflation and the salaries of other professionals.  

      Although our grievances are legitimate and not without merit, we are partly to blame for the rut that we are in.  Our obsession with luxury and the good life does not help our cause one bit.  Just look at the doctor's parking lot at any given day.

      In my small rural community where most of my patients drive Fords and Chevys, the doctor's parking lot teems of imported luxuries, from Mercedes S sedans, Lexus SUVs, BMW Z4s to Porsche Boxters.  The message that people get is that we are rich. 

       No wonder most politicians and insurance companies do not give us some slack.  Doctors are already rich, why listen to them at all?  Society will not look kindly at us since in their eyes, we are just a bunch of wealthy spoiled brats.  Well are doctors really wealthy and rich?

      In their best seller 'The Millionaire Next Door,’ Stanley and Danko stated that most physicians are under accumulators of wealth despite of having a high salary.  They stated several reasons for this anomaly but our desire and penchant for the expensive things in life tie most of this income down leaving almost none for investments, the building blocks of wealth and financial independence.  What are we to do then?

       We all need to reexamine ourselves and the main reason why we became doctors in the first place.  The desire to help and serve people, to be a positive influence in our patient's lives and to set an example to the community and society in general are some of mine.  And being a Tauan, I know they are yours as well.  Lastly we also need to focus on the genuine wealth that truly enriches us, our faith, family, friends, and fraternity because at the end of the day, they are the only ones that matter.

 

MARCH 2004

   

    

THE FINANCIAL TICKLER

By

Bro. Dr. Ferdinand Lyndon "Peng" Q. Magno


BOOKS, BOOKS AND MORE BOOKS

"Give men fish, and he will have food to eat today. 

Teach him to fish; he will have food to last a lifetime."

--- A Chinese Proverb

In my own quest for financial advice 5 years ago, I was fortunate enough to be patient and found excellent book recommendations. These books are not your garden variety ones that promise outstanding returns, ways to beat the market, and what stocks are best to put money in. Most of these classics stress the importance of knowing market history and how it works, the impact of investment costs on total returns, the impact of personal behavior on the bottom line and the proper way to construct a globally diversified portfolio.

For starters, meaning those without any knowledge of investment basics and financial jargon [most of us actually], I recommend the following:

1. The Coffeehouse Investor by Bill Schulthies
2. Mutual Fund for Dummies by Eric Tyson

Now if you have had several years of investment experience the following books are necessary to keep you focused on your goals:

1. Common Sense on Mutual Funds by John Bogle
2. A Random Walk Down Wall Street by Burton Malkiel
3. Four Pillars of Investing by William Bernstein, M.D.
4. What Wall Street Doesn't Want You to Know by Larry Swedroe

Most of us offer the excuse that we do not have time in our ever busy life to educate ourselves about how to invest our hard earned money. In my humble opinion we cannot afford not to. If we had the patience to learn medicine by reading books such as Guyton's, Bates and Schwartz, then reading the above investment gems will be a breeze. Read during your free time and at your own pace and the knowledge you will gain will guide you on your future investment decisions.

Febuary 2004

 

 

THE FINANCIAL TICKLER

by

Bro. Ferdinand Lyndon "Peng" Q. Magno, M.D.

 BROTHERLY ADVICE

"We are Tau Mu neoohytes, we all do everything right

We all do what the master says or we will be truly dead..."

 From The Tauan Roar

As Tauan neophytes, we guarded our ticklers with our lives.  That little notebook we carried with us for three weeks contained merits needed to survive nightlies, gimmicks required to please our masters, vital information essential to carry on daily tasks in order to achieve our goal of becoming a full fledged Tauan.   

Now as practicing professionals and family men, we all need to take care of our own personal finances with the goal of achieving financial independence someday.  In light of this, we alll need a financial tickler to guide us with investment and money decisions that we will have to make whether we like it or not.

I do not claim to be an expert in finance nor do I have any special training in the investment field so please take any advice with a grain of salt.  What I am though is a true blooded Tauan with a desire to share whatever little I know about money to my brods who are willing to learn. POR DA TA!!!

January 2004