Diversification Can Help Protect Against Market Crashes

The idea of diversification is very old and can be, in some cases, useful for survival. How many times in life have we heard “Don’t put your eggs all in one basket?” In investment terms, market crashes like the one we witnessed in March 2020 can happen. Losses such as these can be bad for your financial and mental health as well as your ability to meet your financial plan or retire. Diverse investment strategies and assets can behave differently in various crashes, and this differentiation of responses increases the chance your portfolio will survive a market crash. Here’s why a diversification strategy is important:

Diversification in terms of investing became more popular in the early 1990s and really took off in the early 2000s. Whether it is emerging market bonds, wind parks, real estate, etc., the diversification argument became more obvious after the DotCom Crash of 2000. At its core, diversification forces you to “buy low and sell high,” an adage that is arguably commonplace and easily mocked. But it really works. Just look at March 2020’s market returns.

In March 2020, COVID-19 appeared to impact most asset classes. As a result of our investment strategy and process, we became worried about the asset valuations in early to mid-2019. This led us to diversify away from an over-concentration in stocks and into a more varied portfolio of assets.  Consequently, we were better prepared for March 2020 and had exposure to longer-dated Treasury bonds and gold, which were some of the only major asset classes up last month.

In 2019, prudence and diversification came under fire. With the S&P 500 Index up a massive 31%[i], investors with diversified portfolios felt like they left money on the table. In 2020, diversification came roaring back as investors realized the above-mentioned benefits of having parts of their portfolio perform when risky assets struggle. What a difference a few weeks and months can make! March 2020’s crash was the quickest decline in stock market history[ii]. During market crashes, diversification not only helps to potentially shore up returns, but also provides a source of money for rebalancing. With a 20% decline in equities in just under a couple of weeks, buying low and selling high is paramount for investment success over the long term.

In March 2020, the Federal Reserve balance sheet has increased +$1.1 trillion and the European Central Bank’s balance sheet has increased +$400 billion[iii]. Another $2 trillion fiscal stimulus bill is being considered in the U.S.[iv] So, we may yet again be lulled into believing that a period of elevated U.S. stock market valuations and low market volatility could persist throughout this decade. In that case, diversification may return to its regret-maximizing ways, where there will often be an underperforming asset (in this case, bonds or cash) in your portfolio that you wish you had sold, just like there will often be the asset (usually, equities) you wish you owned more of because its price went up the most. That said, when market volatility inevitably returns, you realize that staying diversified is worth it in the long run.

At CIG Capital Advisors, we attempt to pursue diversified portfolios for clients by employing the following thought processes. First, we invest only in investment choices we understand. Second, we determine investment and asset allocations based on collecting as much data as possible, employing common sense constraints, doing fundamental research, and rebalancing portfolios regularly. Lastly, we adapt to change, try to learn continuously, seek new sources of returns, and re-evaluate allocations regularly. We tend to shy away from an investment with an effortlessly smooth return history. These might or might not be safe as many of these strategies are the equivalent of picking up pennies in front of a steamroller.

While there are many known unknowns related to COVID-19, we anticipate continued volatility in the near term as the economic fallout from the pandemic is realized. As always, we maintain diversified, risk-balanced portfolios for clients to help ride out potential market selloffs, and to evaluate, and sometimes capture, the opportunities that present themselves. We conclude with a famous quote from Benjamin Graham, the British-born American investor known as the “father of value of investing,” “the essence of investment management is the management of risks, not the management of returns.”[v] Thus, diversify!

This report was prepared by CIG Asset Management and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward-looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.

---

[i] Yahoo Finance

[ii] Bloomberg, Goldmoney Research

[iii] https://docs.google.com/spreadsheets/d/1s6EgMa4KGDfFzcsZJKqwiH7yqkhnCQtW7gI7eHpZuqg/edit#gid=0

[iv] Source: “How big could the Fed’s balance sheet get?” Financial Times, April 5, 2020 citing a report from Bank of America

[v] https://www.azquotes.com/quote/1259823

Managing a Healthcare Practice through the Pandemic: Finance and Operation

Medical practices, dental practices, small and rural hospitals and larger healthcare systems alike are feeling the effects of the COVID-19 pandemic.  Recent regulatory changes, like the $8.3 billion emergency funding measure that expands Medicare reimbursements for telemedicine and the prohibition of all non-essential medical, surgical, and dental procedures during the outbreak, have upended the planned revenue cycle of nearly every U.S. healthcare practice or business.  How can medical practice owners, dental practice owners and other healthcare managers adjust the financial and operational levers of their business to better weather the economic turmoil caused by the pandemic?

Financial steps to take:

1. Put together a 12-week cash flow statement to understand better how you can manage the disruption, assessing what should be coming in and what you must pay and can delay paying, including evaluating the best approach to manage your staff given the circumstances.
2. Billing staff should work remotely in order to continue billing as usual and connect with insurance companies.  Their time should be used to follow-up on past billings and accounts receivables.
3. Reach out to your bank to determine if/when you can setup or increase a line of credit for your business.
4. Contact your accountant for up-to-date financials and clarity regarding whether you will be paying your sales/use and withholdings taxes as normal or taking advantage of your state’s relief, if applicable.
5. Look for state and federal programs you may qualify for, including the SBA’s Economic Injury Disaster Loans.

Operational steps to take:

1. Consider employees carefully. Can non-essential staff work remotely or even be laid off or furloughed to find work elsewhere through a healthcare staffing company, given that many large systems are currently understaffed?  Use web conferencing to hold staff meetings, utilizing services such as Zoom, WebEx, Skype, Google Hangouts and/or FaceTime.
2. Move to telehealth when possible, as CMS changes are allowing increased telehealth reimbursements.  Using video visits for patients with compromised health can help them avoid coronavirus exposure.  Chronic medicine can be delivered to patients’ homes. Of course, when moving to telehealth solutions, notification to patients and training staff members is necessary. 
3. Prepare for patient visits by securing the doors and screening patients before entry.  Provide hand sanitizer, face masks, and gloves and take basic sanitary precautions that can make a difference:
   • Disinfect all surfaces, equipment and door knobs between patient consults.
   • Shared resources should be kept clean.
   • Proper hand hygiene.
   • Waiting-room chairs are placed six feet apart and social distancing respected during interactions as possible; alternatively, you can allow sign-in/call-in at the entrance/via phone and ask patients to stay in their car in the parking lot and call them when you are ready to take them back.
4. Deal with elective procedures by rescheduling to a later date.  Serve patients when you believe it medically irresponsible to delay but disclose the risks, and keep them separate from patients coming in for non-elective procedures.  Please note the difference between necessary elective procedures and not-necessary elective procedures.
5. Update your website and phone greetings to communicate your current processes and availability.

Medical practices, dental practices, and small and rural hospitals are more likely to weather the pandemic storm by taking positive financial and operational steps now to mitigate business losses and emerge from the crisis in an even-stronger market position.  For individual steps your medical or dental practice or hospital should take, schedule a complimentary phone consultation here or join our webinar, “Managing a Healthcare Practice through the Pandemic: Finance and Operations” on Thursday, April 2 at 12:30 p.m. by registering here.

Understanding Medical or Dental Practice Financial Statements

Financial statements are to accounting what CT scans and X-rays are to the medical profession: the financial health of a business or medical practice can be assessed by analyzing its financial statements. While most dentists would prefer to focus on dentistry rather than the business of dentistry, it can be beneficial for dentists (or any physician-owner) to familiarize himself or herself with the basics of financial statements.

Learning how to read financial statements allows a physician or dentist to see where the practice’s money came from, where it went, and where it is now. Dentists and physicians will want to be aware of the following three basic financial statements:

1. Balance Sheet. The balance sheet provides detailed information about your practice’s assets, liabilities, and shareholder’s equity. It is a snapshot of the financial status of your practice as of a certain date.   Assets are things the practice owns that have value. Assets may include physical property, such as office buildings and equipment, cash and investments, receivables, and intangibles, such as goodwill.   Liabilities are amounts the practice owes to others. Liabilities can include items such as taxes owed to the government, bank loans, and money owed to vendors. Shareholders’ equity is the amount the practice would have left over if it sold all its assets for the amount appearing on the balance sheet and paid off its outstanding liabilities. This equity belongs to the practice owners.
2. Income Statement. An income statement shows how much revenue your dental or medical practice generated over a specific period, usually a year. It also shows the costs and expenses that went into earning that revenue. The bottom line is the practice’s profit or loss for the reporting period. Pay close attention to the practice’s operating expenses, such as rent, utilities, and supplies. A practice that experiences a net loss may look to reduce its operating expenses in an attempt to return to the black.
3. Cash Flow Statement. The cash flow statement reports the dental or medical practice’s inflows and outflows of cash during the reporting period. A cash flow statement tells you the net increase or decrease in cash. Cash flow statements are generally divided into three parts: cash flow from operating activities, cash flow from investing activities, and cash flow from financing activities.

As experienced advisors, we can help you dig deeper into your numbers and show you where you can make changes that will improve your practice’s bottom line. Contact a CIG Capital Advisors medical practice management professional today for a complimentary initial consultation.

Easing into Retirement

Given the physical and emotional demands of their profession, it’s little wonder that some physicians look forward to retirement. However, many other doctors nearing retirement age are reluctant to turn their backs completely on their profession and would rather find a way to ease into retirement.

What should you do if retirement is on the horizon but you would prefer to transition gradually into retirement by working part-time? Here are some things to consider if you are thinking of cutting back on your work hours:

1. Review Your Finances

First off, determine if you can afford the reduction in earnings that reducing your work hours will entail. Pay particular attention to any debt you are carrying (mortgages, etc.). Ideally, you don’t want to be overly burdened with debt once you are no longer practicing full-time.

A review of your current net worth can give you a clearer picture of your overall financial standing. Net worth takes into account the value of all your assets as well as your outstanding liabilities.

If you’ve been funding a tax-favored retirement plan, hopefully you have accumulated sufficient assets to provide a steady stream of income for all the years you may be retired. If you still haven’t met your goal, you’ll want to determine if your earnings from part-time work will allow you to comfortably continue adding contributions to your retirement plan. You’ll also want to determine when you can start taking penalty-free withdrawals from your plan(s) and project what your tax situation will look like. These are all issues we can help you assess.

2. Look at Your Options

If you are part of a multi-physician practice, talk to your colleagues about what arrangements can be made for you to start cutting back your hours. You may need to revise your practice agreement to incorporate a new compensation arrangement. Typically, such arrangements are based on the productivity of the part-time physician less a share of practice overhead expenses.

If you are a solo practitioner, you may find it hard to practice part-time without creating problems with your current patient base. Patients may feel that you can’t deliver the type of patient care they expect if you are practicing part-time. Bringing in a physician assistant may be helpful. However, recruiting another physician who would eventually take over the practice may be the most effective route for solo practitioners.

Give careful consideration to the financial arrangements you make with the new physician. When it comes time to sell, you’ll want to have a formal purchase agreement that outlines all of the rights, obligations, and responsibilities of the buyer(s) and the seller. It should also include a valuation of the practice.

3. Consider Malpractice Insurance

Don’t ignore the issue of malpractice insurance when you are weighing the pros and cons of going part-time. You need to be certain you will be covered during your part-time years and after you stop practicing completely. “Tail coverage” can protect you against any malpractice claims that may be filed against you after you retire.

CIG Capital Advisors Can Help with Retirement Planning

Whether you are serious about transitioning to part-time work or are simply exploring your options, be sure to consult with us. We can help evaluate your personal financial preparedness for retirement and assess the need for other steps, like medical practice valuation or a partnership exit strategy. Schedule a complimentary consultation with a CIG Capital Advisors professional to discuss your specific situation.

New Year Resolutions for Better Financial Health

As we approach the new year, it is a good idea to examine and review a financial health checklist and make changes as necessary. Here is a list of some of the items the CIG Capital Advisors Wealth Management team recommends you review as part of your resolution for better financial health in the new year and to help establish good personal finance habits in the years to come:

1. Review and update beneficiaries.  Confirm who is designated as your beneficiaries on your retirement accounts. For many people, naming beneficiaries happens one time, when they set up the account or policy. However, life changes (birth, marriage, divorce, death) are inevitable, and when these changes occur, you, or your family, may find that the designated beneficiary on your retirement account is not who you think it should be now.When it comes to planning for wealth transfers, it’s extremely important to review your beneficiaries periodically, especially if you have had children, divorced, or remarried since you first established your retirement account. This also applies if you had previously named a charity or trust as your beneficiary upon account setup and that organization no longer exists.
2. Review and/or prepare for Required Minimum Distributions (RMDs)  If you’re 70½ or older, you’re required by the IRS to take RMDs from certain retirement accounts by December 31—or face a penalty equal to 50% of the sum you failed to withdraw. If you turned 70½ this year, you have until April 1, 2020, to take your first RMD, albeit with potential consequences. Additionally, if you will be turning 70½ soon, now is the time to review your distribution strategy.
3. Retirement Plan Contribution Increase.  The contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan, is increased from $19,000 to $19,500 for tax year 2020. Consider reviewing and changing your contribution limits if appropriate.
4. Review Living Wills and Trusts.  Most often people wait to do their estate planning and draft a Will until they absolutely have to, which is often after they have children, get married, buy a house, start a significant business or have a spouse or family member convince them of its importance. If nothing sudden or significant has happened such as the birth of a child, divorce, marriage, death of a family member, change in jobs, or change in your balance sheet or assets, then a good benchmark for reviewing your estate plan is once every five years. Otherwise, it’s a healthy habit to do a general review once a year.
5. Revisit Tax Withholding.  Changes in dependents, income and marital status can all affect your tax bill. Use the IRS’s withholding calculator to ensure you’re withholding enough—but not too much.
6. Check your credit reports.  Under the Fair Credit Reporting Act, each of the national credit-reporting agencies is required to provide you with a free copy of your credit report, upon request, once every 12 months. Get yours at annualcreditreport.com.
7. Review your insurance needs.  Make sure your loved ones and the things you’ve worked so hard for are protected. Ensure that there are no gaps in your home, auto, business insurance coverage.

Resolve to get take care of your financial health in the new year.  To get assistance with a complete, holistic review of your financial plan, contact a CIG Capital Advisor to schedule a brief introductory call today.

Selling Your Practice? Important Issues To Consider

Charitable trusts and the difference between a charitable lead trust and a charitable remainder trust

For many of us, philanthropy can provide great personal satisfaction.  However, when properly planned for, charitable giving can provide financial benefits both today (as an income tax deduction and/or capital gains tax shelter) and in the future (when the amount of taxes your estate may owe when you die can be reduced).

There are many ways to give to charity. A common vehicle for many families is a charitable trust, where a charity is named as the sole beneficiary.  You may name a non-charitable beneficiary as well, splitting the beneficial interest (this is referred to as making a partial charitable gift). The most common types of trusts used to make partial gifts to charity are the charitable lead trust and the charitable remainder trust.

What is a charitable lead trust?

A charitable lead trust pays income to a charity for a certain period of years, and then the trust principal passes back to you, your family members, or other heirs. The trust is known as a charitable lead trust because the charity gets the first, or lead, interest.  A charitable lead trust can be an excellent estate planning vehicle if you own assets that you expect will substantially appreciate in value. If created properly, a charitable lead trust allows you to keep an asset in the family and still enjoy some tax benefits.

SOURCE: Broadridge Investor Communication Solutions, Inc. Copyright 2017

What is a charitable remainder trust?

A charitable remainder trust is the mirror image of the charitable lead trust. Trust income is payable to you, your family members, or other heirs for a period of years, then the principal goes to your favorite charity.  A charitable remainder trust can be beneficial because it provides you with a stream of current income — a desirable feature if there won’t be enough income from other sources.

SOURCE: Broadridge Investor Communication Solutions, Inc. Copyright 2017

Note: There are expenses and fees associated with the creation of a trust.  Please speak to your financial and/or tax professional to understand the cost and tax implications of your particular giving situation.

What Ophthalmologists Need to Know Before Selling Their Practice to a Private Equity Acquirer

The private equity acquisition market has been heating up in recent years, and private ophthalmology practices whose physician-owners are in the market to sell stand to gain from the industry’s interest. Part of the private equity market’s rush to acquire ophthalmology practices stems from a historically large surplus of cash– $2 trillion as of the […]

What Dermatologists Need to Know Before Selling Their Practice to a Private Equity Acquirer

The private equity acquisition market has been heating up in recent years, and private dermatology practices whose physician-owners are in the market to sell stand to gain from the industry’s interest. Part of the private equity market’s rush to acquire dermatology practices stems from a historically large surplus of cash– $2 trillion as of the end […]

Making Use of Cash Flow Projections

When you manage your medical practice’s cash flow effectively, you can better prepare your practice for both strong and weak economic times. The key to managing cash flow is the cash flow projection — a forecast of your practice’s cash receipts and expenditures. A cash flow forecast shows the anticipated flow of money entering and […]