Dr. Wise Money

Wyatt Unger, M.D., M.B.A, is a 3^rd year radiology resident at the University of Arizona.  Wyatt earned a B.A in Economics from Northwestern University and an M.B.A. from the University of Arizona.  Prior to pursuing a career in medicine, Wyatt has worked as an equity options market maker at the NYSE/ARCA options exchange and the Chicago Board Options Exchange (CBOE), as well as a proprietary equities trader at Great Point Capital.  Wyatt has previously held Series 7, 55, and 63 certifications.

Through this “Wall Street to White Coat” interview series, Dr. Unger will share his first hand experience from Wall Street and his extensive education/ knowledge in finances and economics with his white-coat colleagues.

(We have no financial relationship.)

• When the stock market is volatile like it is now, what is the best investment strategy the frequency and timing of putting money in the market?

There’s no clear research that one strategy outperforms another strategy when deciding when to invest during a volatile market. Warren Buffett said “when others are greedy be fearful and when others are fearful be greedy.” There are definitely opportunities in a volatile market so it is important to remain levelheaded and look for them. The most important thing is not to panic and to have a clear set of investment objectives and goals that you continue to pursue during the market volatility.

• What indicators are useful for deciding if the companies undervalued (therefore a good stock to buy and hold)?

The value of the company is determined by how much income the company can generate and also how much that income is expected to grow in the future. Stocks are generally divided between growth stocks, where price-to-earnings ratio’s can be quite high and value stocks, which would generate a stable income without much growth. It is really difficult to determine if a company is undervalued looking only at these ratios. Teams of professionals with full access to their accounting books have a difficult time making this determination.  It is generally better to assume that the market has better information than you do about the value of the stock and pursue a diversified portfolio. You can set a portion of your portfolio side for single stock investments if you have a really strong feeling about an investment but realize that single stocks are inherently more risk than index funds.

Apply to Earnest by clicking here, you will get $300 cash bonus and WCW will get a referral fee when you sign your contract. Win-win!

• Should I invest or pay down my student loans?

This really depends on the interest rate you’re paying on your student loans. The long run historical average of returns for the market is around 8% but going forward this is more likely to be in the 5 to 6% range. A lot of student debt has an interest rate of 7% however the after-tax interest payment is lower so you might expect a higher rate of return with stocks.

However you have to consider that a debt is still due if you lose your job, your health or find yourself in other unforeseen circumstances. With a long time horizon and from a perspective looking just at the rates of return investing in stocks is probably better, however paying off debt will help you deal with unforeseen circumstances.

Apply to DRB by clicking here, you will get $300 cash bonus and WCW will get a referral fee when you sign your contract. Win-win!

• What books on investment do you recommend reading?

I recommend A Random Walk Down Wall Street by Burton Malkiel, Reminiscences of a Stock Operator, and anything by Warren Buffett.

• What percentage of my stock holdings do you recommend for single stocks vs. index funds:

There is a lot of research out there that investors who pick single stocks underperform the market as a whole so my short answer to this question would be 0%.  Sticking to index funds will minimize your risk, save you time, and help you sleep better at night. You can allocate a portion of your investments to single stocks as you gain more experience and if you enjoy it.  There is no magic number for how much to invest in single stocks but when doing so, diversification becomes even more important in managing your downside risk, which becomes more substantial when investing in single stocks.

More interviews with Wyatt will be coming shortly. Are there any question you want to ask him? Comment below!

Wyatt Unger, M.D., M.B.A, is a 3^rd year radiology resident at the University of Arizona.  Wyatt earned a B.A in Economics from Northwestern University and an M.B.A. from the University of Arizona.  Prior to pursuing a career in medicine, Wyatt has worked as an equity options market maker at the NYSE/ARCA options exchange and the Chicago Board Options Exchange (CBOE), as well as a proprietary equities trader at Great Point Capital.  Wyatt has previously held Series 7, 55, and 63 certifications.

Through this “Wall Street to White Coat” interview series, Dr. Unger will share his first hand experience from Wall Street and his extensive education/ knowledge in finances and economics with his white-coat colleagues.

(We have no financial relationship.)

1. I’ve never invested before, how and where do I start?

The best way to start investing is by doing it.   I started investing when I was 10 years old when my grandfather gave me a check for Christmas and instructed me to invest in stock. I wish I could say that that stock is worth a lot of money today but it actually went to zero which taught me a really important lesson about investing and the risks of not being diversified.

It is important to realize when you’re starting investing that it is a risk and that you don’t always make money when you’re doing it. The best thing you can do is educate yourself as much as possible and start small with the understanding that a new investor is going to make mistakes.

2. Should I invest with pretax or post tax retirement accounts or a taxable brokerage account?

You should invest with both retirement accounts and if you have extra cash flow also in a taxable brokerage account. It makes sense to max out your retirement account every year due to the tax savings but ideally you should save more than the allowed maximum in a retirement account.

That doesn’t mean all of your savings should be invested in stocks because having all of your savings in one instrument (stocks, bonds, CD, etc.) is generally not appropriate for the average investor. It is generally appropriate to have a portion of your savings invested in stocks, bonds, real estate and cash, depending on your financial situation.

3. What is a general rule of thumb for asset allocation?

The general rule of thumb for asset allocation would be to take 100 and subtract your age and that would be the percentage invested in stocks. The remainder should be invested in bonds or other assets. Of course this also depends on your financial goals and family situation.

4. What is spread, load, and price-to-earnings ratio?

There are a lot of complicated terms in investing that the general investor doesn’t understand. Fortunately there are many resources to help understand these terms. Some terms you might’ve heard before may include,

Spread: this is the difference between the bid and ask prices for a stock or fund.

Load: this is the fee charged by a fund or mutual fund for management. (Upfront?)

Price to earnings ratio: there are many financial ratios used to describe a stock’s financial performance. Price-to-earnings ratio is probably the most commonly cited one. This is the ratio of a stock’s market capitalization (total market value) to its after-tax earnings.

5. What major principles should novice investor go by?

The best principal for novice investor is to follow is diversification. What diversification means is not having too much of your savings in any given asset. Assets include stocks, bonds, real estate, and cash. The reason for this is unexpected things happen frequently in the financial markets and by having your savings amongst a number of assets you minimize your downside risk when things start to go bad or if something changes in your life situation.

It also helps you sleep better at night. An excellent book for the novice investor regarding investing in index funds and the benefits of diversification would be A Random Walk Down Wall Street by Burton Malkiel.

6. Which index funds do you recommend investing for retirement saving purposes?

Index funds are treated like stocks but represent a large number of underlying assets. There are literally hundreds if not thousands of index funds in the marketplace now. When selecting appropriate index fund it is important to find out its management fee which should be available in the prospectus.

A new investors should start with an index fund that is broadly representative of the market. There are funds that mimic the performance of the S&P 500 (SPY), the Dow Jones industrial average (DIA), the NASDAQ composite index (QQQ) the Russell 2000 (IWM).

7. Where do I put my money if I’m saving for short-term expenses?

For short-term expenses where you need the money to be available, stocks are generally too risky. For example suppose you need your savings for a purpose five years from now and the market happens to be down substantially that year, you put yourself in a position where you might be forced to sell at a loss or at sub-optimal time. It is generally advisable to hold funds that will be needed in the near future in less risky investments such as investment-grade bonds, treasuries, municipal bonds, or CDs.

A second interview with Wyatt will be coming shortly. Are there any question you want to ask him? Comment below!