Answers to the Major Concerns That Affect Your Finances

You`ve stashed money to the maximum in your 401(k) tax-deferred retirement plan, squirreled away savings in the kids` college accounts, eked out extra funds for more life insurance and socked away a bit for a summer vacation. Now you`re about to spring for a rich disability policy to cover all your bases.

Hugh F. Doherty, DDS, CFP

Disability insurance is a must

You`ve stashed money to the maximum in your 401(k) tax-deferred retirement plan, squirreled away savings in the kids` college accounts, eked out extra funds for more life insurance and socked away a bit for a summer vacation. Now you`re about to spring for a rich disability policy to cover all your bases.

Did you stumble over that last item? Join the club. Fewer than 65 percent of the dentists in the country have disability insurance. To my amazement, when I ask these dentists why they don`t have disability coverage, I find that the respondents believe becoming disabled would cause them to lose their savings and their standard of living.

Why the disconnect between risk and remedy?

The most obvious answer is cost. For a disability policy that promises to replace 60 to 65 percent of your income, you will pay about 2 percent of your gross annual income, or $1,000 annually on $50,000 of your salary. Because most people have so many other needs competing for their hard-earned dollars, they are willing to gamble that lightning will hit the other guy.

Everyone realizes that at some point in time he or she will die. People believe they need life insurance to cover debt and to educate their kids. But when it comes to protecting income, a lot of doctors think that because they are not in a high-risk occupation, they are less likely to be hit with a disability.

About one in four people in their thirties will be disabled for 90 days or more by age 65, and there is nearly a one in 10 chance that the disability will last two years or more.

But accidents can happen, and by playing the odds that it "isn`t going to happen to me," you run the risk of being stuck in bed without enough cash to pay your bills.

When `P` and `E` spell profits

The P/E ratio is the more commonly used measure of stock value around. It also is the most commonly misused.

A little knowledge can be a dangerous thing, especially if investors rely solely on P/E when deciding whether to buy a stock. A P/E ratio can mean many things, and if you don`t understand the variations, you may be seriously handicapped. You calculate a P/E ratio by dividing the price of a single share of stock by the company`s per-share earnings. A stock selling at $20 per share that earned $1 per share would have a P/E of 20 to 1, or just 20.

Wall Street analysts

Wall Street analysts spend a lot of time trying to estimate future earnings per share and, therefore, future P/E ratios, too. So when someone says that Merck shares trade at "just 16 times earnings," you need to know whether that P/E is for the past 12 months, the current calendar year or the coming year. The further into the future, the less you can rely on a P/E ratio, because forecasting earnings have a way of not fully materializing.

There`s a strong correlation between P/E ratios of individual stocks and the stock market as a whole; P/Es tend to rise during bull markets and shrink when bears are on the prowl.

It`s easy to make the mistake of comparing apples to oranges when using P/Es unless you know that lofty P/Es are common to fast-growing, high-tech companies. By contrast, Citicorp`s P/E of 7 looks cheap - unless you know that financial institutions rarely command high P/Es.

General guidelines

There are, however, some general guidelines for interpreting P/Es. As a rule, high-P/E stocks - those with ratios over 20 - are associated with young, fast-growing companies and considered riskier than low-P/E stocks because they rarely maintain the impact of their earnings growth. Low-P/E stocks are concentrated in mature, low-growth industries and in stocks that have fallen on hard times. So-called cyclical stocks, those that wax and wane along with the national economy, tend to rise and fall accordingly. When the trailing P/E ratio of a cyclical stock drops to single digits, it`s probably time to sell, because earnings are at or near peak.

Investing in low-P/E stocks not only is less risky, but also more rewarding than buying high-P/E stocks. Those who buy low-P/E stocks are called "value investors."

P/E screening is merely an easy first step in identifying prospects that fit companies that are undervalued, but possess excellent growth prospects and other unrecognized or unappreciated attributes. So-called growth investors, on the other hand, are willing to accept higher P/Es because they believe that future earnings will rapidly drive up share price.

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Hugh F. Doherty, DDS, CFP, is a national lecturer, financial advisor to the health-care profession and CEO of Doctor`s Financial Network. For personal financial consultations or to have Dr. Doherty speak to your study club or dental society, call (800) 544-9653.

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