Should you manage your investments on yourown or seek professional help? That's one ofthe most important and difficult decisions allphysician-investors have to struggle with.Below are some tips for making the right decision.
Do It Yourself
If you want to manage your investments on yourown, your best bet is to follow the simplest, time-proveninvestment method. Start with a financial planand a target asset allocation for stocks, bonds, andmoney market investments. For the stock part of yourportfolio, stick to low-cost total market index fundsor something similar. Make your investments throughdollar-cost-averaging over the years and be a longterminvestor, not a market timer.
Put your bond money into low-cost, short-termbond funds, Treasury inflation-protected bonds, orbank CDs of no more than a 3-year maturity. Formoney market investments, stick to reputable fundcompanies. The recipe is simple enoughâ€”althoughnot particularly excitingâ€”but if you can follow itstrictly, over time you could do very well.
If you can find the right financial advisor, you willmost likely be better off with their help. Thinking youcan follow a simple, boring investment method fordecades is not the same thing as actually being able to doso. Over the years the market will test your resolve, andthe returns that people earn through years of patientinvesting can be wiped out by just one or two missteps.
More than anything else, the right financial advisorwill help you stay on a steady course and controlthe risk of your portfolio so that you do not get carriedaway during the next bubble. On their own, mostinvestors take too much risk, and then when they getburned, they cut back risks so much that they end upwith much lower returns than they could have reasonablyearned.
Another important consideration is that when youbuy a total market index fund, you invest in all thestocks in proportion to their market values, whichmeans you end up putting a lot of your money in largecap growth stocks that include many grossly overpricedtech and fad stocks. These stocks tend to dovery well in bull markets, but they also take most ofthe beatings in bear markets.
The right investment advisor can create and managea low-cost, quasi-passive portfolio for you thatholds the various types of stocks in different proportionsto better match your risk tolerance and otherobjectives. Such a portfolio may also simultaneouslyincrease the expected return and reduce the risk ofyour portfolio. This is not something you can orshould try to do on your own, because unless youhave extensive investment knowledge and experience,straying from the straight and narrow path of indexfund investing is dangerous.
To achieve superior long-term investment returns,you also need knowledge of other areas such as taxation,asset allocation, and retirement planning. Youhave to be able to combine them properly to createand manage the right overall portfolio. For example,properly managing the process of selling investmentsto cover expenses during retirement is crucial to makingyour money last. If not handled correctly, you runa high risk of outliving your savings.
For most physician-investors, being one's ownfinancial advisor is unwise and can be expensive.Chances are, the right financial advisor will save youand make you a lot more money than they will costyou. But the real problem is finding the right professionalat the right price. If you're not careful, youcould be charged exorbitant fees and other costs,many of which are carefully hidden. Until you find theright person, you may want to stick to the simple,time-proven investment approach.
Chandan Sengupta, author of The Only ProvenRoad to Investment Success (John Wiley; 2001),currently teaches finance at the Fordham UniversityGraduate School of Business and consultswith individuals on financial planning and investmentmanagement. He welcomes questions orcomments at firstname.lastname@example.org.