Review the Past Year Before Cutting Ties

Physician's Money Digest, February15 2004, Volume 11, Issue 3

The stock markets rebounded very nicely in 2003. The performance of the markets in 2000, 2001, and 2002 marked one of the steepest declines in more than 6 decades. It seems that patience has finally begun to pay off for investors.

The broad market averages—the Dow, S&P 500, and Nasdaq indexes— wrapped up a winning year after a 3- year decline, which has not happened since World War II. In fact, since the inception of the Dow back in 1896, there have been only 3 time periods during which the Dow has suffered 3 or more years of back-to-back declines.

The Dow closed out the year at 10,453.92, up more than 2100 points during 2003, but still down 10.8% from its all-time high of 11,721.98, reached on Jan 14, 2000. For the year, the Dow hit its closing low of 7524 on Mar 11, just 9 days prior to the beginning of the war with Iraq. The S&P 500 was up 232 points, or 26.4%. The Nasdaq rose 668 points this past year, or nearly 50%. However, it is still down about 3045 points, or 60.3%, from it all-time high of 5048.62, set on Mar 10, 2000.

Expectations for 2004

If history is any indication, the markets usually post gains during an election year. With that said, one would expect the markets to end higher in 2004 than they did in 2003, barring any unforeseen geopolitical or economic events. Remember that, regardless of your investment strategy, you should properly diversify your portfolio among the different available asset classes.

Asset Allocation Strategy

Even with the gains realized this past year, many investors' retirement and investment portfolios are down from the highs realized just prior to the market decline at the beginning of 2000. Depending on how aggressive your investment strategy, you can avoid the staggering losses that many investors suffered because they were not properly diversified through asset allocation. By utilizing a sensible investment strategy and adhering to the strict discipline of asset allocation, a physician-investor should be able to see significant positive returns on their portfolio.

Utilizing this asset allocation approach, I constructed a balanced portfolio comprised of 65% equity and 35% fixed income, broken down as follows: 17% large cap value; 18% large cap growth; 9% mid cap value; 9% mid cap growth; 6% small cap value; 6% small cap growth; and 35% fixed income. To keep portfolio expenses to a minimum, I utilized indexes representing each asset class. See Tables A and B on the following page:

Constructed Portfolio

With the exception of the Dow, the portfolio (Table A) constructed on the left from indexes that represent broad asset class categories (ie, a mixture of varying large, mid, and small cap funds) beat the indexes (Table B) on a 5-year annualized basis. However, because the portfolio constructed was comprised of 35% fixed income, it was subjected to substantially less market risk than the indexes. Physicians should always give consideration to risk when constructing their portfolios.

Whether this turns out to be a good or bad year for the markets, remember to stay diversified. Do not try to maximize return at the expense of taking on too much risk, but rather, minimize risk for an acceptable level or return.

Thomas R. Kosky, MBA, and his partner, Harris L. Kerker, are principals of the Asset Planning Group, Inc, in Miami, Fla. The company specializes in investment, retirement, and estate planning. Kosky also teaches corporate finance in the Saturday Executive and Health Care Executive MBA Programs at the University of Miami in Coral Gables, Fla. They welcome questions or comments at 800-953-5508, or visit www.assetplanning.net.