Know Your Risk Tolerance

Physician's Money Digest, October15 2003, Volume 10, Issue 19

No matter which vehicle you'reconsidering, Armstead urgesindividual investors to appreciatetheir risk tolerance. "I see peopleinvesting in things they have no businessowning, and it's usually because they'vebeen seduced by a high yield on an 8-year bond. It's fine to make that type ofinvestment, as long as you understandthe potential for risk."

Aversion to risk is 1 of the reasonsArmstead says he prefers plain, vanillabonds. "You know that there's a momentin time when you're going to get yourmoney back. It's going to happen eventually.That's the thing with fixed-incomeinvesting—you're looking for somethingthat's minimal risk."

Armstead adds that right now themarket is coming off historic lows forlong-term interest rates, and stronglysuggests that physician-investors laddertheir maturities. Start off slow. For example,start with 1-year or 3-year bonds,then watch what happens as the economydevelops. "I would not take the suckerpunch and go out long in this environment,"he warns. "If you do, I thinkyou'll regret it."

While fixed-income investment vehiclescan provide less risk than otherinvestment vehicles on the market, youstill need to do your homework. Thisrequires evaluating return and risk todetermine whether the fixed investmentis an appropriate investment for you.Fortunately, there are many fixed-incomeinvestment vehicles to choose from.