Take the Investment Path Less Traveled

Physician's Money DigestSeptember15 2003
Volume 10
Issue 17


There's a new trend in portfoliodiversification. The traditionalstock, bond, and mutual fundportfolios are being enhancedby a state-of-the-art investing approach.Sophisticated investors are actively employingasset allocation techniques anddesigning investment portfolios that minimizerisk and provide excellent long-termperformance possibilities. In short,these investors are looking beyond stocksand bonds and taking advantage of otheravailable investment opportunities. : well-balanced portfolios.

Today's Portfolio

Modern asset allocation theorystrictly limits how much of an investor'sportfolio should be allocatedto stocks and bonds. This portfoliodecision is based on an investor's tolerancefor risk and their need for return.In addition, today's financial scholarsadvise investors to consider potentialeconomic conditions when they're assemblingtheir investment portfolios.The economic conditions investorsneed to think about include risinginflation rates, higher interest rates,and future recessions.

While stocks and bonds generally performin opposition to each other, undercertain conditions they can both reactadversely to the market. For example,both stocks and bonds perform badlywhen inflation erodes their value. Assetallocators have addressed these portfolioconcerns by including asset classes thatperform differently from existing stock,bond, and mutual fund investments.

Valuable Real Estate

What asset classes perform differentlyfrom stocks, bonds, and mutualfunds? "Hard assets," such as realestate and equipment leases, tend tobenefit from inflation and generallydon't trade down when stock or bondmarkets decline. Other alternative investments,such as hedge funds and venturecapital funds, also perform differentlyfrom stock and bond investmentsand provide welcome portfolio diversification opportunities.

A real estate investment trust(REIT) is 1 type of hard asset investmentthat many investors are includingin their portfolios today. Created byCongress in 1960, an REIT is a companythat owns, and usually operates,income-producing real estate (eg, shoppingcenters, apartment complexes,office buildings, hotels, and warehouses).When you invest in an REIT you'reinvesting in a professionally managedportfolio of real estate properties. Overthe years, REITs have provided investorswith returns of 10% to 17%.


Indeed, the enormous popularity andsuccess of REITs illustrates their attractivenessas a diversification vehicle forinvestors. Because of the rapid increase inreal estate values and the relatively weakrental market, however, it may be a goodidea for today's REIT investor to invest inmoderation. : If you're interested inlearning more about REITs, check outwww.reitnet.com.

Equipment Opportunities

Portfolio harmony

Equipment leasing investment programs(ELIPs) are another diversificationvehicle physician-investors may want toconsider adding to their portfolios.Although they're not as popular asREITs, ELIPs shouldn't be overlooked—especially if you're already invested inREITs.: ELIPs complementREITs because they're lessvolatile and offer higher cash flows.

How do these investment vehicleswork? ELIPs pool investor capital toacquire quality "business necessary"equipment that's already leased to leadingcompanies. The leasing income is designedto allow above-average monthlydistributions to investors. When a leasehas expired, the equipment is usuallysold, leased again to the company, orleased to a third party. This often generatesadditional distributions.

Over the past few years, ELIPs haveexcited the financial advisor community.An added attraction of ELIPs is thattheir generally high cash flows are substantiallytax-deferred in the earlyyears. This allows investors to reinvesttheir monthly distributions. Investorscan use the money to rebalance or fundinsurance needs, retirement accounts,college expenses, or health care plans.

The alternative hard asset investmentclass has proven itself to be avaluable component to the sophisticatedinvestor's portfolio in both bull andbear markets. Generally, asset allocatorsrecommend that most investorsdedicate at least 10% to 15% of theirportfolios to these noncorrelated, alternativeinvestments. This may mean acombination of REITs, ELIPs, andother alternative investments. Naturally,what you invest in and howmuch you invest always depends onyour specific goals.

Paul Weiss is president and chiefacquisition officer of ICON CapitalCorporation, a major sponsorand manager of ELIPs, and hasover 20 years of experience in theequipment leasing and financialservices industries. He welcomes questions orcomments at 800-435-5697. For more information,visit www.iconcapital.com.

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