Recognize the Value of a Sound Strategy

September 16, 2008
William B. Howard, Jr, ChFC, CFP

Physician's Money Digest, August15 2003, Volume 10, Issue 15

Before you invest in mutual funds,you'll need to get back to basics:investment management. Investmentmanagement is the strategy an investoremploys to determine how much they'regoing to invest and what they're going toinvest in. Every physician-investor shouldhave an investment strategy. Without astrategy, a physician's portfolio won'thave the opportunity to evolve over timeand adjust to changing situations.

STRATEGY AND RISK

When developing an investment strategy,a physician-investor should ask andanswer the following 3 questions:

  • How long do you have until you planon retiring?
  • Are you just starting out in medicineor do you have an established practice?
  • How much can you save every year?

In addition to answering these 3 questions,creating an investment strategyrequires determining how comfortableyou are with risk. Every person is different;therefore, we all react in a unique waywhen we're confronted with risk. Howyou react to risk determines what type ofphysician-investor you are.

There are 3 broad categories of investors:conservative, moderate, andaggressive. Using these classifications,you can predict how you'll handle marketvolatility and what kind of investmentsare right and wrong for your situation.Once you're able to answer theimportant questions and determinewhat type of investor you are (ie, conservative,moderate, or aggressive), youcan make better mutual fund asset allocationdecisions.

MUTUAL FUND FACTS

Mutual funds are a popular vehicle forinvesting because they typically provideinstant diversification by holding a basketof stocks instead of only a few concentratedpositions. Mutual funds are also popularbecause mutual fund managers are usuallyable to select a portfolio for their clientthat performs comparably to a benchmarkindex (eg, S&P 500, Russell 2000, and WilshireReal Estate Investment Trust).

Science and

finance:

Financial advisors usually recommend acombination of investment vehicles thatinclude mutual funds as a major portionof an investor's portfolio asset allocation.The creation of a portfolio of mutualfunds is very similar to a physician's diagnosisof a patient's illness. In both cases, you need to runtests and analyze all the data before makingan informed decision.

For the purpose of this article, let'sbreak down mutual funds into 6 assetclasses: cash, bonds, US large company, USsmall company, international, and realestate. Based on what type of investor youare (eg, conservative), the number ofyears until you retire, how much moneyyou can save every year, the estimatednumber of years you plan on beingretired, and the 6 asset classes, a mutualfund manager can help you construct aportfolio of suitable mutual funds.

The bottom line on mutual

funds:

Since mutual funds come in differentshapes, styles, and sizes, not all mutualfunds will perform the same. For this reason,it's always a good idea to seek theadvice of a financial professional to learnmore about the characteristics of mutualfunds in different asset classes beforemaking any adjustments to your currentportfolio. Check with your advisor beforemaking mutual fund decisions.

William B. Howard, Jr, is

president of William Howard

& Co Financial Advisors Inc,

a fee-only investment and

financial planning firm in

Memphis, Tenn. He has 23

years of experience working with physicians

and was named 1 of the top 150 advisors

by Medical Economics. He welcomes questions

or comments at 901-761-5068 or

whoward@whcfa.com.