Recognize Your Risk-and-Reward Standard

Physician's Money Digest, June30 2003, Volume 10, Issue 12

During our current bear market, manyphysician-investors are looking at theinvestments, especially mutual funds, intheir retirement portfolios, and askingthemselves what to do now.

New York


First, reconsider your retirement horizonwith respect to the average return youwish to receive. An October 1997 article noted that the San Franciscomutual fund company Montgomery AssetManagement surveyed 750 investors. Thissurvey found that those questioned anticipatedaverage annual returns of 34% ontheir investments over the next decade.Most investors' long-term projections arebased on very short-term information. Themarket has, on average, returned about8% to 10% annually since the early 1900s.

Next, reexamine the amount of riskyou're comfortable with. When times aregood, almost everyone invests agressively.Be honest with yourself, and take an objectivesecond look at your risk tolerances.

Finally, be systematic and brutallymethodical when measuring and applyingthe first 2 steps. Make sure your investmentsunequivocally follow the parametersyou have set forth. If you take the timeto develop a plan, it can become useless ifyou don't know how to implement it.


Implementation is relatively easy withrespect to average returns. During thedizzying bull market of the late '90s,investors' perception of risk becameskewed. The more risk the better, as longas the market was generally rising. Eventhough the broad indexes were appreciating,mutual fund investors bragged abouthow their favorite fund had beaten themarket over the past years. Even thoughthe indexes rose, some mutual fundsappreciated by a greater percentage,sometimes double that of the indexes.

Now, 3 years later, most investors feelthey have been bitten by the risk in theirportfolios. The problem most mutual fundinvestors encounter is that they're unawareof the amount of risk they have totake on to achieve an average return.Descriptions like high, medium, and lowrisk are ambiguous. Average risk should bepresented to the investor in more specificterms. The last thing investors want to dois unknowingly take on great risk for lessthan great returns. Average risk is just asimportant a parameter as average returnwhen deciding on a portfolio of funds.


Investors often asked themselves,"How do these mutual funds beat thisbull market?" Three years later, they'reasking, "Why are they depreciating somuch more in this bear market?" The truequestion investors should be asking is,"How is my portfolio performing on arisk-adjusted basis?" Most mutual fundsdo not, on average, outperform the marketon a risk-adjusted basis, but there is away to find the funds that have.

Talk to a financial advisor who has carefullystudied the risk-and-return quantitativeanalysis and its practical application.They can generally gauge whether or nota mutual fund has, on average, shownability to outperform the market on a risk-adjustedbasis. A physician-investor with ahandcrafted portfolio of these mutualfunds cannot be assured against fluctuationsin value. However, they will knowthey are receiving an average return comparableto the amount of risk they havedecided to take on, and that in itself offerssome investing comfort.

James Douglas Mattern always

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