Weather a Stormy Investment Environment

Physician's Money Digest, September15 2004, Volume 11, Issue 17

After 3 lousy years in the market (2000 to2002), a banner year last year, and a marketwhose indexes are down significantly, thiselection year is, thus far, not looking verypromising for physician-investors.

Admittedly, there are extenuating circumstances—such as the race for the White House and geopoliticalrisk—which have been revealed in terms of terrorismand high oil prices. And even though the economy ischugging along at a nice pace, these factors have cloudedthe public's expectations concerning the market. Withthese thoughts in mind, physician-investors should try toavoid the most common mistakes made when makinginvestment decisions, especially in an environment asvolatile as this one.

The Chartered Financial Analyst Institute recentlyconducted a survey of selected individuals within itsmembership and asked that the surveyed participantsshare their perspective on some of the most common andcostliest mistakes made by individual investors.

The survey yielded the following results as to themost common mistakes made by investors:

• No overall investment strategy. A well-thought-outinvestment strategy must consider and incorporatethe investor's time horizon, tolerance toward risk,amount of assets that can be invested, and furtherplanned contributions, if any.

• Investing in individual securities. Instead, investin a diversified portfolio of securities. Failing to diversifyleaves a physician-investor vulnerable to the marketvolatility inherent in a particular security.

• Investing in stocks instead of in companies.Rather than necessarily listening to and taking the adviceof someone who recommends a stock, one should analyzethe underlying fundamentals of the company andindustry in question and not the shifts in the marketprice of the stock.

• Buying high and selling low. Physician-investorswho are at risk for buying high are those who followinvestment fads and buy the popular stocks of the day,which are usually selling at a premium. By the sametoken, many investors are reluctant to sell a stock untilthey attempt to recoup their losses, which many timesdoes not happen.

• Churning investments. Frequently buying andselling securities erodes investment returns.

• Acting on tips. Before making an investment decision,one should gather information from several independentsources and conduct their own research andanalysis rather than acting on an impulse.

• Decision making by tax avoidance. Even thoughyou may be in a high tax bracket, your first objectiveshould always be to make fundamentally soundinvestment decisions, rather than making investmentdecisions for the expressed purpose of attempting tominimize taxes.

• Unrealistic expectations. Rather than making ablanket statement such as, "I require a 12% compoundedannual rate of return," you should compare the performanceof your investment portfolio with relevantbenchmark indexes to develop realistic expectationsabout long-term expected returns.

• Unwarranted neglect. Don't become complacentand leave your portfolio unattended. Physician-investorsshould continue investing in every market environment—in all different types of investment vehicles—andestablish a mechanism to make ongoing regular contributionsto their portfolios, all the while making sure thatthey are adhering to their overall strategy.

• Not knowing your real tolerance for risk. Don'twait for a "market correction" before you conduct anevaluation of your level of tolerance for risk.

The important thing to remember is to develop a discipline,stay the course, and make investments on a systematicbasis. Just because the market is not performingwell does not mean you should stop making contributionsto your pension and retirement plans. The marketalways bounces back. You must also temper your expectationsrelative to long-term stock market returns. Arepeat of the excessive returns enjoyed during the marketboom of the 1990s will probably not repeat itself inthe foreseeable future, and returns will likely revert backto a long-term norm.

Thomas R. Kosky and his partner, Harris L.

Kerker, are principals of the Asset Planning Group

in Miami, Fla, specializing in investment, retirement,

and estate planning. Mr. Kosky teaches corporate

finance in the Saturday Executive and

Health Care Executive MBA Programs at the

University of Miami. He welcomes questions or

comments at 800-953-5508, or visit www.assetplanning.net.