By now all physician-investors haveheard that they should be long-terminvestors. However, manymisinterpret this as only meaning thatthey should hold on to any stocks, bonds,or funds they buy for the long term, irrespectiveof changes in market conditions,the prospects of the underlying companies,etc. This mistake can be very costly.
True long-term investing requiresadopting a long-term perspective in makingall investment decisions, especiallywhen choosing the right investment philosophy,making individual investments,and selecting an investment advisor.
Unless you feel confident at the timeof making any of these decisions thatyou will be able to live with it for at least5 years, preferably 10 years or evenlonger, you haven't done sufficienthomework and should not be makingthe decision yet. Also, you should chooseup front the objective criteria you woulduse to change a decision if the circumstanceschange significantly. Otherwise,you will make changes at the wrongtime or for the wrong reason because offear or greed.
Investment PhilosophyDon't even invest a dime before carefullychoosing a long-term investment philosophythat is right for you—temperamentallyand otherwise. To be able tostick to it, you must know for sure whyyou are adopting the particular philosophyand what hurdles you will invariablyencounter. There are actually very fewinvestment approaches that work in thelong run. If you choose wisely, you willend up with one of these, but you stillneed to know why the others don't work.
Although this is the critical first stepin investing, almost all investors skip it.By default, they become lifelong trial-and-error investors. They make investmentsbased on tips from friends, magazines,etc, and as each investment doesnot seem to work out, they keep tryingsomething else at a huge cost over time.
No investment methodworks under all market conditions, andall of them take time to work.
Do extensive research before investingin anything so you will have thecourage and conviction to hold on to it,even if the investment does not seem towork out for a few months or even a fewyears. But when the fundamentals of aninvestment occasionally turn out to bedifferent from what you had expected,do not stubbornly hold on to it.
A good way to control yourself is to aimfor a portfolio turnover of less than 20%per year (ie, aim to hold stocks for at least5 years on average). Apply the same criterionto funds you buy. Although fundmanagers keep preaching the gospel oflong-term investing, the typical fund'sturnover ratio is between 100% and200%, meaning it holds stocks on averagefor 6 months to a year. For various reasons,most funds that do well in the long runhave low turnover ratios.
If you decide to work with an investmentadvisor, it should be a long-termdecision as well. Decide up front if you arereally willing to pay someone to manageyour investments, because you will invariablypay for the service in one form oranother. While most investors do not mindthe costs in good years, the costs definitelybother them if the market and theirportfolio perform poorly for a few years ina row. Yet, that may be exactly the wrongtime to fire a good investment advisor.
Do not try to hire an investment advisorbased on their past performance, asit is almost always misleading. Insteadchoose one based on their investmentphilosophy and qualifications. If youexpect your advisor to show a lot ofactivity to earn their keep, and theybelieve in low-turnover investing, yourassociation won't last long. As withstocks and funds, frequently changinginvestment advisor or frequently switchingbetween doing it yourself and lettingsomeone else do it for you will hurt yourportfolio's performance.
The Only Proven Road to
Investment Success (John Wiley;
2001) and Financial Modeling
Using Excel and VBA (John
Wiley; 2004), currently teaches
finance at the Fordham University Graduate
School of Business and consults with individuals
on financial planning and investment management.
He welcomes questions or comments at