Center Yourself with an Investing Policy

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Physician's Money Digest, January15 2003, Volume 10, Issue 1

Smart physician-investors tend to havean investment strategy to accomplishtheir financial objectives. They plan, setgoals, and monitor performance. They arenot gamblers in search of the big win.

SUCCESSFUL INVESTORS

An example:

Investors who chase the silver lining cansuffer big losses. Tomreceived $450,000 in a court judgment andput the entire sum in the trust departmentof a bank, where it was wisely invested.Growing bored of the bank's staid strategy,he withdrew the money and begantrading in stocks online. His first investmentwas in an initial public offering forNetscape, with an immediate return of$75,000. Intoxicated with this initial success,he later lost all his assets in a downwardspiral of bad trades. He did not makemoney on a single investment.

Unsuccessful physician-investors rarelyhave any sense of strategy or actionplan. They tend to follow the herd,rarely challenge broker advice, and mayattempt to minimize losses by "doublingup" on floundering stocks. Always chasingthe market and reacting to events,they are often uninformed and tend tospeculate rather than invest, usingmoney they can't afford to lose.

In contrast, successful physician-investorsare disciplined and understandmarket fluctuations. They don't makerash decisions based on the "flavor ofthe month's" investment opportunity.They have an underlying strategy andlook at financial issues soundly. Successfulinvestors tend to do the following:

  • Know themselves;
  • Have an exit strategy;
  • Move against the herd;
  • Use advisors as a sounding board;
  • Avoid situations that trigger a "deer-in-the-headlights" reaction; and
  • Know that if something seems toogood to be true, it probably is.

In addition, successful investors knowwhat they don't know. If they love thrillrides, they go to amusement parks, notthe stock market. They look at theirinvestment success over the long term,which usually means opting for a moreconservative, if less exciting, approach.

PERSONAL INVESTMENT

Most importantly, successful investorshave a center point that reflects who theyare and helps define their financial objectives.This center point is a "personalinvestment policy," which should be developedaccording to the following: yourinvestment horizon, your tolerance forrisk, your expected investment return, andmatching goals to investments.

Be realistic about how life works. Setexpectations according to the law of averages.Make your decisions against a backdropof practical goals. A successfulinvestor's wisdom comes from knowingwhat is achievable in the investment worldand respecting those bounds.

In midsummer 2002, with the markettaking stunning losses, many institutionalinvestors began increasing their equityholdings. Why? If their predefined investmentpolicies required them to have athird of their holdings in equities, thisdecline in the market triggered increasedstock purchases as share prices fell.

Likewise, the balance of assets in a personalportfolio should reflect its investmentstrategy. Having this investment policydefined in advance helps to make dispassionatedecisions, which serve portfolioswell in the long term.

Policing a personal investment policycan be done with the assistance of aninvestment advisor such as a CertifiedFinancial Planner™, CPA, or trusted andknowledgeable friend. They should understandthe investor's goals and be able tomake recommendations that align investmentswith those goals. This reassessmentshould occur annually or quarterly.

Joel G. Block is president

of Growth-Logic, Inc, in

Agoura Hills, Calif. Growth-

Logic provides financial planning,

insurance, and investment

services for medical and business

professionals, helping them fulfill their

lifetime financial goals. For more information,

call 818-597-2990 or visit www.growth-logic.com. James P. Murphy is a partner in the

accounting firm Lucas, Horsfall, Murphy &

Pindroh, LLP, and a principal in LHMP

Financial & Insurance Services LLC (LHMP

F&I) in Pasadena, Calif. He welcomes questions

or comments at 626-744-5100, or for

more information visit www.lhmp.com.