Counter the Explosion Method by Thinking

Physician's Money Digest, October 2005, Volume 12, Issue 14

Too many people invest by whatI call the explosion method.They sit with cash in the bankand then suddenly plunge into the stockmarket based on a tip or after readingan article touting some new, can't-missproduct. Over time, the explosionmethod results in a portfolio ill-suited toa physician-investor's needs, weigheddown by investments of questionablevalue. Before your next investment, stepback and survey where you are.

Consider Your Age Now

Start with your current age. One ruleof thumb is that an investor's percentageof stocks in their overall portfolio shouldequal 100 minus their age. Thus, a 45-year-old would have 55% of their portfolioin stocks, and the rest in fixed-incomeinvestments. Another commonapproach used by investment advisors isa fixed 60/40 split between stocks andbonds. Bonds complement stocks in aportfolio by reducing risk and providinga steady income for living expenses.

However, relying on any fixed formulahas its drawbacks. For example,adding long-term bonds to your portfoliowhen interest rates and inflation arelow but moving higher is a recipe forlosing money. Instead, buying the stocksof well-respected companies with soliddividends may be a better choice to addstability and income to a portfolio,while guarding against inflation.

Circumstances Vs Risk

Apart from your current age, consideryour particular circumstances bycomparing your income to your expenses.If you have enough money comingin, you will have the flexibility to investin more stocks and have a longer horizon.Are you soon expecting to care foran elderly parent or pay for college? Inthat case, a portfolio should have somelow-risk, short-term, fixed-income investmentsthat can be converted quicklyto cash. Never put money in the stockmarket that you may need within thenext 6 months.

Finally, what are your goals? Ifyou wish to save for a particular purchase,look at your time horizon andthe return necessary to achieve yourgoals. Then create a portfolio withthe right mix of assets to give you thebest chance of obtaining them. Mostphysician-investors' ultimate goal is asecure and prosperous retirement. Toaccomplish this, establish the rightportfolio mix and carefully adjust itover time. Use tax-advantaged retirementaccounts—IRAs and 401(k)s—to the maximum extent you can.

With a well-thought-out blueprint,you can avoid the mistakes of the explosionmethod. Consider your age, circumstances,and goals, so you can builda portfolio that fits your needs.

Jay A. Rosenberg is the principal at Arrival

Capital Management LLC. He welcomes

questions or comments at jay@arrivalcapital.com. This article was reprinted with permission

from the Southern Ulster Times.