Consider a New Approach for Your Portfolio

Physician's Money Digest, March 2006, Volume 13, Issue 3

From doctors just out of residency and starting tobuild their nest eggs to mature practitioners withlarge portfolios, strategic asset allocation yokedto a diversified mutual fund portfolio with a top fundfamily is an inexpensive, conservative, and consistentapproach to investing that works for all physicians.

Strategic or dynamic asset allocation means allocatingyour money to different asset classes (eg, largecap, mid cap, and small cap stocks; foreign stocks;government bonds; and money markets) usingsophisticated modeling techniques. It also involvesmodern portfolio theory, which requires calculatingthe risks and potential returns for your entire portfolioinstead of focusing on the individual securities—to see the forest for the trees. The goal is to create anoptimal portfolio that provides the greatest expectedreturn for a given level of risk.

Deciding Variables

But a portfolio that is optimal today may not beoptimal tomorrow. Hundreds of changing variablesinteract to raise or lower the risks and potentialreturns of various assets. Based on past performanceof market sectors, allocating more assets to advancingclasses and reducing investment in declining ones mayenhance returns with less risk. Thus, it's important toreview allocations quarterly and readjust allocationsas needed. Reallocating your investments balancespositively and negatively correlated asset classes andmaintains optimal portfolios for aggressive, growth,conservative, and middle-of-the-road investors.

Making smart allocation decisions does notinvolve consulting market gurus, whose trackrecords are no better than flipping a coin. Instead,a sophisticated approach removes emotion frominvesting by using many statistical indicators, suchas moving averages, stochastics, trend lines, andmoney market yields.

Make Great Choices

Choosing well-managed mutual funds is theother half of the equation. Besides top-notch investmentmanagement, each fund must reliably representits asset class and not meander about. Yet neitherphysicians nor skilled financial advisors areequipped to regularly reallocate portfolios to maintainthe optimal mix of asset classes. It makes sensefor your advisor to hire an outside service that hasdemonstrated its worth in up and down marketsover the long haul. Such reallocation services areautomatic. Once the program has been set up, youdon't have to lift a finger. The service provides elaboratereports and charts that explain what moveswere made and the rationale behind them.

The bigger your portfolio, the more you haveriding on it. The combination of broad diversificationand dynamic asset allocation provides cushioningthat helps you stay the course. Market-timing,in which you are totally in or out of the market,is risky because you might be out when youshould be in, or vice versa. A buy-and-holdapproach is risky because it leaves you completelyexposed to big downturns. Dynamic asset allocationmay offer a best-of-both-worlds approach—cushioning physician-investors from the jaggededges of the market, while always positioning themfor growth and income.

Frank Congemi is a financial advisor who works with many physicians

in several states. He lives in Deerfield Beach, Fla, and has

an office in Queens, NY. He welcomes questions or comments at

800-228-2309 or