THUMBS UP: The Best Investment for Middle-class Doctors

Physician's Money Digest, October 2006, Volume 13, Issue 10

BetterInvesting

BetterInvesting

Do you invest in index funds? Accordingto some economists, they makea lot more sense than putting yourmoney in individual stocks. Dr. JamesD. Miller recently made this case in hisarticle in . Dr. Millerbelieves the common idea of high riskequaling high returns is only partiallytrue. He bases his argument on the factthat stock market investing offers twotypes of risk. According to the article,these are: (1) the risk of the entire marketgoing up or down; and (2) the company-specific risk of one particularstock doing better or worse than themarket at large. He explains that marketsonly "compensate" investors forthe first type of risk, while "the marketdoesn't need investors to take on thesecond type of risk and so does notcompensate for it." While investors certainlycan't control the state of theentire economy, they can control thesecond risk through diversification—inother words, broad-based index funds.The editors of notedthat they don't agree with Dr. Millerbut felt he offered "a good explanationof a common argument."