The Market Can Be a Wild Ride-Turn the Ups and Downs to Your Advantage

Physician's Money Digest, January 2007, Volume 14, Issue 1

Looking back over the last decade, it may be easyfor physician-investors to say they should have putevery dollar they had into technology in the late 1990sand then sold in January 2000. But, as Alan Haft, anationally recognized investment advisor, points out,no one has a crystal ball.

"The early 1990s launched the biggest bull marketin the history of Wall Street," Haft explains. "Foryears, many didn't think it could end. Then the techcrash hit and everyone woke up to reality. As good asthe markets have been over these last few years, manypeople still feel the pain."

As a result, the trend of stock investing has returnedto the basic fundamentals of prudent, sound investing.So, if you want to know where you should be investingtoday and for the next 10 years, the fundamentalsare a good place to start.

Diversify, Diversify, Diversify

It may sound monotonous, but the first rule whendeciding where to invest is to have the majority of yourholdings, typically around 80%, in a solid portfolio ofwell-diversified market sectors such as cash, bonds(including international and domestic), and stocks(including large, mid, and small cap), internationalemerging markets, and some staple sectors like realestate. One sector may go up while another goesdown, but in the end, gains exceed losses.

Diversification also helps investors avoid makingcostly mistakes. Nick Raich, director of research forthe Private Client Group at National City, explainsthat in mid-May 2006, excessive fears that inflationwould spiral out of control, crude oil would hit $100per barrel, and the economy would fall into a recessionled to a sell-off in growth-oriented stocks in favor ofdefensive stocks. This sell-off was not based on thestocks' fundamentals, but was caused by fear.Diversification takes the fear out of investing becausewhere one area fails, another will prosper.

"Picking good stocks is really the easy part ofinvesting," explains David Twibell, president of theWealth Management Division of Denver-basedColorado Capital Bank. "The hard part is designing aplan that lets you sleep at night. Without that, you'llbe hard-pressed to stay the course with your investmentselections and will usually end up buying andselling at exactly the wrong time."

Sector Allocation

Experts agree that before you decide which stocksyou want to invest in over the coming years, it's mostimportant to understand how you should invest.That's where sector allocation comes in. MichaelKozak, director of wealth management at Salem,Mass-based Cabot Money Management, explainsthat sector allocation is extremely important becausecertain sectors tend to outperform others at anygiven time and may carry more risk than potentialreturn. He believes that stock and sector selection isthe key to building a strong portfolio.

Twibell agrees. He points out that sector allocationis extremely important if your goal is to manageyour overall portfolio risk. Most US stocks move intandem depending on how the overall market isbehaving. Investing in stocks that move up and downtogether isn't really diversification. Instead, holdingsecurities from a variety of market sectors, none ofwhich move in unison, provides you with muchsteadier returns and much less volatility during USbear markets.

"Most investors think that investing is primarilyabout picking good stocks," Twibell says. "That'sreally the least of the issues. What is really importantis how you manage the risk in your portfolio. If youhave most of your assets in one area, then diversify.If you have losing positions in your portfolio, makesure you have a predetermined price at which youwill sell the security to minimize additional losses. Ifyou foresee a difficult macroeconomic environment,make sure to hedge the investment that could beadversely affected. None of these strategies has muchto do with picking good stocks, but they are criticalto being a successful investor."

Back to the Future

So, if there's no way to tell who the winners willbe, and no advisor has a crystal ball, where shouldphysician-investors look to invest as the next decadebegins to unfold?

John Schloegel, vice president of investment strategiesat Capital Cities Asset Management, indicatesthat technology stocks are regaining market leadership;large cap value stocks and dividend-payingstocks are in favor. In the bigger picture, he sees individualsbecoming more active in owning individualstocks rather than mutual funds.

But, Schloegel cautions, all investors need a roadmap. "Understanding your goals and objectives willthen help you develop a plan to meet or exceed thoseobjectives." To illustrate, Schloegel says that if yourgoal is to retire in 17 years, based on your portfolio,you might require a 6% annual return to meet thatobjective. Therefore, you will map your target returnwith a benchmark. Schloegel suggests a balance-typeallocation between the S&P 500 and the LehmanAggregate Bond Index.

"Consequently, you will stick to the plan, stay thecourse, and follow that prescribed map in order tomeet your goals," Schloegel says. "The benchmark isthe key to achieving success. If you don't know whereyou are going, then it doesn't matter which road youtake."