Don't Neglect Your Mutual Fund Possibilities

Physician's Money Digest, February 2007, Volume 14, Issue 2

The biggest hurdle for physician-investorsis where to invest.Begin with the broad allocationdecision of how to divide your investmentsbetween debt securities (eg,bonds, CDs, etc) and equities (ie,stocks). Your decision should be basedon risk tolerance and life cycle.

Navigating the Options

For example, if you are 10 years ormore away from retiring and are willingto ride the ups and downs of the stockmarket, consider 80% to 100% allocationto stock mutual funds. If you arenearing retirement or already retired,you may want to consider a much higherallocation to debt securities. A goodneutral position is a split of 40% debtsecurities and 60% equities. Then,depending on your risk tolerance andlife cycle, you can adjust to a moreaggressive or less aggressive posture.

You then want to divide your debtsecurities into shorter term maturitiesthat range from 1 to 5 years and longerterm maturities that are 5 years ormore. A good neutral allocation mightbe one third shorter term bond fundsand two thirds longer term bond funds.You'll also need to maintain an appropriateamount in a money marketaccount for emergency reserves as well.Deciding how to allocate your equityinvestments is a bit more challenging. Agood neutral allocation might be 60%US large companies; 15% US mid-sizecompanies; 10% US small companies;and 15% international stock.

Rebalance Your Allocation

Once you have your portfolio inplace according to your allocation decisions,you'll need to establish a rebalancingschedule. Consider rebalancingat least once per year. For nonretirementaccounts, waiting 1 year and a day torebalance means that any gains willreceive favorable long-term capitalgains tax treatment—maximum 15%federal rate. Structured rebalancingforces you to take some money fromhigher priced positions and move it tolower priced positions. This meansyou're selling high and buying low.Over time, the underperformers willbecome the top performers, and you'llown more shares at lower prices.

Once you have made these asset allocationdecisions, it is important tomemorialize them in a written InvestmentPolicy Statement (IPS). Having anIPS helps keep you on track, and adherenceto your IPS prevents your portfoliofrom continually drifting away fromyour original intentions.

Stewart H.Welch III, CFP®, AEP, is the founderof the Welch Group, LLC, which specializes inproviding fee-only wealth managementservices to affluent retirees and health careprofessionals throughout the United States.He is the coauthor of J.K. Lasser's New Rules for Estate andTax Planning (Wiley; 2005). He welcomes questions or commentsat 800-709-7100 or visit Thisarticle was reprinted with permission from the BirminghamPost-Herald.