Investment Risks Worth Taking

One of the most important aspects of a wealth manager's role is understanding what matters most to a client. This discovery process uncovers such vital information as a client's values, familial relationships, retirement goals and also, his or her tolerance for risk. For many individuals this latter aspect of risk relating to investments is tricky.

One of the most important aspects of a wealth manager’s role is understanding what matters most to a client. This discovery process uncovers such vital information as a client’s values, familial relationships, retirement goals and also, his or her tolerance for risk. For many individuals this latter aspect of risk relating to investments is tricky.

For instance, there is a widely held misconception that building wealth through the stock markets is very difficult and yes, too risky. However, building wealth through the stock market is much easier than most think. In fact, building wealth is inevitable if you have the right foundation and guidance. For physicians, many of whom start their professional career with considerable medical school debt, taking the right steps to build wealth from the beginning is critical. It begins with understanding the investment risks worth taking.

Addressing Medical School Debt Early

According to a Sept. 10, 2013 MoneyWatch report on CBS News, the average new physician begins his career with $166,750 in medical school debt. The report goes on to say that the average annual salary of physicians is declining although physicians across all practice areas, at minimum, draw salaries in the 6-figure range. Specialists like orthopedic surgeons, neurologists, and radiologists go on to be among the highest-paid doctors with average annual salaries reported to be $405,000, $216,000 and $349,000, respectively, based on data from George Washington University’s School of Public Health, the American Association of Medical Colleges and Medscape. For all physicians, regardless of their specialty or the debt they are carrying, it is important to have a sound investment and asset protection plan. It should reflect the practice of structured investing and incorporate smart investment risks designed to build wealth.

Structured Investing

Structured investing is an approach which ensures good returns with acceptable risk and prudent diversification. It is not the approach used by major Wall Street firms, primarily because it is not as profitable for them since it is not based on a trading strategy.

Structured investing:

  • Minimize excessive portfolio turnover and associated fees to investors,
  • Reduces the natural volatility of the stock market through the use of broadly diversified investments which are tested through annual or semiannual rebalancing, and
  • Maintains a focus on strategy, while continuing to seek new opportunities.

Structured investing also reflects important investor characteristics, including:

  • Patience, that is, not making impulsive decisions spurred on by a so-called “hot tip” or after hearing one of the too many talking heads on television excitedly talking up one stock or another;
  • Discipline, both your own personal discipline in remaining focused on your financial goals and the discipline of your financial advisor; and
  • Diversification which positions you for a lower risk-greater return investment experience.

Investments Risks That Are Worth Taking by Physicians

A wise man once said that to profit without risk and to experience life without danger is as impossible as it is to live without being born. That all may be true, but which risks are worth taking and which are not?

The fact is even the most self-declared risk-averse people take risks every day. There are routine risks to our safety in crossing the road, in riding public transport, in exercising at the gym, in choosing lunch, and in using electrical equipment. Then there are the "big decisions" like selecting a degree course, choosing a career, finding a life partner, buying a house, and having children. These are all risky decisions; all uncertain, all involving an element of fate.

In making these decisions, we seek to ameliorate risk by carefully weighing alternatives, researching the market, judging possible consequences, and balancing what feels right emotionally and intellectually, both in the short-term and long-term. Sometimes, we ask an independent outsider to guide us in making our decision. The advisor does this by providing an objective assessment of the potential risks and rewards of various alternatives, taking a holistic view of our circumstances, and by keeping us free of distraction and focused on our original goals.

In investment, this is the value that a good financial advisor can bring—not only in understanding risk and return and how to build a portfolio, but in knowing the specific needs, circumstances and aspirations of his or her individual client. Quite simply, many people who invest without the help of an advisor take risks they do not need to take. They gamble on individual stocks, they rely on forecasts, they chase past returns, they fail to rebalance their portfolios to take account of changing risks, and they run up unnecessary costs and tax liabilities. To use an analogy, this is like trying to cross an -lane highway in the face of heavy traffic when there is a pedestrian bridge a little way down the road. You may well get to your destination safely through the traffic, but it will be despite your actions, rather than because of them.

Understanding risk in investment begins with accepting that the market itself has already done a lot of the worrying for you. Markets are highly competitive, which means that new information is quickly built into prices. Instead of trying to second-guess the market, you work with it and take the rewards that are on offer. Your biggest investment is in spending time with an advisor building a diversified portfolio designed to meet your long-term requirements, then meeting with your advisor periodically as your needs change to ensure you are still on course.

In considering all of this, it is important to understand that risk can never be totally eliminated. If there were no risk, there would be no return. But your chances of a good outcome are far greater if you use the accumulated knowledge of financial science and the guiding hand of an advisor who knows you. To sum up, risk and return are related. But not all risks are worth taking. The process of working this out starts with not trying to do it all alone.

Charles Massimo is president of CJM Wealth Management (Deer Park, NY). He is recognized as a 2014 “America’s Select Financial Advisor,” and his firm was listed by NABCAP as a 2012 “Premier Wealth Management Firm.” He has been ranked on the Reuters’ “Top Advisor List” and nominated to the Worth Magazine “Top 100 Wealth Advisors” list. He recently completed his first book, Getting Off The Street — Sane Investment Advice from One of the Nation’s Leading Wealth Managers. http://vimeo.com/107521060