Hugh F. Doherty, DDS, CFP
ost investors spend too much time on tactics (e.g. a method used to gain a limited temporary advantage) and too little time on strategy. This imbalance can be one of the most expensive mistakes you will ever make as an investor. Without a strategy to achieve long-term investment goals, you likely will be inclined to shift money frequently in and out of the market, chasing those three big performance rabbits:
(1) Trying to "get rich quick"
(2) Chasing last year`s winners
(3) Guessing the market`s next move
Allowing popular trends to influence investment decisions often results in buying into opportunities that have already passed and missing those that are just beginning. For example, if you look at the period from 1984 to 1998, the average mutual fund posted an average annual return of 10.7 percent. The average investor, however, earned only a 7.3 percent average annual return during the same period. I am absolutely convinced that no one could consistently predict the stock market or interest rates over the short term.
I have heard too many stories of doctors who, out of fear, sold most or all of their stocks or bonds near the market`s low, and completely missed the subsequent recovery. Some of them, waiting for the next pullback, would miss most of the next several years of extraordinary advances in the stock market as well. Think of their cost: realizing all of the losses, then missing all of the subsequent gains. That`s the price you pay when you invest without a strategy.
The cost of such a mistake can be enormous. For example, investors who remained fully invested in the S&P 500 from 1982 through 1998 would have enjoyed average annual returns of 21 percent, turning $10,000 (with all dividends reinvested) into almost $256,000. But if an investor missed the best 30 days out of more than 4,000 trading days during that period, that return falls to 9 percent, and, more importantly, the $10,000 grows to less than $46,000, a $210,000 difference for missing just 30 days.
Making sure you are invested for all of the market`s moves is one of the most important benefits of having and executing a long-term strategy. Remember, it`s not the market`s daily moves that determine your risk; it`s you. Based on research going back to 1950, it becomes clear that the relative risk of holding stocks and bonds changes as you change the length of time you are invested. Time horizon is one of the most important criteria to consider. On its simplest level, if you need your money in the next three or four years, investing your funds in corporate bonds makes sense. If you plan to be invested for 10 years or more, invest in equities to build wealth. A significant allocation to small- and mid-cap stocks makes sense.
The reasoning is simple, yet compelling: the average annual return (1926-1999) of small-cap stocks was 12.3 percent. Large-cap stocks were 10.1 percent. Compare that to the puny annual return in the same period for US Treasury bills, which was 3.2 percent.
For many doctors, the most serious downfall is to "buy high and sell low." Some guidelines for your consideration are:
(1) Purchase your investments as if you are going to live forever.
(2) Use historical returns as a guide.
(3) Don`t be concerned by the market`s up-and-down blips.
One change you should heed, however, is something called "your age." As every year goes by, the time frame for reaching your financial goals shortens. As a consequence, your appropriate asset allocation also should change to reduce the expected volatility of your portfolio. This is a must for doctors to realize their future financial security.
Strategic asset allocation takes time, and you might need help. Call (800) 544-9653 for information on how to achieve the best allocation, taking into consideration your age, personal investment objectives, time horizon, and risk tolerance.
Hugh F. Doherty, DDS, CFP, is a Certified Financial Planner, national lecturer, financial advisor to the health-care profession, and CEO of Doctor`s Financial Network. For further information on lectures, study club workshops, or consultations, you can fax to (732) 449-3229, send e-mail to Drfinnet@aol.com, call (800) 544-9653, or visit www.dr.hughdoherty.com.