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As a result of the 2008 stock market crash and the subsequent strong 2009 rally, many doctors are confused as to how they should invest in 2010. Robert V. Sytz Jr., CPA, CFP®, president of Select Consulting, tells how his firm is investing its clients' accounts during these turbulent times.
Sytz says that most doctors have learned the hard way that their actual risk tolerance is not nearly as high (aggressive) as they originally thought. In response, many doctors are now trying to time the market or design a new and improved investment strategy. However, the majority of our doctor clients just want to reduce the risk within their investments and shift their primary focus to capital preservation.
While each client's situation is different, Sytz offers the following seven strategies he has used to assist doctors in systematically reducing their investment risk in this volatile market.
- Maintain your current asset allocation, but consider shifting a larger portion of your equity allocation to more defensive stocks and mutual funds.
- Make your asset allocation more conservative by increasing the percentage of fixed income investments within your portfolio.
- Adjust your asset allocation to a more conservative model by rebalancing your accounts, or simply using new deposits to invest in more conservative areas to slowly change your asset allocation over time.
- Divide your investments into two separate accounts, with one being ultraconservative and the other more aggressive. This allows the doctor to decide which account he or she wants to send new money to, based on their comfort level with the market and whether he or she wants to reduce or add risk to the investment portfolio.
- Use long/short or hedge stock funds that utilize strategies to minimize the volatility of the stock market and have the potential to provide positive returns, regardless of the direction of the stock market.
- Use stop limit orders on stocks to lock in profits and minimize the potential downside loss.
- Utilize covered calls on stocks in order to generate additional option premium income.
The degree with which doctors should implement these strategies depends on how they are coping with the current stock market volatility. With the recent market rebound, doctors are becoming more complacent in thinking everything is back to normal. Doctors should actually be reducing some of their equity exposure and making their accounts more conservative, so they will have a less risky portfolio if the market goes through another correction in 2010.
The most common strategy Sytz's clients are using is reducing their targeted stock allocation by selling stocks in the recent rallies. Another strategy is using all new deposits coming into the account to invest in fixed income securities, thereby making the account more conservative without selling stocks and thus realizing any losses on the stocks and mutual funds.
This allows the doctor's original investment to recover as the economy and stock market continues to improve. Moreover, since new money is invested much more conservatively, the doctor feels more comfortable continuing to invest toward long–term goals in this volatile market.
One additional caution to doctors regarding their 2010 saving and investing plan: Avoid the common problem of confusing saving and investment. A few clients, determined to stem the decline in their investment accounts, reasoned they should eliminate their tax–deductible contributions to their retirement plans.
Sytz notes that this “pretzel logic” is extremely dangerous — as a result of the stock market decline, doctors must save more, rather than less, in order to maintain hope of reaching their retirement goals. Reducing their savings in this environment simply means that many doctors may never reach their retirement goals.
Rather, doctors should recognize that investing is a totally different concept than saving. Doctors should continue to maintain, or increase, their level of savings and make the maximum tax–deductible contributions possible to their retirement plans. Through adopting the strategies outlined above, doctors can then minimize their investment risk while positioning their accounts to recover as the stock market and economy rebounds.
John McGill provides tax and business planning exclusively for the dental profession and publishes “The McGill Advisory” newsletter through John K. McGill & Company, Inc. Robert Sytz provides investment advice through Select Consulting, Inc. Visit www.mcgillhillgroup.com for more information.
