Financial Planning for Physicians: Improving Your Odds, Part 2

Financial Planning for Physicians: Improving Your Odds, Part 2

“Most people don’t plan to fail; they fail to plan.” —John L. Beckley

Throughout the course of our lives, we all face decisions with the potential to either greatly improve our finances or to sabotage them. One of the best ways to increase the chance of successfully meeting our most important financial goals is to have in place a solid, evidence-based financial plan and long-term strategy. Physicians, especially, understand the importance of basing decisions on sound research, solid data, and proven facts, rather than emotion or the whim of the moment. In this two-part essay, we’ll examine four of the most prevalent financial pitfalls physicians encounter and what you can do to avoid them:

  1. Lifestyle Inflation
  2. Buying financial products instead of securing professional advice
  3. Mismatched asset allocation
  4. Not having a written investment policy.

In this article, we’ll discuss Pitfalls 3 and 4.

Previously, we discussed the importance of guarding against the lifestyle inflation that so easily overtakes physicians who have completed their residencies and are transitioning into the part of their careers where they can actually begin earning a good income. We also talked about how vital it is to avoid “magic bullet thinking” by simply buying financial products instead of establishing a solid long-term financial strategy with the help of a qualified, fiduciary professional.

3. Mismatched asset allocation.

The next step is to discuss the importance of matching your asset allocation (the types of investments in your portfolio) with your long-term goals and major life priorities. The fact is that just as the same medicine doesn’t work for every patient and every condition, the same investment mix doesn’t work for every investor. And yet, one of the most common problems we see, as financial advisors, is a misalignment between the investor’s risk tolerance, long-term goals, and asset allocation.

For example, let’s say you’re looking to maximize your long-term earnings to stay ahead of inflation (a very important goal, especially for younger investors with many years to go before their retirement). At this stage in your life, you aren’t overly concerned with short-term fluctuations in market value. Rather, you’re looking for growth over the long haul to fund a comfortable retirement lifestyle. If this description sounds like you, you should probably consider having a majority of your assets invested in equities—stocks. Why? Because historically, equity-based investments have outperformed inflation and exhibited good growth over the long term. While past performance is no guarantee of future results, the historical data argues for equities as a good long-term growth vehicle.

On the other hand, if you are nearing the end of your career and you are becoming more concerned about preserving the growth you’ve achieved and making sure your capital is available for providing retirement income, you may want to reduce your exposure to assets that tend to be illiquid or that fluctuate in value—real estate and aggressive-growth equities, for example—and focus on more stable investments with government-guaranteed or otherwise highly secure income streams. Examples might include US Treasury securities, high-quality corporate bonds, or other more conservative, fixed-income assets.

The point is, unless you have proper, professional financial advice that is delivered with your best interests foremost, you may not be aware of the asset mix that is most appropriate for your risk tolerance and life stage. Every physician understands the danger of “self-diagnosis”; the same is true with your financial strategy. You need to know what you’re invested in and, more importantly, why you’re invested in it. Just as in medicine, good information is required to make good decisions. Or, as Warren Buffett says, “Only when the tide goes out do you see who has been swimming naked.” The best way to keep from “exposing yourself” financially is to get the right kind of advice for your asset allocation.

4. Not having a written investment policy statement.

Closely related to understanding your asset allocation, having a written investment policy offers good insurance for future decision-making. After all, most of us want to have our most important information in writing, whether it’s a will, a “bucket list,” or even the grocery list for a party we’re hosting. So, there’s definitely something to be said for having a written document in place that outlines how your finances should be handled, whether the market is headed up, down, or sideways.

For one thing, this can help to take the emotions out of your decision-making. It has often been said that the financial markets are like taking the stairs on the way up, but taking the elevator on the way down. When the markets are dropping, many investors react out of panic or a “herd mentality,” joining the stampede for the exits. And the problem with that type of behavior is that too often, they get trampled.

You should never sell in a panic, just as you should never buy in a fit of greed. Research has proven, over and over, that those who make emotion-based investing decisions fail to achieve the type of long-term growth enjoyed by those who establish a sound strategy that is suitable to their goals and risk tolerance, and then stick with it through all the phases of the market cycle. A written investment policy is how you avoid “blowing yourself up” during periods of market volatility. If your goals haven’t changed, it’s likely your portfolio allocation shouldn’t change either.

At the same time, your investment policy statement is meant to be a living and breathing document that you revisit often. It is possible that over time, as your circumstances and goals change, you may need to make adjustments in your policy, with the guidance of your financial advisor. That’s fine. But it should be done logically and in the context of your circumstances, not as a knee-jerk reaction to market movement.

A good investment policy should outline the following:

  • Time horizons for each “bucket” of money (short-, medium-, long-term);
  • Asset classes you will and will not hold inside your portfolio;
  • Asset allocation preferences for each bucket of money (ideally a range of equity, fixed income, alternatives, and others that you would like to maintain your portfolio at all times);
  • Periodic rebalancing cadence (e.g., “rebalance 2x per year on 1/1 and 6/30”) to maintain your asset mix within your established guidelines.
    Your investment policy should also outline a framework for making changes to your portfolio (such as tax-loss harvesting, emergency liquidity, paying down debt, etc.). But these should be exceptions to the rule, not the norm.

If you are looking to make wholesale changes to your investment allocation, there should be some hurdles in place to help protect from making knee-jerk decisions. These hurdles may consist of (but are not limited to) the following:

  • Waiting periods for buying or selling positions in your portfolio;
  • Meeting with a financial professional before any wholesale changes are made;
  • Authorization from a spouse or significant prior to making changes.

The thing to remember is that most often in investing, your biggest enemy is you. Or, as investment pioneer Benjamin Graham said, “The investor’s chief problem … is likely to be himself.” In its simplest form, a written investment policy statement is designed to protect your future from—you.

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