Diversification and Portfolio Management

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What is Financial Asset Allocation?

By Jeffrey S. Coons; Ph.D, CFA

By Christopher J. Cummings; CFA, CFP™ 

Once the risk management goals and objectives for a physician’s financial portfolio have been identified and prioritized, the next step is to build a mix of investments that will best balance those conflicting goals.   

Asset allocation is defined as the portfolio’s mix between different types of investments, such as stocks, bonds, and cash.  The goal of any asset allocation should be to provide a level of diversification for the portfolio, while also balancing the goals of growth and preservation of capital required to meet the medical professional’s objectives.

Establishing the appropriate asset allocation for a physician investor’s portfolio is widely considered the most important factor in determining whether or not he/she meets his/her investment objectives.  In fact, academic studies have determined that more than 90 percent of a portfolio’s return can be attributed to the asset allocation decision.  

So, how do physician investors and their advisors typically make asset allocation decisions? 

One method is best characterized as a passive approach, in which a set mix of stocks, bonds and cash is maintained based on their historical risk/return tradeoff.  The alternative is an active approach, in which the mix among various asset classes is established based upon the current and expected future market and economic environment. 

In addition to pursuing a passive investment strategy, such as indexing, medical professionals supporting the notion that market prices accurately reflect all available information generally are not concerned with the timing of their investment decision.  

The most frequently used strategy to avoid a market timing decision when establishing an initial allocation to stocks is referred to as dollar cost averaging. Dollar cost averaging entails investing the same amount of money at regular intervals.

For example, an investor who wishes to dollar cost average may decide to invest 1/24 of the allocation on the first of each month for two years rather than investing the full amount immediately or trying to time buys when stocks are trading at a low point.

Value-cost averaging does the same thing with the same number of shares, rather than dollar amount, for its regular intervals.

Now, what is your personal favorite strategy?

Product Details

Product Details

 Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

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5 Responses

  1. Why Buying On the Dips Is Still All It’s Cracked Up to Be

    Wall Street Journal columnist Jason Zweig, relative to the above DCA comments, wrote a puzzling article Why Buying on the Dips Isn’t All It’s Cracked Up to Be. The gist of it is that buying on the dips doesn’t work. An thoughts?

    http://thefinancebuff.com/why-buying-on-the-dips-is-still-all-its-cracked-up-to-be.html

    Clayton

    Like

  2. Do FAs eat their own cooking – Apparently NOT!

    Did you know that a recent study of Swedish pension accounts found that returns were negatively affected by herding behavior of people using financial advisors – not by poor allocation?

    It seems that the same buy/sell advice was used by so many financial advisors at the same time, that their clients caused their own failure.

    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1952850

    I was a certified financial planner for almost 15 years who quit because of: 1] a lack of industry accountability, 2] no fiduciary responsibility, 3] and educational malaise [as only a HS degree/GED was required before 2008].

    Oh yea … and to start the CMP™ program to neuter the above and provide additional knowledge and deeper insight for all those FAs seeking to understand and advise medical professionals in this very niche, and lucrative, space.

    THINK: Different
    ACT: Different

    Dr. David Edward Marcinko MBA CMP™
    http://www.CertifiedMedicalPlanner.com
    [Founder and CEO]

    Like

  3. Why I am Happy Stock Prices Are Falling
    [Retirement security]

    Like most investors out there, I buy stocks (mostly stock funds) primarily to build my retirement security. The whole world’s productive assets (TWWPA)

    Unlike most investors out there, I don’t pick individual stocks. I construct a portfolio of low cost funds that represents the whole world’s productive assets. For the sake of simplicity, let’s give it a symbol – TWWPA.

    As long as human race exists, TWWPA will keep growing in fundamental value by the simple fact that we (human race) are growing in number and we are demanding ever increasing living standards. The market value of TWWPA will fluctuate, but the fundamental value will not.
    The more TWWPA you own, the more secure is your retirement.

    Why I am happy?

    Every month, I invest $10,000 to buy TWWPA. Since stock prices have fallen about 15% due to irrational fear of oil price dropping and China not building as many ghost towns, I get to own more TWWPA with the same amount of money. Fear will dissipate sooner or later, but the more TWWPA I own will remain mine.

    Michael Zhuang

    Like

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