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Equity Securities Provide a Portfolio Growth Engine
By Dr. David Edward Marcinko MBA, CMP™
[Editor-in-Chief]
Equity securities provide growth. Theoretically, the amount of growth potential in an equity security is infinite. A stock’s price appreciation possibilities have no limit. However, a stock’s price can also go to zero and an investor can lose the entire amount invested. Therefore, while stocks contribute long-term growth to a portfolio, they also add risk.
Stock Diversification is Key
Diversification is the best defense against risk, so only a portion of every portfolio should be in stocks. Other investments—fixed income securities; cash equivalents that can be used to take advantage of opportunities or for emergencies; real estate; and even commodities (precious metals, for instance, or securities of companies whose businesses are commodity-based)—should all be considered by the responsible physician-investor or financial advisor as components of a well-rounded, balanced portfolio.
And So is Portfolio Diversification
The stock portfolio itself should also be diversified. Diversify among all types of equity securities such as some large capitalization stocks, some small capitalization stocks, some utilities, some cyclical stocks, some value stocks, some growth stocks, and some defensive stocks. Because it is difficult to adequately diversify an equity portfolio with a small amount of money, consider mutual funds or ETFs for some doctors or financial advisory clients. At least this is the philosophy of our Certified Medical Planner™ [CMP] online educational program.
www.CertifiedMedicalPlanner.com
Assessment
Always remember that, because the equity component of the portfolio can be expected to provide more than its proportionate share of the risk of a portfolio, it must be constantly monitored. Also remember that every physician-investor as a different level of risk tolerance, and some may be able to handle ownership of only the most solid and stable equity investments.
Conclusion
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Filed under: CMP Program, Financial Planning, Investing, Portfolio Management | Tagged: asset allocation, CMP, david marcinko, Equity Securities, Investing, Portfolio Management, stock diversification, www.certifiedmedicalplanner.com, www.healthcarefinancials.com |
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Dr. Marcinko,
Good post. Moreover, the older I get, the more I believe that Index funds are becoming harder to beat?
Passively managed portfolios that aim to match, not beat, the performance of the broader market are ever being tweaked to make investing cheaper and easier for us all.
http://money.msn.com/mutual-fund/index-funds-becoming-harder-to-beat-wsj.aspx
So, why pay a full-service broker, FP or FA? Why waste money?
Buy the market – and forget it.
Dane
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Has The Financial Planning Profession Bet Its Future On The Stock Market?
If there’s one staple of financial planning wisdom that virtually everyone will agree upon, it’s stocks for the long run. Sure, we all acknowledge that markets can be volatile in the short term, but we all seem to still agree that in the long run, stocks are still where it’s at.
So as long as you have a long enough time horizon – whether you’re a young person still accumulating, or a retiree looking at a multi-decade spending phase – stocks are still a material portion of the portfolio.
But within the past hundred years alone, there was nearly an entire generation – who grew up during the Great Depression – that gave up on stocks for their entire lives. What if that happened again?
Has the financial planning profession hitched itself to the stocks-for-the-long-run wagon so tightly that if stocks fall off a cliff, so too will the profession?
http://www.kitces.com/blog/archives/175-Has-The-Financial-Planning-Profession-Bet-Its-Future-On-The-Stock-Market.html
Clark
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