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Valuing the Quintessential Alternative Investment

By Dr. David Edward Marcinko MBA CMP™

[Editor-in-Chief] www.CertifiedMedicalPlanner.org

As all FAs, and informed physician investors know, the investment industry and Modern Portfolio Theory [MPT] strives to make optimal ‘allocations’ into different ‘asset classes’; according to some defined risk tolerance level or efficient frontier.

Equities, fixed income, property, private equity, emerging markets and so, are all ‘asset classes’, into which physician investors and mutual fund or portfolio managers will make an allocation of their total funds under management. It is quite proper for them to do this as they seek to balance the risk and potential returns for their own; ME, Inc., or other clients’ money.

But, by creating a “new” asset class, this concept opens the door to significant capital flows; advisory and management fees. Hence; the unrelenting innovation of Wall Street, and its’ commission driven and fee-seeking mavens, is unending.

Making an Impact

This secular and non-secular concept is broadly known as “impact investing”; and may be illustrated using Social Security as an example.

So, Wall Street opines,  if you’re not counting on Social Security benefits as a part of an overall asset allocation strategy, you may be missing out on bigger gains in a retirement portfolio. Those of this ilk say that retirement investors should consider the value of their Social Security as a portion of their fixed-income investments. Others believe it may be too risky for some.

The Strategy

Generally, adopting such strategy would mean shifting a big portion of investible assets out of bonds and into stocks. And, into the hands of money managers, stock brokers, wealth and endowment fund for a fee; of course. This is akin to those financial advisors who rightly or wrongly goaded clients a decade ago, to not pay off a home mortgage and instead reposition the free cash flow into a rising; and then falling; market.

Of course, there are detractors, as well as proponents, of this emerging financial planning philosophy.

Vanguard Group

Jack Bogle, founder of the Vanguard Group, often cites his penchant for basing one’s asset allocation on age. (If you’re 40 years old, you have 40% of your investments in fixed income and 60% in equities. By the time you’re 60, you’ve got 60% in fixed income, 40% in equities).

Example:

So, let’s consider Social Security, citing a physician with $300,000 in an investment portfolio, and capitalizing the stream of future payments.

If the $300,000 is all in equity funds, even equity-index funds, and $300,000 in Social Security, you are already at 50/50″ fixed income versus equities.  The next step is a conversation as a DIYer or ME Inc physician investor or advisory client. This is the nexus of where Social Security meets risk management.

Now, how will the doctor feel when market goes up and down? Some may believe the concept, but not enjoy the inevitable more fluctuating self-directed 401-k, or 403-b plan. So, one must be comfortable with taking on a larger stock position.

Source: Andrea Coombes; MarketWatch, September, 2013.

http://money.msn.com/mutual-fund/social-security-as-part-of-your-portfolio

The Negative

Others experts, like Paul Merriman, opine that Social Security is not an asset class and the idea is fundamentally flawed and should not be a part of anyone’s portfolio.

Why? As classically defined, a portfolio is composed of financial assets. A financial asset is something that can be sold. Social Security cannot be bought and sold. Because of that, it has a market value of zero.

Source: Paul Merriman, MarketWatch, November 2013

Assessment

Therefore, the definitional decision is left up to the informed reader, modern physician or enlightened advisor. Is a medical practice an asset class?

MORE: About iMBA Inc Expertise in Healthcare Valuation

MORE: Social Security as an Asset Class?

Conclusion

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Filed under: Alternative Investments, Investing | 3 Comments »