Thinking Beyond Portfolio Asset Allocation

Join Our Mailing List

Don’t Forget Your Spending Policy – Doctors

By Dr. David Edward Marcinko MBA CMP™


If you are economically literate – or read the ME-P regularly – you may be tired of hearing the familiar saw, “the single most important determinant of investment results over time is asset allocation.”

But, as most of us realize, this glosses over critical obstacles to building personal wealth—taxes, inflation, and spending policy. A doctor’s spending policy itself is as critical as asset allocation in preserving wealth, as well as for all investors who understand the trade-offs: there are both allocation and spending strategies that stand to preserve wealth and insulate against excessive equity risk at the same time.

Income versus Security

In proving his point a decade ago, the author—Roger Hertog in “Income Versus Security”— traced the growth of a $1 million portfolio during the period of 1960–1994. He showed that while an all-stock portfolio would have experienced a compound growth rate of 10.1%, an all-bond portfolio of 7.4%, and an all T-bill portfolio of 6.1%, these growth rates dropped to 8%, 5%, and 3.7%, respectively, after taxes and conservative transaction costs. When further reduced by inflation, they dropped to 3.1%, 0.2%, and -1%, respectively. Stocks still nearly tripled in real value after taxes.

Next, Hertog factored in spending. He showed that the greater the equity exposure, the more likely investors will preserve or increase their levels of real spending and wealth. Also, he demonstrated how a spending policy of a fixed percentage of the portfolio; or of spending all the income is ill-suited to estate building. He arrived at an optimum allocation of 60% stocks and 40% bonds with a policy of spending all stock dividends but only spending interest to the extent it exceeds inflation. This latter spending policy adjusts for the fact that in – unlike today but perhaps again in the near future – an inflationary environment a portion of bond interest is a return of principal. This type of asset allocation and spending policy resulted in the greatest amount of growth over the years and gained on inflation. Hertog contends that the 60/40 allocation provides an appealing combination of growth and protection.

IOW: It gives investors a milder ride.


Over the 35-year period studied, a 60/40 mix returned almost as much as the all-stock portfolio both before taxes and after taxes and achieved some 75% of its real after-tax growth. Also, the portfolio’s worst year was only half as bad as the all-stock portfolio. Hertog believed that balancing with bonds softened the downside. But – what about the “flash-crash” of 2008-09?

Note: “Income Versus Security: Do You Have To Choose?” Roger Hertog, Trust & Estates, March 1997, pp. 44–62, Intertec Publishing Corporation.


And so, your thoughts and comments on this ME-P are appreciated. Is the bull market in bonds over? Do you believe Hertog? Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: and

Our Other Print Books and Related Information Sources:

Health Dictionary Series:

Practice Management:

Physician Financial Planning:

Medical Risk Management:

Healthcare Organizations:

Physician Advisors:

Subscribe Now: Did you like this Medical Executive-Post, or find it helpful, interesting and informative? Want to get the latest ME-Ps delivered to your email box each morning? Just subscribe using the link below. You can unsubscribe at any time. Security is assured.


Sponsors Welcomed: And, credible sponsors and like-minded advertisers are always welcomed.


Product DetailsProduct DetailsProduct Details

Product Details  Product Details

7 Responses

  1. David Edward Marcinko is a consultant, speaker, economist and journalist whose professional interest is the convergence of medicine, technology and practice management.

    He blogs at the: and has just release the third edition of his seminal book:

    Ann Miller RN MHA
    [Executive Director]


  2. “Focusing on past performance often is the first and biggest mistake financial advisers make when it comes to asset allocation.”

    This, according to Thomas Schneeweis, professor of finance at the University of Massachusetts at Amherst.

    Any thoughts?



  3. What is Sustainable Investing?

    Sustainable investing seeks profits by focusing on the positive–rather than shunning the negative–in corporations, say experts at a recent conference panel.

    A Quant Approach To Sustainable Investing

    CRD Analytics’ sustainability algorithm incorporates 200 financial, environmental, social and governance indicators that drive the bottom line.



  4. Say Goodbye to Traditional Asset Allocation
    [Welcome Factor Investing]

    Dr. Marcinko – In 1981, Rolf Banz published his finding that small stocks had outperformed large ones. The discovery caught the attention of Wall Street, which soon introduced a slew of small-cap funds.

    Your thoughts?



  5. Ben,

    Interesting article. But, is this really the most diversified or the least correlated efficient frontier?



  6. Asset Protection

    Asset Protection for a physician is just not about Swiss bank accounts (which probably is not a great idea anyway).

    As mentioned, risk to a portfolio can be greatly reduced by asset allocation. More importantly now, owning stocks that pay dividends can make a big difference over time versus owning stocks in same asset class but no dividends. Again, using a 60/40 blend or even 50/50 or 40/60 will return perhaps 1% to 2% less on average over a back test going back to 1970 but with much less volatility.

    Maybe it is better to stay in the game and accept slightly less return rather than have a down 40% year and pull out only to get less than 1% on a money market return.

    David K. Luke MIM
    [Physician Financial Planner]
    Certified Medical Planner™ candidate


  7. What a 60/40 Portfolio Can Deliver

    The 60/40 portfolio, one that consists of 60% equity and 40% bond, is very common. Most of my clients use a variation of this portfolio. Because of this, I want to understand how this portfolio performed in the past.

    For this study, I use the S&P 500 for the equity portion and the 10 year treasury bond for the bond portion. The market data I use is from 1928 to 2015. Note that this period includes the Great Depression.

    The portfolio is rebalanced every year to maintain the 60/40 allocation. Then I examine five return intervals: 1 year, 2 years, 5 years, 10 years and 20 years. For each return interval, I calculate the average return, best return and worst return.

    Here are the results I get. Note all numbers are annualized returns without the % sign.



















    What can I learn from these results?

    1. The 60/40 portfolio can still be quite risky in the short term. Note that the worst returns for the 1 year and 2 year intervals are -27.55% and -20.6% respectively. These are steep losses nobody likes.

    2. The worst return for the 5 year interval is a much smaller -5.37%. It’s clear that the longer the investment horizon, the better the risk/reward ratio. In fact, after 1941, there has never been a 5 year interval that this portfolio has a negative return.

    3. Never in history did this portfolio ever produce a negative return in the 10 and 20 year interval.

    Most people’s retirement investment horizon is 20 years. The worst 20 year return is an anemic 3.48%. The best is 14.78%. The average is 8.55%. Even the worst return will nearly double your money in 20 years!

    If you invest consistently into the 60/40 portfolio during your working years and divest consistently during the the retirement years, that is, avoid lump sum investment and market timing, your long-term return will most likely be not as low as 3.48%, and not as high as 14.78%, but around the average of 8.55%.

    Michael Zhuang
    [MZ Capital Management]
    Washington, DC 20006


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: