Three Fundamental Criteria All Physicians Should Consider before Investing

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Re-Appreciating the Basic Three Rs …

By Guy P. Jones CFP®

Guy P. Jones

Physician-investors are often confronted with a myriad of decisions concerning any potential investment not the least of which is:

“When or how should I change my investment strategy?”

Given the choice of investment options, there are three criteria by which any investment you make should be evaluated: Risk, Reward and Liquidity.

  • Risk, in a financial context, is defined as: The probability that the actual return on an investment will be lower than the expected return.  For our purposes and for most people, it equates to whether there is the potential to lose money on an investment and how much of a risk you are willing to take in order to achieve an acceptable return.

One measurement of the risk or volatility of market-based investments can be quantified by the beta of an investment.  Beta is a measurement of volatility of an investment and is measured against how volatile an investment is relative to the market.  The beta of the market is always 1.00, so any investment that has a beta of less than 1.00 is less volatile and conversely, one with a beta greater than 1.00 is more volatile.   The desired result is low beta (low volatility) investments that have higher returns vs. the market.  Each of our institutional-class money managers utilize investments that collectively have a beta that is lower than the market while generating results that avoided the steep losses of the stock market in 2000-02 and 2008.*

  • Reward, in a financial context, is the positive return on your investment.  The rule of thumb is that the reward – or return on investment – is directly proportional to the amount of risk that one is willing to assume- i.e. – the higher the risk, the higherreturn on investment.

In addition, traditional thinking says in order to reap stock market-like returns, you have to invest in the stock market.  In our managed portfolios, that is not necessarily the case.  Two of our investment managers, who do not invest in the stock market, have generated average returns over the past 7 and 10 years that are equal to or better than returns of the stock market over similar timeframes with 76-84% less risk as measured by the beta of each manager*

  • Liquidity, in a financial context, means how quickly you can get your hands on your cash or is the ability to get your money whenever you need it.  One of the first things I advise anyone to have is a liquid emergency fund of readily available cash.  By having available cash, you don’t have to convert another asset to cash and create a transaction that could result in potentially adverse tax consequences or worse, trigger losses.  I often see clients sacrifice higher returns that they could be earning on idle cash because of their perceived need for absolute liquidity of their money.  But what if there was a way to have both?  Wouldn’t you want higher returns in low risk, low-volatility assets as well as the ability to get at those assets quickly?

With our multi-manager investment platform, investors have the ability to have a portion of their assets held in a safe, liquid money market account while also having their remaining assets diversified in a variety of low risk, low-volatility investments.

financial risk



*Past performance is not a guarantee or indicator of future performance


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2 Responses

  1. Are Physicians Poor Investors?

    “Physicians are bad at investing.” I hear it in the investing community on a regular basis. There is some truth to the impression, but the reasons might surprise you. Physicians have to be confident in their decision-making in medical practice, something that works against them in the investment world. The complexity of finance, in many ways, is equal to the rigors of medicine.

    Assuming that making “As” in medical school leads to good investments is an expensive error. The literally millions of professional investors you invest against includes a large subset of very smart and experienced individuals. Having a broker or “adviser” who has perhaps a few weeks of education (much in how to make sales) is a recipe for failure.

    All this is not to say that a physician can’t be a good and prudent investor. But, it is to acknowledge the many factors that work against this being the case.

    Source: Steven Podnos MD CFP®
    Physicians Practice [7/7/14]

    Liked by 1 person

  2. Good Points:

    But, how to choose a portfolio that is full of these criteria is more difficult:

    1. Warren Buffet always buy a company, not only the stock. He seeks to become a stakeholder and his strategy is to buy and hold.

    2. Value is the discounted value of future cash flows of the company.

    3. The crucial part of valuation is to consider the P/E ratio and ROE; try to buy stocks with lower P/Es and higher ROEs.

    4. Free Cash Flow (FCF) represents the cash that a company is able to generate after using the money required to maintain or expand its asset base.


    Liked by 1 person

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