The Dos and Don'ts for Physicians When Forming an Investment Portfolio

In prior articles, I’ve made the point that one’s portfolio should contain large groups of stocks clustered inside mutual funds and/or exchange traded funds (ETFs).  This will help you avoid the added layers of risk of owning individual stocks.

Assuming you agree, which funds do you buy?  First, make sure the universe of choices you are considering does not include overly expensive vehicles.  You can probably eliminate any fund controlled by a brokerage or insurance company right off the bat. You then need to consider whether or not you are buying active managers or investing passively (or both). 

Active management costs more, although I’d say rarely more than 1 percent a year.  Go ahead and throw out funds that cost more than that annually and you will still have plenty of great options.  Passively structured index funds and ETFs should always cost under .5 percent.  Everything you buy should be liquid - that is, you should be able to sell them any day the market is open. 

Avoid “non-traded” real estate and other investment vehicles like the plague.  Also understand any commissions or surrender charges you will pay (although hopefully you have chosen a fee-only planner if you are receiving professional advice).

Next, decide on a rough-asset allocation: How much to equities, how much to fixed income, and how much to “other” (commodities, real estate, cash, gold, etc.). As a very rough guide, the longer your time horizon to invest, the more you should have in equities. 

After that is decided, drill down into each category further. 

For equities, consider how much in the U.S. and how much in large foreign well-developed markets?  How much in “emerging markets” (almost half the world’s population)? What size companies? A value or growth tilt? Should you segment your investments by company profitability, book value, momentum, or by equal weight?  Note that these are some complex choices, but I never said it was easy.  Either do the research yourself or find impartial help.

In the fixed income allocation, you have many of the same decisions to make in terms of “where” to put the money.  Here, you also must choose on quality and duration.  You must choose from the many types of fixed income (sovereign debt, corporate, government) offered globally.

In the “other” category, you have a plethora of choices.  Often, this category is used for a “tactical” approach towards improving total portfolio return based on expected trends and valuation changes (for example, you might overweight oil investments based on geopolitical events).

I hope this helps you begin to think about how to assemble a portfolio.  Monitoring and changing it is another topic for another day.