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Strategies to help you invest well in hard times
Whenever I talk with clients these days, they are likely to ask two questions: "When is this market going to turn around?" and "What should I be doing now?" The answer to the first question is: "Eventually - and probably sooner rather than later." The answer to the second question is a little more complicated.
Today's stock market may remind you of your days as a resident: a seemingly endless period of high stress and sleepless nights. Now, as you look back, you know that was simply a tough period that you needed to get through to reach your professional goals. You exercised discipline and patience and persevered. Exercising that same kind of discipline in your investment strategy will help you get through this difficult market and ultimately reach your financial goals.
Here are some strategies that will help you survive.
Look beyond today
The past three years have been brutal for investors. During this downturn, we've lost more money faster than any other time in history except the Great Depression. People have seen their portfolio values decline anywhere from 30 percent for the most conservative investors to 90 percent for the most aggressive.
With few exceptions, the most appropriate stance you can take toward the current market is, "I'm in it for the long term." Even if the stock market doesn't repeat its run of the '90s anytime soon - and it's unlikely that it will - stocks have proven to be a good investment over the long term (see History of Stock and Bond Returns, below).
Unfortunately, most people stay focused on what happened yesterday, today, and maybe what will happen tomorrow. Only a few think about what's going to happen next month or next year. But in the investment business, that's where the stars focus their attention. The most successful investors are people who are visionaries, who spend their lives thinking not about where they are now, but where they are going and where they need to be.
Peter Lynch, the former manager of Fidelity Magellan, once told The Wall Street Journal that while the U.S has had nine recessions in the last 50 years, it has a perfect record of recovery after them. He has also said that while he doesn't know which way the next 1,000 points in the stock market will go, he's sure that the next 5,000 will go up.
As a rule, physicians don't provide medical treatment to their close family members. It's too hard to make objective decisions when you're emotionally involved. It's no better to make investment decisions based upon your emotional reactions to what's happening in the market today. Instead, develop an investment strategy, choose a diversified portfolio that reflects that strategy, and then maintain your discipline.
For example, most physicians with a clinical practice might consider a core portfolio of large-cap growth stocks, supplemented with fixed income investments or annuities, depending on your age.
Of course, sticking to an investment plan is difficult in today's American culture, with its emphasis on instant gratification. It's much harder than day trading or timing the market. You don't get to brag to your friends about the killing you made - or gain their sympathy with your stories of losses.
Taking a disciplined approach does not mean that you never change your investments. But instead of reacting to a market that can be volatile, formulate a plan and follow it. Along the way, you will make adjustments to this plan as your situation changes; one may be to re-evaluate your risk tolerance. If you've been losing sleep since the market downturn, it may be time to ask yourself what level of risk you can actually live with. This is part of the process of developing an investment discipline or strategy that works for you.
Take advantage of bargains
You can view this market period as a disaster - or as an opportunity. I would suggest that you embrace it as one of the greatest sales in the last decade.
I'm not usually a person who believes that you can save money by spending it. But on a trip to China a few years ago, I was amazed to discover how inexpensively we could purchase some high-quality merchandise. It was a buying opportunity that we took advantage of. But we didn't buy junk - we bought quality goods.
Right now the stock market is having a sale. That doesn't mean you should rush in and buy whatever's available. Stay disciplined: Buy stock in companies that have good fundamentals and that are differentiating themselves in some way from their competitors. Your portfolio will benefit when - not if - the economy improves.
Act your age
When our children are young, we may wrestle or play tackle football with them. Few of us do the same with our grandchildren, because we're older and more concerned about injuring ourselves.
As investors, we need to exercise that same type of caution as we approach retirement age. When you're young, you should be most aggressive in your investment strategy. As you reach middle age, you need a more moderate approach, building core investments around large-cap growth stocks, supplemented with international and small caps. In both cases, you're still looking at the long term - you have years to go to retirement.
If you're looking at retirement in five to seven years, however, it's time for you to ease out of the game. This doesn't mean getting out of the market altogether, but it does mean looking for more immediate gratification, setting your sights on the shorter term. This can be more difficult than you think, because it also means giving up some of the fun. When you hear the news about the new, coated catheter that company XYZ is coming out with, your first instinct may be to call your broker.
But that's not a good idea at this point in your investing career. I've seen too many physicians who had retired - and are no longer retired - because they lost so much when the market dropped. They'll be working for many years to come. Many of them are the people who said they intended to stay aggressively and fully invested in the market no matter what their age.
Consult a specialist
When your patients need medical expertise you can't provide, you send them to a specialist who has the experience and training to treat them.
Working with a good investment adviser is like going to a specialist. An investment adviser gets to know you, helps you determine your goals and risk tolerance, and based on that knowledge, helps you find the investment strategy that's right for you. Most important, an adviser will help you maintain the discipline to structure your portfolio and allow it to grow.
Left to their own devices, most investors choose their stocks in reaction to the latest crisis or to what's in the headlines. An investment professional will help you maintain the discipline that you need to keep your sights focused on the horizon and on your long-term financial goals.
In our investment lives we will encounter a number of market cycles. These strategies will help you manage these cycles and build long-term wealth.
Trevor 'Chip' Lewis, Jr., CFP, is Managing Director of PSA Financial Center, Inc. in Lutherville, Md. He was designated one of the Top 250 Financial Planners in Worth magazine in 2001, and the Top 150 Best Financial Advisers for Physicians in Medical Economics in 2002. Lewis has been active in the leadership of the National Financial Planning Association and the National Association of Planned Giving, among other professional organizations. He can be reached at email@example.com or via firstname.lastname@example.org.
This article originally appeared in the April 2003 issue of Physicians Practice.