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A question we hear frequently from physicians concerns the details around what are commonly known as “alternative” investments.  Derivatives, options, hedge funds, gold, master limited partnerships, junk bonds, and the list goes on.  Investors are intrigued by the potential reward they believe these investments offer.  The marketing stories for these vehicles seem strong and often suggest “can’t-miss” type opportunities; they play on our greed.

Another question that ranks near the top of the list asks about the latest hot stock to purchase or the next “dog” that should be sold.  Someone in a breakroom conversation suggests that as corn prices continue to fall, China will provoke North and South Korea to go to war with one another so the US has to send additional resources to the Pacific; commodity prices will then rise over the fear of a pending stock market crash.  I know – makes no sense – but on close inspection, neither do most theories that cause investors to act irrationally.  Uncertainties tempt us to consider pursuits that are neither in our best interest nor align with our long-term goals.

While most folks don’t find a question answered with other questions satisfying, here are some important questions that should precede entertaining such investment moves: 

  • Do you have a financial plan that outlines a clear path toward achieving life-long goals for you and your family?
  • How would this investment fit within your plan and increase the probability of you achieving your goals?
  • Do you actually need the return potential (not guarantee) suggested by the investment in order to achieve your goals?
  • Can you afford the inherent risk of the investment (remember, risk and reward are inextricably linked), and the potential loss if things go badly?

Think about it this way…say you have $1 million invested today, comprised of your employer’s qualified retirement plan, IRAs, brokerage accounts, and maybe even an ownership interest in a medical practice.  Further, let’s assume you’ve done the math (or in the context of a planning relationship with a trusted advisor) and determined that in order to retire in 15 years with $6 million available for living expenses, you need to invest $100,000 annually with an overall return of near 8%.  Again, based upon your own dynamic circumstances and goals, the annual required rate of return is 8%.  Over the last 10 years, a globally diversified portfolio, passively managed to merely capture market return has earned over 9.5% annualized.  Past performance is absolutely never a guarantee of future results.  Heard that before?  But why open yourself to significantly greater risk of loss in the hope of doubling your return if that’s not what your goals require… with the potential of significant loss?

According to the Journal of Financial Planning’s July, 2014 issue, 23% of millionaire investors say their biggest investing mistake was failing to adequately diversify their portfolio.  In other words, they didn’t believe their mistake was not finding the biggest fish in the pond.  Remember, diversification doesn’t necessarily come from multiple advisors providing competing philosophies, but rather a portfolio offering exposure to multiple global asset classes whose return patterns differ from one another.  Seek the path that can improve your probability of success, not with the one with the thrilling story that may completely derail your hopes and dreams if it doesn’t deliver.  Plan, stick to the plan, and stay diversified.

 


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