Investing for Your Future
Investing wisely in stocks, bonds, or other securities is a key component to optimizing your long-term financial security. But designing an optimal investment portfolio requires careful planning, analysis of your goals, and a clear-eyed self-awareness.
How you invest – how much money you allocate and where, your age, and your tolerance for risk – must be taken into account in order to create a portfolio that best reflects your goals. Many chiropractors tend to be risk adverse. Busy with managing both patients and the business of running a practice – not to mention all the various products being pushed at them – the idea of diving into something as intangible as the stock market can be intimidating.
Your Attitudes Toward Risk
“Black Tuesday.” “The Great Recession.” Investors cringe recalling the dozen or so significant market corrections of the past century. While we can do a great deal to mitigate risk, we cannot eliminate it. In any investment plan, it is important to understand both the types and the amount of risk you are taking on and to be sure that you are comfortable.
For example, if you need your portfolio to grow more quickly over your time horizon, you will want a higher rate of return. An increase in your rate-of-return objective, however, will generally mean taking more risk. If your return objective is higher than your risk tolerance (willingness to take risk) or your risk aversion (your vulnerability to losses), then you must adjust one or more of these parameters. This could mean, for example, retiring from your chiropractic practice later and possibly subjecting yourself to the discomfort of greater risk or increasing your savings.
On the other hand, if your rate-of-return objective can be lowered because your assets can support your goals with less growth, then your need to take risk is reduced and your portfolio should be allocated accordingly.
The Power of Diversification
The risk and reward characteristics of all of your portfolio’s holdings should be analyzed as one, not separately. While you may have heard from a colleague, or even Jim Cramer, that a certain stock is “hot” or “primed to rally,” an efficient allocation of capital to specific asset classes is far more important than selecting the individual investments.
Smart diversification of your portfolio can mean investing in a variety of stocks or bonds, both domestic and foreign as well as real estate. While stocks tend to be more volatile in the short term, they have historically offered superior long-term returns. Bonds are less risky – though they lack the potent punch of stocks’ long-term payoff. Because of this difference, a balance between risky stocks and staider bonds is key, though achieving the right balance for you will depend on your tolerance for risk as well as your goals and time horizon.
Your asset allocation – where your money is invested – can determine over 90% of the performance variation of your investment portfolio. How your investment dollars are allocated far outweighs the potential effects of individual security selection and market timing.
One key to diversification when you are planning your asset allocation is deciding how much of your portfolio to place in domestic and foreign investments. Global diversification reduces your risk by putting more and varied stocks into your bucket. Consider this fact: while there are 3,500 stocks in the U.S., there are globally around 10,000.
Still, investors tend toward a significant home bias when building out their portfolios. Investors seeking the comfort of the familiar may feel more at ease in their home markets or have concerns over currency fluctuations. But over time, financial theory holds that global asset diversification can bolster your portfolio more than if you stay in your home market. Of course, you’ll want to balance your domestic and foreign investments according to your unique needs.
The Time is Now
Regardless of the time horizon of your financial goals, the simple fact remains that the more time you have, the more likely you are to succeed as an investor. There are two reasons for this. The first is the miracle of compound growth. This is the idea that when you put money aside to earn returns, and then reinvest those returns, you have both your original investment and the returns working for you.
The second reason is the phenomenon of risk reduction over time. Time reduces investment risk, especially in diversified portfolios of stocks. It is natural to worry that if you invest in the stock market today, it may go down tomorrow. But if you have a long investment horizon, tomorrow is just one of the thousands of market days during which you will be investing. Over long periods, many of the ups and downs in the market are cancelled out, leaving the broad market trend.
Even with these powerful reasons to set up an investment portfolio today, many would-be investors still procrastinate. The reasons may vary – lack of funds, intimidation of the process, lack of a trustworthy advisor. But delay can really cost you.
Ready to start building your investment portfolio? Great. For most chiropractors, the skill they most excel at is helping people to heal, move more fluidly, or become free of pain. Because these important talents don’t necessarily translate into investment expertise, begin by learning the basic terminology and concepts. There are plenty of online resources such as Investopia.com and well-regarded investment books such as The Only Guide to a Winning Investment Strategy You’ll Ever Need by Larry Swedrow and Behavioral Investment Counseling by Nick Murray.
The following five steps will help you design the right portfolio. Congratulations on making today the first day of more secure financial future! Let’s get started:
The Five Steps of Investing:
- Assess your goals and circumstances. What are your financial values and goals?
- Set long-term investment objectives. Taking into account your tolerance for risk, what is your investment horizon(s)?
- Plan your asset allocation. How much of your portfolio will you invest in each of the different investment types?
- Select your investment approach. What investment vehicles will you use to implement your portfolio strategy?
- Build your portfolio. Building on the first four steps, construct a portfolio suited to your needs, goals, investment horizons and risk attitude.
Why Mutual Funds?
At its most basic, a mutual fund is an investment company that pools the monies of many individuals for the purposes of investing in various securities. Mutual funds are one of the most advantageous investment products for the average investor. Their power: they give small investors access to professionally managed portfolios that are highly diversified. As well, the funds can be redeemed at any time.
Mutual funds have become increasingly popular over the past several decades. In the U.S. in 2016, 9,511 mutual funds managed around $16.34 trillion. While convenient, however, they do cost money. It’s important to understand the fee structure in any mutual fund you choose so that you can avoid any surprises and select the fund that is in alignment with your goals.
Smart and timely investing can set you on course for a bright future because what the returns on your investment really represent is choice – the choice to retire earlier and better, the choice to live debt-free, the choice to pay for your child’s college or wedding or grad school.
The power of this is too often offset by fear and busyness and an unfamiliarity of how to get started. But you can stop stalling and take the first step by educating yourself with the numerous and varied resources available. The time is now. As Warren Buffet famously said, “Someone is sitting in the shade today because someone planted a tree long ago.” Go ahead and plant your tree today!