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Investing 301 - Risk & Return Potential

This final week of the 4 week series we're talking about the different types of traditional investment choices along with what to know about investment risk. Certainly this series hasn’t covered every type of investment choice, but hopefully this overview has covered some of the most important considerations on your investing journey and discussed some steps you can take to safeguard your financial future.


Diversifying Your Portfolio


One of the best ways to protect your investments is to diversify your portfolio. This means investing in a variety of different assets, such as equities, bonds, and real estate or more. This will help to reduce your risk if one asset class performs poorly. For example, if you invest only in stocks equities and the stock market as a whole takes a downturn, your entire portfolio could be affected. However, if you have a diversified portfolio, you may be able to offset losses in one sector or another with gains or at least flat returns.

One way to illustrate this is to look at the Callan Institutes Periodic Table of Investment Returns. Looking back at 20 years of multiple investment sectors, no individual sector class has performed in the top spot 2 years in a row. Take 2021/2022 for example. 2021 Large Cap Equities outperformed other sectors with a 28.71% return, but in 2022 it had an 18.11% loss. Cash Equivalents due to rising interest rates were the best performer in 2022 at 1.46% but in 2021 had a mere 0.05% return and was in the middle half of performers.



There are a number of different ways to diversify your portfolio. One way is to invest in different asset classes, such as stocks, bonds, and real estate. Another way is to invest in different industry sectors, such as technology, healthcare, and consumer staples. You can also diversify your portfolio by investing in different countries or regions.


Top Categories of Marketable Investment Choices


When diversifying your portfolio, it's important to loosely define the different categories of marketable investments available. This is not an exhaustive list, but hits many of the investable area you may see or hear about.


These include:

Stocks: Stocks represent equity ownership in a company. When you buy a stock, you're essentially buying a piece of the company. Stocks can be volatile in the short term, but they have historically trended upwards over the long term.

Bonds: Bonds are loans that you make to a company or government. When you buy a bond, you're essentially lending money to the issuer. Bonds are generally less volatile than stocks, but they also offer lower returns.

Real estate: Real estate is another asset class that can be a good way to diversify your portfolio. Real estate can be a good hedge against inflation, and it can also provide you with rental income.

Commodities: Commodities are raw materials, such as oil, gold, and wheat. Commodities can be a good way to diversify your portfolio, but they are also very volatile.

Alternative investments: Alternative investments are a broad category that includes assets such as hedge funds, private equity, and venture capital. Alternative investments can be a good way to diversify your portfolio, but they are also more risky than traditional investments.

Cash & Cash equivalents: Cash equivalents are assets that are very liquid, meaning they can be easily converted into cash. Some examples of cash equivalents include money market funds, certificates of deposit, and treasury bills. Cash equivalents are a good way to keep some of your money safe in case of an emergency.


These are broad general categories of investment choices, but within most of these categories there are sub-sectors that go deeper in particular categories of investing. If you are a beginning investor, you may consider Exchange Traded Funds or Index Funds as a way to get broad diversification with lower investment costs and minimums to enter.


As your wealth grows, for tax, diversification, or risk purposes, you may want to own specific holdings whether stock or bonds on long-term performing companies. I would suggest involving a financial advisor or tax advisor to help plan and advise on diversification strategies that fit your needs, goals, tax situation and risk tolerance appropriately.


Rebalancing Your Portfolio Regularly


Once you've diversified your portfolio, it's important to rebalance it regularly. This means periodically adjusting your investments to make sure they still align with your risk tolerance and investment goals. For example, if you're nearing retirement, you may want to shift your portfolio away from stocks and towards bonds.


Rebalancing your portfolio can help to ensure that your investments are still working for you and that you're not taking on too much risk. It can also help to keep your portfolio on track to achieve your investment goals.


Investing for the Right Period of Time


The stock market is volatile in the short term, but it has historically trended upwards over the long term. This means that if you invest for the long term, you're more likely to ride out any short-term fluctuations and come out ahead.


Of course, there's no guarantee that the stock market will continue to rise in the future. However, over the long term, the stock market has been a good investment for most people.


Controlling Your Emotions During Downturns


When the market takes a downturn, it can be tempting to sell your investments. However, this is usually the worst thing you can do. If you sell your investments when they're down, you're locking in your losses. Instead, it's important to stay calm and ride out the storm.


The market will eventually recover from any downturn. If you sell your investments when they're down, you may miss out on the recovery.


Consider your Risk and Return potential


Risk and return are two of the most important concepts to understand when investing. Risk is the possibility of losing money on an investment. Return is the potential gain you can make on an investment.


The higher the risk, the higher the potential return. However, there is no guarantee that any investment will make money, even if it is considered to be low-risk.

Medical professionals should carefully consider their risk tolerance and investment goals when making investment decisions. Those who are more risk-averse may want to invest in lower-risk assets, such as bonds or money market funds. Those who are more willing to take on risk may want to invest in higher-risk assets, such as stocks or real estate.


Here are some specific things medical professionals should know about risk and return when investing:


  • There is no such thing as a risk-free investment. Even low-risk investments, such as bonds, can lose money.

  • The higher the risk, the higher the potential return. However, there is no guarantee that any investment will make money, even if it is considered to be low-risk.

  • Your risk tolerance should be based on your financial goals and time horizon. If you need to access your money in the short term, you should invest in lower-risk assets. If you have a long-term investment horizon, you can afford to take on more risk.

  • Diversification is essential for managing risk. By investing in a variety of assets, you can reduce your risk of losing money if one asset performs poorly.

  • Rebalance your portfolio regularly. As your financial situation changes, you may need to adjust your asset allocation to maintain your desired level of risk.

It is important to remember that investing is a long-term endeavor. There will be ups and downs along the way, but over time, you should be able to achieve your financial goals if you invest wisely and stay patient.


If you are a medical professional who is new to investing, it is a good idea to speak with a financial advisor. A financial advisor can help you understand your risk tolerance and investment goals and create a portfolio that is right for you.


Beneficiary Designations


A beneficiary designation is a provision in an insurance policy, retirement account, or other financial account that specifies who will receive the benefits if you die.


Conclusion


Understanding risk and returns on your investments along with contributions to the proper retirement and non-retirement investment accounts can help safeguard your financial future.


If you have any questions about protecting your personal assets, please feel free to leave a comment below.

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