Take a Comprehensive Approach to Investing

We are often asked to provide thoughts on investment opportunities presented to dentists. Many times, these products are not constructed with the client’s interests in mind. They frequently involve greater risk than what is presented, they carry hidden language negating guarantees, and they are designed with hidden costs. While I love a good showman (my first job was as a game barker, and I have played in circus and carnival bands over the years), your financial future should not rely on who can offer the best entertainment experience. You should approach your portfolio as a treatment plan, not as an assortment of interesting sales pitches.

In this article, I am going to discuss building a comprehensive approach to investing. Throughout our blog posts, we strive to offer sound financial recommendations, whether they’re in regard to your practice, your personal life, managing debt, structuring insurance, ensuring a proper estate plan, or buying or selling your practice. But sound decisions in these areas can be undone with an incorrect or incomplete approach to your investment philosophy.

No one-size portfolio design fits all financial plans. Your plan’s goal is to reach financial freedom as you envision it. Financial freedom, as we describe it, is simply the accumulation of a sufficient level of assets to have confidence in maintaining your desired lifestyle throughout retirement while preserving your legacy goals. By defining what your ideal retirement looks like, a picture of what you need to do to get there becomes clear. Combine this with an understanding of the three angles of risk assessment (need, ability and willingness), and one can form an idea of how to structure the aforementioned picture. Take this information, look at all your assets and ongoing savings, and build a portfolio that:

- Uses evidences-based strategies

- Tilts to factors that provide the greatest risk-adjusted return

- Diversifies globally

- Minimizes credit risk

- Focuses on total return

It is difficult to beat the market. Thousands of highly educated and experienced professionals trade in the market on a daily basis, keeping prices relatively close to fundamental values. When these prices deviate, algorithmic programs designed by physicists and engineers implement high-frequency trading strategies at the speed of light (seriously, they pay incredibly high prices for real estate with line-of-sight access to trading floors so they can utilize light and laser technology to trade faster than current bandwidth will allow). And yet, we see that globally diversified portfolios anchored in tilts to specific factors have persistently outperformed active strategies and are significantly less expensive to implement and manage.

Empirical evidence has shown, and peer-reviewed academic research has confirmed, that certain equity factors persistently provide greater return on a risk-adjusted basis than an equally weighted index strategy. In recent academic and trade publications, various authors have uncovered hundreds of factors that can be used to subdivide the market. The valuable factors are the ones that are definable, investable, have an economic story, and are persistent. Our director of research, Larry Swedroe, recently co-authored a book, “Your Complete Guide to Factor-Based Investing,” in which he digs deeply into this often-studied topic and affirms findings that show equity beats debt, small beats big, value beats growth, momentum beats stagnant, and global weighting beats home bias. The best news is that this rigorously studied approach to investing in equities can be cost effective when working with the right fund families.

When it comes to fixed income, historical data has shown that bonds with the most boring characteristics serve their purpose of dampening volatility the best. Government and FDIC-insured bonds provide the greatest level of diversification with the lowest level of risk. Corporate bonds, junk bonds and speculative debt perform like, or are highly correlated with, equity markets in downturns (which is exactly the time we want their greater safety).

A comprehensive approach to a portfolio also implies a tax-conscious approach. Various investments and types of accounts have different tax treatments. A comprehensive approach to investing takes into account and aligns tax consequences with your evolving tax and investment picture.

An investment philosophy supported by academic research, implemented with lower-cost vehicles and managed in a tax-conscious fashion is the best way to reach financial freedom. Avoid the showmanship of our industry. A carnival can be fun, but it’s no place to get your teeth pulled. Approach your financial future the same way you would your patients, through a treatment plan based in research and evidence and that provides an efficient and effective solution with the greatest possible likelihood of success.

This commentary originally appeared January 10 on DentalTown.com

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