Whether investing for retirement or any other objective, the biggest investment mistake physicians make is not having a sound investment strategy in place to guide their decisions. The challenge in investing is not that it takes special skills or knowledge; it’s that it is often driven by emotions which can be devastating for physicians who lack a clear investment strategy along with the patience and discipline to follow it. It’s emotions that drive most investors to buy high in times of market exuberance and sell low during market panics, and it’s why many physicians still haven’t recovered from the losses they suffered from the 2008 market crash.
The Biggest Investment Mistake Physicians Make
Investing too conservatively/aggressively – Physicians who don’t have a clear destination might be either to cautious of to agressive in their investment approach. Either approach can be ruinous for a portfolio that is expected to generate a lifetime of income. Investment risk is necessary to achieve good returns over the long term, but understanding how much risk is tolerable and how to mitigate risk through an investment strategy will provide much more stable and certain results.
Trying to time the market – Contrary to the claims of many celebrity market gurus, no one can predict, with any degree of certainty, changes in market direction. No one was prepared for the crash of 2008, which is the reason why crashes happen in the first place. Precipitous drops in the market are unexpected, and they usually trigger panic selling—and small investors get trampled in the stampede. When the stock market recovers, most investors wait to see if it will be a sustained recovery or a “sucker” rally, and they end up getting back in the market when it is well into its recovery. Yet, there are still a number of investors who hold onto the notion that they can call the market shift and make the right move at the right time. Quite simply it can’t be done with any degree of consistency.
Trying to pick winners – Decades of academic-based research has revealed that investors who try to pick individual stocks or who try to pick mutual fund winners stand no better chance of consistently outperforming the markets than investors who, with far less risk and costs, simply invest directly into the S&P 500 index.
Studies clearly show that investors who adhere to a plan with clearly defined objectives and a tailored investment strategy managed with patience and discipline outperform those who don’t. A well-conceived investment strategy is what keeps investors from falling into investment traps, such as chasing returns or trying to time the markets.
- Having a plan enables you to stay focused on your individual benchmarks, rather than market benchmarks or indexes, which are meaningless to your long-term strategy.
- A plan keeps you firmly grounded in risk management principles that closely track your personal risk profile while optimizing your asset allocation.
- More importantly, the plan shields you from the irrational behavior of the herd which is often driven by euphoria or panic. From 2007 to 2010, investors who adhered to their long-term strategy performed significantly better than those who bought as the market neared its peak, and those who sold in panic as the market plunged.
Without an investment strategy based in sound principles and practices, many physicians will more often than not succumb to the emotions of greed or fear which causes them to act in ways that are counter to their long term needs. It must start with a goal, a targeted objective with a specific time horizon so you can determine how much you need to invest, what rate of return is needed on your investment and how much risk you will need to take in order to achieve that rate of return.