Asset Allocation through the Physician’s Life Cycle
As you age your lifestyle needs change as do your investment outlook and priorities. For most physicians, the longer their time horizon, the more risk they are willing to take in order to achieve better returns on their investments. Then, as their time horizon shortens, they tend to become less tolerant of risk with a greater willingness to accept lower returns. An asset allocation strategy should constantly evolve to reflect the physician’s current risk tolerance, preferences and priorities.
While it is important to keep some portion of your assets working in growth oriented investments, the weighting you give to them should decrease over time, while the weighting given to safer investment increases. This will ensure that your portfolio value will not fluctuate to widely as you approach the end of your time horizon. The specific weighting will depend on how far away from your objective you are in terms of time and value.
The following examples are representative of the allocations used at the various stages of a physician’s career:
Early Stage: In the early years, physicians are busy establishing their careers and building their earnings. They’re usually single or newly married, and some are starting a new family. The primary goals at this stage typically include saving for a home, but many physicians begin to take advantage of contributing to their qualified retirement plans early on. Their time horizon for retirement is at its longest, so it is usually recommended that they take the greatest amount of risk for their comfort level in order to achieve higher returns. High growth investments, such as stocks, aggressive growth mutual funds, emerging market funds and large cap funds comprise the largest portion of the portfolio while balance and stability are achieved through a combination of low risk, moderate risk and risk free investments.
Mid Stage: Ten to fifteen years into their career, physicians are quickly moving up the earnings ladder supporting a growing family, a mortgage while harboring aspirations for a college education for their kids. Taxation becomes a bigger consideration in all of their investment decisions, so they do what they can to maximize their retirement contributions and invest for greater tax efficiency. Their retirement time horizon, while growing shorter, is still long enough to sustain market fluctuations in pursuit of higher returns. The shorter term goal of funding college expenses may warrant a slightly higher weighting towards low to moderate risk investments. As they progress through the mid stage, they will want to consider gradually changing their allocation towards zero to low risk in order to lock in portions of their portfolio gains while reducing fluctuations.
Late Stage: In the late stage of their practices, physicians are generating maximum cash flow and their debt is well under control if not eliminated all together. They have educated their children and are living in the empty nest of a large home in a desirable area. They have been making maximum contributions to their qualified retirement plan for some time, and they have built up other assets such as investment property and securities portfolios. The issue at this stage is whether they are achieving the maximum tax efficiency in their overall retirement plan. With their retirement time horizon down to less than 10 years, they should be concerned with reducing the fluctuation of their portfolio value while maintaining growth opportunities. It would be a good time to introduce high quality income investments such as corporate and government bonds for greater stability.
Retirement Stage: At retirement the main objective becomes generating enough income to live comfortably throughout your life expectancy, which for people turning age 65 today can be as long as 25 years. If planned properly, your retirement should be mortgage free and debt free. With the possible exception of helping your kids out financially, or spoiling your grandkids, all of your income can be directed at your life of leisure. Preserving your wealth to extend your retirement income and pass on a legacy requires an emphasis on guaranteed and income producing investments with a smaller allocation in growth and balanced investments to keep ahead of inflation.