That physicians tend to be risk-adverse and cautious in their approach to investing can work to their advantage. But the same approach, when applied through several market cycles consisting of both market advances and market declines, is less likely to generate the long term returns necessary to build the necessary capital to sustain a lifetime income at retirement. The biggest physician investing mistake is to invest too conservatively.
Most physicians are not afforded the same luxury of time that others have. They have less time in the workforce and underfunded pensions or retirement plans in the beginning. They have less time to allow for the time-value-of-money to work for them, and they must be able to accumulate more capital in order to sustaining a high quality of life over a lifetime. With the possibility of living 25 plus years in retirement, the biggest risk we all face is the loss of purchasing power due to inflation.
The chart below illustrates the erosion of purchasing power on earnings generated from an investment in 10-year Treasury Bonds. The decade of 2000 – 2009 had one of the lowest rates of inflation, as measured by the Consumer Price Index, in the last 30 years, yet purchasing power on the earned income was reduced by 25 percent. It is important to note that the CPI, which is the official government measure of inflation, doesn’t include food and gas prices which have increased at rate three times the CPI over the last couple of years. If food and gas prices were included in the CPI, the rate of inflation would be closer to 9 percent, and, at that rate, the net purchasing power of earnings in ten years would be less than the initial investment, meaning you would have lost money.
Source: National Association of Realtors, Economistsoutlookblog.realtor.org
Investing your money in safe or guaranteed instruments may provide peace-of-mind that you won’t lose any money due to market fluctuations; however, each day that your returns fail to exceed the rate of inflation, you are, in effect, losing money, and that loss becomes more pronounced over time.
There are ways to invest conservatively that will minimize market risk, reduce portfolio value volatility and overcome the risk of inflation. The key is in knowing what your financial objective is in real terms, factoring in the true cost-of-living and taxation, in order to know the minimum rate of return you need to generate, and, therefore, the level of risk you need to incur. With an investment strategy tailored to your specific needs, you need not take any more risk than is absolutely necessary to achieve your objective. And even with that, a well-conceived investment strategy will incorporate methods to mitigate most of the risk. Your job is to stay focused on your objective.