Look outside traditional routes to find lucrative avenues for growth.
In the previous installment of this column, we looked at how physicians should diversify investments to mitigate potential losses in one particular sector. In this follow-up article, we explore how investments outside the stocks-and-bonds formula may benefit young retina surgeons seeking to maximize their long-term returns.
— Jason M. O’Dell, MS, CWM, and Andrew Taylor, CFP
According to a 2016 World Wealth Report from Capgemini Financial Services, the investment mix of the world’s high-net-worth individuals is estimated to include a 15% allocation to alternative investments.1 A key benefit of alternative investments is their low correlation to broad equity markets. Nontraded alternative investments can play a variety of roles in a physician’s portfolio.
In the past, certain categories of alternative investments have successfully served as a hedges in client portfolios. In 2008, when multiple stock indices declined by nearly 50% from their peak values, most managed futures strategies nonetheless offered positive returns. Past performance does not provide assurance of future success. Still, a hedging technique that helped minimize damage during the worst financial crisis in recent memory certainly warrants consideration. Master limited partnerships, business development companies, long/short strategies, and certain hedge funds are other examples of vehicles that have demonstrated low correlation to traditional stocks and bonds.
For doctors who cannot build or participate in surgery centers or other profitable health care investments, a popular investment strategy is to take advantage of other investment programs that are not traded on public exchanges, such as nontraded real estate investment trusts (REITs) and business development companies. As with any investment, there are pros and cons for each type of offering.
Given recent market conditions, many physician-investors have been attracted to nontraded investment programs because they offer a sense of stability. Most of these programs are available to investors at a flat price—for example, $10 per share—during the offering period. An advantage of these programs is that their performance is not correlated with any particular market or index, making them an additional form of diversification. Holding noncorrelated offerings may help reduce the volatility rollercoaster of a traditional portfolio. They should be an additional allocation in your portfolio, not a substitute for proper allocation.
Private investments generally offer a premium in exchange for their lack of liquidity. If due diligence is performed, an astute investor can identify these opportunities, and his or her investment will be compensated in the form of enhanced yield. Alternative investments such as these provide physician-investors access to strategies not available to retail investors and to investments that have traditionally been reserved for large endowments and institutions.
WORDS OF CAUTION
It is important to note that one of the advantages of a nontraded offering is also a disadvantage. That is, there is typically no market for shares of these programs. As an investor, you are expected to hang on to the security for the life of the investment, which commonly ranges from 4 to 10 years. This makes your investment illiquid.
Also, these programs are not without risk. Your hedge fund could use a high degree of leverage, have a concentrated strategy, and actually add to the volatility of your larger portfolio. Like any other investment class, some offerings are more aggressive than others, and none make any guarantee about future performance. Physician-investors should always make sure they understand the terms of investment and the ancillary costs and fees associated with an investment, as well as how it fits into their portfolios, before committing to a strategy.
1. World Wealth Report 2016. Capgemini. www.worldwealthreport.com/download. Accessed June 14, 2017.
From the BMC Archive
Thinking Outside the Stocks (and Bonds)
By Jason M. O’Dell, MS, CWM, and Andrew Taylor, CFP New Retina MD Volume 8, Issue 1
Jason M. O’Dell, MS, CWM
• principal, OJM Group; author, For Doctors Only: A Guide to Working Less & Building More
• 1-877-656-4362; firstname.lastname@example.org
Andrew Taylor, CFP
• wealth advisor, OJM Group
For a free hard copy of Wealth Management Made Simple or For Doctors Only: A Guide to Working Less and Building More, call 1-877-656-4362. Or visit ojmbookstore.com and enter promotional code NEWRET18 for a free e-book download of these books for your Kindle or iPad.