One of my favorite financial quotes of all time comes from Carl Richards, CFP® professional, author, and financial planning industry thought leader. The quote comes from his book The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money, where Carl explains how our financial behavior and decisions can cause issues in our lives.
On the subject of outperforming the market and generating investment alpha, Carl writes simply, “We don’t beat the market. The market beats us.”
It’s a powerful lesson for all investors: The best way to “beat” the market is to simply avoid the market “beating” you. There’s no way around it, markets are volatile, and volatility can cause seemingly rational and long-term investors to make irrational and short-term decisions. The market can chew you up and spit you out if you aren’t ready for it.
For physicians that are looking to avoid getting “beat” by the market, allowing their investments to grow and compound for decades, here are five steps to consider:
Know Your Goals
The best place to start is with a thorough outline of your financial goals around the topic of investing. These goals are what you are working towards and are the entire reason you’re investing in the first place, and they should be front and center at all times.
One can have many different investment goals, from sending your kids to college, to early retirement, to creating a legacy for generations to come. Whatever your goals may be, they will direct your entire investment strategy from how aggressive you should be to how long you plan on being invested.
For those with joint finances planning with a spouse or partner, be sure to create shared goals and individual goals for your investments. This will ensure that both partners are on the same page and that you can keep each other accountable along the way.
As you identify the goals you are working towards, they will help to provide clarity around your investment decisions. For example, when faced with a particular investment option, ask yourself whether or not it aligns with your goals. Is it too risky? Is it not risky enough? Your goals will serve as a measuring stick, allowing you to identify what is a good fit and what is not.
Construct a Well-Balanced Portfolio
Often, constructing a well-balanced portfolio is an excellent job for a CFP® professional. They’ve been trained on the ins and outs of portfolio design and can help you match your investments to your goals. However, for those that are interested, here are some things to consider:
Diversification is important. To understand the importance of diversification, consider the following: Would you rather get on an elevator suspended by a single cable or an elevator suspended by thousands of cables? Boarding an elevator with a single cable is equivalent to placing all of your investments into a single stock and hoping for the best.
On the other hand, diversification is spreading your investments across many different stocks and various asset types. Thus, it spreads out your risk and subsequently creates a more favorable, risk-adjusted return. For most investors, purchasing mutual funds, index funds, and ETFs can be a great way to create a diversified portfolio quickly.
Your risk tolerance is unique to your situation. Risk tolerance is simply how much volatility you can withstand in your investment portfolio.
Generally, your specific risk tolerance combines your investment timeline with your (and, if applicable, your partner’s) financial anxiety levels. For example, imagine you are a long-term investor with a 30-year time horizon. Generally, you would be invested fairly aggressively, with a high proportion of stocks to bonds in your portfolio. However, if you and your partner are both highly financially anxious, and massive downswings would create significant stress causing you to sell off your investments. You should taper your risk down, adjusting your bond allocation higher while lowering your exposure to stocks.
Investors can have anywhere from 100/0 stocks to bonds allocation to 0/100 stocks to bonds allocation. Generally, investment portfolios range from 80/20 stocks to bonds to as low as 50/50 stocks to bonds.
Fees have an impact. When designing your investment portfolio, you cannot overlook the impact of fees. Most mutual funds, ETFs, and index funds have an expense ratio or a fee you are charged throughout the year for using the fund. These expense ratios can range from as high as 1% or more of assets to as low as 0, so evaluating the fees you’ll be paying for using a particular fund is crucial. Generally, you want to aim for low fees, but it can be worth paying a higher fee as long as you get a higher total return.
To illustrate the impact of fees, consider that over a 30-year time horizon, earning 7% annual returns and investing $1,000 per month, a 1% fee results in close to $185k in fees over that period.
Avoid the Financial Media
Unfortunately, fear and pessimism sell news, while an optimistic outlook falls flat. This is why a 1% drop in the stock market will be followed by headlines explaining why the market is doomed to fail, while a 1% increase in the market will largely go unnoticed by the financial media. As an investor, you can generally decrease the fear and anxiety you have about markets by avoiding the financial media altogether.
Keep a Long-Term Mindset
As a long-term investor, one of the best ways to avoid getting “beat” by the market is to maintain a long-term mindset. Think in 5 to 10-year timeframes rather than six months to a year. If you were to view a graph of the stock market as a whole, you would find that it marches relentlessly up and to the right over time. However, if you were to closely examine any one moment, you might find the market in absolute disarray, down 20% from its most recent high.
As a long-term investor, just remember: a zoomed-in view is bumpy, but zoomed-out is smooth and steady. Do what you can to stay zoomed out, trusting that the market will deliver consistent returns over long periods, supercharging your investment portfolio with the power of compounding.
Seek Average Returns for an Above-Average Period
As an investor, time is your greatest weapon. If you can achieve average returns for an above-average period, you will be rewarded. Unfortunately, many investors seek above-average returns but find that they can only sustain them for a below-average period as the volatility or uncertainty causes them to panic-sell, often locking in steep losses and interrupting the power of compounding.
For an investor looking to avoid being “beat” by the market, staying invested for long periods and earning average returns is a ticket to success. This allows the power of compounding to take hold, allowing you to earn returns on the returns you’ve already generated in your portfolio, leading to exponential growth over decades.
Idaho Medical Association Financial Services is Always Here to Help
If you’re interested in finding and working with a fiduciary CFP® professional to help outline your unique investment plan, complete with a custom investment portfolio to deliver your financial goals, then Idaho Medical Association Financial Services is available to help you achieve success.
Idaho Medical Association Financial Services is a leading financial planning institution specializing in wealth management for medical professionals in Idaho. At Idaho Medical Association Financial Services, we focus on helping our clients build long-term wealth with tax planning services in Boise while also maximizing the ability to enjoy the money they receive. Our team does this by pairing our clients with dedicated and reputable CFP® professionals.
For our team at Idaho Medical Association Financial Services, it’s about so much more than money. It’s about serving the community and helping professionals achieve freedom and flexibility in their lives. To learn more or schedule a no-cost consultation, visit our website at Idaho Medical Association Financial Services or call today.