While health, healthy eating, healthy living, etc.
are always topics of interest to most everyone; clearly it is hard for any of us today to not have an opinion on the topic of healthcare.
Now of course healthcare, and the system that provides it to millions of Americans will have a significant, ever growing impact on a society that at least 16% of its population will be 65 or older by the year 2020.
Though clearly there are many areas of the debate that have been poorly discussed, over emphasized, or barely mentioned at any meaningful length, there is one area of healthcare I want to help you examine this month.
Do you have a healthy investment portfolio? Whether you ask a doctor or nurse, a pharmacist or herbalist, or even an executive at a pharmaceutical or insurance company, all would agree that prevention, proper diagnosis and early treatment are essential in maintaining good health.
Prevention.
Regular examinations and review are the bedrock of good healthcare whether it is your dentist, gynecologist, or primary care physician and the same is true for maintaining the health of your investments.
When working with your medical professional, the personal goal for you is essentially live long and live well (stay healthy).
While the specific approach that you take to pursue personal health goals is based on your pre-determined needs, health history, and personality, your progress can be measured and your strategy updated as necessary.
This same customized, goal-oriented methodology should also apply to the design, construction, and maintenance of your investment portfolio, as it is an indicator of your long-term financial health.
Diagnose Your Needs.
Why are you investing? What do you hope to achieve? How quickly do you want to reach your goal? How much risk are you willing to take? How well would you sleep tonight if your portfolio dropped 10% today? Or as those of us that have fresh memories of 2001 and 2008 can recall how we slept as our portfolios dropped 25% in a month.
Importantly when I use the word "risk" I always want you to think in terms of how much you are willing to loose in the short term (and at all) to achieve your long term objectives.
Does your spouse have investments? Do they complement yours? The answers to all of these questions and more should come together to help you make decisions about the types of investments that you should own and the percentage of your portfolio that each investment should represent.
The composition that you decide upon is known, in investment terms, as your "asset allocation.
" The Most Important Decision You Can Make.
A Nobel Prize-winning study by Dr.
Harry Markowitz published in 1952 recognized that asset allocation has a greater impact on portfolio return than any other decision an investor can make.
A portfolio composed of aggressive investments exposes investors to greater risk, but should theoretically provide higher returns.
Conversely, a conservative portfolio offers less risk, but the tradeoff for safety is likely to be lower returns.
The key then is to find an asset allocation that strikes a balance between the statistical likelihood of a given return and your willingness to accept the associated level of risk.
It's not as easy as it sounds, though the explanation is quite simple, and moreover Dr.
Markowitz's study and related work were based on a time period when there were far less individual investors from all over the world participating in the markets.
Diversification and strategic asset allocation do not guarantee a profit nor protect against a loss in declining markets.
Thus it is important from my perspective that you consider statistical models as important guides for examining the data that you use to make your decisions, as they are neither perfect nor exact science, any more than our doctors can be a 100% correct with all of their treatments.
Asset Allocation Is as Complex as Life Itself.
Determining an appropriate asset allocation for you is not a one-time decision it is an ongoing campaign.
Just as the proper actions for you to maintain your physical health as a 20 something will be different then the actions needed when you are a 60 something.
Remember too, that most of us who become 50 something's in this century are likely to live to be 80 something's or older.
Debts, salaries, family concerns, age, and lifestyle decisions all play a role.
While many have seen so-called "asset allocation quizzes" (answer a handful of questions, get an asset allocation recommendation), these simple, cookie-cutter solutions alone don't provide an adequate replacement for a well-constructed financial strategy, where your asset allocation changes over time in tandem with your needs, means, and priorities.
Your financial needs (like your body) over time require more personal attention and care, so with a busy lifestyle, and dynamic changing goals a one-size-fits-all approach, will not adequately address your investment portfolio health needs.
Regardless of the final healthcare bill, to maintain proper financial health find a good practitioner that you are comfortable with and get regular examinations/reviews, diagnosis/analysis, and a strategy/treatment that works for you.