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How to Better Understand Physician and Investment Behavior

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How to Better
Understand Physician
and Investment
Behavior
BY
W
E’VE OBSERVED A GROWING sense
of angst and frustration among investors
who feel their portfolios may not be progressing toward their retirement goals. Media stories
compound the situation by focusing on how difficult
today’s investment cliProcrastination is a painful friend
mate is for individuals.1
However, at some point
to all of us; make certain he is not
investors need to leave
the rhetoric behind and
manipulating and destroying your
focus on strategies that
can help them move forfinancial future and peace.
ward. To help jump-start
this process, we’ll cover
a few areas that may
improve current perceptions and hopefully improve
your future results. So let’s consider this:
В®
В®
wasn’t saving for retirement, it was managing a client’s interest in finding the next hot Internet stock
so she could retire by age 40. Unfortunately, that
didn’t work out too well for most of investors, as the
tech boom unofficially came to an end on March 10,
2000. That’s when the tech-heavy NASDAQ topped
out at 5132. Two weeks later, the far broader S&P
500 index peaked at 1527.
Fortunately, UMA Financial Services chose to
avoid the fluster of behavior and the NASDAQ has
yet to recover, but the S&P 500 eventually set new
highs. The S&P 500 peaked in October 2007, but
soon retreated and has only recently moved above
the March 2000 highs, sitting at 1585 as I write this
article. Given the current price level, it may seem
that the first 13 years of the 21st century have not
been kind to U.S. equity investors.
INVESTMENT BEHAVIOR | continued on page 18
17
June • July 2013
Many fondly remember the roaring returns of
the 1990s tech era. I had just started my professional
career as a financial advisor where the challenge
PATRICK J. BRADY, CRPS , AIF
INVESTMENT BEHAVIOR | continued from page 17
Fortunately, most investors don’t hold
100% U.S. equity portfolios,2 but most
likely have a globally diversified mix
of stocks, bonds, real estate investment
trusts, commodities and cash. Despite the
recent resurgence of the S&P 500, prudent
diversification can help investors survive,
and potentially gain ground, during less
than ideal market conditions.
The included growth chart below
shows that while U.S. stocks have not
delivered strong returns to date (albeit
positive due to dividend reinvestment),
a balanced portfolio has doubled since
2000. That’s a return of roughly 5.8% per
year. This is not the same experience as
the high-flying 1990s, but it’s better than
the perception held by many investors
that the last 10, 12 or 13 years represent a
lost decade.3,4
Lessons from the past
As financial advisors, one invaluable
skill we employ is to remind physicians
that market leadership is constantly
changing. Predicting future market outcomes is difficult at best, impossible at
worst. Despite tendencies to lean heavily
on past results, we should never rely solely
on history to project future returns. However, we can learn valuable lessons from
the past to help steer our decisions. One
invaluable lesson is that market leadership is constantly changing. By the time
a change is recognized by the investing
public, it is often too late because the market has shifted again.
The chart on page 20 helps illustrate
the dynamic nature of market leadership.
It shows the calendar-year returns of different asset classes commonly found in
today’s diversified portfolios.
You can see that leaders change from
year to year and decade to decade. Buying
what worked yesterday is no guarantee
that it will continue working. Even buying what worked over the last 10 years is
no guarantee of future success. A great
example is emerging markets equity
(EM). Emerging markets were the worst
performing asset class the decade before
2003. They were by far the best performing asset class for the next 10 years.
However, that 10-year ride was very
bumpy, with EM finishing both “first”
and “last” in multiple years.
Trying to predict tomorrow’s leader
is a losing game. We believe it’s best to
hold a globally diversified portfolio with a
mix of assets that goes beyond traditional
U.S. stocks and bonds. If you spend your
time truly understanding your investment
goals, time horizon and risk tolerance,
there’s a good chance you could be way
ahead of the average investor.
Tomorrow’s Leader
Physicians have a reputation for
chasing performance. Left to our own devices, we humans tend to gravitate toward
investments that have recently done well.
Economists and academics who study
this sort of behavior call it recency bias,
and it can be very self-destructive. Given
the cyclical nature of the markets, recency
bias can lead investors to buy high and
sell low, which is the exact opposite of
what you want to do.
Unfortunately, recent research indicates this kind of behavior is alive and
well.5 In January 2013, for instance, retail
investors put a record $39.3 billion into
U.S. equity mutual funds and ETFs. The
previous record was $34.6 billion set in
February 2000, one month before the tech
bubble burst.
Need more convincing? It took the
S&P 500 until 2007 to regain its 2000
highs, but 2007 was the last year that
investors were net buyers of U.S. stock
funds. It’s worth mentioning that 2007
was the same year stocks began to slide
toward new lows. What’s more, retail
investors have been net sellers of stocks
since that 2007 peak, despite the 120%plus return off the March 2009 low for the
S&P500.6
There’s also new Morningstar research
that covers the differences between published mutual fund returns and actual
returns that average investors in those
funds experienced. The pattern isn’t surprising. Again, investors tend to arrive late
to the party, buying hot funds after they’ve
already posted strong performance. Over a
10-year period ending in 2012, the average
investor returns lagged published fund returns by 0.95% annually.7
There’s an industry-wide view that
market returns may be somewhat muted
for the foreseeable future given our current economic state (high government
debt levels, low GDP growth, global deleveraging, low interest rates). If this view
is correct, combining modest returns with
performance-chasing won’t likely be a
winning combination.
INVESTMENT BEHAVIOR
| continued on page 20
18
www.utahmed.org
INVESTMENT BEHAVIOR | continued from page 18
So what can an investor do? While there are no easy answers, having a plan and exercising discipline are good starting
points. We believe you should work with your financial advisor
to create a plan based on your investment goals. A competent
advisor can help you stay focused on what’s really important to
your long-term financial success.
Your advisor can also help you maintain the discipline to
stick with your plan. Here it’s important to design a plan that allows you to benefit from the good times, but also to ride out the
difficult ones. Nothing has the potential to derail long-term success like abandoning a plan at the bottom of the market.
What’s more, you need to have the discipline to review your
plan annually. Reviews can also be triggered by life events
(marriage, children, college, etc), but generally not by market movements. Finally, you need the discipline to stick with
your asset allocation (the mix of stocks, bonds and other assets
you originally agreed to with your advisor). One way to stick
with the asset allocation plan is to have your advisor help you
construct an Investment Policy Statement (IPS). This statement provides your general investment goals and objectives and
describes the strategies that the financial advisor, acting as a
fiduciary, should employ to meet these objectives. Specific information on matters such as asset allocation, risk tolerance, and
liquidity requirements would also be included in an IPS. This
all goes back to the unpredictable nature of market leaders we
discussed earlier.
Always remember that markets run in cycles, and at times
these cycles are long and challenging to your psyche. Planning
and discipline can really help during those times. Even though
they cannot guarantee success, planning and discipline almost
always work better than chasing yesterday’s results.
For 13 years I have participated in writing articles for the
UMA Bulletin. I have always encouraged physicians to meet
with a qualified, experienced financial advisor. If you haven’t
met recently, pick up the phone and call your advisor. Schedule
an appointment. Learn how the recent market movements have
possibly improved your portfolio. Also, is your current asset
allocation correct and prudent for your advancement in both career and age? Life moves forward and the years you are able to
save for retirement are dwindling away quickly. Procrastination
is a painful friend to all of us; make certain he is not manipulating and destroying your financial future and peace. Q
1
The Wall Street Journal, 12/10/12, For Many Financial Advisers, Stocks Become a Hard Sell
2
http://www.aaii.com/investment- education/index.php/category/aaii- survey/
3
http://blogs.wsj.com/ totalreturn/2012/11/07/why-buy- and-hold-feels-dead/
4
http://blogs.marketwatch.com/ encore/2013/03/05/lost-decade- not-over-for-401ks-iras/
5
http://bucks.blogs.nytimes. com/2012/02/13/tomorrows-market- probably-wont-lookanything-like- today/
6
http://finance.fortune.cnn. com/2013/02/05/mutual-funds- individual-investors/
7
http://news.morningstar.com/ articlenet/article.aspx?id=582626
10
Years
Ending
12/02*
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
10
Years
Ending
12/12*
REITS
10.5%
EM
55.6%
REITS
31.6%
EM
32.6%
Infrast
38.6%
EM
40.9%
US Bonds
5.3%
EM
83.7%
REITS
27.9%
REITS
8.3%
REITS
19.7%
EM
16.4%
US Eq
8.9%
Ex-US
40.2%
Infrast
29.6%
Commod
21.4%
REITS
35.1%
Infrast
22.4%
Balanced
-24.9%
Glb Bond
60.7%
EM
21.7%
US Bonds
7.8%
Glb Bond
19.3%
REITS
11.8%
US Bonds
7.5%
Infrast
39.0%
EM
24.1%
Ex-US
14.3%
EM
33.4%
Commod
16.2%
Glb Bond
-27.1%
Ex-US
35.6%
US Eq
16.9%
Glb Bond
3.2%
EM
18.8%
Infrast
11.6%
Balanced
7.5%
REITS
37.1%
Ex-US
20.6%
Infrast
14.2%
Ex-US
25.9%
Ex-US
13.2%
Commod
-35.7%
Global Eq
31.5%
Commod
16.8%
US Eq
1.0%
Global Eq
16.8%
Glb Bond
11.0%
Commod
6.7%
Global Eq
33.8%
Global Eq
15.1%
REITS
12.2%
Global Eq
20.1%
Global Eq
9.2%
US Eq
-37.3%
US Eq
28.3%
Glb Bond
15.4%
Balanced
0.5%
Ex-US
16.7%
Ex-US
8.9%
Global Eq
6.7%
US Eq
31.1%
Balanced
12.4%
Global Eq
9.6%
US Eq
15.7%
Balanced
8.8%
REITS
-37.7%
REITS
28.0%
Global Eq
12.4%
Infrast
-1.3%
US Eq
16.4%
Balanced
8.3%
Glb Bond
4.3%
Glb Bond
28.1%
US Eq
11.9%
Balanced
8.5%
Balanced
15.3%
US Bonds
7.0%
Infrast
-39.5%
Balanced
24.4%
Balanced
12.2%
Global Eq
-5.7%
Balanced
12.1%
Global Eq
8.3%
Ex-US
5.8%
Commod
23.9%
Glb Bond
11.3%
US Eq
6.1%
Glb Bond
12.0%
US Eq
5.1%
Global Eq
-41.2%
Infrast
24.0%
Ex-US
9.6%
Ex-US
-12.4%
Infrast
11.9%
US Eq
7.7%
EM
-1.3%
Balanced
23.1%
Commod
19.2%
Glb Bond
3.3%
US Bonds
4.3%
Glb Bond
1.7%
Ex-US
-44.2%
Commod
18.9%
US Bonds
6.5%
Commod
-13.3%
US Bonds
4.2%
US Bonds
5.2%
Infrast
N/A
US Bonds
4.1%
US Bonds
4.3%
US Bonds
2.4%
Commod
2.1%
REITS
-15.7%
EM
-55.5%
US Bonds
5.9%
Infrast
4.8%
EM
-19.4%
Commod
-1.0%
Commod
4.1%
*Annualized return
Market Indexes: U.S. Eq – Russell 3000® Index; Global Eq – Russell Global Index; Ex-U.S. – Russell Global ex-U.S. Index; EM – Russell Emerging Markets Index; U.S. Bonds – Barclays Aggregate Index; REITS – FTSE
NAREIT All Equity Index; Commodities – DJ UBS Commodity Index; Global Bonds – BofA Merrill Lynch Global High Yield Index; Infrastructure – S&P Global Infrastructure Index; Balanced – 50% Russell Global/40% BC
Agg/5% Russell EM/5% FTSE NAREIT
Indexes are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance and are not indicative of any specific investment.
20
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