Should Physicians Get Back Into The Market? May 2003  By: Marc Singer, MBA, CFP In the last 3 years, we have witnessed the most turbulent market conditions of the last 70 years.  Many physicians have lost 30% to 50% of their portfolio investment values! This could not have come at a worse time, considering that physicians are also facing lower reimbursements and rising malpractice insurance expenses in a slowed economy. So what are the investment options today? There are several broad categories to invest in. These are Money Markets, Bonds, Real Estate and Equities (Stocks).   Money Markets now pay 1% interest. With 40% taxes and 2.5% inflation, this is a guaranteed loss of 2% per year.  Money markets can be used as a short term holding place, but are not a long-term investment vehicle. Bonds that are mid- to long-term pay 4% - 5%. While this seems like a reasonable return, bond values are very vulnerable to rising interest rates. With rates expected to increase as the economy recovers, Corporate bonds have a potentially large risk. High Yield and Foreign bonds pay much higher returns (6% - 9%), and actually have lower exposure to rising interest rates. Conservative investors should have bonds as part of their portfolios. Real Estate has certainly been a winning investment over the last 3 years. Home values have risen by up to 60%. What could be wrong with this investment strategy?  Real Estate is affected by two factors: demand and interest rates. As rates increase, buying a high-end home becomes less affordable. In addition, many people, out of frustration, have upgraded homes with their money instead of investing in a falling market. The philosophy was that you might as well enjoy it rather than lose it. As the stock market recovers, funds will be diverted from real estate and flow back into equities, thus reducing real estate demand. "Most people wait for the market to go up so they can buy at the highs." Equities - The market indices have been slowly increasing for 7 months. The actual low of the market was October 2002 when the DOW was at 7,197. It is now at 8,726, a 21% increase.  Likewise, the NASDAQ has gone from 1,108 to 1,541, a 39% increase. Most physicians find it difficult to believe that the situation might be getting better. This is not to say that one should expect the astronomical returns of the good old days. However, it is reasonable to assume the return on equities will be in the 7% - 9% range for the next several years, which far exceeds the yields of other investment categories. Emotions play a part and unfortunately, many individuals invest in the market based on how they "feel". When the market is high, they "feel" optimistic and buy. On the contrary, when the market is low, as it is today, they "feel" pessimistic and stay in money markets. Many will wait until things get "better". Put another way, most people wait for the market to go up so they can buy at the highs again. Before rushing out to buy your favorite technology stocks, it is critical that a game plan be in place. Going forward, the best method for reducing risk in a portfolio is by using asset allocation. This means a portfolio should have a well-diversified mix of Growth and Value equity funds, as well as Large, Mid and Small Cap funds. International equities provide an additional level of diversification and opportunity. Over the last 3 years, a properly diversified portfolio that used asset allocation should have fallen only 7% - 15% in value. This provided a significant buffer against the trauma of the overall market. For the next several months, we anticipate that investment in Small Cap Growth funds will be the leading sector of the market, providing the highest returns as a recovery commences. Needless to say, professional management of your portfolio can be a significant edge in taking advantage of future market returns. Singer Xenos does not provide legal advice. Please consult with your own legal counsel.