Foolish Investment Strategies: Stocks Have No Risk

There are only a few right ways to manage an investment portfolio and many more wrong ways to do so. I’ve shown you 2 examples of foolish investment strategies physicians already use. (Read them here and here.)

Up next is another real example I recently encountered:

A physician in his mid-50s with a sizable investment portfolio of $2 million was getting nervous about handling his own investments. He had seen advertisements in popular financial magazines and on TV from a large private investment advisory firm that managed tens of billions of dollars for thousands of investors. The firm’s pitch was that stocks always go up in the long run. No matter what the client’s age, they invested everyone’s money 100% in stocks—all big name US companies.

The firm showed the long-term returns of US stocks over the past 100 years, and it looks like a steady ride up. Perhaps your financial advisor has shown you a similar chart.

And, of course, there was the usual claim that the firm’s proprietary methods outperform the US stock market. So the entire portfolio was invested in 30 individual stocks.

I see multiple problems with this:

1. While stocks have gone up in the long run, there is no guarantee that they will do so in the timeframe that you need the money. For example, from 2000 to 2009, the so-called “lost decade” of investing, US stocks lost 10% of their value.

In 2008 a portfolio of 100% US stocks lost 37%—or close to $750,000 on a $2 million portfolio. A retired physician who is invested 100% in stocks, does not have employment income, and is withdrawing money from his portfolio would have suffered a devastating loss.

2. How likely is it that this physician would stay invested when the value of the portfolio dropped over 50% during the financial crisis of 2007 to 2009? Data on investor behavior shows that few investors have a stomach of steel when the market crashes. Even if you “know” stocks go up in the long run, when it’s your hard earned money at stake, emotions rule over reason.

3. There are around 15,000 publicly traded stocks in the world. How can we be so sure that the 30 stocks this investment firm selected will outperform the other 14,970? It’s not possible for anyone to research all 15,000 publicly traded stocks on the planet. And even if you did, the market is so efficient that you don’t have an advantage anyway.

Many financial advisors are guilty of luring investors—including physicians—with high investment returns and low risk. Sorry, the market doesn’t work that way.