Eric C. Jansen, ChFC

Try to think about what you ultimately want to do with your investment returns, within realistic limits.

Dentists’ mentality is about risks and outcomes. Whether the job at hand is preventive care, diagnosis, treatment or surgery, a dentists unerring focus is on the risks involved in what they do or don’t do.

Yet many dentists stray from this outcomes-based mentality when considering investment risk. An investor’s risk tolerance is a key factor in determining the asset allocations of an investment portfolio. If you take too much risk, by purchasing investments with high potential returns but a high potential downside as well, this could jeopardize goal achievement and keep you awake at night. On the other hand, if you take too little risk, you could end up forgoing potential returns and sacrificing progress toward reaching your investment goals. Thus, taking too much or too little risk can both lead to the same undesirable outcome.

So how do you assess your risk tolerance? The internet is awash in questionnaires that purport to help you do this. If you have a financial advisor, chances are you’ve filled out such a questionnaire at the outset of the engagement. These questionnaires typically ask how you’d feel if investment markets went down by x, y and z percentages — so you pondered each prospect and gave your best answer.

Unfortunately, this method may not get at your true risk tolerance because it’s too abstract, too theoretical. A more effective way is to take the same approach you do with your patients, one that’s based on outcomes.

By this, I mean real outcomes, like your patients’ health as a result of your diagnosis and treatment. The parallel for your financial outcomes is whether you’re able to achieve the life goals you’re seeking to fund through your portfolio’s returns—and how you’d feel about falling short of these goals.

Your portfolio’s risk level is determined by the potential risk and returns of specific investments chosen for it. As the guiding parameter here should be your risk tolerance, getting the right fit may mean lower returns for the fearful and potentially higher returns for the truly brave. It’s all about how much risk you can handle emotionally. The whole idea is to build wealth 

 by aligning your portfolio with your true emotional capacity for risk.

An outcomes-based approach considers how you’d feel if you failed to achieve key goals. Just about everyone (except the obscenely wealthy) invests for retirement. The pertinent issue for most investors is: What kind of lifestyle will you have during retirement? Let’s say you plan to keep your home and buy another home in a different region or country. Let’s also say you plan to keep your country club membership and take 5 or 6 trips abroad every year. What if your investments to fund these goals divebombed in a market crash and rebounded with excruciating slowness? How would you feel if this meant you couldn’t afford the new home? The trips abroad? The club membership? These outcomes would probably have real emotional consequences.

Retirement planning may not be your only goal for investing. If you’re investing for your kids’ college educations, how would you feel if you could only afford to send them to a state university instead of the private schools you’d planned on? What if you couldn’t buy the summer home you’re counting on acquiring while you’re still practicing? Assuming you have such interim goals covered, what if market events meant that you couldn’t leave your kids the legacy you’d planned to?

Understand that such disappointments can come either because you took too much risk or not enough. Those with portfolio risk levels lower than their actual tolerance may still achieve some of their goals, but they could be forgoing returns (needlessly, as they could handle the associated risks) that would take care of others. For these people, the issue isn’t emotional stress; it’s not getting where they realistically planned to go.

So instead of pouring over questionnaires, try doing some hard thinking about what you ultimately want to do with your investment returns, within realistic limits, and how you’d feel if you failed to real these goals. This won’t just indicate how much risk you can tolerate in your portfolio. It will also tell you a lot about yourself.

Eric C. Jansen, a Chartered Financial Consultant, is the founder, president and chief investment officer of Westborough, Mass.-based 

, which provides fee-only financial planning and investment management services for high-net-worth clients nationwide.

The information presented is not intended as financial advice, and you are encouraged to seek such advice from your financial advisor. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Keep in mind that investing involves risk. The value of your investment will fluctuate over time, and you may gain or lose money. Diversification/asset allocation does not ensure a profit or guarantee against loss. Registered representative/securities and investment advisory services offered through Signator Investors, Inc. Member FINRA, SIPC, and Registered Investment Advisor. AspenCross Wealth Management is independent of Signator.

Articles

In order to assess your true risk tolerance, take the same approach you do with your patients, one that's based on outcomes.

A Practical Approach to Assessing Investment Risk Tolerance

Sometimes a classic perceived as obsolete just needs some freshening up to be viable again. This is true of the buy-and-hold strategy of stock investing.

For decades, buy and hold was a religion for professional and individual investors alike. The bible of this religion was 

, first published in 1934 by Benjamin Graham and David L. Dodd, and in several revised editions since.  

The idea was that by assembling a highly diversified stock portfolio and leaving it alone for years — even decades — investors could build wealth gradually, experiencing lower volatility along the way. The method required the discipline to stick to an investment plan and resist the temptation of flavor-of-the-month stocks. It was an ideal investing model for busy dentists, who lack the time to monitor equity markets and engage in frequent trading.

Buy and hold’s venerable image took a hit in the financial crisis of 2008-2009, when many investors lost significant portfolio value, erasing much or all of their gains of the preceding 10 years — a period that became known as the lost decade. As a result, the strategy fell into disfavor.  

Yet, buy-and-hold investing is still highly viable, but in a new form. We’ll call it the new, or modified, buy and hold. Like the old buy and hold, the new version relies on purchasing large, established, stable companies, which tend to pay regular dividends. Dividend investing is itself a classic investing technique that, for generations has helped provide a good way for investors to receive passive and generally increasing income from their stock holdings.

Like your father’s buy and hold, the new form of the strategy relies on a diversified portfolio — a core group — of companies for the long haul. These are stocks in sectors that historically have done well at all points in the economic cycle. Core holdings are the passive portion of a portfolio that generally includes stocks from companies that have consistently increased dividend payments over 15, 20 or even 25 years plus, so they’re meant to be held long term. The goal is to have the core portion of the portfolio composed of slow and steady growers that will likely provide stability in both good and bad markets.  

Stocks serving as core holdings are typically from perennially stable sectors of the market, including: consumer staples, such as food and health aids (people eat and brush their teeth in good economies and bad); utilities (keeping the lights on is a necessity); health care, another necessity; and telecommunications (in a culture where smartphones have become essential).

Though well-chosen core holdings can probably be kept for 10 to 15 years or more, practitioners of this method shouldn’t have blind faith in them. Instead, they should stay vigilant and monitor not only performance but circumstances and events that might affect a stock’s longer term prospects, such as fundamental changes in the industry or competitive landscape.

The second investment category for buy-and-hold portfolio is referred to as satellite holdings, so called because they tend to revolve around the core group. These stocks are the the active portion of the portfolio, and tend to be held for shorter periods — generally for one to five years.

Satellite holdings are more strategic. They’re traded more frequently than core holdings to take advantage of economic cycles or company- and industry-specific trends and are designed to potentially boost the overall returns of the portfolio. 

Sectors that are typically candidates for satellite holdings include: consumer discretionary, or non-essential consumer goods and services that people can forgo when they feel threatened by an economic slowdown and that tend to rise during times of increasing consumer confidence triggered by positive economic news; energy companies, which rise or fall with oil and gas prices; industrials, dominated by goods used in construction and manufacturing; materials (chemical companies, mining companies), buoyed by construction growth in upward economic times; and financials, whose financial services firms and banks may benefit from a rising interest rate environment in an expanding economy.

Satellite stocks tend to be more volatile, but volatility can be harnessed for potentially superior returns if you buy and sell at the right times, based on the economic cycle and how these companies’ will likely be affected by it.

Unlike your father’s buy-and-hold model, the point of the new version is to create an investment strategy that attempts to minimize large losses while capitalizing on market opportunities. In investing, slow and steady wins the race.

The new buy and hold strategy can hold big advantages for self-employed dentists, who are largely reliant on their own resources for retirement income, as it may be used for both pre- and post-retirement retirement portfolios. Retirees can continue to collect dividend payments to help fund their retirement income needs, and they can benefit from potential share-price appreciation.

Eric C. Jansen, ChFC, is the founder, president and chief investment officer of Wesborough, Mass.-based 

, which provides fee-only retirement-income planning and investment-management services for high net worth clients nationwide.  

The information presented is not intended as financial advice and you are encouraged to seek such advice from your financial advisor. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Keep in mind investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money. Diversification/Asset Allocation does not ensure a profit or gurantee against loss. Registered Representative/Securities and Investment Advisory Services offered through Signator Investors, Inc. Member FINRA, SIPC, a Registered Investment Advisor. AWM is independent of Signator. One Technology Drive, Westborough, MA  01581. 026-20170120-345489

What's old is new again. Buy-and-hold investing is still applicable for funding your retirement today, just with a few adjustments.