Dentists spend much of their professional lives minimizing risk â€“ a feared word in many aspects of life. But as any thrill-seeker will tell you, personal risk isn't all bad.
Dentists spend much of their professional lives minimizing risk — a feared word in many aspects of life. But as any thrill-seeker will tell you, personal risk isn’t all bad. With investing, too, risk goes hand in hand with return. Generally speaking, the bigger the risk of an investment, the bigger the potential return.
No investment is entirely without risk, although some investments—like government bonds, certificates of deposit, and money market funds—come close. Even those vehicles, many of which are considered savings options as opposed to investment options, bring a different kind of risk: inflationary risk. Because low-risk investments earn only modest returns, inflation can erode the purchasing power of the funds invested. Your investment amount is unlikely to decrease, but the value of that investment may.
Your role as a dentist often involves avoiding or limiting risk, but as an investor, risk is not your enemy. Here are some ways to manage that risk and use it to your advantage in your investments.
1. Set—and stick to—your investment goals. Once you’ve established your investment goals, you can map out a strategy and a timeframe to get you there. This will involve knowing your risk tolerance and your investment window. Work with an advisor or your spouse to create a detailed investment plan. Actually write down your goals, your investment objectives, and your plan for meeting those objectives.
2. Understand the relationship between risk and time. If you’re just out of dental school or just starting your own practice, your available investment funds may not be limitless, but your risk tolerance should be on the high side. Why? Because you have many more years in your investment career to overcome any short-term losses that result from market fluctuation. The number of years you have until the finish line for your investment goal should and will dictate how much risk you can take and how much you can bear. It will also determine, to some extent, the investing vehicles you’ll pursue. If, for example, your investment goal is for your freshman in high school to be able to afford college out of state, you may think you need a big return. But you also won’t be able to lose a big chunk of that investment in a short-term market downturn. If you have a longer time window, you’ll be able to bear—and withstand—short-term market volatility.
None of these financial decisions happen in a vacuum, which is why the first point listed above has that No. 1 next to it. Your goals will need to be adjusted over time as well.
3. Diversify and adjust. One of the best ways to mitigate risk is to have balance in your portfolio. This doesn’t just mean investing in growth stocks alongside blue-chip stocks, although that is part of diversification. It may mean investing in completely different kinds of investments, such as a portion in stocks, a portion in bonds, some in mutual funds, and some in real assets such as real estate.
Once you’ve set up your portfolio, the work isn’t finished. As your life changes, your goals and strategies are likely to change as well. The birth of a child, the death of a parent, growth or loss in your practice, or a divorce are just some of the life events that may necessitate a fresh look at your portfolio and may mean a different strategy with a different level of risk.
As an investor, risk isn’t your enemy. Inertia is.