Doctors gain from the advantages of both active and passive investing

October 25, 2017

The debate between active investment strategies, meaning hands-on investing with a portfolio manager’s help to beat the market, and passive investment, holding onto securities through the market’s ups and downs, is unlikely to subside any time soon.

A medical professional’s wealth-building strategies must include layers of personal liability coverage, and should also include disability coverage. The specialized nature of doctors’ work justifies their caution: They need to protect themselves from anything that challenges their ability to work. But should that caution extend to their investment strategies? The debate between active investment strategies, meaning hands-on investing with a portfolio manager’s help to beat the market, and passive investment, holding onto securities through the market’s ups and downs, is unlikely to subside any time soon. A wise physician will employ both strategies. By diversifying, they enjoy the advantages of both and mitigate the risks.

Passive investing takes nerves of steel

Doctors tend to prefer passive investing, and with good reason: A do-it-yourself investor who doesn’t have much free time to conduct market research can put their money into index funds and, for the most part, accumulate wealth. But passive investment won’t work if a doctor doesn’t stick to the plan. The biggest reason passive investors underperform is selling in downturns. A doctor should know, now, what they would do if the stock market declines by 5%, 10%, 20% or even 40%. If they plan now, they won’t panic later.

Active investing creates opportunities

Doctors who pursue active investment strategies will fi nd themselves with a plethora of choices. Investing in private equity, hedge funds or other investment strategies outside of traditional stocks and bonds are all viable avenues of growth for a medical practitioner. Captive insurance, a practice by which doctors can create an insurance company wholly for their own use, can also be an effective active risk-management strategy for doctors concerned about asset protection. Captive insurance can protect against certain kinds of risks not covered by traditional plans while creating tax-advantaged profi t for the doctor.

 

Active strategies perform better in down markets

Generally speaking, passive investments perform best in a bull market, while active investments shine during downturns. Investments with a tactical component and a go-to-cash option, as well as long/ short strategies, are active maneuvers that work well in a down market. Additionally, it never hurts to amass a cash reserve to seize opportunities to buy while prices are tumbling.

Don’t abandon passives during a correction

It’s important to take advantage of both strategies and diversify. If your index fund is tanking, your active portfolio can move more rapidly to stanch losses. But these moves should not come at the expense of your passive investments. The passive strategy is for the long haul, and prematurely pulling money from passive investments during a market correction undercuts their ability to perform. Both passive and active strategies should play a role in a doctor’s portfolio. Some options, like exchange-traded funds (ETFs), incorporate aspects of both strategies. Also, certain active or passive strategies may perform better during a particular segment of an economic cycle. A diversifi ed plan for investments will allow a doctor to capitalize on market highs, offset losses from corrections and get back to focusing on their careers.