Tips for physicians to shore up their financial portfolio

July 10, 2017

New currents are flowing in the world financial markets.

Traditionally, a diversified, or balanced, portfolio is invested in stocks for growth and bonds for preservation of principal. This somewhat simple strategy has helped balance risk and reward investors over the long term, but new currents are flowing in the world financial markets. 

A report by McKinsey Global Institute, “Diminishing returns: Why investors may need to lower their expectations,” concludes that “The forces that have driven exceptional investment returns over the past 30 years are weakening, and even reversing. It may be time for investors to lower their expectations.” 

The report estimates that average annual returns could potentially decline to anywhere from approximately 4% to 6.5% for stocks and 0% to 2% for bonds. The McKinsey study was produced before the rally in stocks that began late last year and continued into early 2017, but it is still very much worth considering for its longer-term perspective.

From a financial planning perspective, this viewpoint should encourage investors and retirement savers to do two things: First, make sure the assumptions that you are using for investment returns are realistic and conservative. Second, look to include asset classes other than stocks and bonds into your financial portfolio.  

You should always plan for the worst and hope for the best. My team typically uses a hypothetical rate of return of no more than 4% to 5% for our clients’ financial plans.

If your investments outpace your projected returns, you will be in the comfortable position of being over-funded for retirement-a good  problem to have.

 

Most wealth managers would advise that diversifying into multiple assets classes that historically have investment performance unrelated to one another is a smart strategy.  The desired result is to achieve the same returns of an all-stock portfolio by taking less risk.

Investors have typically accomplished this task by using gold and real estate; however other alternatives do exist such as utilizing the cash-value of your whole life insurance policy.

While everyone generally recognizes the financial protection life insurance provides, there are unique characteristics offered with whole life insurance in comparison to some other alternative assets. Whole life, for example, builds guaranteed cash value over time that increases each year and will never decline in value due to changes in market conditions.  

These guarantees built into the policy can be particularly valuable for clients who have retired and need to make withdrawals to help support their lifestyle. Withdrawals do reduce the death benefit and cash value in the policy, but you probably won’t need as much death benefit in retirement as you did when you were working.

A common strategy to maximize the cash value of a whole life policy is to pay off the policy in full within 10 years. Fully paying up the policy early enables you to front load all the expenses, getting them out of the way so that the cash value can benefit from the contractual growth rate in the policy and annual dividends, if declared.