Do You Understand Your Investments?

Do you really understand all of your investments and wealth strategies as a physician.

I’m fairly certain that when I see patients, they have no clue what most of the medical terminology means, such as “cholecystectomy,” or “conjunctivitis,” or “myocardial infarction.”

So I try to say these things in terms they understand, such as, “You have stones in your gallbladder and they need to be removed,” or “You have pink eye,” or “You’re having a heart attack.” Now those are concepts they can grasp.

It’s the same way in investing. If you’ve hired a financial advisor, you need to know what you are invested in and why. But I bet that you don’t know what you’re invested in, and I’m almost certain you don’t know why you’re invested in it.

I’ve got a theory about why financial advisors purposefully make investing far more complicated than it should be: Many want to confuse clients in order to justify their high fees -- either that, or they’re just plain incompetent.

Here are some things you need to understand and ask about your own investments, whether you do it yourself or hire an advisor:

Why do I own these particular individual stocks?

There are close to 15,000 publicly traded stocks in the world. If you own just 50 or 100 of them, then what about the other 14,000-plus stocks out there? How do you or your advisor know that those few that you have are the winning stocks? Think about it. If you have 50 individual stock in your portfolio, you’ve covered less than 1% of the number of publicly traded stocks in the world. Academic data show that only a small portion of stocks in each asset class drive most of the returns within an asset class. What if you choose the losers? That gets to another point: Excluding all these other stocks out there implies arrogance -- that you know more than the collective wisdom of millions of investors out there. What’s the chance of that?

Why do I own these mutual funds?

Just like individual stocks, there are thousands of mutual funds out there. You need to understand what role each fund is playing in your overall portfolio. Mutual funds are simply tools to fit your asset allocation, which is the mix of broad investments that is right for you. If the title of the mutual fund does not make sense, then you’ve seriously go to question the fund’s role in your portfolio. For example, if you own Oppenheimer Quest Opportunity Value Fund, what the heck does that invest in? The name makes no sense and I know you or your advisor don’t know what it does. Instead if you own Vanguard Large Cap Index you know that it’s an index fund that owns every U.S. large company.

In a future post, I’ll give you more thought-provoking questions you need to ask yourself about your investments.

The bottom line: Ask yourself, ‘Why do I invest in this but not that?”