EyeWorld is the official news magazine of the American Society of Cataract & Refractive Surgery.
Issue link: https://digital.eyeworld.org/i/357599
63 August 2014 Ophthalmology Business 3. Invest like a Nobel Prize winner. The main argument against an index-only strategy is that it generates merely average returns in the best-case scenario. This logic appeals to doctors who have never once settled for things that are merely average, and that's pretty much all the physicians I've met. Thanks to the research of Nobel laureate Eugene Fama, we now know it's possible to reliably beat the averages over the long run, but it's not free. Fama, a financial luminary who founded the first small cap index mutual fund way back when fax machines were the size of washing machines, discovered that the small- er a company is, the more likely it is to outperform a larger one. This is known as the "small cap effect" and it's robust, having been observed in U.S. market history as well as the return series of developed foreign stock markets and even emerging markets. Fama and colleague Kenneth French, both researchers who hail from the University of Chicago's renowned Booth School of Business, also found that the stocks of cheap companies, known as "value stocks," tend to outperform their more expensive "growth stock" peers in what is known as the "value effect." This effect is also robust in markets domestic and foreign, and is avail- able to investors using index funds. While a small cap value tilt may add up to 4 percentage points more than the average untilted portfolio over long periods of time, it brings more volatility too. When equity markets decline, those index funds filled with cheap little stocks take it hard, and you may wish you had never owned them. The only way to reliably garner the higher expected returns from small cap value stocks is to remain fully invested and stay the course even when times are tough. This too is old news. Even though Fama won the Nobel Prize in economics just last year, his research on the small cap and value effects has been public knowledge since way back in the 1980s. These perfectly decent strategies are so mundane—so incredibly bor- ing—that you and your colleagues may never have heard of them. After all, words like "diversified," "tax-efficient," and "cost-effective" make wimpy headlines. The good news is that you can start using a solid investment strategy and keep using it year after year, decade after decade, secure in the knowledge that you have found a permanent answer to a nagging question. Remember, the answer to good investing is more than where you put your money now. It's where you keep it over the long haul. EW Mr. Utley is an attending advisor with Physician Family Financial Advisors, a fee-only financial planning firm helping physicians in the U.S. to make a plan and get on track with saving for college and investing for retirement. Visit PhysicianFamily.com for more information. About the author The good news is that you can start using a solid investment strategy and keep using it year after year, decade after decade, secure in the knowledge that you have found a permanent answer to a nagging question. Remember, the answer to good investing is more than where you put your money now. It's where you keep it over the long haul. digital.ophthalmologybusiness.org