The Holy Grail of Investments

Wouldn’t a risk-free 15% annual return be nice? You could sleep safe and sound while your investments grow at an amazing clip, and nothing, not the stock market, the real estate market, some political mess, etc., could take it away from you. Physicians in particular get incredibly creative in seeking such returns.

Here are just a few examples of where physicians look for what I refer to as the Holy Grail of investments – an extremely high-risk free rate of return:

• Funding a clinic pension with an orchard. Yes, the kind with trees, fruit and a harvest. A company did this only to discover that a few years later the orchard had lost significant value and needed to be sold at a fire sale price to provide liquidity for an exiting partner.
• Individual stocks. Remember, Apple and Microsoft are the rare exceptions, not the rule. About 99% of individual stocks don’t even come close to doing what those companies have done.
• Sector plays. Physicians are smart and can conjure perfectly rational arguments for investing in biotech, gold, etc. But, no one is smarter than the collective wisdom of the market. It’s a force not worth fighting, especially in the information age. In that sense, all you’re doing is taking concentrated risk in a sector. You may get lucky, but probably not.
• Falling prey to downright scams. There are countless cases of scam artists working their way into a physician group and selling them on a guaranteed 15%+ return. If it sound too good to be true, it is – period.

The search for the Grail will continue due to one very fundamental rule of finance. Risk and return are related – a higher expected return comes with more risk, and less risky investments come with a lower expected return. In economic terms, there is no free lunch.

But, do we even need the Grail? If U.S. large cap stock returned 10.1% and U.S. small cap stocks returned 12.3% annually over the past 86 years, maybe we don’t. Accepting what the market gives us and using the evidence to craft a globally diversified portfolio is a fine solution. While nothing is guaranteed, I for one much prefer the idea of investing with evidence. Searching for something that doesn’t exist at the expense of your retirement goals, and everyone who is depending on you to make the right decisions, is a risky venture. Proceed with caution.