The Optometrist’s Guide to Investing 101

Chapter 3: Additional Assets Classes

Let’s quickly go over some of the other types of investments that you can include within your portfolio.  Do you need any of these Asset classes to be successful? Absolutely NOT!

 As you become more experienced with your investing knowledge and want to diversify into other fields, then feel free to. We usually recommend only allocating 5-10% of your total portfolio to these smaller investments

 (1) Emerging Markets Mutual Funds:  

These funds concentrate on companies in developing or emerging countries, such as Brazil and, perhaps surprisingly, China. While these nations aren’t underdeveloped, they aren’t fully developed either, often resulting in accelerated growth (and potentially higher returns) than established US Domestic companies. The catch? They are extremely volatile. 

These markets can experience dramatic fluctuations in a short span. Many investors opt for a maximum of 10 percent allocation to emerging markets to strike a balance between risk and reward.

Recommended: Vanguard Emerging Markets Index  ETF Shares (VWO)

(2) REIT (Real Estate Investment Trust) Funds

If real estate piques your interest but you lack the resources or inclination to buy properties or be a landlord, then REITs provide an avenue. They invest in a range of real estate properties, from commercial to residential. They aren’t essential but can diversify your portfolio.

Recommended: Vanguard Real Estate Index ETF (VNQ)

Financial Tip

"REITs are extremely tax inefficient because they are forced to pay a dividend payout each earning period, therefore these should strictly be in a tax-deferred retirement account, like a Roth IRA or 401K"

(3) Commodities Fund

These funds basically invest in items like agricultural goods, natural resources and/or precious metal such as gold and silver.  They have an extremely low rate of return and are considered a poor long-term investment. We recommend NOT investing in simple commodities like gold or weed since they are an awful investment and don’t produce anything (unlike stock in a company).

From 1836 to 2011 (accounting for inflation), the long-term return on gold is a ridiculously low 1.1%.  If you want to invest in precious metals, do so in a commodity index fund or better yet, invest in the stock of a company that uses commodities like Starbucks (Coffee) or Exxon Mobil (gas). Many companies use commodities as their material, thus giving you an indirect exposure to commodities.

Recommended: Vanguard Materials Index Fund ETF (VAW)

(4) Sector Funds

These funds invest exclusively in businesses within specific industry sectors, such as technology or healthcare. They can be structured as mutual funds or ETFs. If a particular sector aligns with your interests or expertise (e.g., healthcare for doctors), sector index funds are an efficient choice. However, be aware that these funds often come with higher management fees.


What About Individual Stocks?

You might be pondering, “What about individual stocks? That is all my rich doctor buddies talk about?” Investing in particular companies, like Apple or Tesla, is exciting but higher risk. It demands comprehensive research into the company’s financial history, earnings reports, and future prospects. To excel as an individual stock investor, you must critically determine the company’s value and fundamentals and stay updated with its current events and quarterly reports. This can be a source of significant stress for novice investors. But if you strike gold by investing in the next Google or Apple, the returns can be immense!

Please note that it is nearly impossible to beat the market return of an S&P 500 index market return over the long term, even for the most experienced professional asset managers.

However, as your investing acumen grows and you feel the urge to explore individual stocks, go for it! They can enhance your portfolio’s diversity and boost potential earnings. That said, individual stocks aren’t for everyone, and they’re NOT a prerequisite for investment success. For most, we advocate for low-cost, passive stock index funds as the backbone of their portfolios. Stick to this, and you’ll fare well!


Buffett’s Bet on Index Funds vs. Hedge Funds

In 2007, Warren Buffett challenged the hedge fund industry, betting that a simple S&P 500 index fund would outperform a selection of hedge funds over a decade. Asset management firm Protege Partners took the challenge, selecting five fund-of-funds to compete against Buffett’s choice. By the end of 2017, the index fund had an average annual return of 7.1 percent, while the hedge funds managed about 2.2 percent. Buffett’s win highlighted the value of low-cost, passive investing over the high fees of active hedge fund management.

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