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when the investor sells during a down- turn in the market — generally because of fear; and (2) the investment itself cannot recover — normally due to bankruptcy of the company invested in, for example. Rationally we all know that we can ride out mere volatility, but permanent losses cannot be undone. The problem with defining risk as permanent loss is that it cannot be measured or predicted. The Disconnect Investing requires that we buy assets that will be affected by future events, which cannot be known or predicted. Risk arises when negative outcomes are possible because of those future events. Rational investors seek compen- sation for the risk of exposure to those negative outcomes. Phy sicia ns need to decide how to position their portfolio for future developments, but they don't know what those will be. In other words, and this is the disconnect involved with investing: Investing requires assets to be purchased for the impact of future events, but the future isn't knowable. Coping by Financial Modeling Not knowing the future doesn't mean we cannot deal with it. The future needs to be viewed not as a knowable outcome capable of being predicted but rather as the range of possible outcomes. Financial modeling gives investors a tool for coping with the uncertainties of investing. Financial modeling is not meant to produce a fixed outcome, but rather a range of possibilities. Modeling allows investors to consider many variables simultaneously, including risk tolerance and fear of permanent loss, as well as risk capacity and inflation (concepts we will discuss next month) and determine which possibilities are most appropriate for their particular situation. Financial modeling is a process that allows inves- tors to better understand their options while simultaneously gaining a better understand of what risk really means to them. Once this phase of planning is completed, it is much easier to design a portfolio suited to the investor. Value of Advice and Financial Modeling Collaborat ing w it h investors to understand the components of risk (risk tolerance, risk of loss, risk capacity and inflation) and examine what outcomes are possible is one of the most valuable and important services an advisor can provide to investors. The modeling becomes a plan upon which to construct the portfolio, and serves as a safety net during turbulent markets. Financial modeling gives investors something concrete to hold onto during turbulent market conditions. It also provides a solid foundation so concrete goals can be set and measured regularly. In my experience physicians generally tend to be more analytical than many other investors and tend to look at the market with less emotion. I find that a solid plan often provides physicians with the analytical foundation nec- essary to view their portfolio more objectively, and the security to look beyond volatility and focus on their longer-term objectives. Without finan- cial planning and modeling, physicians can be prone to the same emotional disconnect that derailed many investors in the 2008 collapse. Questions to Ask Below are a few questions to get you started thinking about your risk profile: Compared to others, how do you rate your willingness to take financial risk? How easily do you adapt when things go wrong financially? When you think of the work "risk" in a financial context, what words come to mind? Have you ever invested a large sum in a "risky" investment mainly for the thrill of seeing whether it went up or down in value? How muc h con f idence do you have in your ability to ma ke good financial decision? Bill Strand, Founder and Principal, has over 30 years of experience in the financial services industry, and founded Paradigm: Strategies in Wealth Management, LLC in 1995. He has particular expertise working with physicians, helping them not only achieve f inancial success but devising creative strategies to preserve the wealth they have worked so hard to build for themselves and their families. Strand meets many doctors who are extremely busy practicing medicine and have no investment plan for financial independence. Find out more at www.planparadigm.com or by contacting Strand at 763-201-1025 or bstrand@planparadigm.com. ■ M D N E W S . CO M ■ MD NEWS Minnesota | 1 1