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The answer depends on myriad factors, including their level of spending, whether or not they desire to leave an inheritance, charitable or philanthropic activities, and how the markets perform over the next several decades. It's important to have the conversation and take a good look at whether the target of retiring at age 50 is possible or simply too aggressive. Without knowing whether retiring under these circumstances is possible, it becomes challenging to set specific investment objectives. An analysis of whether retirement at age 50 is possible can make it much easier to set a meaning- ful, goal-related strategy and understand what successfully achieving this strategy looks like. Doing so makes adhering to the investment plan over time more likely. With a clearer understanding of the pos- sibilities, investors can more easily define and embrace their objectives. Minimize Distractions Without clear objectives, it is easy for investors to get distracted. I often have investors tell me their objective is to "out- perform" the market — in an earlier article I mentioned that it is not possible to manage a portfolio "as an abstraction," and the objective to "outperform" is an abstraction. Normally, what investors really mean by "outperform" is that they want to beat a particular benchmark or index. Last fall, State Street's Center for Applied Research published results of a two-year study that examined true invest- ment success. The study, entitled "The Folklore of Finance," posited that the way both professional and individual investors make investment decisions is so flawed that achieving both high returns and long-term objectives is nearly impossible. Absolute Skill Versus Luck: Understanding Alpha One ongoing debate in the investment world is the disagreement over skill versus luck in investing. Generally, investors seek returns that beat an index or a benchmark, which, in the financial world, is called "alpha." Alpha takes the volatility — price risk — of a mutual fund and compares its risk-adjusted performance to a benchmark index. The excess return of the fund rela- tive to the return of the benchmark index is a fund's alpha. Simply stated, alpha is often considered to represent the value a portfolio manager adds to or subtracts from a fund's rate of return. With the Internet and the correspond- ing proliferation of information and access to data, one would think that "adding alpha" would get easier. As the State Street study indicates, however, just the opposite is happening. It is getting more difficult each year to actually provide alpha — at least the kind of alpha generated by skill. This is slightly counterintuitive and is referred to as "the paradox of skill." As absolute skill rises, relative skill generally declines, leaving more to luck. Stephen Jay Gould initially observed this phenomenon in baseball. While the absolute skill of hitters has increased over the ages, nobody has matched the proficiency Hall-of-Famer Ted Williams achieved at the plate in the 1950s. This is because the absolute skill of pitchers has also increased over time, resulting in a lower variance of relative skill and leaving the outcome of pitcher/hitter matchups more to luck than ever before. The same is true within the investment management industry. While absolute skill has increased significantly, rela- tive skill has converged. It's important however, to keep searching for alpha opportunities. Otherwise, there would be no price discovery and the markets would no longer function properly. The point to remember is that while to "outperform" is not an objective, alpha is still an important component to portfolio management. Success: What is Possible? The step I most often see physicians miss is discovering what is possible with their money. This typically leaves them unable to clearly articulate a goal-related strategy. Without the goal-related plan, physicians are much more likely to rely on abstractions like "outperformance." I find that the most successful investors tend to have strong goal-oriented invest- ment plans. They measure investment success not by "outperformance," but by progress in achieving their unique investment strategy. Next month I'll discuss the second barrier to investment success: time and market noise. 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. Bill has particular expertise work- ing with physicians, not only helping them achieve financial success but also devising creative strategies to preserve the wealth they have worked so hard to build for themselves and their families. Bill meets a lot of physi- cians who are extremely busy practicing medicine, but they have no investment plan for financial Independence. Find out more at planparadigm.com or by contact- ing Strand at 763-201-1025, or via email at bstrand@planparadigm.com. ■ M D N E W S . CO M ■ MD NEWS Minnesota | 1 1

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