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Investment Portfolio Return Drivers

I’ve been a bit caught up with work and traveling, so I haven’t had much time to spend on my investment portfolio. But I have been thinking about the return drivers of my portfolio.

Return drivers are the factors which provide me with profits. Using my medical career as an example, the profits from my medical career come from being in clinic seeing patients as an employee.

If I had my own private medical practice, however, there would be profits from seeing patients but also by hiring the right staff, creating workflows, analyzing my patient base, figuring out how to cut overhead, and performing more procedures.

An Investment Portfolio

We are all investors in this society. If you have more than $20 in cash you are investing your money. That idle money that’s sitting in your checking account is “invested”.

It’s just that you are indirectly choosing to have that $15,000 in your checking account earn a return of 0.5% annually. Bank of America thanks you.

Most physicians have retirement accounts and other investments. All of these together make up the investment portfolio.

Because each item in the investment portfolio has a different investment return, it’s nice to have a general idea of the average return of the overall portfolio.

Most of us can figure this out on our own. Or a good financial advisor can help out with this.

My Investment Portfolio

The majority of my investments are in my index funds. These are mutual funds, not individuals stocks or bonds. Because they are passively managed I don’t pay much in management fees (expense ratios).

I only have a handful of funds in which I invest. Most of my funds are stocks, only because they tend to offer higher returns, though with higher volatility.

20% of my investments is made up of bonds. These are less volatile, as in they fluctuate less wildly, which means that they offer lower returns.

Then I also have real estate, my businesses, and income potential as a doctor. This last one is an investment, no doubt. Don’t ignore it. I invested a decade of my life to reap the profits of this investment.

Portfolio Returns

The returns from a portfolio is how much profit you get from investing in it.

For example, my stock index fund portfolio as a whole should offer me annual returns of around +5%. Over a long enough time horizon it could be on average as low as +4% or as high as +6%. Nobody knows for sure.

But portfolio returns in stocks are rather volatile. Over a short time horizon the returns could be -20% or +30%.

My bonds tend to offer portfolio returns of somewhere around 1.5-2% annually.

My Portland condo would have returns somewhere in the 4-5% range.

The condo in Spain would add another 4% return to my overall investment portfolio.

Since the majority of my my money is in index funds, somewhere around $500,000, and the majority of my index funds are stocks, I have an average investment portfolio return of 4%.

A 4% Portfolio Return in Action

4% of $500,000 is no joke, that’s $20,000 a year, or $1,700/month.

Because this is not earned income but an investment return it’s taxed at much lower rates. So most of this money would go straight into my pocket.

Imagine if you don’t have to worry about a work commute, maintaining a car, or having to live in an expensive home close to work. Imagine you can cook at home and leave the house whenever you want. $1,700 a month can go a long way, suddenly.

Want more money? You can invest in riskier investments, as long as you believe the risk is compensated. Meaning, you are getting a fair compensation for the risk you are taking.

I know real estate investors who are getting 10% returns. Which means that they can get the same $1,700/mo investment return from only a $200,000 investment.

9 Investment Portfolio Return Drivers

I don’t want to get overly technical. I’ll just list the factors which have contributed the most to my investment returns over the years.

As I mentioned, as an employed physician my biggest return driver is me being present in the clinic and seeing patients. Opening and closing charts, flippin’ ‘dem statins.

I have an overall portfolio value of somewhere around $900,000.

#1. Leaving it Alone

Leaving my investments alone and letting them grow over the years has been the best return driver of my investment portfolio. That’s because compounding rates of return allow for the portfolio to grow even faster.

I have cashed out my investments over the years but only to convert one investment into another. I cashed out my stock index funds to buy my Portland condo. And I cashed out my bond index funds to buy my condo in Spain.

#2. Automatic Investing

I automated my finances a long time ago. I pay myself first. Meaning that I make sure that whatever I earn goes towards my future before I pay Uncle Sam or for hookers and blow.

Even though I’ve been bleeding cash over the past couple of years for the medical board investigation, I’ve always earned that money. And I still contribute money towards my investments. I’ve never stopped.

#3. Steady Investing

Steady investing means that I haven’t made wild investing decisions. I have stuck to the same investing strategy of index funds and real estate over the past 7 years.

Going through a divorce? Keep investing. Working part-time? Keep investing.

#4. Low Risk

My investing portfolio certainly comes with risk; I could have major repair expenses in my rental property. Or the stock market could crash and take my index funds down with it.

But the overall risk is low. Low risk means that the chance of utter failure is low. Possible, but unlikely. And I have contingency plans even for that.

#5. Long-Term Investing Horizon

When you look at the stock market with a magnifying glass all you see are Bloomberg headlines. To me that’s all financial noise and easily tuned out.

When you zoom out, when you have a long-term investing horizon, the stock market is damn sexy. A $100,000 investment doubles every decade with that kind of outlook – so does a $200k or $500k investment. I heart you, stock market! ❤️

#6. Investing Early

Because the number of years your investment spends in the market matters, it’s good to invest as early as you can.

I stopped contributing for a little while because I wanted to pay off my student loan debt. But as soon soon as that was accomplished I went back to contributing to my investments.

#7. Ignoring the Hype

There will always be new investments. Some banking nerd in a penguin suit will come up with some leveraged reverse IPO deal. Or, um, digital currency. Right.

I’m comfortable with missing out. I can watch others boast about their 20% returns while I tuck my unimpressive 4% returns under the sheets at night – every night, for many nights.

I’m not interested in being a millionaire or having the highest investment returns. I want to have the kind of passive income which will support the kind of lifestyle I want to enjoy.

#8. Healthy Fear of Inflation

Inflation is a strong economic driver in our financial society. Which means that you can’t ignore it.

Too many well-intentioned physicians have their money invested in cash. They have it parked in a savings account or perhaps in a couple of weak CD’s.

I can’t tell anyone how to invest, but another one of my investment portfolio drivers has been that I didn’t let inflation gnaw on my bills.

A 2% savings account will yield 0% if that year’s inflation was 2%.

#9. Practicing Investing

I don’t mind making mistakes because I try to learn from them. I have made plenty of investing mistakes.

But I have had good financial advisors and mentors who have helped me improve my investing skills. Just like any skill, investing takes practice, and no two individuals will want to invest the same.

Start investing early so that you can make your investing mistakes with smaller sums of cash. You’ll become a better and stronger investor as your net worth grows.

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