The Situation
A plastic surgeon in the 90’s is making great money from a booming cosmetic practice. They feel confident about their ability to take risk, especially since their income far exceeds their expenses. They’re also consulting in medical tech, which gives them a sense of insight into tech stocks.
With the goal of reaching financial independence quickly, they invest 90% of their money into U.S. investments – 10% of which is in high-tech investments. In 1998 and 1999, those bets pay off big time. Instead of rebalancing, they double down – borrowing against their business to invest even more in tech.
Then the dot-com bubble bursts.
The surgeon’s income takes a hit, their tech-heavy portfolio drops hard, and they’re forced to sell investments at a loss to cover expenses. They eventually recover – but with scars.
What Went Wrong (and Why It’s Common)
- Recency bias: Believing that strong past returns would continue
- Overconfidence: Assuming expertise in one domain translates to another (e.g., medical tech vs. public markets)
- Leverage: Borrowing to invest amplifies both gains and losses
- Failure to rebalance: Allowing a portfolio to drift toward concentrated risk
- Misjudging risk tolerance: It’s easy to say you’re comfortable with volatility – until you experience it
Years later, after another downturn in 2008 and a decade of flat returns, the surgeon abandons equities altogether and moves their entire portfolio into bonds – just before the longest equity bull market in history begins.
Key Takeaways:
- Risk tolerance isn’t what you think – it’s how you behave during stress
- Leverage and concentration multiply risk, even when things feel “under control”
- Having a written investment plan improves discipline Including: your target allocation, when to rebalance, and when changes are acceptable
- Emotional risk should matter as much as mathematical risk
Case Two: The Business Owner with a Windfall
A business owner sells his company in late 2019. He’s financially independent, still earning a consulting income, and living below his means. But he’s also cautious – burned by past investing mistakes and nervous about doing something that could “ruin it all.” He has low spending, low need to take risk, and low willingness to take risk – but high ability.
The Decision Point
He wants to invest the lump sum from the sale but is unsure about the timing. Statistically, the best expected outcome comes from investing everything right away. This beats out “dollar cost averaging” about 66% of the time (Finlay & Zorn, 2023). But that doesn’t mean it’s the best move emotionally.
After reviewing both options, we were going to decide on dollar-cost averaging into the market over 10–12 months to manage regret risk – particularly because he didn’t need to (and he didn’t care about trying to) squeeze every ounce of return from this money. One month later he came back to us and decided he wanted to invest the lump sum.
Then What Happened?
Well, not long after, COVID hits and markets tank.
To his credit, he stayed calm – but when told it’s time to rebalance (i.e., sell bonds to buy more of the falling equities), he hesitated. Buying more of something that just plummeted feels deeply counterintuitive and is very tough to do in the moment.
Key Takeaways:
- Lump sum investing wins on paper – but behavior trumps math
- Rebalancing is hard emotionally, but critical strategically
- “Regret management” is a valid investment consideration - Sometimes it’s worth giving up a few basis points in returns to increase the odds you’ll stick to the plan
- Diversification matters – even more when there’s a large single-event windfall
- Single-stock risk and general market volatility are not the same thing
Bonus takeaway: Harry Markowitz, founder of modern portfolio theory, famously said during a market crash: “If we don’t rebalance, no one else will. We’ll end up owning the whole market.” It’s a helpful (if extreme) reminder: rebalancing is one of the only ways to systematically buy low and sell high.
Final Thought: Big Money Doesn’t Mean Perfect Decisions
Whether you’re starting out, selling a business, or entering retirement, the truth is the same: our investment decisions are shaped as much by our emotions as they are by our spreadsheets.
That’s not a flaw – it’s human.
But having a written plan, understanding your risk profile (ability, willingness, and need), and working with someone who can challenge your worst impulses? That’s how long-term investors make it through short-term chaos.
Disclosures:
Important information about mutual funds is found in the Fund Facts document. Please read this carefully before investing. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated. Unit values and investment returns will fluctuate.
The information provided is based on current laws, regulations and other rules applicable to Canadian residents. It is accurate to the best of our knowledge as of the date of publication. Rules and their interpretation may change, affecting the accuracy of the information. The information provided is general in nature and should not be relied upon as a substitute for advice in any specific situation. For specific situations, advice should be obtained from the appropriate legal, accounting, tax or other professional advisors.
References:
- Felix, B. (2024). Dollar Cost Averaging vs. Lump Sum Investing. PWL Capital Inc. https://pwlcapital.com/wp-content/uploads/2024/08/Dollar-Cost-Averaging-vs-Lump-Sum-Investing.pdf
- “We have shown that, on average, dollar-cost averaging consistently trails lump sum investing about two-thirds of the time. This is true across stock markets and throughout history, and it is consistent with the historical nature of the equity risk premium. The implicit historical cost of dollar-cost averaging has been an annualized 0.38% over 10 years when compared to investing a lump sum” (Felix, 2024, p. 12).
- Finlay, M., & Zorn, J. (2023). Cost averaging: Invest now or temporarily hold your cash? Vanguard. https://corporate.vanguard.com/content/dam/corp/research/pdf/cost_averaging_invest_now_or_temporarily_hold_your_cash.pdf
- “We find that historically, LS outperformed CA roughly two-thirds of the time. This result is consistent with the fact that over the period 1976–2022, U.S. stocks and bonds outperformed cash—as proxied by the 3-month U.S. Treasury bill rate—76% of the time for stocks and 68% of the time for bonds. This highlights how a cash allocation, even if temporary, represents the opportunity cost of lost risk premium” (Finlay & Zorn, 2023, p. 2)
If you’ve had a major financial event – or feel like one is coming – and you want to make a plan you can stick with, we’d be glad to help.
Get in touch with us to learn more.
