For a bunch of smart people, doctors are notorious for being bad investors. But bad investment decisions are preventable. Understanding the common mistakes physicians make when it comes to investing their money can pay big dividends in the future.
6 Investing Mistakes Doctors Make
Failure to start early
Yes, physicians enter their careers with a lot of debt to pay off. But that’s generally manageable on a doctor’s salary. Meanwhile, qualified educational debt is often tax deductible – and a portion of it may be forgiven if you continue to make your payments on time, without fail, for ten years.
On the other hand, doctors have a variety of tax-advantaged savings opportunities available to them, including a 401(k) or 403(b) defined contribution pension plan from their employers (complete with matching contributions), Roth IRAs (ideal for residents and early career physicians with a lot of upward mobility potential and pay raises in their future), and traditional IRAs.
At a minimum, most young physicians should invest enough in a 401(k) plan, if available, to pick up their employer match, before aggressively paying down debt. As for the IRAs, that’s a matter of style: If you think you can get a higher return investing than you pay out in student loans, then it makes sense to do that. But don’t fall prey to the mistake of underestimating investment risk, or overestimating your investment ability. Speaking of which…
Overestimating Investment Ability
You’ve studied long and hard to earn that medical degree. Veteran financial professionals have studied long and hard to master their own profession as well (The ones who don’t wash out early). But many physicians, quite accustomed to being smart, overestimate their expertise. As such they are too often lured into questionable investments, such as penny stocks or concentrated investments in pharmaceutical and medical device companies.
You may know medicine pretty well. But few doctors know how to read a company financial statement, complete with all the footnotes, in light of a deep understanding of generally accepted accounting principles (GAAP).
That company you think is a sure thing, or a can’t miss, isn’t. And this can be true even of companies making a great product.
Failure to Protect Investments
It’s not what you have, it’s what you get to keep, and spend for yourself and for your family. It’s fine to build up a tidy nest egg – but if you don’t protect yourself and your family with an adequate insurance plan, you and your loved ones may find yourselves forced to spend down your future just to get through the present.
So save and invest aggressively. But don’t neglect to build that savings on a firm foundation: An insurance program that protects you and your family against each of the following potential catastrophes:
- Your unexpected death or terminal illness
- The death or terminal illness of your spouse
- Disability, to the extent of losing your ability to work
- Your spouse’s disability
- The need for long-term care or nursing facility services, either in the near future or later in life.
- The risk of living too long and outliving your savings.
The primary tools to mitigate these catastrophes are life insurance, disability insurance, long-term care insurance and as you approach or enter retirement, annuities.
Trying to time the market
Timing or outsmarting the market – that is, knowing just when to buy or sell – is extremely difficult, even for people who devote their lives to investing with the same fervor and dedication you devote your life to medicine. In fact, it’s nearly impossible. But too many physicians, overestimating their own financial acumen, try anyway, and get burned.
For the vast majority of physicians, you will be much better off investing regularly under a consistent and disciplined plan, month in and month out, through thick and thin, re-balancing occasionally to maintain a balanced portfolio.
Failure to diversify
Many doctors invest too much in stocks, even as they approach retirement. This is usually because they don’t understand the funds they own, or again, because they are overconfident in their own ability to pick winning stocks or funds and time the market.
Sometimes they think they’re diversified because they own several mutual funds. But in reality the funds are all invested in the same bunch of large cap US stocks. In that case, you aren’t very diversified at all.
A healthy, well-diversified portfolio should include exposure to many different asset classes:
- U.S. stocks
- International stocks
- Bonds
- Real estate
- Life insurance
… and eventually,
- Small/micro caps
- Emerging markets
- Bonds
- Real estate
- Precious metals
- Annuities
Paying too much in fees and expenses
Yes, good financial advice is worth paying for. But there are limits. Many doctors are lured into high-commission products by mediocre advisors who aren’t worth the money paid. Common examples include high-expense annuity products where the physician doesn’t understand the benefits of the annuity or the alternatives, or expensive managed accounts with “wrap fees” of two percent on top of the underlying investments.
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