physician investing

Investing - Where to put your money now

You make more money than you spend. It’s the right problem to have, but it’s a problem nonetheless. In fact, every new dollar of savings seems to call for a new investment strategy, but you don’t know where to begin.

When you ignore the problem, cash piles up in your checking account—first $40,000, then six figures. Now you’re getting nervous. If it was hard to invest a smaller sum, it seems impossible to invest more than $100,000.

Then one day, you stumble upon the headline that brought you here, hoping to find the answer. And if this were any ordinary article, you might be well on your way to making the same mistake that most of your colleagues have made at least once in their careers: they pile their money into a hot investment touted at the time.

First they buy it. Then they watch it drop like a rock. And months later, when the promised results fail to materialize, they sell everything and feel foolish.

It gets worse as the cash continues to pile up and your question goes unanswered: “Where do I put my money, now?”

The best investment strategies have nothing new about them and they work. Here are three investment strategies you can use over and over again, decade after decade, to make your savings last.

1. Stop trading stocks. Start owning markets. 

I know you’ve heard stories in the break room about how your colleague’s latest stock pick shot up 147 percent or how he nabbed a tax-free bond paying five full percentage points above average.

Sounds like he’s making a killing, right?

Not exactly. Chances are good he’s gotten killed on plenty of trades, but physician culture won’t allow him to tell you about his blunders. I’ve seen plenty of doctors who stock-picked their way to a small fortune, but most started out with a much larger one.

Instead of taking a bunch of risk by betting on one stock, keep risk in check by owning a whole bunch of them—the easy way. Single stocks can go bankrupt and single bonds can go into default, wiping you out completely. Index funds, which represent ownership in hundreds if not thousands of companies, make it easy to gain instant diversification, diluting the uncompensated or “bad” risk while retaining the “good” risk that leads to rewards over the long haul.

Index funds are cheap. With carrying costs (a.k.a. “operating expense ratios”) as low as 0.05 percent, you can buy an index fund and gain exposure to bonds or stocks around the world for a pittance. That tiny carrying cost also buys you the freedom to stop acting like a stockbroker and get back to serving as a healthcare provider.

Savvy physicians prefer mutual funds for their tax efficiency. Since they follow a buy-and-hold approach to investing, index funds are more likely to realize tax-favored capital gains and tax-qualified dividends than more highly taxed short term gains. This keeps your tax bill in check.

2. Stop timing the markets. Start owning them (all). 

If you have heard about index investing, you probably know about the SP 500, a basket of stocks that represents the 500 biggest companies in the U.S. The index was made famous in the ‘80s and ‘90s as it ran up to the dotcom bubble, then vilified in the ensuing “lost decade” when the ten year return on that index was close to zero.

What index hecklers fail to realize, even to this day, is that there’s more than one index. In fact, you can gain exposure to practically all the stocks and bonds on the planet by owning as few as four mutual funds. Had investors done this during the past ten years, they would have avoided some of the tech wreck, found the lost decade and enjoyed very decent returns after all.

Unfortunately, the average investor seldom receives average returns. According to a recent study by mutual fund data company Morningstar, “the typical investor gained only 4.8 percent annualized over the ten years ended December 2013 versus 7.3 percent for the typical fund.” That’s a yawning 2.5 percent gap.

Why did investors miss out on fully one-third of the market returns? It’s simple. They did the same thing with their funds that your colleague did with his stocks: they traded in and out of the market. To garner the returns advertised over the past decade, or even the last three decades, you would have to own them through thick and thin, no matter how dramatic nor dire the news.

3. Invest like a Nobel Prize winner. 

The main argument against an index-only strategy is exactly that it generates merely average returns in the best case scenario. This logic appeals to doctors who have never once settled for things that are merely average, and that’s pretty much all the physicians I’ve met.

Thanks to the research of Nobel laureate Eugene Fama, we now know it’s possible to reliably beat the averages over the long run—but it’s not free.

Fama, a financial luminary who founded the first small cap index mutual fund way back when fax machines were the size of washing machines, discovered that the smaller a company is, the more likely it is to outperform a larger one. This is known as the “small cap effect,” and it’s robust, having been observed in U.S. market history as well as the return series of developed foreign stock markets and even emerging markets.

Fama and colleague Kenneth French, both researchers who hail from the University of Chicago’s renowned Booth School of Business, also found that the stocks of cheap companies, known as “value stocks,” tend to outperform their more expensive “growth stock” peers in what is known as the “value effect.” This effect is also robust in markets domestic and foreign, and is available to investors using index funds.

While a small cap value tilt may add up to four percentage points more than the average untilted portfolio over long periods of time, it brings more volatility, too. When equity markets decline, those index funds filled with cheap little stocks take it hard, and you may wish you had never owned them. The only way to reliably garner the higher expected returns from small cap value stocks is to remain fully invested and stay the course, even when times are tough.

This too is old news. Even though Fama won the Nobel Prize in economics in 2013, his research on the small cap and value effects has been public knowledge since the 1980s.

These perfectly decent strategies are so mundane—so incredibly boring—that you and your colleagues may never have heard of them. After all, words like “diversified,” “tax-efficient” and “cost-effective” make wimpy headlines. The good news is that you can start using a solid investment strategy and keep using it year after year, decade after decade, secure in the knowledge that you have found a permanent answer to a nagging question. Remember, the answer to good investing is more than where you put your money now. It’s where you keep it over the long haul.

 This article originally appeared in Orthopreneur with the same title "Investing - Where to Put Your Money Now".


3 tips for financing medical equipment | Fierce Practice Management interviews W. Ben Utley CFP®

Fierce Practice Management tells physicians that can't or don't want to rely on a hospital for a major purchase to get a bank loan. W. Ben Utley advises them to shop around and let the banks compete but to "just be mindful of politics, saving money and relationships you have." Utley also encourages physicians to have an attorney go over the fine print before signing on the dotted line. "Spending $400 to have an attorney review it to save $5,000 on the loan contract is worth it.”

Read other tips in the article by Debra Beaulieu-Volk.

9 reasons why most physician 401k's stink

Warning: Physicians who follow my blog know this is a family affair, meaning I'm direct but "nice." This is not one of those posts. Lately I've been rebalancing 401k accounts and I can't help but notice that they are lacking in many, many ways. Here are most--but not all--of my complaints:

  1. Your plan provider is (probably) an insurance company. Need I say more? OK, I will. When I recently surveyed insurance company 401k providers, I found that several are accepting revenue from the mutual funds you buy AND adding a "record keeping" fee on top of that. I know everybody's got to eat, but this adds a bunch of expense, which subtracts a chunk of your return. Of course, they disclose this expense but you don't have time to read it, much less time to do anything about it.
  2. Enrollment is a pain. They send you a ton of paperwork and they expect you to read it, understand it, and take action. Most of what they're requesting is so obvious (your name, Social Security Number, date of birth) that someone else should have filled it out for you already… but they didn't. If you're lucky, they may enroll you automatically but...
  3. They expect you to pick your investments yourself. Someone out there seems to believe that "Mutual Fund Selection 101" was part of the curriculum in medical school… and they're wrong. How on earth are you supposed to know the difference between "growth and income" and "total return" when you spent years learning the difference between a Steinmann pin and a K-wire? To make matters worse, some 401k providers will not accept a limited power of attorney that allows someone else to do this task for you.
  4. You've got way, WAY too many options. With as many as 81 investment options in some plans I've seen, it's no wonder some physicians have told me that they literally "dropped a pencil on the page and bought what it hit." No kidding. Sometimes less is more but sometimes there's...
  5. Not enough options, either. If you are a tax conscious investor (I am… and you should be too), you know that your "fixed income" investments (a.k.a. "bonds") belong in a tax-deferred account like your 401k while stock mutual funds belong in a Roth account or perhaps a regular old taxable account. So why do they offer you only two choices when it comes to bond funds? It baffles me, and it robs you of a shot at diversification.
  6. Your options are limited to old-school actively managed funds. It's like the folks who created the list of investment options inside your 401k are stuck in the 1950's: they never got the memo that tells us actively-managed mutual funds tend to do worse than comparable, passivley-managed funds over the long haul due to the impact of management fees (and the occasional human blunder that can torpedo years of outperformance). To that guy who continues to overlook index funds when building out the list of investment options I say, "Wake up and smell the Vanguard and DFA, dude."
  7. The plan website is a labyrinth. I've seen the inside of scores of participant-directed retirement account websites and I have noticed that no two sites use the same word for "rebalance." And to make matters worse, you can rebalance either your existing assets or your future contributions, or both. Yes, there is a difference, and yes it's a good idea to make different elections for each.
  8. Your Roth is lumped in with your Regular. You may have a Roth subaccount in your 401k but you probably didn't know about it. You really have to dig to find it. And if you do, you will want to allocate your faster-growing assets to that subaccount but you probably cannot do this easily. Some 401k providers do not allow for separate allocation instructions while others make the process more difficult than it has to be.
  9. There's lots of "service" but no real help. Sure, your retirement plan company has an 800 number, and even a smiling rep who comes to see you each year, but nobody really has your back. This is a do-it-yourself thing, so YOU have to pick the funds, YOU have to rebalance the account, YOU have to be certain you are actually maxing out your contributions and YOU have to make sure you are getting the full match (and believe me, many docs miss out on this fundamental part of the plan).

Does your 401k stink?

I sure hope not. But if it does, and you want to do something about it, prepare for a long slog through a deep morass of minutia pockmarked with political pitfalls. There's a lot of money on the table with your practice's 401k plan and everybody wants a piece of the action. Your best bet is to find someone who can really help: a professional who has a penchant for picky details, a "winners never quit" attitude and an undying interest in your family's financial security.

Top Strategies for Physician Wealth Building | Physician's Practice interviews W. Ben Utley CFP®

Healthcare author and financial columnist Janet Kidd-Stewart interviews Certified Financial Planner™ W. Ben Utley, several physicians and other financial planners to reveal the Top Strategies for Physician Wealth Building in this feature-length article for Physician's Practice. Discover tips and advice about saving for retirement, paying for college, buying disability insurance, saving on taxes and planning for a secure financial future.