Practical Investing Advice for Doctors: The Pareto PrincipleAt The Physician Philosopher, I want medical students, residents, and early career attendings to be able to be able to become financially literate and to perform personal finance on their own. It’s the reason I am making a personal finance curriculum at the medical school at Wake Forest. Depending on the stage of the game you are in, the 20% that is necessary to know changes. For example, as a medical student your 20% is pretty simple. You have two jobs: Study medicine and minimize debt. That’s it. The rest is simply to not screw it up. As a resident it gets a little more complicated. Like most things in life, you still need to do all of the things you were doing before (studying medicine and minimizing debt). However, residents have to come up with a plan pretty early to deal with their debt, consider investing, and to learn the top ten things they need to know about disability insurance. Again, when you become an attending physician you must continue to perform all of the preceding functions. The additional work becomes figuring out when conflicts of interest exist, investing more, consider getting a student loan consult to refinance your loans, make any necessary changes to your debt repayment plan, and decide whether to invest or pay down your debt. You probably need to increase your asset protection (increase life and disability insurance; add umbrella and malpractice) and work on an estate plan, too. That may seem like a lot! You basically need a checklist (fortunately you can find that financial checklist for new attendings here!)
The following is an example of the 20% that you need to know about investing.
Set It and Forget ItWhen you invest, there are many ways that lead to success. That said, I am a “set it and forget it” investor for two reasons.
- Research has shown that the more you check your portfolio, the more likely you are to make changes in a down market. Changes typically lead to worse performance in a down market. Time in the market and staying the course are possibly the most important rules in all of investing.
- Your job is to learn practice good medicine. Patients depend on that. You should not be spending a lot of time trying to figure all of this stuff out. Just learn the 20% you need to know. Then, focus on taking care of patients.
Best Asset AllocationsThere’s more than one way to skin this cat. In fact, the White Coat Investor keeps a list of 150 portfolios that are better than yours. That said, I am trying to make this simple and effective. Remember, this is the 20% of investing advice for doctors that you need to know to get 80% of the results.
Three Fund PortfolioHow simple can index fund investing be? Well, Taylor Larimore (one of the original Bogleheads), has read pretty much every financial book out there and has come to recommend a three-fund portfolio that captures a piece of all of the market. What are the three funds?
- Stocks: Total Stock Market Index Fund (Examples: VTSMX, SWTSX, FSTMX, FSTVX)
- Stocks: Total International Stock Market Index Fund (Examples: VGTSX, SWISX, FTIGX, FTIPX)
- Bonds: Total Bond Market Fund (Examples: VBMFX, SWAGX, FBIDX, FSITX)
The Bernstein “No-Brainer” FundThis is another example of a simplified portfolio. Dr. William Bernstein, a neurologist turned financial advisor, offers a similar “no-brainer” portfolio that consists of investing in index funds in four key asset classes, all in index funds:
- 25% total bond index fund
- 25% international stock index fund
- 25% small-cap index fund
- 25% large cap index fund
What investing advice would you give a doctor who doesn’t have those options?Of course, not every employer offers these funds. Mine certainly doesn’t, but they do offer index funds. So, my job is to try and mirror the diversification shown above in my 403B and my 457 plan. I do not know the specific index fund company your employer uses, but they (hopefully) will have index funds broken up into individual asset classes. For example, it could look something like this:
- 25% Large Cap Index Fund
- 25% Small Cap Index Fund
- 25% International Stock Market Index Fund
- 25% Bond Market Index Fund
Take a Peek Occasionally (Rebalance your Assets)Once a year, take a peek at your investments to make sure that they are still mirroring your desired asset allocation. This is called rebalancing and the purpose is to lower risk and – hopefully – increase returns. There are two different techniques here. Either one is fine. Just pick one. The purpose of rebalancing is to keep your portfolio diversified. Just because one class has done well over the last year or two doesn’t mean it will continue to do well. Stick to the plan and rebalance back to your pre-chosen asset allocation.
Time BasedThe time based rebalancing technique simply says that every year or two you look at your portfolio. Then, you rebalance it to make it look like the asset allocation you decided on above. Anything more than 5% above or below your desired asset allocation, you correct it. For example, if you want 25% large caps and the large caps have exploded and are now 35% of your portfolio, sell some of your large caps and buy some of the other index funds in the other classes that didn’t perform so well. You may be concerned about taxes here. However, inside of a retirement account (401K, 403B, 457, IRA) you can buy and sell as much as you want because you are not actualizing any returns until you actually sell them to take money home. However, in a taxable account these concerns are founded. When you sell something there, you are likely going to get hit with a long-term capital gains tax. If your account is small enough, you can simply change your future allocations to purchase more of the funds you need more of and less of the funds that are plentiful. As your accounts grow, this can become more challenging. If you can rebalance things by buying and selling inside of your retirement accounts, that is preferred. If you must rebalance stuff in your taxable account, just do it efficiently.
Band BasedThis other type of rebalancing technique involves exchanging funds anytime an asset goes above or below a certain percentage of your desired asset allocation (say, again, 5%), then you rebalance. In other words, you rebalance when you break past a “band” threshold that you’ve previously set. I personally don’t love this technique as much because it encourages you to look at your portfolio more often. As I’ve stated before, I am a fan of “set it and forget it” investing. This style of rebalancing implies that you are going to keep a closer eye on your portfolio.
Risk Tolerance as We AgeOne other piece that you absolutely need to understand is that your stock to bond asset allocation will likely change with age. While the rule of thumb for people who start investing early is that your portfolio should have the same percentage of bonds as your age. However, doctors typically start saving later. Solid investing advice for young doctors might involve investing in 90% stocks and 10% bonds (90/10). If you are risk averse, you might lower this to 80/20 or 75/25. A higher percentage of stocks implies more risk, which ought to eventually lead to higher returns. The reason for the higher returns is that you are taking more risk. Investing 101 teaches us that more risk = more reward. However, as we age and get closer to retirement, 90% stocks is likely too aggressive. So, early on set a timeline goal. Purely as an example, at age 40 you might transition to 80/20 stocks/bonds. At age 45-50 maybe you’d further transition to 75/25 and then at age 50-55 to 70/30. Personally, the lowest I’ll likely ever go is 60/40. That could change, though. Make a predetermined plan that has nothing to do with the market. That’s always best because the best investing advice for doctors (and for anyone else) is to STICK TO THE PLAN! The worst thing you can do is buy high and sell low, which is why “set it and forget it” is so important. It keeps you from actualizing your losses.
Take HomeThat’s it. We’ve covered much of the 20% of investing advice doctors absolutely need to know in terms of asset allocation, picking funds, and taking a peek occasionally. Not too bad, right? You just read that in about ten minutes. If you want to learn the rest of the 20% doctors need to know about personal finance to get 80% of the results, then read The Physician Philosopher’s Guide to Personal Finance (or listen to it on Audible). It can be complicated if you want it to be, but it doesn’t have to be. And, if you need some help along the way, make sure that you get your financial advice from a financial advisor you can trust. That someone is going to be a fee-only, flat rate financial advisor who specializes in working with physicians.
What do you think? Is there a piece of the 20% that I left out for asset allocation and picking funds? Do you subscribe to set it and forget it investing? Why or why not? Leave a comment below.