The Purpose of Asset ProtectionOn personal finance blogs (particularly for physicians), an inordinate amount of time is spent discussing asset protection. Are discussions on the top ten things a doctor should know about disability insurance, life insurance, and umbrella insurance important? Yes. With the frequency that the topic is covered, though, you’d think that these catastrophic events must happen all of the time and to everyone! That’s just not the case, though. The reason they are so often covered is because life events like being permanently disabled or losing your life can be devastating for you and your family. That’s why you have to know about life and disability insurance. Yet, these products are not the only way to protect your assets.
An Additional Income StreamYour biggest asset while young in your career is your human capital, or your ability to earn a paycheck . For this reason we should protect this income earning potential by purchasing term life and disability insurance from a recommended insurance agent. While we are young and healthy it is also our job to use this earning capital to save for retirement. Remember, the reason that we prepare for retirement is that we anticipate at some point that we A) no longer wish to work and/or B) we plan on our current income stream drying up. Retirement accounts serve as an income stream. Side hustles do the same! If you have side hustles in place – and do not depend on the income from them to live – this forms another protective layer to provide income when you need it. Like the wings of the birds, side hustles minimize the risks that we take every day in life by giving us a buffer should we lose our job. They can also help us retire earlier. Examples of side hustles include expert witness work, writing a book, real estate investing, or even writing a physician finance blog. All of these income producing endeavors can help produce income. The more passive they are, the more they can also count as supplemental disability insurance if we are no longer able to work.
Diversification is KeyEver heard of the saying, “A bird in the hand is better than two in the bush?” The idea here is that a certain guarantee is better than two possibilities that might not work out. Another way to deal with possibilities not working out is by having as many of them as possible. While some ideas fail, others will fly. This is called diversification – and side hustles might be one of the best kind, but I am getting ahead of myself. In investing 101, we learn that diversifying is key to our success. As an example on the importance of diversification let’s put yourself in someone else’s shoes. Say you were an employee of Enron back in their golden days. As an employee, they gave you stock options, which allowed people to put a lot of their retirement money into Enron stock. Given it’s prior track record for success, people just couldn’t see how investing in Enron could be a bad idea. They were on the up and up. So, many put all of their eggs in the Enron basket. Well, we all know how that story ended. If you were that employee, you would have lost a substantial portion of your retirement portfolio. The reason? You were not diversified into more than one investment. Failing to diversify is a personal finance sin. What is the opposite of this? Investing in a well-diversified portfolio so that when one part of the market zigs, the other part of your portfolio will zag. For example, good index investing involves purchasing large cap, mid cap, small cap, international stocks, bond index funds. You might also wisely consider adding real estate investments, if that is one of your goals. However, one form of diversification many sites spend much less time talking about is having a side hustle. If you are earning money through a side hustle, this will almost certainly perform independently of the stock market – unless of course it is some form of income tied to market success.
Some Speculation is GoodFor anyone who has been a consistent reader on The Physician Philosopher, you know how anti-speculation I am. I think taking unmitigated risk is unintelligent. Just take care of the 20% you need to know to get 80% of the results. Some say you can diversify your portfolio with as little as 20-25 individual stocks. While I understand the premise (and the math), I see this as pure speculation in those 20-25 individual stocks. And I don’t think it’s smart. What if one of those 20 stocks (or 5% of your portfolio) goes bankrupt? How protected would you be then? And why would you take this risk if you can simply take the market return and let that be enough? It might surprise you then to learn that I do support one form of speculation, which is speculating on yourself. The only risk there is in the amount of time and money you put towards something and your ability to provide a good return on investment. I think it will serve you well to speculate on a side hustle for which you will be passionate enough and that has the potential upside of providing some additional income. Of course, the more pans you have in the fire, the more likely one is to catch. So, don’t just diversify your portfolio. Diversify your side hustles, too.
Take HomeThe take home here is simple: Side hustles can serve as an additional income stream, form of diversification, and asset protection. It’s worth at least considering these possibilities. The other unmentioned added benefit, of course, is that if one of your side hustles becomes wildly successful, then you will have a lot of interesting choices in your near future. How much should I keep working at my main hustle? Do I need less to retire? Am I happier doing my side hustle or my main job? All of these questions would be good problems to have, but you have to have a side hustle first! I encourage you to spread your wings and to make the leap. Just like the birds my little girl and I love to watch – the more you practice taking risk, the better you’ll get.
Do you have a side hustle? Do you view it as an opportunity for asset protection? How does your side hustle fit into your retirement planing? Leave a comment below.
Completely agree. Side hustles, alt income streams and ultimately financial independence should be the primary focus. Disability and term life insurance are just a bridge until you reach your goals and then you can cancel those policies.
I get annoyed with the amount of time that gets dedicated to insurance during residency. They are important but if you plan correctly they should only be temporary.
Completely agree. Let’s be overprepared for the most unlikely event (disability or death) and under prepared for the most likely event (old age and wanting to retire).
The more income streams you have the better you are protected. If one dries up, you still have water to protect everything from getting parched.
The best side hustles are the ones that have the least correlation with each other. If you have a side hustle that is similar to your main job (i.e. consultations, expert witness, etc) and some disability prevents you from doing it, then both streams dry up.
That’s sort of why I think the best asset protection is to get as much capital as early as possible to start working for you. That’s the beauty of passive income streams. They continue to flow as what may impact your ability to earn won’t have any bearing on your capital’s ability to continue earning.
Completely agree, Xrayvsn!
My side hustle senses were tingling and told me to check your blog tonight. Of course side hustles are a great form of diversification! I love knowing that if I lost my job tomorrow I could ratchet up my side hustles and make up the lost income with minimal effort. In the meantime they open up a world of new self employed tax breaks and retirement accounts. Side hustles rule!
Haha you should trust your senses more often! ?
And completely agree. I hope after the work I’ve put into mine I can someday say the same!
My job was all consuming and my overlords would not have allowed me to side hustle. But when I retired I immediately started side gigs and that has kept my withdrawal rate at zero for three years which greatly reduced any sequence of returns risk I could have faced. I enjoy them as hobbies so plan to keep them going.
Man, I think that would be amazing. If my main hustle ever came to that point I’d go part time. I had to work 1.3 FTE last year because of staffing shortages. I have no desire to repeat that this year.
Actually the 20 stocks = market risk is investing 101. The number comes from a 1973 study that found the difference in diversity between 1 stock and 20 was 80%, between 20 stocks and 1000 stocks was only 4% additional. This study is commonly taught in college level finance courses. Saying “some people believe…” is like saying some people believe “acceleration due to gravity is 9.8 m/s^2. It is what it is. If a stock went bankrupt you would sell it ASAP of course. The same thing happens in the Dow, as GE finally left after 18 years of sputtering. Lets say your stock went bankrupt and you sold it for half. That means only 2% was at risk for the loss. Since GE was in the index and ook 18 years to leave the index that propped up the price so the risk is minimal. You might consider that only 40 stocks account for 30% of the S&P 500’s gain. That means the other 460 ain’t doing much for your bottom line, or they are adding to your loss and risk because they are under water. People think piled higher and deeper is safer but as you add more and more you add friction to the index. People also pay too much risk for their return. US has an expected 11% return and a 14.5% risk. International has 6.4% expected return and a 16.2% risk. Emerging markets have a 9% return and a 23% risk. This data is based on 1995 to 2018 data aka a long time and many market conditions. Just put your money in the USA. Over the long term you get more return for less risk. International funds and EM funds cost more to own. This piled higher and deeper philosophy somehow providing more safety doesn’t make sense or cents. The point is once you numerically achieve market risk, you achieve market risk and no further action is necessary. Once you achieve market risk you want to maximize return if you have a choice.
It should have been worded differently, you are right about that 🙂
I think side hustles are a form of diversification, but one that takes work. But if you pick hustles that you mostly enjoy it doesn’t seem like work 🙂
Agreed! I like working on my site. Helps me get out of my head. Only feels like work when doing the “necessary” items like scheduling tweets.
Having several streams of income is ideal in modern times. You’ll never know when one could dry up so it’s best to have back up. Additionally, by the nature of being diverisified this way you may also capture some fantastic growth if it happens…
Completely agree. Need to have multiple pans in the fire with the hope that a few catch while some flame out.
Totally agree with this strategy.
However, some people just aren’t wired this way. It takes an entrepreneurial spirit to do these things. That’s not part of a lot of folks DNA. That’s largely due to risk aversion.
Fear keeps us stuck. If there’s something one is passionate about that can turn into income, it makes it much easier to pursue.
I like the idea of multiple income sources. It’s smart diversification.
Fear can be a great motivator or a great intimidator. We have to learn to be comfortable in anxiety and fear.
Totally agree. I have done pharma lecturing at night for 30 years. Put 2 children through college purely on my side gig, which is more enjoyable than the 60 hour per week front line grind.
That’s pretty awesome! Strong work
That is not what asset protection is…..