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.