By Vivek Verma, MD
Estimated reading time: 8 minutes
For the vast majority of physicians, personal finance and investing is not a particularly strong point. This is largely a result of a lack of formalized training and/or instruction in this realm. However, as physicians, we are very used to continually learning – as such, trying to learn new skills with respect to finance or investments field should not be too much of a foreign concept. After all, finance and investments are not rocket science, and definitely not medical science either!
The following comprises a basic list of important points for the physician with little to no experience on this topic, shaped by personal experience as well as that of trusted peers and colleagues.
Understand the fundamental importance of finance & investing
It is relatively intuitive that $100 in the 2020s does not have the same value as $100 in the 1990s. At one time, a dollar was enough to get you into a movie theater (with popcorn included) – yet, nowadays, a dollar is often not even enough for many items at the dollar store! Naturally, the takeaway is that earned money simply sitting in a bank account slowly – but steadily – loses value over time.
There must be a mechanism we can use to counteract that slow degradation in value, right? Well, this is where investing comes in. It allows for steady growth in the number of dollars to compensate for the loss of value of a given dollar. This is why basic knowledge in finance is essential, especially because there are easy options to avoid slow degradation in your hard-earned money.
Know whether you want to be more of a passive vs. active investor
Having understood that money needs to be grown to avoid losing its value over time, there are many strategies to do so. A lot of those strategies depend on whether you want to do this process passively or actively.
Passive investors generally want to spend little to no time thinking about finance and investing, whereas active investors would likely not mind spending time researching various types of investments, crunching numbers, and following the stock market.
In other words, passive investing offers a low amount of effort, lower risk, and lower returns, whereas active investing involves higher effort, higher risk, and higher returns.
Passive investing strategies for physicians
High-yield savings accounts: Many passive investors simply place their money in high-yield savings accounts or money market accounts, which give them a flat ~3-4% per year without risking a cent in terms of potential loss of the invested money. This may not seem like much, but in a $500,000 account, this literally means getting $15,000-$20,000 “for free” every year!
CDs: Certificates of deposit (CDs) lock up money for a desired period, but the risk of losing money is minuscule and can offer rates as high as ~4-5% from certain carriers.
Bonds: Bonds are very popular investments that are similarly low risk with potentially even higher returns than the options mentioned above.
Professional money managers: Lastly, other passive investors pay professional money managers, which minimizes one’s workload but limits profits (these professionals can charge 0.5-2% or flat fees regardless of return).
Active investing strategies for physicians
Active investing can range from relatively minor time consumption to a lot of time and effort.
Index funds: An extremely common strategy that requires relatively low effort is to simply set aside a fixed amount of money every month and invest them in index funds, which are investments that mirror the large stock market indexes such as the S&P 500, Nasdaq, and Dow Jones.
Individual stocks: Others, who enjoy following the stock market, financial news, and/or individual companies, opt to do their own research and invest in individual stocks at strategic time points based on market movements.
Technical analysis-based and futures trading: Still others, who are highly into financial nuances, utilize advanced strategies such as technical/chart analysis-based trading, options trading, and futures trading. These strategies can apply to either individual stocks or index funds.
The bottom line is that the more the effort, the more the risk, and the more the reward.
How to start investing as a physician: key first steps
Before you get started with investing, there are a few key steps:
1. Determine your risk tolerance
Regardless of whether you are an active or passive investor – especially if you are an active investor – it is essential to ask yourself what your level of acceptable risk is. This is because any investment that is higher reward will necessarily also be higher risk.
In other words, ask yourself whether you invest a certain amount of money into a particular investment, and tomorrow it loses its value by 10%; will you be able to swallow that discomfort with a level head, or will you not be able to sleep that night? Your answer to that question will go a long way to finding out your personal tolerance to financial risk, and thereby the kind of investments you should pursue.
If you do not want to lose a cent of your money and earn 3-4%, there are special investments for you. If you are OK with losing 50% of your investment and potentially earning a 50% return, there are other special investments for you as well. If you want something in between, there are still other special investments for you.
For instance, in the scenarios above, a $500,000 portfolio can be invested into various investment vehicles and yield different results. A money market fund can yield $15,000-$20,000 per year without diminishing a cent of the initial $500,000. Investing the same amount into high-flying stocks can grow the investment into $750,000 – or it can be cut to $250,000 before you know it as well. Investing the same amount into index funds corresponding to the S&P500 or Nasdaq can result in a 10-20% correction (leaving $400,000-$450,000) but can also yield returns of the same amount (resulting in $550,000-$600,000).
2. Determine your time horizon
The time horizon refers to how long you realistically expect to invest and is most often influenced by age and the amount of time you wish to continue working. As such, younger investors generally have a longer time horizon than older individuals, and as a result they tend to skew more towards riskier investments than older investors.
This is based on the principle that losses of a certain percent in an investment tend to be a big deal for someone who will need to use that money sooner in retirement; but for someone far away from retirement, it is merely a temporary blip over a long period of time.
3. Take action!
Once you have determined the answers to the aforementioned issues and chosen the associated strategies thereof, the next step is to open the proper type of investment account, whether that is at a regular bank or a brokerage company, and transfer money to that account to start the process.
In either case, when beginning the process of investing, there will be a myriad choices of bank/brokerages, types of investments, and advising firms. Which of these choices you pick is not as important as simply taking the action itself. This certainly does not mean making an uninformed decision, but at minimum avoids sitting on the sidelines because of inertia or a lack of confidence.
4. Know whom to trust – and whom not to
The media, social media, Google, AI, YouTube, and such sources will tell you whatever sounds good to your ears – simply put, they are not to be trusted. Financial advisors are also hit-or-miss, namely because they can personalize a path of action best for you, yet also do not have the level of accountability to necessarily do what’s best for you either.
In this author’s humble opinion, the best way to wade through all of this is to talk to several of your friends and peers/colleagues who know you and who have been through this process. There are always outliers, so talking to just one or two may not suffice.
5. Take some time to re-evaluate your strategies
A lot of items in the finance & investing realm constantly change – including each person’s thoughts, risk tolerance, financial situations, and goals. Because a lot of finance and investing is based on individual experiential learning, it is extremely common to attempt a strategy first and then change that strategy after some time. This is very healthy and very useful. Therefore, perhaps at the end (or beginning) of every year at minimum, take some time to evaluate what you liked and disliked about your previous year’s financial actions and strategies, your financial returns, and ask yourself whether you are satisfied or not.
Finance and investing are a learning process, especially in the beginning, and regularly re-evaluating and giving yourself feedback is important to keep fine-tuning the process to optimize it for yourself amidst ever-changing circumstances.
6. Know your limits
Having a basic understanding of finance and investments is very important, but it should by no means overwhelm you, nor alter your daily functioning. Finance and investing should neither be taken lightly nor too seriously. It should be a process that is important to you (hopefully with decent returns) yet not interfere with the things you regularly enjoy doing. If you are noticing any signs of mental angst, dissatisfaction, or lifestyle changes caused by the finance/investing process – stop, talk to someone trusted, and have a low threshold to change your activities/strategies in this realm.
At Sermo, we are fortunate to have an excellent community of physicians who routinely discuss financial topics and support each other’s financial journeys.
This article reflects the personal experiences and perspectives of the author. The views and opinions expressed are their own and do not necessarily represent the views, positions or policies of Sermo.
