For many physicians, the decision to invest in the stock market is very easy. They understand the benefits and are reaping the rewards. For others, there is significant hesitation. They see investing as complicated and confusing, and they fear losing all of their money in a market crash. By explaining how investing can be simple and financially rewarding, I hope I can convince some physicians that investing in a diversified portfolio of low-cost index funds is superior than the alternatives.
Reasons why doctors hesitate to invest
1. Not understanding how it works / Too complicated
Many doctors fear investing in the stock market because they have never been educated about it. This is a problem with personal finance education in general, as very little time is spent teaching personal finance in our high schools and colleges. In medical school, almost no time is spent on personal finance education, even though most medical students currently take out six-figure sums in student loans. At my medical school, personal finance and investing education was limited to a single half-day in the fourth-year of medical school, organized by a local wealth management firm. Websites such as the White Coat Investor, Physician on Fire, and this blog are bridging the gap in medical student education on personal finance issues, but many physicians still feel poorly equipped to handle their money and investments.
Often, physicians feel that they should let others manage their money. They feel that wealth managers have fancy finance degrees, more letters after their name than they do, and the time and knowledge to handle their investments. Just as they have spent their entire educational career studying to be a physician, they feel that it takes significant education to invest their money properly.
2. Fear of losing money
Many physicians are very scared of investing in the stock market because they fear that they will make a mistake and lose their entire portfolio. They remember the stock market crashes of 2000 and 2008, and worry that a future crash will wipe out their hard-earned savings. Perhaps they are pessimistic about the future of the U.S. economy, especially if they are fearful about what a Donald Trump presidency will mean for the world.
For these physicians, the safety of certificates of deposit (CDs) becomes attractive. It guarantees them a small but safe return. There was a time in the not-too-distant past when CDs actually gave you a non-trivial return. Back when CDs returned 4-5%, many physicians felt comfortable accepting this guaranteed return while avoiding the volatility of the stock market.
3. Belief that real estate can provide superior returns
Many physicians feel that their money may be better invested in real estate instead of the stock market. Perhaps their family owned a rental property that was successful. Perhaps they watch a lot of HGTV, where normal people can flip a house over a half-hour show and make a lot of money. Perhaps the stock market is an abstract concept, while owning real estate provides a tangible asset that they can see and visit whenever they like. Real estate always has some intrinsic value, but a company can go bankrupt and its stock can go to zero.
Why you should invest
1. In the long run, a diversified stock/bond portfolio will (almost) never lose money
While the stock market has fallen significantly during many stretches over the course the last century, it has always bounced back. In the long run, a diversified portfolio of stocks and bonds will almost always make you money. For example, from 1928-2017, a 50/50 portfolio has always made money over a ten-year period. For the young attending physician who has a long-term investment horizon, you can (almost) guarantee positive returns.
2. Investing can be as simple as you want it to be
Investing does not need to be complicated. It can be as simple as investing in a single target-date mutual fund. A target-date fund contains a diversified portfolio that is allocated according to your planned retirement date (for example, Vanguard Target Retirement 2050 Fund). The asset allocation will change with time, becoming more conservative as you get closer to your target retirement date. If you want to save some money on mutual fund fees, you can instead purchase a diversified portfolio of three index funds: Total Stock Market, Total Bond Market, and International index funds. If you want to learn about more complex strategies, you can read this blog or others, but the reality is that you can achieve your financial goals by saving more and investing in a target-date fund.
3. Difficulty in achieving financial goals without investment returns
If you try to be conservative and invest only in CDs or short-term bonds, you will require a significantly higher savings rate in order to achieve your financial goals. It is well-established that, on average, the stock market will have higher returns than CDs, because of the risk that stock market investors take. If the stock market didn’t have better average returns than the guaranteed returns of CDs, no one would invest in the stock market.
4. You can get a financial advisor if you’d like
Some physicians are more comfortable having a “money guy” who takes care of their investments. This is completely reasonable, as not everyone wants to learn about investing. If you do so, be sure to select an advisor that is obligated to act in your best financial interests (fiduciary responsibility), and uses low-cost index funds. While many financial advisors do good work managing their clients’ investments, always remember that the person who cares most about your money and your financial future is yourself.
Real Estate vs. Stocks
Real estate is attractive to many physicians because it is a tangible asset that always retains some intrinsic value. However, it is difficult to have a diversified portfolio of real estate investments, since most physicians will hold only one or two rental properties. If one of your properties sharply declines in value, you don’t have other properties to balance this loss. While individual stocks can go bankrupt, a diverse portfolio of stocks, such as a S&P 500 index fund, will rise in the long run.
For physicians with a long-term (greater than 10 years) time horizon, investing in the stock market is a smart decision that will help you achieve your financial goals. What reasons have you heard from colleagues regarding why they don’t invest in the stock market? Do you know anyone who prefers real estate over stocks?