[I talk about investing often on FPMD. But I haven't addressed the common investment mistakes physicians make. The following guest post is provided by Ryan Inman of Physician Wealth Services (PWS). Full disclosure: PWS is a paying sponsor of FPMD.]
Have you ever heard of someone becoming wealthy by investing in some get rich quick scheme?
Yeah, me either.
Wealth is not only created by how much one can make during the good years; it's also created in how much one can persevere in the down years. That said, avoiding some of the common investing mistakes that many doctors make will help set you up for long term success. Here are five of them:
Mistake #1: Buying Investments Recommended by Family and Friends
Because physicians are pressed for time, one of the most common mistakes I see are physicians following investment advice given by family and friends. They trust their family and friends, so they do what they say, but this is often a mistake.
You should always do your own research when it comes to investing. Don’t follow the hype over a particular stock; this is an almost sure way of losing money. If everyone is talking about a stock, it most likely is overbought and overvalued. Stick to your research and tune out the noise.
As an extension, don’t trust the wrong people to handle your money. Even if your colleagues all recommend a specific financial advisor, do your own research first. If someone tries to sell you very expensive products, take a step back. The best financial advisors have your best interest in mind, not theirs. Try to find a financial advisor who shares your views on long term investing, and that will help you reach your wealth goals.
[FPMD: Unfortunately too few docs actually take the time to do their own due diligence on investment products. And often by the time they find out they've trusted the wrong people to handle their money, it's already too late... The only way to get around this is education, which I suppose is the point of Mistake #3 below.]
Mistake #2: Confusing Investments with Insurance
Speaking of expensive financial products, this brings me to my next point. Please don’t confuse investments with insurance. Furthermore, they often call these insurance products investments because dishonest salesmen pitch them this way.
Whole life insurance and variable life insurance are insurance products. They are not investment products, and they can cost you a significant amount of money. Again, there are many financial advisors out there who will try to sell you products like this because they make a high commission off of them. Once again, it’s very important to find an advisor who shares your goals and has your best interest in mind, not their own.
[FPMD: I cannot agree more, see my previous post Just Say NO to Whole Life to see how I really feel.]
Mistake #3: Not Taking the Time to Learn About Investing
It took you years to understand medical terminology, it might take some time to understand investing lingo too. You need to be able to understand the difference between a mutual fund, an ETF, an individual stock etc. in order to make educated investment decisions.
Furthermore, I’ve had clients not invest in work retirement plans thinking 403b plans or 401k plans are a scam. But more often than not, investing in your work sponsored retirement plans with a match is the best place to start investing.
In order to feel comfortable in investing in a work sponsored plan, however, make sure to ask your HR team a lot of questions about your investing options. You should be able to explain what investments you are buying into and how they will benefit you over time.
[FPMD: I've always said the biggest mistake physicians make about finances is not paying attention. Why do people think work-sponsored plans are a scam? And yes, if you have a work-sponsored plan, you should definitely take advantage. In fact, these are some simple steps you can take to start building your nest egg.]
Mistake #4: Having Too Many Investments
You should limit the number of investments you own. While this may seem obvious, it’s really important. This rule is meant to keep your portfolio to a manageable level of review and investment understanding while still allowing you to be diversified in the markets.
Owning five to ten low cost, highly diversified funds representing different sectors and geographic locations is much better than owning 200 individual stocks or one/several high expense ratio mutual funds. This will also help keep transaction costs lower as well, which will increase your returns over the long run.
Additionally, for long term wealth, remember to reinvest the dividends you earn to take advantage of compounding growth. Stocks and funds that pay dividends should have a place in your portfolio because a majority of the gains in the stock market over the past several decades have derived from dividends, not capital appreciation. Reinvest those dividends to accelerate your asset accumulation.
[FPMD: As I grow older, I've become a subscriber to the "less is more" philosophy. And yes, finances can get cluttered fast. Be sure to check out this great article by the Wall Street Physician - The Benefits of Simplicity in Personal Finance.]
Mistake #5: Spending Too Much on Fees
This last mistake is extremely important to avoid. In fact, spending too much on funds and fees can mean hundreds of thousands of dollars lost over time.
I recommend that all my clients invest in low cost, highly diversified funds (index funds). Investing in index funds allows you to diversify your investment portfolio, for a minimal cost (generally lower than 0.2% per year), allowing you to keep transaction costs and taxes low.
Index investing is a passive investment management style. Nobel Prize winning academic research has shown that investing in actively-managed mutual funds will not outperform its passive counterpart. Why pay a mutual fund 1% or 2% to not outperform the market? Don’t be fooled.
[FPMD: Ah yes... the evil fees... There are plenty of resources online that will explain to you how a fee difference of even just 1% can eat significantly into your long term returns. Here's a great article by Physician on Fire - Investment Fees Will Cost You Millions.]
Ultimately, when it comes to investing, keep it simple, invest for the long term, and you will be able to achieve your investment goals. As physicians, you don’t have a lot of time to spend on your investment strategy so don’t overthink it or buy into falsehoods. Simply do your research, choose diversified index funds as your investments, and stay consistent even during market dips. If you do all that, you will be well on your way to having your hard earned money work for you to create the long term wealth you deserve.
Ryan Inman is a fee-only financial planner who specializes in helping physicians and their families build a solid financial future through his firm, Physician Wealth Services. As the husband of a pediatric pulmonologist, Ryan has a unique insight into what it’s like to be a part of a physician family and thoroughly enjoys helping his clients. To schedule a free 30 minute consultation, feel free to contact Ryan at any time.
Full disclosure: Physician Wealth Services is a paying sponsor of FPMD.