Physician investors routinely worry about the wrong things when it comes to their finances. We want to help you to obtain a better perspective when it comes to managing your money.
#1 Should I Pay Off Debt or Invest?
Most of the time, this question really doesn’t matter all that much because it’s usually a difficult decision. Should you pay off a 6% mortgage or max out a Roth IRA, where you will hopefully earn 9-10% but without a guarantee? Doesn’t matter. Now, sometimes it does matter whether you pay off debt or invest. If you’ve got a 29% credit card debt, you should definitely pay that off before investing. But if you’ve got a 2.5% mortgage; have little saved for retirement; and haven’t put anything toward a 401(k), Roth IRA, or HSA this year, you’re probably better off investing than prioritizing that debt.
But most of the time, the answer to this common question just doesn’t matter much—especially considering the amount of time we all spend talking about it. You will have this dilemma until the day you are debt-free. Get used to it.
The Important Principle
Paying off debt and investing are both good things, but the total amount of your income going toward the sum of those two is really what matters when it comes to building wealth.
#2 How and How Much Should I Pay for Transportation?
Doctors debate car choices and financing choices ad nauseam. Most of the time, this is pretty silly. It’s actually not that silly for lower earners. The reason many of them are not rich is often sitting in the driveway. But for attending physicians and those who earn like them ($250,000-$600,000+ a year)? Not so much. It really doesn’t matter if you drive a $10,000 car, a $50,000 car, or a $100,000 car. You should still have the ability to save enough to retire comfortably as a multi-millionaire. It really doesn’t matter if you pay cash for that car, finance it for a year or two, or even lease it. Your income will “hide a multitude of sins,” and this is usually one of them.
Now, it’s still possible to evaporate a large amount of wealth on cars. If you’re earning $250,000 a year and churning two Tesla Xs every three years, that might keep you from reaching your financial goals. However, the real issue usually isn’t just the cars; it’s that many of the people who churn Teslas also overspend on housing, clothing, travel, eating, and entertainment.
The Important Principle
Habits and behavior matter. The more you spend, the less you can save. But if you want to buy a $15,000 car with a six-month $7,000 note instead of an $8,000 car with cash, you’re still going to retire comfortably as a multi-millionaire. If you want to buy a new $40,000 car every 10 years instead of a slightly used $25,000 car every seven years, it’s not going to make you go broke.
More information here:
Don’t Be Car Poor
My 27-Year-Old Car Will Make Me a Multimillionaire
#3 Should I Add This Investment to My Portfolio?
Portfolio complexity is an ongoing issue. There will always be something new and shiny where you can invest. Diversification matters, of course, but too much of it is unnecessary. Frankly, I think there is little reason to have fewer than three asset classes or subclasses in your portfolio, and there is likely a real benefit to that fourth, fifth, sixth, and seventh subclass. There may be minimal benefit to classes 8-10, too. Beyond 10, you’re definitely just playing with your money.
In our portfolio, we have four types of stocks, two types of bonds, and three types of real estate, and I worry that’s already more complexity than we should have.
The Important Principle
There are no called strikes in investing. You don’t have to invest in everything to be successful. Pick 3-10 asset classes/sub-classes you like and stick with them long-term. If you’re considering adding a new one, are you sure you’re not just performance chasing?
#4 How Should I Withdraw from My Portfolio in Retirement?
The amount of anxiety about this topic among retirees, and especially those about to retire, is unbelievable. Just like it’s OK to invest in any reasonable way, you can also withdraw from a multi-million dollar portfolio in any reasonable way without having to worry about if you’re going to be eating Alpo in retirement. The truth is that most well-prepared retirees spend less than they safely could and still seem to afford their preferred lifestyle.
The Important Principle
You can take out about 4% of your original portfolio value, adjusted for inflation, and expect it to last 30 years with a high probability. You’re far more likely to run out of time than run out of money. That’s not the case if you’re spending 7%-10%, though—especially if you end up with a bad sequence of returns.
More information here:
Real Life Examples of How WCIers Live, Worry, and Withdraw Money in Retirement
Fear of the Decumulation Phase in Retirement
#5 When and How Should I Rebalance My Portfolio?
Rebalancing actually doesn’t matter all that much at all. When studied, optimal rebalancing periods are much longer than most expect—in the 1-3 year range—and no superior method (time-based, performance-based, whatever) has been found. How you do it and when you do it just don’t matter that much.
The Important Principle
Rebalance your portfolio every now and then when you get around to it, especially if it has been more than three years since you did it last. Yes, it will be out of balance again the following day, but that’s OK.
#6 How Can I Reduce My Taxes?
From the way some doctors talk, you would think that there is nothing worse than paying taxes. You know the best way to reduce taxes? Stop working. Stop earning. Don’t have any investments. As a general rule, those with high tax bills are in far better financial positions than those with low tax bills.
The Important Principle
It really doesn’t matter how much you pay in taxes. What matters is how much you have left after paying taxes. Earn, invest, and live tax-efficiently, but don’t let the tax tail wag the investment dog, much less the life dog. Be at least a little grateful to have a six- or seven-figure tax bill. Lots of people would love to have your financial problems instead of theirs.
More information here:
3 Big Tax Deductions for Doctors
The 1 (Weird) Tax Trick the IRS Hates
#7 When Should I Invest This Money?
Everybody knows you can’t time the market successfully in the long-term, but many are still trying to do it. Should I invest after the election? What about the jobs report? Is the market about to go up or down? Am I going to regret buying high? Are we in a bubble? What about this historically high valuation? Give me a break.
Time in the market matters more than timing the market, and you’re usually investing at or near market highs. Do you really think the market is going to go down between the time you invest this money and when you spend it in 10, 20, 30, or 50 years? No? Then, why are you worrying about it?
The Important Principle
Invest when you have the money. Then forget about it for a few years.
#8 Dollar Cost Average or Lump Sum?
It gets even worse when there is a windfall from an inheritance, the sale of a home or business, or lottery winnings. Now, people wonder if they should dollar cost average (DCA) that money in or just get it invested. “Should I DCA this in over the next week, month, quarter, or year?” Knock yourself out. Nobody cares. The data shows you get the most time in the market by investing it all immediately. Since the market usually goes up, that usually works out well. But a third of the time or so it doesn’t. The truth is that at the end of your DCA period, whether that is one week or one year, you will have all that money fully exposed to the market. Does it really matter if that day is today or in one year? Not that much. And over the next 40 years, even money you held out three months to invest was still in the market for 39 3/4 years, basically the same length of time.
The Important Principle
You should invest when you get the money, but if you wait a little while to invest, it doesn’t matter that much. Maybe it makes you feel smarter or safer or something, and that may be worth what it will likely cost you.
More information here:
What to Do with a $900,000 Lump Sum of Money
I Have $150,000; Should I Be Nervous About Lump Sum Investing It When the Stock Market Is at an All-Time High?
#9 Should I Buy a House as a Resident?
On average, it takes about five years to break even on a house because you need the house to appreciate enough while you own it to overcome the transaction costs (typically 15% of the value of the house round-trip). First-time homebuyers are usually surprised by just how much time and money it costs to outfit and maintain a house. In a three-, four-, or even five-year residency, you will come out behind financially much of the time by owning instead of renting.
However, a beautiful thing happens at the end of residency for most doctors. Their income quadruples or even octuples. You want to know why you don’t hear about very many doctors who got burned by buying during residency? Because when they left, they started making enough money that they could afford two mortgages or even to lose a few tens of thousands of dollars without having to buy their clothes at Goodwill or get their food at the local food pantry.
The Important Principle
Residents should still consider renting as the default option for residency, but they’re still not going to do so. It will almost always work out fine, occasionally because they make money on the house but more often because their future high income bails them out.
What Does Matter?
Now that we’ve discussed what doesn’t matter all that much, let’s talk very briefly about what does. The people who end up being financially successful do all of the following things:
- Become financially literate to minimize idiotic mistakes.
- Insure well against financial catastrophes.
- Earn as much money as they can without jeopardizing their desired lifestyle or ethical standards.
- Optimize their career for longevity.
- Save a big chunk of their income and put it toward building wealth.
- Watch their investment and tax-related costs and take the easy steps to minimize them.
- Develop a reasonable investing plan and follow it for decades.
- Optimize their financial affairs for flexibility.
- Withdraw a reasonable amount from their portfolio each year during retirement.
This financial stuff is not that hard. Get the big stuff right and don’t beat yourself up when you make minor mistakes on the little stuff.
What do you think? What else do physician investors worry about too much? What should they actually worry about more?