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By Dr. James M. Dahle, WCI Founder
A question.
“I just sold an investment and will need to pay taxes on the gains in a few months. Should I put the proceeds into Tesla stock or Shiba Inu cryptocurrency until then?”
I write this as I return from the 2021 ACEP Scientific Assembly. It was great to be all together again in person and to speak with many of you face-to-face about your specific financial situations and questions. Hundreds of you came to my two presentations, and I recorded two podcasts: one with the Emergency Medicine Residents’ Association about financial tips for residents and another for the ACEP Frontline Podcast with Ryan Stanton MD, FACEP, about inflation and cryptocurrencies.
When I started The White Coat Investor more than a decade ago, the tagline was, “Helping those who wear the white coat get a fair shake on Wall Street.” More recently, I’ve described our work as “Helping docs stop doing dumb stuff with their money.” In recent months, I am getting an increasing number of questions about ideas that I would consider “dumb stuff.” Just like in medicine, there is no such thing as a stupid question, just controversial topics in the financial world. However, some of the financial mistakes doctors are doing or considering doing these days are the equivalent of treating a gastrointestinal bleed with a combination of Coumadin and Heparin. These unforced errors are likely to end very badly.
Many young physician-investors have no personal recollection of a serious downturn in the stock or real estate markets. With the exception of three very brief drops, stock prices have been rising consistently since the Great Recession struck in March 2009. The price of housing and real estate investments, in general, has also been skyrocketing in many areas of the US for most of the last decade. Thousands of cryptocurrencies have been invented; many of them have had spectacular returns so far.
Even bonds have had better-than-expected returns over the last decade. Meanwhile, due to government policies, interest rates have been kept artificially low to the point that the current yield on a 10-year treasury bond is nearly 6% less than the current rate of inflation. Most physicians have mortgages at rates under 4%, and many have not made a student loan payment in nearly two years.
The appetite for, and tolerance of, both market risk and leverage risk in the financial markets right now is ridiculously high compared to most of financial history. Many doctors have made terrible financial decisions, and not only have they gotten away with them, but they've also been massively rewarded for taking on unwise risks. This trend will not continue forever—trees do not grow to the sky.
Here, I discuss three unforced errors that investors, including physician-investors, commonly make and seem to be making more frequently in the past few years.
#1 Investing Short-Term Money in Long-Term Investments
Stocks, bonds, and real estate are long-term investments. If you need money in a few months to pay off a loan, buy a car, make a house down payment, or pay your taxes, it has no business in any of these investments. That’s what a savings or money market account is for. In this situation, the return of your principal matters a lot more than the return on your principal. The price volatility of these investments dramatically outweighs any benefit you might see. You are essentially gambling and are nearly as likely to lose money in the short term as to make it. If investing short-term money in solid long-term investments that produce earnings, interest, and rents is just gambling, where does that put speculating into precious metals or cryptocurrencies? You might as well take next quarter’s estimated tax payment down to the roulette table in Las Vegas and put it all on red.
More information here:
Should I Invest in Cryptocurrency?
#2 Taking on Too Much Debt
The mathematical benefits of investing with leverage—especially fixed, long-term, noncallable, low-interest-rate debt—cannot be denied. However, just because a little bit of something might be good does not mean that a lot of it is better. Given the higher than historical investment returns in all asset classes over the last decade and with interest rates less than the rate of inflation, I cannot recall a more tempting time to invest with borrowed money. Physicians sometimes do this unknowingly by delaying the payoff of a mortgage or student loans, or they do it deliberately with cash-out refinances and margin loans. Either way, the effect is the same, and it works until it doesn’t. If you have borrowed half of the money you have invested and the investment drops 50% in value, your entire investment is wiped out. If you borrowed 80% of the money you have invested and the investment drops 50% in value, you may find yourself in front of a judge declaring bankruptcy. Be careful how much you borrow to invest.
More information here:
The Best Ways to Use Debt to Your Advantage
#3 Putting Serious Money into Play Assets
Many investors enjoy learning about their investments, doing research, and investing in the cutting edge of technology. Maybe they’re trying to time the market, picking individual stocks, dabbling in precious metals, or speculating on which cryptocurrency the world will eventually adopt for widespread use. While I view my entire portfolio as serious money and do not do any of this stuff, I certainly agree with most financial advisers who think it is fine to do this—so long as you only do it with “play money.” Play money is 5% or less of your portfolio—total. If you want to put 5% of your portfolio into cryptocurrencies like Bitcoin, Cardano, Solana, or even Shiba Inu, knock yourself out. But if you put 5% into each of those and another 20% into GameStop or whatever the latest meme stock might be, you will violate the basic tenets of investing. History has shown that doing so does not usually end well in the long run.
More information here:
What Are Meme Stocks and Why You Should Avoid Them
You have worked hard to learn how to be a physician. You work hard now for your paycheck. If you want to be financially secure, you need to make sure your money is working as hard as you. Doctors make enough money that they do not need to hit home runs or optimize every single financial decision to have a comfortable retirement as a multimillionaire. They do not, however, make enough money that they can do foolish things with their earnings and expect their generous salary to always bail out bad decisions.
What other temptations should docs avoid? What mistakes have you made while chasing these temptations? Have you made other unforced errors? Comment below!
[This article was originally published at ACEPNow.]
How are you navigating the current market? Are you putting in more money into your ETFs now that the market has come way down? Do you just do buy and hold?
I’m following my plan like always. I invest a portion of my earnings (from whatever source) once a month into whatever asset classes have been doing most poorly lately to maintain balance in my chosen asset allocation of 60% stocks, 20% bonds, and 20% real estate. Boring? Sure. Effective? Absolutely.
Hey Jim great article as always. always good to have a reminder of what are sensible investments vs speculation. What did you tell the doc who asked that question? Probably took awhile! Or maybe just said, “you need a plan,” and referred to your course!
You read it. That’s the answer. These columns that run first in ACEP NOW are mostly hypothetical questions. I get similar ones but nobody ever asked me this exact question before.
Hi Jim,
I find myself have a lot of panic attacks because I had most of my money, millions of dollars, in long term bonds. I thought I was being smart and conservative, but it is causing more stress than ever.
Should I keep putting money into bonds even though they just keep falling? Even though the fed said they will keep raising interest rates for throughout next year?
I just don’t know what to do anymore. I want to stick with my plan, but losing millions of dollars in bonds is not what I had in mind. Would appreciate any words of advice. Thank you!
I’d suggest that you’re a good candidate for an appropriately priced financial advisor, maybe vanguard. If you have millions assuming you don’t have crazy spending they should be able to help you do construct an appropriate portfolio.
For what you’ll pay Vanguard (0.3% * millions), you can get much more personalized financial planning and asset management. I’d call one of these folks if you want a professional financial advisor:
https://www.whitecoatinvestor.com/financial-advisors/
First of all, I’m sorry for your loss. It’s a gut-wrenching experience to lose real money you carved out of your income to save for later in life.
However, let me be blunt. Putting all your money into long term bonds was not a reasonable portfolio. There is a wide range of what is reasonable, but that is outside of that range. I don’t hold long term bonds at all due to the risk you have just seen show up. My bonds are all short to medium term for just that reason.
Obviously, selling low is not a great idea. If you have a reasonable portfolio, you should never do that. You should just rebalance and ride out the markets ups and downs. If you don’t have a reasonable portfolio, you should get a reasonable portfolio. Better to get one BEFORE the risk shows up that crushes your unreasonable portfolio, but even if you wait until that happens, as you have, you still should get a reasonable portfolio. Here is a list of reasonable portfolios:
https://www.whitecoatinvestor.com/150-portfolios-better-than-yours/
Here is how to get an investing plan in place:
https://www.whitecoatinvestor.com/investing/you-need-an-investing-plan/
No idea what the right portfolio is for you. Perhaps it includes some long term bonds. Obviously, you don’t need to sell those, but I suspect it involves owning less in short term bonds than you now own.
Keep in mind that rising interest rates are actually GOOD for bonds in the long-term, with the long-term defined as a period of time longer than the duration of the bonds. The higher interest they now pay eventually more than makes up for the loss that occurred when interest rates went up.
As a general rule, in these sorts of situations, you want to sell down to the sleeping point. It’s not worth having panic attacks over.
Thanks Jim. I agree it wasn’t reasonable and I am paying for it dearly. It is extremely painful. When you are younger and only have a few hundred thousand dollars, its not that big of a deal to watch half your money go down, but when you have saved for years and years and have accumulated millions, to watch that real money go down is gut wrenching. A lesson I will never repeat. I will certainly be more diversified going forward. But I also didn’t think that long term bonds which have done great for 40 years would have this big of a loss. Its not like I was putting all my money into crypto or some meme stock, I thought I was being smart and conservative.
But I don’t only own long term bonds, I do own stocks so it is more balanced, but based on my risk tolerance I did have about 75% of my portfolio in long term bonds. In retrospect I completely understand this was very very stupid, but I can’t change the loss right now and I am certainly not going to lock in my loss by just selling all that and locking in a multi-million dollar loss.
I think what scares me the most is that I hear so much stuff which I don’t know if its true or media nonsense. Things like the bond bull market is over and bonds will never ever reach their all time highs again and that bonds will be down for the next 20-30 years.
I know your crystal ball is always cloudy, but I was hoping you can share your insights on this. Again, I know you don’t know the future, but your writing always helps to calm me down and keep me on track. Do you think bonds will ever go back to all time highs and there will be another bond bull market or has that ship sailed and we are looking into low/falling bond prices over the next few decades? I value your opinion. Thanks again.
It’s likely not going to be as bad as the talking heads are saying. But they could drop even further than they have. Vanguard’s Long Term Bond Index Fund is down 19% year to date. Wouldn’t surprise me at all to see that drop to -30% or 40%. But it’s possible it only drops a little more I suppose. Seems very unlikely to start going back up any time soon with inflation so high and the Fed talking about raising rates. My crystal ball, cloudy as it is, certainly goes no further than 1 year out.
I understand STAY THE COURSE given downturns…and we are continuing that. But what about a windfall that I was getting ready to invest in my Vanguard account? It’s less than 50k, but a lot for us.
What about it?
Think of it this way. Every day that you hold your portfolio is exactly the same (ignoring transaction and tax costs of course) as lump summing into that exact same portfolio that morning. If you had your money already invested, would you sell out today? If not, then you should buy it all today. There is no other logically correct reaction.
But if you want to play games with your psyche to make you feel better, you can always dollar cost average over a few months or years. Just realize you are more likely to hurt your overall return than help it.
https://www.whitecoatinvestor.com/dollar-cost-averaging-is-for-wimps/
You like to buy the worst performing stuff, maybe like biotech stocks now. Falling wedge technical analysis and catching a falling knife worries me though.
These are my alternatives:
Why do you not short scamcoins as a long term investment?
Thoughts on going 10 percent into energy stocks now? Too risky?
The problem with a great return on shorting a scam coin is to sell it high. They often go way up before busting and having to cover a short would be really bad.
I already own all the energy stocks. Just like I did 5 years ago. Same with tech stocks etc. My crystal ball is too cloudy to jump from sector to sector expecting success.