By Eric Rosenberg, WCI ContributorIf you’re a high-earning medical professional, you’ve likely spent decades gaining medical expertise but relatively little time learning about investments. From real estate to the stock market and beyond, understanding your options and the pros and cons of investing as a high-income earner is essential.
With my sister on the verge of wrapping up her fellowship and starting high-income years as a surgeon, the topic is particularly timely to me. I’m happy to tap into my financial expertise to help her ensure she’s making the best investment choices for her long-term financial health. I’ll give you similar advice. Here’s a look at potential investment strategies for high-income earners.
The Investment Snowball for High-Income Earners
For most high-income earners, putting your funds in a single place is likely not the most beneficial approach. Instead, creating a diversified investment portfolio covering your most certain needs alongside your more costly wants is best.
For the average investor, I like what I call the 80/15/5 portfolio. That’s broken up like this:
- Safer investments–80%: Retirement and safer long-term investments
- Riskier investments–15%: Riskier traditional investments with a potential for outsized returns
- Riskiest investments–5%: Risky alternatives and moonshot investments
As a high-income earner, you may want to adjust this to better suit your financial situation. For example, you may want more than three categories or have the ability to put a larger portion of your portfolio into riskier investments. Nonetheless, I would start by maxing out my tax-advantaged, long-term accounts and focusing those dollars on diverse, low-cost ETFs, such as an S&P 500 index fund or a total market fund.
As you maximize that part of your portfolio, you can put additional dollars in the riskier but not too risky portion. Finally, once you are comfortable that it meets your goals, the remainder can go into the final category of the riskiest investments.
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Safer Investments
As the core of your long-term portfolio, it’s best to put your funds into what we’ll call “safer investments.” That doesn’t mean risk-free, but it does mean choosing investments that historically perform well even when considering market swings. That’s mainly low-fee .
ETFs
Exchange Traded Funds (ETFs) make up the bulk of my portfolio. You can quickly buy and sell ETFs like stocks, and the cost of ownership is often very low. For example, the Vanguard Total Stock Market Fund ETF (VTI) charges just 0.03% and gives you exposure to virtually every single publicly traded company on major exchanges in the United States. VT is the international equivalent, giving you a slice of nearly every stock in the world.
For a focus on the S&P 500—the 500 largest stocks in the US—SPDR Portfolio S&P 500 ETF (SPLG) costs just 0.02% and gives you exposure to the 500 biggest public companies in the US. SPY, VOO, and IVV all charge 0.09% or less for a similar portfolio.
You may also want to divide a portion of your portfolio into other safer ETFs—such as large cap, dividend growth, or blue-chip stocks. Each has its own pros and cons. With most major brokerages, you can buy and sell ETFs with no transaction fees. These types of funds make up the vast majority of my investments.
Mutual Funds
Mutual funds also give you exposure to a basket of stocks with a single holding, but they trade daily at the end of the day and offer different tax advantages and disadvantages compared to ETFs. While we mostly prefer ETFs, mutual funds may still earn a coveted spot in your portfolio.
In fact, many of the funds above come in both mutual fund and ETF form. The mutual fund version of VT is VTSAX. Fidelity’s FXIAX is the Fidelity mutual fund covering the S&P 500, charging just 0.015%.
If you’re interested in mutual funds, it’s likely best to focus on funds with no transaction fees at your preferred brokerage. Brokerages like Fidelity and Charles Schwab both offer long lists of no-transaction-fee (NTF) mutual funds to consider.
Target Date Funds
While target date funds can be both ETFs and mutual funds, it’s worth calling them out as a separate option for the safer parts of your portfolio. With target date funds, a professional fund manager buys a mix of index funds on your behalf that aligns with the typical investor retiring in a certain year. For a 40-year-old, for example, a Target Date 2050 fund is likely the best fit, as of this writing.
Most target date funds have higher fees than if you were to buy the underlying index funds on your own, but if you don’t want to learn much about investing or worry about managing your holdings over time, a target date fund could make sense. You may also want to use a target date fund as a portion of your portfolio while picking the rest yourself, which is what I do personally.
For the most part, target date funds are mutual funds, though BlackRock recently started a family of target date ETFs. Based on my age, I chose the iShares LifePath Target Date 2050 ETF, which has a 0.11% annual management fee.
Robo Advisors
Robo advisors> are another route to buy index fund ETFs, with someone else making the decisions. With a robo advisor, you answer a series of questions when signing up, and the app assigns you to a professionally designed portfolio for people with similar investment goals.
One of my retirement funds is in Schwab’s fee-free robo advisor, Schwab Intelligent Portfolios, which also makes a lot of sense for people who don’t want to learn as much about investing or to pick their own investments. If you decide to go this route, be sure to review our most recent list of the best robo advisors to ensure you find the right fit for your needs, paying close attention to annual fees.
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Riskier Investments
For the next portion of your portfolio, you can afford to take on a little more risk in exchange for the potential of higher returns. For today’s discussion, that’s primarily made up of individual stocks and some less risky alternative investments.
Single Stocks
While I don’t trust them for stock advice, I do like one foundational philosophy from The Motley Fool: if you buy a number of well-picked stocks and hold them for a long period, you’re likely to have a few of those far outperform the market, giving you an excellent overall return.
In my past, that big winner was Amazon, which is worth more than 14x what I paid for it. I’ve also seen more than 100% returns on seven others: Alphabet, Fiserv, CrowdStrike, JP Morgan Chase, BlackRock, Fortinet, and Cisco. Those more than make up for the dismal performance I’ve seen from 23 & Me and Lemonade.
The markets are always ebbing and flowing. If you follow a mix of Warren Buffett’s value investing principles with a healthy dose of investing in companies you understand and believe will grow, you’ll probably wind up with a few big winners and can hopefully avoid the losers.
However, as even professional fund managers typically underperform the market about 80% of the time, you may want to skip this altogether.
Medium-Risk Alternatives
Another place I’ve funneled part of the 15%-ish percent of my portfolio is what I deem to be less-risky alternatives. My biggest chunk is an investment with Fundrise, where the company buys, sells, and manages real estate and looks to earn returns for investors. While my experience there has underperformed the stock market and is just better than breaking even, I’m sticking with it for now, as interest rate changes may position Fundrise for excellent returns in the next few years.
I also invested about $1,000, which is less than 1% of my assets, in artworks through Masterworks. Time will tell how my Banksy, Picasso, and Joan Mitchell paintings will turn out.
Real Estate
You may want to expand far beyond these simpler and easy-to-start investments through large online platforms if you have significant assets. For example, buying farmland directly with a small group of investors through AcreTrader could be an interesting option if you qualify as an accredited investor.
As your assets grow, you may even make larger direct real estate investments, though they take more time and effort to run well.
Riskiest Investments
Riskier investments are exactly what they sound like. These are investments where you could see 10x, 100x, or bigger returns, but there’s also a real chance that you won’t get your money back.
Perhaps the best-known investment in this category is cryptocurrency. Early investors became crypto millionaires, while those who joined late may have experienced significant losses. I’ve always said, don’t invest more than you can afford to lose.
You may see other opportunities in this space, including collectibles, wine, and other high-risk/high-yield investments. This should be a small part of your portfolio, and extreme caution is advisable.
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Building the Best Investment Strategy for Your Unique Goals
Everyone’s finances are unique. That’s why it’s called “personal” finance. As your income grows and you have more opportunities to invest, you can also take on more complex, diverse, and sometimes risky investment strategies.
Understanding your options and where to put the core of your investments is vital. Beyond there, high-income earners have plenty of choices when it comes to investing.
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