[Editor's Note: The following post contains some practical investing advice from The Physician Philosopher. Like most things in life, not everything matters equally. Figure out what matters most and do that first.]
The Pareto Principle can be stated many ways, but the premise is that 20% of the work will get you 80% of the results. Investing advice for doctors is no different. It may seem complicated, but with a little knowledge about what falls into the 20% doctors need to know about personal finance, it doesn’t have to be. You can certainly do all of this yourself.
Today, let’s talk about the 20% that really matters.
Practical Investing Advice for Doctors: The Pareto Principle
For example, as a medical student, your 20% is pretty simple. You have two jobs: Study medicine and minimize debt. That’s it. The rest is simply to not screw it up.
As a resident, it gets a little more complicated. Like most things in life, you still need to do all of the things you were doing before (studying medicine and minimizing debt). However, residents have to come up with a plan pretty early to deal with their debt, consider investing, and to learn the top ten things they need to know about disability insurance.
Again, when you become an attending physician you must continue to perform all of the preceding functions. The additional work becomes figuring out when conflicts of interest exist, investing more, consider getting a student loan consult to refinance your loans, make any necessary changes to your debt repayment plan, and decide whether to invest or pay down your debt. You probably need to increase your asset protection (increase life and disability insurance; add umbrella and malpractice) and work on an estate plan, too.
That may seem like a lot! You basically need a checklist (fortunately you can find that financial checklist for new attendings here!)
The following is an example of the 20% that you need to know about investing.
Set it and Forget It
When you invest, there are many ways that lead to success. That said, I am a “set it and forget it” investor for two reasons.
- Research has shown that the more you check your portfolio, the more likely you are to make changes in a down market. Changes typically lead to worse performance in a down market. Time in the market and staying the course are possibly the most important rules in all of investing.
- Your job is to learn to practice good medicine. Patients depend on that. You should not be spending a lot of time trying to figure all of this stuff out. Just learn the 20% you need to know. Then, focus on taking care of patients.
Best Asset Allocations
There’s more than one way to skin this cat. In fact, the White Coat Investor keeps a list of 150 portfolios that are better than yours.
That said, I am trying to make this simple and effective. Remember, this is the 20% of investing advice for doctors that you need to know to get 80% of the results.
Three Fund Portfolio
How simple can index fund investing be?
Well, Taylor Larimore (one of the original Bogleheads), has read pretty much every financial book out there and has come to recommend a three-fund portfolio that captures a piece of all of the market. What are the three funds?
- Stocks: Total Stock Market Index Fund (Examples: VTSMX, SWTSX, FSTMX, FSTVX)
- Stocks: Total International Stock Market Index Fund (Examples: VGTSX, SWISX, FTIGX, FTIPX)
- Bonds: Total Bond Market Fund (Examples: VBMFX, SWAGX, FBIDX, FSITX)
Investing advice for doctors can be that easy. Just three funds.
The Bernstein “No-Brainer” Fund
This is another example of a simplified portfolio.
Dr. William Bernstein, a neurologist turned financial advisor, offers a similar “no-brainer” portfolio that consists of investing in index funds in four key asset classes, all in index funds:
- 25% total bond index fund
- 25% international stock index fund
- 25% small-cap index fund
- 25% large-cap index fund
What investing advice would you give a doctor who doesn’t have those options?
Of course, not every employer offers these funds. Mine certainly doesn’t, but they do offer index funds. So, my job is to try and mirror the diversification shown above in my 403B and my 457 plan.
I do not know the specific index fund company your employer uses, but they (hopefully) will have index funds broken up into individual asset classes. For example, it could look something like this:
- 25% Large Cap Index Fund
- 25% Small Cap Index Fund
- 25% International Stock Market Index Fund
- 25% Bond Market Index Fund
Take a Peek Occasionally (Rebalance your Assets)
Once a year, take a peek at your investments to make sure that they are still mirroring your desired asset allocation. This is called rebalancing and the purpose is to lower risk and – hopefully – increase returns. There are two different techniques here. Either one is fine. Just pick one.
The purpose of rebalancing is to keep your portfolio diversified. Just because one class has done well over the last year or two doesn’t mean it will continue to do well. Stick to the plan and rebalance back to your pre-chosen asset allocation.
Time-Based
The time-based rebalancing technique simply says that every year or two you look at your portfolio. Then, you rebalance it to make it look like the asset allocation you decided on above. Anything more than 5% above or below your desired asset allocation, you correct it.
For example, if you want 25% large caps and the large caps have exploded and are now 35% of your portfolio, sell some of your large caps and buy some of the other index funds in the other classes that didn’t perform so well.
You may be concerned about taxes here. However, inside of a retirement account (401K, 403B, 457, IRA) you can buy and sell as much as you want because you are not actualizing any returns until you actually sell them to take money home.
However, in a taxable account, these concerns are founded. When you sell something there, you are likely going to get hit with a long-term capital gains tax. If your account is small enough, you can simply change your future allocations to purchase more of the funds you need more of and less of the funds that are plentiful. As your accounts grow, this can become more challenging.
If you can rebalance things by buying and selling inside of your retirement accounts, that is preferred. If you must rebalance stuff in your taxable account, just do it efficiently.
Band Based
This other type of rebalancing technique involves exchanging funds anytime an asset goes above or below a certain percentage of your desired asset allocation (say, again, 5%), then you rebalance. In other words, you rebalance when you break past a “band” threshold that you’ve previously set.
I personally don’t love this technique as much because it encourages you to look at your portfolio more often. As I’ve stated before, I am a fan of “set it and forget it” investing. This style of rebalancing implies that you are going to keep a closer eye on your portfolio.
Risk Tolerance as We Age
One other piece that you absolutely need to understand is that your stock to bond asset allocation will likely change with age. While the rule of thumb for people who start investing early is that your portfolio should have the same percentage of bonds as your age. However, doctors typically start saving later.
Solid investing advice for young doctors might involve investing in 90% stocks and 10% bonds (90/10). If you are risk-averse, you might lower this to 80/20 or 75/25.
A higher percentage of stocks implies more risk, which ought to eventually lead to higher returns. The reason for the higher returns is that you are taking more risk. Investing 101 teaches us that more risk = more reward.
However, as we age and get closer to retirement, 90% stocks is likely too aggressive. So, early on set a timeline goal. Purely as an example, at age 40 you might transition to 80/20 stocks/bonds. At age 45-50 maybe you’d further transition to 75/25 and then at age 50-55 to 70/30.
Personally, the lowest I’ll likely ever go is 60/40. That could change, though.
Make a predetermined plan that has nothing to do with the market. That’s always best because the best investing advice for doctors (and for anyone else) is to STICK TO THE PLAN! The worst thing you can do is buy high and sell low, which is why “set it and forget it” is so important. It keeps you from actualizing your losses.
Take Home
That’s it. We’ve covered much of the 20% of investing advice doctors absolutely need to know in terms of asset allocation, picking funds, and taking a peek occasionally. Not too bad, right? You just read that in about ten minutes.
If you want to learn the rest of the 20% doctors need to know about personal finance to get 80% of the results, then read The Physician Philosopher’s Guide to Personal Finance (or listen to it on Audible).
It can be complicated if you want it to be, but it doesn’t have to be. And, if you need some help along the way, make sure that you get your financial advice from a financial advisor you can trust. That someone is going to be a fee-only, flat rate financial advisor who specializes in working with physicians.
What do you think? Is there a piece of the 20% that I left out for asset allocation and picking funds? Do you subscribe to set it and forget it investing? Why or why not? Leave a comment below.
very good article thank you
This is a great article, thanks for sharing. I found “The Physician Philosopher’s Guide To Personal Finance” helpful as I began studying the specific challenges physicians face in both their day-to-day financial lives as well as the larger financial choices they face throughout their career. It’s easy to over-complicate what you’ve laid out here, but this is great advice to follow and it’s effective when applied under rational circumstances.
My opinion: STICK TO THE PLAN is the 20% that makes up 80% of the 20% that you need to know about investing (Pareto principal of the Pareto principal?). This is do doubt the most important part of any investment strategy – create a disciplined, unemotional, and repeatable process…and STICK TO THE PLAN. As such it would be nice to see inclusion of basic fundamentals that derail this, such as biases (anchoring, mental accounting, and availability) and the affect heuristic. While your principals are sound as stand alone recommendations, I believe that insights to decision making will be the glue that holds all principals together.
I think many people make rebalancing too complicated. And I believe you left out the easiest way to rebalance a portfolio for the vast majority of doctors reading this. It is technically a form of your “band based” but I don’t believe it is that complicated. Every year/quarter/month (however often you want to look at your portfolio) simply buy more of whatever has become unbalanced to the low side.
For example. Say you own Total Stock Market Index 1, Total International Index 2, and Total Bond 3. You want your % to be 40/40/20. Now lets say you want to be lazy and only look at your portfolio in January every year. Your percentages in January are 50/40/10. When you are investing your funds in January and February simply put all of the money into Total Bond Fund 3 until you are closer to the 40/40/20 mark. This is SUPER easy with a small portfolio, but still easy with a large portfolio (which most of the time has a cash fund as not all can fit into retirement accounts). During most of the investment phase of your career, this is a simple and easy way to rebalance without buying/selling funds outside of retirement accounts. No capital gains taxes to worry about. You are already putting the money in….just direct it to whichever account you need to re-up to start the year.
Obviously this doesn’t work if you are no longer contributing to your retirement accounts, but the vast majority of the readership still is.
Thanks,
TPP dominating blog post, as usual. I currently have my asset allocation set though your part in the post regarding changing the asset allocation as we age is of interest. Is the strategy you mentioned about taking less risk as we age an absolute? And to what degree should we change asset allocation? should we just pick something reasonable? I have heard the counter argument that maybe the most reasonable would be not to change asset allocation at all according to economist Wade Pfau. He sort of proposes a “glide path” method where given retirement may last 30 years or even longer you should keep your stock allocation high, draw down mostly bonds at beginning retirement and have near the end of your retirement have mostly stocks given these stocks would have been in your portfolio for a long time, decreasing volatility risk. Any thoughts?
Yes, something reasonable. Because the right thing to do can only be known in retrospect.