[Editor's Note: Today's guest post was submitted by Steven Podnos, MD, MBA, CFP®, the principal of Wealth Care LLC which provides fee-only financial planning and asset management nationwide. He was also a speaker at WCICON20. Although this is not a sponsored post, Steven is a paid advertiser on the site. In this post, he provides his observations from his medical and advisory careers.]
When I was practicing as a Pulmonary/Critical Care physician, there was always some “latest and greatest” study purporting that I should be using some new form of therapy. As a resident physician, we’d hear on rounds about the newest theories and latest drugs to use.
Invariably, with time, other studies would emerge that would invalidate the early ones. We’d find that the “latest and greatest” was a mistake and could actually be doing harm to patients. Part of the wisdom of being a good physician was having the skepticism and discipline to discern which therapies were really the best for the patient. Luckily, there has been an increasing prominence to Evidence-Based Medicine, in which multiple studies are subjected to careful review before recommendations are made.
Now, as a financial planner, I find the same is true. There exist some great dogmas that are vastly misinterpreted as well as a constant flow of academic studies and opinions suggesting different investing behaviors all the time. Markets move in long cycles and much of market movement is related to investor psychology, a variable that makes empiric truths hard to prove.
So, I increasingly rely on “evidence-based investing”, putting some beliefs based on history and observation together. Some of this is backed by some good academic research and some is just my opinion from being a Fiduciary planner for two decades.
My Financial Recommendations
Stocks Will Outperform Bonds in Long Term
Stocks are likely to have higher long term returns than fixed income or cash (especially starting with the low-interest rates of today). We see better bond returns only in the periods in which interest rates have dropped steadily and significantly (as during the last two decades. With very low-interest rates today, it is very unlikely that bonds will perform well.
The following charts are visual evidence of superior returns by stocks over fixed income in different time periods.
Investors Need to Stay the Course
We must all fight strong behavioral tendencies to panic and sell just when we should be buying, and vice versa. CNN has even developed a “fear and greed index” to help with controlling emotional-based investment moves. Stephen Wendel found that panic could reduce investment returns by double digits over a ten year period.
Asset Protection Needs to Be a Priority
Asset protection should be done prospectively, or it will often be too late. It is easy to brush off the risk of lawsuits for a variety of reasons, but being sued will immediately focus the mind, and for a long time. Every family is different (especially two physician families), and every state has different laws.
Doctors Need a Comprehensive Estate Plan
Estate planners often start with boilerplate documents that are lightly modified. Physicians often have specific differences from the general population in how their estate planning documents should read.
Two examples:
- Physician’s children are likely to inherit large sums of money and much care should be given to how that money is both controlled and protected over their lifetimes.
- Most practicing physicians should be wary of inheriting assets that might be exposed immediately to creditors.
Don't Rely on Your Accountant to Reduce Your Taxes
Accountants have slowly become loathe to make suggestions on reducing taxes. Either regular reading to keep up with changes in tax law or having a good non-accountant advisor can save a great deal of money on taxes.
Know What is Important in Your Employment Contract
Not knowing what is important in an employment contract can be very destructive to making good choices. There is a common issue I find happening with many of our physician clients having their contracts reviewed by an attorney. The attorney will relate dozens of issues that the physician must consider in a contract and explain everything that can possibly go wrong to “cover” any blame after the fact. However, they frequently fail to address the most important issues that really matter for a physician such as — restrictive covenants, partnership options and path, and what happens in the event of a practice sale.
Know What Type of College Education You'll Pay for Your Children
Mentally preparing yourself and your children for what type of college you are willing to pay for far in advance is a major investment concern. The difference in cost between a state university education and a private college can easily be an extra $200,000 per child. This means that you have to earn as much as a third of a million dollars per child to choose a private school over a public one. You and your spouse should make this decision carefully and prepare your children for your choices. I told my three children that if they chose a state school, then they would have no debt on graduation. They chose wisely.
Steven Podnos, MD, MBA, CFP®
Get Rid of Debt
You should have no debt in retirement. For most retired physicians, income in retirement is dependent on withdrawals from savings — which can be very stressful in the face of debt that requires regular payment. Not having debt gives a family more flexibility to adjust a budget as needed in retirement.
Always Take Reasonable Tax Deductions
Tax audits should not prevent you from taking reasonable deductions. You can always argue about these. Not reporting income, however, is very dangerous.
Beware of Expensive Employer Retirement Plans
Employer retirement plans that are not transparent and run by non Fiduciaries are wealth killers. Many plans are “free” to the employer but kill participants with expensive, poorly performing fund choices.
Have a High Savings Rate and Begin Investing Early in Your Career
If you don’t save enough and early enough, market returns can’t begin to save you.
Beware of Risky Investments
Believing that any “investment” in a small business you don’t directly control will work out well is quite risky.
Be Very Careful Investing in Real Estate
I am commonly asked about investing in real estate — rental houses, vacation houses, commercial space, land, and more. I think there are rare times that this is a good investment. I’ve dealt with many families that have “dabbled” in both commercial and residential real estate for shorter periods of time and have had poor results in terms of aggravation, lost time, and poor investment results. Further, one’s home is a quality of life issue, not an investment in most cases. Even very desirable home property appreciates at best around the rate of inflation nationally.
You should recognize that real estate is illiquid — it can be hard to sell and also take a long time to dispose of. If the property has, or develops, environmental or structural problems, this compounds the illiquidity. External events can act against the property — think of prices in 2007-11 in most locales. Think about owning rental real estate in one of our major US cities at this time in a pandemic.
Real estate buildings carry multiple ongoing costs, regardless of the price you can sell them for. There is insurance, property tax, scheduled repairs, expected large capitalized expenses (roof, A/C), and unexpected damage and repairs (termites, hurricane damage, etc.).
When long term investing in global stocks can reasonably be expected to return 6-8% a year over the long term, real estate investments, with all its risk and illiquidity, should be expected to return at a minimum — a double-digit return. We see many proposed investments that do not even come close.
[Investing in real estate certainly isn't for everyone and isn't required for a doctor to achieve their financial goals. However, it has provided many investors with incredible wealth and diversification and should at least be considered in your portfolio. What is the best way for YOU to invest in real estate? I'd start by reading this post: How Should You Invest in Real Estate. — ed]
Find Trusted Advisors
Finding competent and trusted advisors in the many aspects of your financial life is worth doing, but not easy. The same goes for me — finding skilled accountants, insurance agents, and attorneys with high levels of integrity for myself and clients is a large task.
WCI Recommended:
Contract Negotiation & Review Partners
Beware of Salespeople Masquerading as “Advisors”
Relying on “advisors” that are really salespeople is a recipe for financial disaster. Their “advice” will always put their needs ahead of yours. This includes every insurance agent pushing annuities and whole life insurance and every commission-based broker I’ve ever encountered.
Every physician I know has the ability to achieve wealth. Physicians make enough money to achieve this goal by saving enough in a long term, disciplined manner. It is a great tragedy when I encounter older physicians that “have to work.”
Building financial security takes a lifetime; trying to accomplish it quickly leads to mistakes.
Financial planning is so much more than investing. Understanding the complexity of asset protection, estate planning, tax planning, retirement planning, educational planning, business planning and more is not simple. Actually, investing is relatively simple if you have emotional discipline.
I hope that these thoughts help you be successful!
What do you think? Agree or disagree with these recommendations? Comment below!
Great post Steven! I agree with just about everything but so want to challenge your assertion about real estate investing.
I think what you are asserting propagates very common limiting beliefs about real estate investing especially for physicians. That it is too risky, we don’t have enough time, and we don’t know enough about it. This leads so many to dismiss REI out of hand. It’s true that becoming a reluctant landlord, trying to think of your primary residence as an investment, or going in without strict criteria will lead to bad outcomes. But by dedicating oneself, direct REI based on a buy, renovate, rent, and hold strategy can really be a wealth builder. It is not passive for sure but if wealth and financial well being is a priority, it is certainly a worthwhile pursuit for physicians.
Thanks for the great info!
The Prudent Plastic Surgeon
You are correct that putting in much time, effort and risk can pay off with owned real estate. What I see instead are investments that just are not worth the time for the proportional reward and risk. I have seen rare individuals who build a real estate portfolio successfully over decades of hard work.
Awesome post Steve! Agree with just about all of it. I would just add that in a stable medical practice owner occupied real estate can be fruitful. However, it has to be set up in an egalitarian way, is time consuming initially, and as you correctly point out not completely necessary. I liked the part about investment fads and medical fads. They come and go. Frequently they are disproven down the road. This is a rational, logical approach.
Thank you for the nice comments!
Steven,
Do you think that historical returns are a good place to start when there has been
-so much printing of money leading to a weaker dollar compared to other countries, leading to reduced returns when adjusting to other currencies in this increasingly global economy (US companies have to pay more to import their raw materials, pay higher wages to foreign workers, etc.)
-asset buying by the government (leading a bubble, and likely reducing future returns)
-almost zero interest rates for a long term (with the Fed promising to keep them low even if inflation rises above historically pegged targets), which is an environment we have NEVER seen before
-inflation measures that don’t capture true increases in prices that matter (even with low inflation, food, housing and college are increasing in price, and this is what affects me the most)
-likely prolonged economic fallout from COVID, unemployment, etc. leading to decreased returns
-we’re due for mean reversion
-even if we DO NOT mean revert, high nominal returns mean less in the setting of uncaptured and unmeasured inflation. Therefore, real returns on stock investments to cover food, housing, college could be lower than what we can model out. (CPI-IU and other measures don’t capture everything that is important, I believe).
Despite my comments, my conclusion is the same as yours, that the only place to put money is the total stock market index, or alternatively real estate if we happen to invest in a high-growth market and know what we’re doing and can devote time (which I don’t and don’t).
On that note, what is your allocation between US and international stocks? Your charts are displaying US stock market returns….
Thanks,
Niraj
Hi Niraj!
Our usual allocation for stocks is about 60% US and 40% foreign. Having said that, the current segments that seem most undervalued are small US companies (especially value over growth) and Emerging Markets.
Imagine if a stimulus is not passed The depression would be devastating
I think you have made a lot of great points that will help many people get the most out of their money. However, you mentioned that real estate is illiquid. This is not necessarily true. I’m sure you will be able to sell your properties quickly if you drop the price 10-20% under market value. This is not favourable, but real estate properties are still liquid.
Liquid means I can have cash money in my hands within 24 hours, or at least next Monday if it is the weekend. Real estate doesn’t do that. At best you have money in a month or two. Often it might be 6 months away and occasionally years away. Sorry. Just because you can make it go under contract in 3 days instead of 3 months doesn’t make it liquid.
Very good article. Do agree with the PrudentPlasticSurgeon that one shouldn’t dismiss REI just because it takes a little effort. Most docs already have that drive built in and the hard part is applying it to another trade successfully.
The doc who’s struggling to have an efficient practice (many do), direct REI would simply magnify that problem. The doc running as successful practice and efficiency, the likelihood is good that one is able to translate that to REI successfully and reap it’s large benefits –namely: depreciation of top tax bracket while maintaining cash flow neutral properties that will diversify from a stock market equities exposure. Like target date index funds, these properties naturally transition into a cash flow position with the mortgage being paid down over time too — providing a stable retirement income source.
Direct REI certainly isn’t for the meek. Neither is private practice medicine.
I love the comparison to Target Date Funds. So true. Risk decreases and income increases as the years go by and leverage falls. And if that bothers you, then you can always do a cash out refinance and buy another property.