Those of us who are in medical training or are new attending physicians might have experienced FOMO (fear of missing out) in 2020 and 2021. Many people in our generation have gotten “rich” in the past two years, while the rich white coat investors got even richer.
You might have heard that your spouse’s friend retired early after their company went public or that your college classmate sold their first (or second) home with a healthy profit. You have definitely heard about one stock or cryptocurrency after another soar to the moon. As of December 23, S&P 500’s year-to-date return is 25.82%, but you wish you had the cash flow to invest more.
Browsing The White Coat Investor forum can feel like going through online threads on medical school acceptances and Step 1 scores. Your only solace is that you refinanced your student loan at a low rate or your student loan has been in forbearance for nearly two years. By the time you are done with training and/or paid off your loans, the expected return of the S&P 500 might be lower than it is today, your prospect of a dream house might have been sailed away by the demographic tailwind, and cryptocurrencies might have entered the mainstream.
How will you stay focused on your financial plan in 2022? I ask because if 2022 continues to make people as rich as 2020 and 2021 have, I might not overcome the FOMO. How can financial bloggers be free from any FOMO when Gen-Z “finfluencers” are making $500,000? Alas, I will try to stay focused on my financial plan in the coming year by (1) ignoring my answer to one question and (2) paying attention to my answers to three other questions. Let's focus on those four queries.
How Have My Investments Done in 2021?
My wife works and I am an MD/Ph.D student, so we are in the accumulation phase as opposed to the “minimizing student loans” or distribution phase. One accumulates money in two ways: generating a positive return on investments and saving. If one wants to know how their investments did in 2021, they need to calculate the money-weighted return (aka dollar-weighted or internal rate of return) of their investment portfolio.
But because my wife and I are early in our accumulation phase, I am not excited that the real money-weighted return (MWR) of our portfolio—which is mostly stocks—was greater than the expected annual real return of 5% that we assumed in our financial plan. To put it in extremely simple terms, such “outperformance” at the present increases the likelihood that the stock market will have lower returns during the years when I earn more money to buy more stocks as an attending physician. The selfish side of me roots for the stock market to have low, if not negative, returns now so that I can buy even more of the stock market in the future. The only good reason for us to calculate the MWR is to confirm that we are not underperforming our expected annual return, especially in years like 2021.
In fact, once I know our MWR, I cannot help but fall into the comparison trap. Someone will outperform us every year. Someone who is “not responsible with their money” will win the lottery ticket. Even benchmarks (e.g., S&P 500, 60/40 portfolio) will usually outperform us unless we invest our cash in a lump sum in January. For these reasons, I try to ignore how my investments have done when I plan for 2022. As long as my wife and I keep our side of the bargain, we do not need to ask too much from Mr. Market anyway.
How Much Have I Saved in 2021?
Our side of the bargain is our saving rate, i.e., the output of the payment (PMT) formula that we used to create our financial plan. Our saving rate is the only variable that we can control. It is also the only financial measure that matters for us right now because the amount we save is greater than the return of our portfolio.
Table 1 shows the “break-even” points at which the portfolio grows more than the money added to the portfolio (i.e., savings) in a year with S&P 500’s historical return of 8% or a 10-year return of 14%. Not many residents or new attendings would have a portfolio that is big enough for its performance to matter more than their saving rate. If a new attending who somehow has a $750,000 portfolio experiences a 30% drawdown (like in March 2020), they can “easily” increase their portfolio by 10% with their savings.
Table 2 shows a scenario in which we live in a multiverse and the new attending physician earning $300,000 per year has a different saving rate and portfolio performance in each universe. The physician who saved half of their gross income would still have the biggest portfolio after 10 years although their portfolio did not grow in real terms (i.e., adjusting for inflation). After 20 years, only the physician in Universe A who saved only 10% of their income would not be financially independent.
Regardless of what happens between now and December 31, my wife and I will conclude that we have had a financially successful (and fortunate) year because we saved more than we had planned in 2021 (30% actual vs. 25% planned). Given the increase in our household income in 2022, we will increase our target saving rate accordingly. As Nick Maggiulli rigorously demonstrates, how much I save as my income increases will matter the most, regardless of how much my income increases than that of my age group peers later in my career.
Anyone can boast about their income, but unless I know their saving rate, I do not need to compare myself to them. “Wealth is what you don’t spend,” so I cannot rely on what I hear or see. We saved what we needed to save and spent enough on what we enjoy (e.g., food, travel, charity), so we had a rich year and became wealthier. What more could we want?
Could I Have Boosted the Return on My Investments?
But of course I want more! Regardless of what I tell myself, I wonder if I could have done better. I think about the stocks or cryptocurrencies that would have generated fantastic returns had I bought them when I thought about doing so. “If I bought stock X (or cryptocurrency Y) after reading that blog article or newsletter, I would have made this much money.”
But then again, I do not ask whether I could have done worse. I ignore the ideas that would have decreased my portfolio’s return had I gone through with them. What if I decreased (or even eliminated) my allocation to small cap value stocks at the beginning of 2021 because they underperformed in 2020? What if I bought Dogecoin before Elon Musk went on “Saturday Night Live?” What if I bought an ETF concentrated with Chinese companies after listening to that episode of my favorite investing podcast?
Like many of us, I am risk-averse, so when I have an idea about buying a speculative asset or changing my financial plan, it can take a while for the idea to materialize. What I plan on doing in 2022 is keeping an “investing diary” by writing down such ideas and when I would buy or sell. At the end of the year, I will review each investing decision and determine whether I would have had a positive or negative return relative to the S&P 500.
Perhaps my investing diary will show me that I can identify the most prescient content from financial blogs and podcasts (because I have no time to read an S-1 or a cryptocurrency white paper). But what good is all the information if I do not have the right temperament to allocate my money to the new ideas and stick with them? If one of my ideas would have led to a 1,000% return, how do I know I would not have sold it after 100, 200, or 500% return, let alone a 50% drawdown? I have learned that speculation is a game I cannot win, but limited personal data has been giving me a false hope. My investing diary will help me limit bias and test the hypothesis on whether I can beat Mr. Market.
Which Investment Has the Highest Return?
When someone brags about a 1,000% return, I should not envy them based on limited information. If their initial account size was $240 (i.e., the median account size of a Robinhood customer), we were not playing the same game. Even if any of my investing ideas pan out, they will not produce the highest absolute return for my wife and me.
For our foreseeable future, my medical training, not financial capital, will be the source of highest return. I am playing a long game because longevity will have the largest financial effect on my finances. To win the long game, I need maximum peace of mind, which is an overlooked characteristic of a portfolio, while I am in medical school and residency. Keeping an investing diary is the most energy I want to expend besides regularly clicking a few buttons for automated savings.
Investing my time and energy into medical training includes searching and preparing for the specialty in which I could thrive using my medical skills and knowledge for as long as possible. Even from physicians who are not seeing patients day-to-day but are in academia, administration, industry, or non-healthcare nonprofit, I have consistently heard one piece of advice: become the best physician I can be. I did my Ph.D in a field that is relevant to my specialty of interest, but whenever people ask me which specialty I want to pursue, I qualify my answer by saying that I cannot be sure until I “see patients.” The need to “see patients” before I decide includes factors such as where and when I can see the patients, the amount of notes that I need to write, and how I will be compensated because the non-medical factors seem to be as important in aggregate as the medicine itself. After all, WCI emphasizes that satisfied and financially secure doctors are more likely to continue to practice medicine.
At each stage of my medical career, my source of highest return will change. It could be moonlighting, forgoing an attending salary to train in a non-lucrative sub-specialty, or seeking help from a career coach or therapist. Whatever it is, I hope to stay focused on what is going to make me rich instead of how others are getting rich and to make sure FOMO is not ruling my financial life.
Has FOMO played a part in your career? Do you always feel the need to keep up with your MD peers? Comment below!