This post is a follow up to The 10 Commandments of the White Coat Investor (Part 1) and outlines five more principles every high-income professional should invest by.
#6 Thou Shalt Favor A Passive Investing Approach
The academic literature is quite clear — active management is a loser’s game. Stock pickers and market timers simply cannot outperform by more than it costs to do so. Proponents of active management like to point to Warren Buffett’s record and say, “Look, it can be done.” But Warren says, “A low-cost index fund is the most sensible equity investment for the great majority of investors. My mentor, Ben Graham, took this position many years ago, and everything I have seen since convinces me of its truth.” Humble yourself and realize that yes, you are part of that “great majority of investors.” I am too, and that’s okay. I don’t invest competitively, I invest to meet my financial goals while taking the lowest possible amount of risk.
#7 Thou Shalt Hire Only Competent Advisors
It’s okay to do your own financial planning, manage your own investments, and do your own taxes. With minimal input and assistance from appropriate attorneys you can even design and implement an adequate estate plan and asset protection plan. You do need to put in some effort up front to educate yourself, but these subjects are far easier to understand than a nephron or an action potential. Developing an interest in financial subjects is far easier when you realize just how much of a difference it can make in your finances.
It is also okay to rely heavily on an advisor. This doesn’t excuse you from your need to learn about finance and investing and to do your CFE each year, but many doctors simply don’t have the interest, time, or disposition to manage their own money. However, there are legions of financial professionals out there whose business is transferring money from your pocket to theirs, not necessarily helping you to reach your financial goals. In many ways, by the time you know enough to select a good financial advisor you know enough to do it yourself. When choosing a financial advisor you should look for the following:
High level credentials such as one or more of the following: CFP, CFA, ChFC, or a CPA/PFS
Avoid commissioned salesmen by sticking with a fee-only advisor. Annual fees should be less than $5000 per year. These might be payable as an hourly rate, as a percentage of assets under management, or as an annual retainer. There are advisors out there who will work for $100-200 per hour, for 0.15-0.5% of assets under management, or for an annual fee of as low as $1000 per year. If you’re paying more than this, realize that every dollar you pay in fees is a dollar you don’t have working for your retirement.
Many financial advisors select investments for you based on a lower “suitability standard.” If the investment is suitable for you, he can sell it to you. You want someone who is willing to sign a pledge to act as a fiduciary, meaning he is obligated to do what’s best for you, no matter what it costs him.
A Cloudy Crystal Ball
You want an advisor who knows that neither you nor he can predict the future, and who will design and maintain a plan that has a high likelihood of success no matter what happens in the financial markets over the next month, year, or decade.
A Bias Toward Low-Cost, Passive Investments
#8 Thou Shalt Minimize Expenses And Taxes
Every dollar you spend on investment expenses, fees and commissions, or that you send to Uncle Sam, is a dollar that isn’t working toward your retirement. Studies show that the best predictor of future mutual fund returns is the cost of the mutual fund management. The lower, the better. Despite frequent claims to the contrary, a buy and hold strategy is still the best way to invest not only because it helps you avoid buying high and selling low, but also because it minimizes expenses AND taxes. A wise physician also maximizes tax-protected investing accounts such as 401Ks, cash balance plans, and backdoor Roth IRAs. When investing in taxable accounts, use only tax-efficient investments, and take advantages of opportunities to tax-loss harvest.
#9 Thou Shalt Minimize Debt And Manage Necessary Debt Well
Credits cards are not for credit. Buy your automobiles, recreational vehicles, furniture, and vacations with cash. Don’t ever have a mortgage more than twice as big as your salary. Minimize your mortgage interest by putting 20% down, refinancing when rates drop, and using a 15 year mortgage instead of a 30. Prioritize paying off high-interest student loans. If you have sizable student loans, become an expert on the IBR and PSLF programs. Live like a resident until saving 20% of your income toward retirement is easy and your only remaining mortgage or student loans are at ridiculously low rates.
#10 Thou Shalt Protect Thy Assets, Plan Thy Estate And Stay The Course
Be aware of the simple strategies to protect your exposed assets from malpractice and personal lawsuits. Consider implementing some of the more complex strategies. Get a will and a trust. If your assets begin to approach the estate tax exemption limits, see an attorney to draw up a more complex estate plan.
Most importantly, don’t sell out at market bottoms. You will pass through 3-6 serious bear markets during your investing career. Don’t invest so aggressively that you cannot sleep at night when things turn South, as we know they will. Buying high and selling low can add 5-10 years to your career that you might have preferred to spend doing something else. Your investment plan should be like an oil tanker, not a speedboat. Any changes in direction should occur over a long time period.
This is the financial and investing philosophy of The White Coat Investor. You may not agree with all of it, but if you follow these commandments, financial success is guaranteed.
What do you think? Have you followed these commandments of good investing? Which commandments have you broken? Which are the hardest to keep? Comment below!