In many aspects of life, there is a default option. Take hypertension for instance. If a patient comes in and you newly diagnose them with hypertension, what do you put them on? Well, barring extenuating circumstances, you put them on hydrochlorothiazide. It is safe, cheap, well-tolerated, and effective. Sure, if they’re diabetic you might use lisinopril instead, or if they’re African-American, you might pick a calcium channel blocker. But the default option is hydrochlorothiazide. Likewise, if a 20-year-old male comes into my emergency department with chest pain, I’m going to order an EKG and a chest x-ray. If there are extenuating circumstances, like cocaine use, I might check a set of cardiac enzymes or two, or if there were a family history of pulmonary embolus and he was tachycardic I might check a d-dimer. But the default option is an EKG and a chest x-ray.
5 Investing Default Options
Likewise, in investing, there are default options. Unless you have a good reason to do something differently, you should go with the default option. These should be your default options. As you learn more, you may add some bells and whistles and change some things around. But even if you never change a thing with your investment plan, this is the way to go.
- Savings Rate: Save 20% of your income, every year, toward retirement.
- Choice of investing account: If you are a student or resident, you should use a Roth IRA or Roth 401K for your investing. If you are an attending, you should use a pre-tax investment option such as a 401K or Individual 401(k).
- Asset Allocation: You should have half your money in risky investments such as stocks, and half your money in relatively safe investments, such as bonds. Don’t change this ratio no matter what the markets do.
- Investment Selection: You should use one low-cost total stock market index mutual fund and one low-cost total bond market index mutual fund.
- Mutual Fund Company: All else being equal, you should invest at Vanguard.
There is great wisdom in keeping things simple. These defaults are simple, easy to understand, effective, and very low-cost. Unbiased experts agree that If you follow this strategy, you will reach a comfortable retirement. It is possible you can do a little better than this, but it is also easy to do much worse. Considering the very little amount of effort and expertise required, this method of investing has the best ratio I know of results: effort/expertise required. Don’t let anyone tell you that “being a doctor” is a reason to avoid the default option. It isn’t. This works just as well for doctors as anyone else.
great! i think the asset allocation default needs to be slightly more complicated. In your 20’s be 100% in stock, in your 30’s and 40’s 75% in stock, and 50’s and over 50% in stock.
That’s a nice simple, reasonable way to do it.
Great write-up!
What did you mean to say below on your 2 bullet point.
” If you are an attending, you should use a pre-tax investment option such as a 401K or Individual 401(k).”
Generally attendings should generally use a tax-deferred account instead of a Roth account while in their peak earnings years.