Physician Investor

Physician Investor: How to be an Excellent DIY Investor

You Can Be an Excellent Physician Investor


Physician investors can be excellent DIY investors.

But remember, physicians are considered “dumb money”—we have marks on our back from the financial industry.

Yet we understand evidence-based medicine, standards of care, statistics, complicated systems… we have more than what it takes to be an excellent investor. So, what does it take to make a physician investor an excellent DIY investor?


Physician Investor I: First Steps

First, save money to invest. That is: don’t spend everything that you make.

Next, invest consistently in a reasonable way.

That’s it! That’s all it takes to be an excellent physician investor. The rest is all detail. Of course much of the detail is behavioral finance and the reason why most people are not excellent investors.


Physician Investor II: Philosophy

In general, you can invest in traditional assets (stocks and bonds), real estate, or personal business. These are the three main ways to make money.

If you have a great W-2 income, you can invest in traditional assets, real estate, or non-traditional assets. If you are building a personal business, that’s a great way to invest.

The basic philosophy of physician investing, however, is that you must invest. If you do nothing with your money, you lose out to inflation.

Once you have decided to invest, you must do so in a reasonable fashion. This can be through small business or real estate, but the rest of this blog deals with traditional (stock and bond) investing.

So to summarize the philosophy of the physician investor:

  1. You Must Invest
  2. You Must do so in a reasonable fashion
  3. After deciding to invest, asset allocation is the most important decision
  4. Never sell low


Asset Allocation

Asset allocation is the stock to bond ratio you have in your portfolio. Another way to think of it: risk vs safer investments.

You must take risk, but you should take no more risk than you need to reach your goals.

During accumulation, you can take lots of risk as long as you understand that volatility (the daily or monthly ups and downs of the stock market) is not risk. The risk during accumulation, again, is not investing and therefore not meeting your goals.

During de-accumulation, risk depends on fundedness. If you are underfunded, focus on social security planning.

If you have oversaved, you can do whatever you want. It all depends on how rich you want the kids to be vs how well you sleep at night. If you sleep well at night despite future market crashes (which are a feature of the stock market, not a bug) then you can be 100% stocks. Conversely, if you want to quit playing because you already won the game, you can be 100% cash or bonds.

After deciding that you need to invest, determining your asset allocation and risk level is next.


Interlude: Incentives and Tradeoffs

Especially well seen during the pandemic, all decisions are tradeoffs, and incentives are important to acknowledge.

Remember, physician investor, the incentives of those you interact with in the financial field will entirely paint their view. I began this piece with the idea that you are a “mark” to the finance industry. A whale. While it is important to get good advice, never forget the incentive of the advice-giver.

Next, all decisions are tradeoffs. Though cash is fungible, when it is spoken for, you cannot do anything else with that money. While you believe that your stock investments are liquid, they may not be if the market is down (hence not putting cash for short term needs in the market) or if they are otherwise spoken for (you can’t buy a pool with money saved for retirement). Moreover, think about the asset allocation trade-off for those of you who have oversaved for retirement. At that point, the decision is how well do I sleep at night vs how rich I want the kids to be!

My incentives are to provide you with knowledge in exchange for your putting up with the obnoxious ads on this page. And perhaps you will sign up for advice-only retirement planning.


Physician Investor III: Never Sell Low

Back to the physician investor. Asset allocation involves knowing that there will always be market crashes, and despite that, knowing you will never sell low.

If you can avoid this investment – as a buy-and-hold investor – you will do well in the long run. Let’s figure out why people sell low and ponder how to avoid doing so.


Never Sell Low in Accumulation

First understand that volatility is not risk.

If you are young, your actual risk is that inflation will eat away your purchasing power. You MUST invest in something. The risk is doing nothing with your money. By doing nothing, though omission, you definitely lose to inflation.

Understand that short term volatility is not a risk to the young buy-and-hold-dollar-cost-averaging investor.

Next, volatility is not a bug of the stock market; it is a feature. That is, the risk premium of owning stocks comes from people confusing volatility and risk.

If you are a buy-and-hold investor with time on your side, you will out-earn inflation and be rewarded. There is no 15-year period in history where, despite an immense amount of volatility, the market is risky.

The only way to lose over any extended period of time: sell low. Never Sell Low.

Further, stock market crashes are not a bug, either. They are, again, the cost of admission… why you make money on your money. Crashes are why stocks pay more than cash or bonds. Understand how chaos theory applies to investing.

During market volatility and market crashes, those who sell low transfer their money to those who rebalance from bonds into stocks.

Please understand that when you are young, volatility and crashes are not risky; they are opportunities.


Never Sell Low in De-accumulation

I hope most of you get that the young should not only not fear crash, but celebrate them! Dollar cost average into stocks at lower prices. Rebalance.

When you are de-accumulating, however, market crashes are a bird of a different feather. For those withdrawing funds from their nest egg, a market crash is a real risk with a different moniker: Sequence of Returns Risk.

While I have written quite a bit about sequence of returns risk; it is quite easy to overcome if you plan ahead. Remember: never sell low.

You can set up buffer assets against sequence of return risk. Or, you can de-risk prior to retirement.

What is clear, you must go conservative prior to retirement in order to avoid sequence risk.

The goal: never sell low in de-accumulation. Have at least 3-5 years (or even 10 years) of non-stock assets to get you through the worst of time.


Why Do Folks Sell Low?

So, why do folks sell low?


Emotional investors sell low. Don’t charge off the hill with the other lemmings. And Don’t Watch CNBC. Or the nightly news. Ever.

Remember that Fear and Greed drive the investing cycle for individual investors. If you are a buy and hold investor, and frankly if you have sold low in a prior cycle and learned your lesson, then you are in a position to hold out through the crankiest of market cycles. Understand what the purpose of your investment is, and never sell low because of emotion.

And don’t be overconfident. This is why women are better investors: they are less overconfident.


What to do if you need money and the market is down? That is why you have cash as part of a cash bucket plan. That is why you have mental accounting and a tax-efficient withdrawal plan in place.

The key to never selling low: don’t ever need to! Plan for sequence of returns risk at least 5 years before retirement. As I like to say, the best time to go conservative before retirement is the day before the market crashes. The second-best time to start is 5 years before your retirement date.

Don’t ever “need” to sell stocks and you will never sell low.


Other Sins of Physician Investing

While we are on the topic of investing sins, here is a non-complete list of additional investing sins:

Complicated Investments

Rick Ferri keeps it simpler than most. I hope he will publish his book on the education of the index investor at some point. Remember, most “hedges” against downturns such as structured products are too complicated and too expensive. Your insurance is never needing to sell low.


Buy and hold investors understand that the best predictor of future returns is low fees.


It’s not how much you make, it is how much you get to keep that matters. Active funds will cost you an arm and a leg in turn-over. Understand that short term capital gains are not your friend. Tax-efficiency is the best investment for the advanced DIY Investor.

Here is a good primer how the 3-fund portfolio should be located across the 3 types of funds.

Not sticking to the plan

Or not having a plan in the first place.


Most folks use leverage at some point during their life. It is called a home mortgage. You borrow money so that you can live in a house and meanwhile, invest in your future. Beyond that, routine use of leverage might force you to sell low to cover your losses. If your goal is to avoid the sin of investing, you can get there without the sin of leverage.

Listening to other people or the media

Remember their job is not to report accurately what is going on; their job is to sell advertising to eyeballs.

So, too, with investing. Their job is not to inform you, but to obfuscate the truth behind lies and mistruths… so they can sell you expensive crap you don’t need from an industry that puts their bottom line above your best interests.


Physician Investor IV: What to Invest in?

What goes into your decisions to buy, hold, and sell individual stocks? It seems as if 95% of people’s energy is devoted as to when to buy a stock and no consideration is given when to sell a stock!

Physician investors never have to decide when is the right time to sell an individual stock. Never buy one in the first place!

When do you buy an individual stock? You should buy a stock when you know more about it than anyone else. If you have knowledge or insight about a company that no one else has, even the people with teams of people researching it, then you should buy it. After all, how could you lose?

Or, you could look at the evidence that less than 3% of people can beat a Total Market ETF over 20 years. Of course, you are that 3%, right?

Instead, buy the total market ETF.


When Do You Buy the Total Market ETF?

You buy the Total Stock Market ETF when you have money.

That it. Simple. If the purpose of the money is to spend in more than 5 years, just buy the Total Market ETF.

When you have money, buy. If you get more money… buy more.


How Long Do You Hold?

Warren Buffet’s favorite holding period is forever.

He made his money picking individual companies. For his estate, he instructs the trust he is leave to his heirs to… you guessed it… invest in the Total Market ETF. (Actually the S&P 500 but there really is no difference in long term returns between the two indexes).

How long do you hold that Total Stock ETF? Hold Forever.

What about with individual stocks? Well, evidence demonstrates that people sell their winners and hold their losers.

It is hard to lock in a loss! Hold that stock when it loses money. After all, who cares about the sunk cost fallacy, right? And sell your winners when they are up a bit. That is called profit taking by the talking heads on CNBC when they don’t know why the market is down (which they never do, by the way).

Here is the only thing you can be certain of: you will never know when it is the right time to sell an individual stock.


When Should You Sell that Total Market ETF?

When you need the money.

What about if the market is down when you need the money? Sell the bonds you have set aside just for that reason.


Which Is Easier To Leave to Your Kids for the Step Up In Basis?

If you have large capital gains in a stock or the Total Stock ETF and you want to leave it to your kids when you die to get the step up in basis, which is easier?

Would you rather hold all the stocks of the entire economy (which, if it goes to zero, you have much larger issues to worry about than taxes or legacy), or an individual stock? Is that stock going to be around in 30 years? I encourage you took look at the stocks that made up the Dow Jones 30 years ago and see which of those winners is still around.

If you don’t buy individual stocks, you will never need to decide if the company will go out of business before you do.


Summary: What to Invest in?

What I like about the Total Market ETF is that I never need to decide when I’m going to buy or sell it. I buy it when I have money. Next, I hold it forever; or, until I need money, then I sell it. I never have to make a decision!

With individual stocks, they not infrequently go to zero. If you have large capital gains, you have to decide if you want to recognize them, or if you want to take a chance that the underlying company is still there when you die and leave it to your heirs.

With the Total Market ETF, there is no decision to make. Leave it until you die. It will still be there.

And if the market is down when I need the money? I sell bonds. After all, that’s why I have bonds, so I never have to commit the sin of investing which is selling low.

Buy when you have money, and you sell when you need money.

How about that for a plan? I don’t care what the market does day to day, because it doesn’t matter!

When you buy a stock, you have to be right three time. When you buy it, when you hold it, and when you sell it. And you have to decide every day if it is the right thing to do.

When you buy the Total Market ETF, you buy it when you have money and you sell it when you need money. There is no decision making necessary to screw up your success.


Physician Investor V: What Returns Should I try to Get?

Asset allocation is directly tied to your future expected returns. In fact, about 90% of your returns are due to your stock/bond allocation.

What kind of return do you want? You want the best anxiety-adjusted return you can get.


What are Anxiety-Adjusted Returns?

Anxiety-Adjusted Returns describe the effect behavior has on long term investment returns. If you sell (even once!) at the wrong time, you may be worse off than if you never invested in the first place. Think about that—one behavioral miscue in 20 years can negate the benefit of participating in the growth of the American economy (which is what stock market investing is).

Essentially, discussion of anxiety-adjusted returns is another way to get at the importance of asset allocation. Asset Allocation, after deciding to invest in the first place, is the most important decision you make when investing. What is my stock/bond ratio such that allows me to be comfortable buying and holding until I need the money?

How can I get the best possible returns understanding that it is only human to want to sell out at the worst possible times?


Best Possible Returns

OK, if you want the best possible returns over your life, you should be 100% equities until the day before a market crash. Then you sell! Easy, right?

Actually, you don’t even have to predict every market crash… you can ride right through them when you are young. The importance of sequence risk really starts to heat up 5 years before retirement. In order to get the best possible returns over your lifetime, you might just need to sell the day before the market crashes within 5 years of your retirement date. Perfect, sign me up!

Of course, no one can do that. Timing the market… even only having to be right once in your life, is a fool’s errand.

Since you never can know the day before the market crashes, you must De-Risk starting 5 years Prior to Retirement.

You will never get the best possible returns. It is better to hope for the best anxiety-adjusted returns.

In summary, we have the best way to invest (only sell at the perfect time), and the (usual) worst way to invest (buy and sell at the wrong time). What can a guy or gal do? Enter: Anxiety-Adjusted Returns.


How to Get Anxiety-Adjusted Returns

So, how can you get real world, quality, anxiety-adjusted returns?

One word is all you need: Asset Allocation. Ok, that’s two words, but it is harder than it looks. One way to look at asset allocation is to consider how much risk can you tolerate?

Again, risk means different things to different people, and frankly the risk questionnaires do not adequately answer the asset allocation question.

Another way, which is perhaps better as it is more anxiety provoking, is to understand how bad it can get. Remember, you set your asset allocation not for the good days, but for the worst of all possible days.

Know what your stock to bond ratio is, and then know how bad it can get.


Invest for the Best, Expect the Worst

I argue that you need to set your asset allocation with the bad days in mind, not the good days. Right now, there are a lot of good days going on, and not too many people are thinking about market down side.

But don’t misunderstand me. In general, remember, the graph of the stock market over time is up and to the right.


Getting Rich vs Staying Rich as a Physician Investor

Finally, remember that you get rich with concentration, and you stay rich with diversification.

When you are young, you have plenty of human capital, and it is all about savings rate. Be aggressive with your investments and take joy when the market crashes.


Physician Investor: Getting Rich vs Staying Rich

physician investor

See above, as physician investors age, human capital crashes, but financial capital starts up an exponential curve. This curve slows down as you do what is prudent—you stay wealthy through diversification.

Total wealth slowly goes up over time as your human capital is turned into human capital.

You must take on risk. Understand that you only should take on the amount of risk you accept.

In order for you to be successful, you don’t need to understand risk-adjusted returns, you need to understand anxiety-adjusted returns. How bad can it get?


Physician Investor VI: How to Time the Market

You can’t time the market. But there is an acceptable way for physician investors to time the market: what about positioning assets rather than predicting the future?

As the saying goes: time in the market is better than timing the market.

What does that mean? It means you miss the big up days if you pull yourself out during the big down days. Volatility is always around, and big volatility to the upside is temporally related with big volatility on the downside. You cannot miss these big up days! But the reason you need those big up days: because you recently had big down days!

And that is the difficulty with timing the market, you need to be right twice: both when you sell and when you buy. You know better than to time the market. No one is right twice. Not all the time.


Positioning is Like Market Timing

What if you position your investments to take advantage of market volatility rather than trying to predict the future?

Positioning vs. predicting: predicting means guessing if the market will be up or down.

Positioning means deciding ahead of time on asset allocation and rebalancing strategy.


Positioning is Asset Allocation and Rebalancing

If you have bonds in your portfolio, then you can rebalance and sell them while they are up in order to buy stocks when they are down. That’s right! You just rebalance your position rather than predict the market. No foul!

Of course, you can’t be 100% equities in order to take advantage of positioning your investments.

But you don’t want to be 100% equities anyway.


Why Don’t I Want to Be 100% Equities?

Even if you are young and have time on your side, in order to take advantage of rebalancing during a downturn in the market, you want to have at least 10% bonds in your portfolio.

After all, a 100/0 equity to bond ratio is just about as good as a 90/10.

Wait, no one has told you that before? Well, just take a look at the efficient frontier.

Physician Investing and the Efficient Frontier

Physician Investing and the Efficient Frontier

Above, you can see the efficient frontier. Returns are on the vertical, and risk (as measured by standard deviation) is on the bottom. Basically, the efficient frontier is the set of portfolios that offers the highest expected return per unit risk. Reward due to the risk you take given your asset allocation.

The top right dot is a 100/0 portfolio with the highest risk and the highest return.

But look at how shallow the slope is when you go down to 90/10, 80/20, etc.

You take less risk, as you drop down your asset allocation, but the reward is not much different. My point: 100/0 is not much different than 90/10.

Once you get down to the 60/40 portfolio (the circled dot), then back up two more to 40/60. Here, the curve takes an unusual turn: more bonds actually increase the risk AND lower the return. Portfolios with more bonds than 30/70 have more risk and less returns. Who knew?

Go efficient frontier! Of course, it is not that simple, as the efficient frontier changes depending on the actual returns and volatility during a given time period. Let’s check that out now.


Positioning vs Predicting over the Decades

Asset Allocation over the Decades

Asset Allocation over the Decades

Above, you can see the curve looks different for different decades. Spend a little time looking at this graph, but let me just point out that the 60’s (light blue) had a pretty normal looking efficient frontier. The 70’s, on the other hand (in green) had flat returns regardless of asset allocation.

Next, in red, look at 2000-2004. Look closely! During that period, bonds are actually on the top (where you would expect to see stocks), and you got less return and more volatility for 100% stocks!

Finally, in black, see the average from 1960 to 2004.

These are inflation-adjusted (real) returns, and they make several important points. But the point I want to make: 100/0 is not much different than 90/10, or 80/20 for that matter. Look at the evidence above!


Rebalancing: When You Have Bonds, You Can Time the Market

Or rather than time the market, you can rebalance your position when it gets out of whack.

Remember the goal is not to predict the future. If you could do that, you’d be rich and not bother with blogs on the internet. But no one can do that despite knowing that every year there is usually a 10% drop in the market, and every 5-7 years a drop of 20% plus. These are the times when the impatient transfer their money to the patient.

Positioning vs predicting. You want to have bonds so you can use positioning to time the market via rebalancing.

When to rebalance? Well, do it when the market is high to control your risk and get back to your preferred asset allocation. And do it when the market tanks to sell high (bonds) and buy low (stocks). I haven’t written anything about rebalancing because you can’t do better than this whitepaper from vanguard.

If your asset allocation is, say 80/20, it’s not because you expect better returns. Asset allocation is about higher risk-adjusted returns.

Remember, concentration makes you rich, diversification keeps you rich.

Risk-adjusted returns (and even anxiety-adjusted returns) are more important after you have saved up some money. Sure, initially, go 100% stocks. Once you have “enough,” however, take some risk off the table and invest per your preferred asset allocation.

If you don’t want to be accused of being a market timer, be a positioner. Set your asset allocation and rebalance.

Or, Consider Bond-Alternatives

Many folks want to avoid bonds right now. While I hope you see there is value in bonds, you may consider a slice of your asset allocation devoted to bond-alternatives. These are not for increased yield!




Physician Investor Finale: Why Invest?

Finally for the physician investor: why invest?

What is the purpose of money? What is Money?

Money is deferred time. It is a medium of exchange where by work/time is stored.

Usually, people say money is a medium of exchange for goods and services. Yes, it is that, but what it really is: Time. Money is Time.

Money is merely a commodity, which makes it truly fungible. It doesn’t matter what you did to earn it, where it came from, and it certainly doesn’t matter where it goes. Money is deferred time.


Time Is Money

We all know the aphorism “time is money.” Nope. Money is Time.

This is a truism, as if time equals money, then it necessarily follows that money is time. Same, same. A=B, then it is true that B=A.

Money is time.

We all know that time is limited, and having extra money at the end of your time really doesn’t mean much to anyone. What you do with your money when you have time is what matters.

So, what can you do with money?


What Can You Do With Money?

So, what are all the things you can do with money? As a commodity that represents stored time, the only thing you can do with it is to buy time.

Fundamentally, all you can do with money is spend it.

You can spend it now to save time, or you can spend it later to save time. That’s it.


What can you spend money on?

Current Spending

You can spend your money now in order to save time. Think about this: what did you spend money on today. Everything you exchanged money for was in exchange for someone else’s time. That coffee: time to grow the beans, roast them, brew them and make the cup at the factory. You leveraged other’s time for that 5 bucks you spent at Starbucks.

What else did you spend today? See how it is all time?

Future Spending

You can save money, too. But that is just future spending. Anything you save today you will spend in the future to leverage other’s time.

Charitable Giving

You can give to charity. Sure, that is so they can leverage other’s time. You are donating your time, not your money, when you give to charity. They use it to provide time to others.

Wasted Spending

What about money that is wasted?

Are taxes wasted, or do you exchange that for the time for public services and roads? And healthcare for congress, too. They have a better plan than you do. Thanks! There are your tax dollars at work.

What about late fees, overdraft charges, interest payments on consumer goods. Is this money wasted. Nope, this is your time, wasted.


The Usual Suspects: The “Usual” 4 Things You Can Do With Money?

Normally, folks say you can do these 4 things with money: spend it, invest it, give it away, or have it taken away (either through taxes, force, or fraud).

Think about each one and you will see it is a transfer of your time to other people.

You earned the money through your time (and skills and/or knowledge, which took time to acquire). Sure, some skills and/or knowledge are more renumerated than others, but that is just because some time is more valuable than other.

In the end, all you have is your time. And it is limited. You can exchange it for money, or you can spend your money in exchange for time.

The missing ingredient? Leveraging other people’s time.


Time and Leverage

Even if it doesn’t take you any time to make money, it still is all about time. You leverage other people’s time to make money even if you don’t do anything to acquire it.

If you inherit it, is might be your grandparents’ time.

If you run a business, it is your employee’s time you are leveraging to make you money. You get a cut of the money they produce in exchange for their time. And all the supplies you buy in your business: you are putting them to a higher use than those who produced them can, leveraging their time in exchange for money.

And if you own property, you are providing a service that people value. They are paying you with their time.


What Can You Do With Money?

I hope you see the only thing you can do with money is spend it. You can spend it now or later.

It represents time, either your time or other people’s time you have leveraged, and you can use it to buy time.

All you can do is spend it.

Current spending: on things you “need” (that save you time instead of you doing it yourself), on things you “needed” (debt payoff on things that saved you time in the past), and on things you “will need” (future spending).

You can give to charity, which is things that other people need, needed or will need. You can give it to your kids: same thing! Or you can give it to the government to spend on other people (in order to save them time).

But you can’t not spend money. Your time is reimbursed in exchange for money. As personally your time is limited, so is deferred time (which is money).

Spend it to bring you and others joy.

Physician investors know how to spend their money now, and to save and invest their money to spend later.

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