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

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: Sine 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.


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 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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