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Don't make these top ten investing mistakes
The days of fat profit margins for physicians are over. Medical cost containment policies in some form or another are here to stay. You're working harder than ever, so there's more at stake now in ensuring you don't make investment mistakes. And, of course, physicians do make them.
Case in point: the sad tale of Debasis Kanjilal, a New York pediatrician who put more than $500,000 into the dot-com company InfoSpace upon the advice of Merrill Lynch's star analyst Henry Blodget. The company crashed, the analyst was sued, and Merrill settled out of court. Other analysts were involved in similar public fiascos.
Kanjilal committed two common investing mistakes -- trusting Wall Street and trusting one's financial adviser implicitly. They are among the 10 most common investment mistakes made by physicians, according to Eugene Schmuckler, PhD, director of behavioral finance for the Institute of Medical Business Advisors, Inc. They are outlined here, with a treatment plan for preventing each one.
Not having an Investment Policy Statement
Just as we physicians wouldn't think of treating a patient without a careful history and physical examination, you should not invest your hard-earned capital without an Investment Policy Statement (IPS).
An IPS details what you want your money to do for you, and who is responsible for achieving those goals. It may be three to five pages for an individual physician, 10 to 15 pages for a small medical group retirement plan, or dozens of pages for a clinic or hospital endowment fund.
A properly written IPS should contain the following parts:
Most stockbrokers, insurance salesmen, full service, discount, or Internet brokerage firms do not create IPSs. This is a document you can develop with your financial adviser.
Not diversifying/losing sight of portfolio objectives
Although the media frenzy of a few years ago has subsided with the more recent slowdown on Wall Street, anecdotes of easy money are still out there and doctors may forget that investment portfolios serve a specific purpose (e.g., retirement, college funding, etc.) within the context of a broader financial plan. Moreover, a single investment may become too large or too small a portion of the portfolio as a result of market growth in one component or slack in another.
Diversify, monitor your holdings, and select components with your risks and goals in mind. Diversification can reduce portfolio risk. Consider investing in sectors such as basic materials, capital goods, communications and services, technology, consumer cyclicals and noncyclicals (such as pharmaceuticals, alcohol, and cigarettes), healthcare, energy, financial services, and utilities. Do not forget about cash equivalents, treasuries, zero coupon and municipal bonds, and international securities.
Forgetting the investing risk/return tradeoff
Some physicians fall into the trap of chasing "hot" investment products promising the highest returns.
Beware of projecting forward historical averages. The stock market is inherently volatile and, while it is easy to rely on past historical averages, there are long periods of time when returns regress from their long-term historical mean. But don't let that discourage you. Slumps eventually self-correct, so you should continue a prudent investing plan.
Also, do not confuse investing with trading or speculation. There are momentum-driven market periods when investors start to believe that profits are easy and that there is always a "greater fool" to buy at a higher price. Such trading and speculation are high-risk propositions that have more in common with gambling than investing. Avoid market timing and the urge to jump in or out of the market at every economic hiccup.
Failure to recognize the effect of taxes
An attractive investment and a slick sales pitch sometimes hide the underlying tax costs of the investment.
Pay your taxes and do not let the "tax tail wag the investing dog." Strive for legitimate tax reductions and avoidance.
Failure to recognize the effect of fees and expenses
Front-end loads, back-end loads, disappearing loads, commissions, advertising, and sales expenses can all have significant impact on your investment program.
Monitor the costs of your investment program to ensure that total costs are known, reasonable for the services provided, and are not consuming a disproportionate amount of the investment returns. Carefully consider full-service versus discount brokerages.
Take care using so-called discretionary "Assets Under Management" (AUM) accounts where you pay some percentage for personalized money management. More often than not, these one-size-fits-all accounts are aggregated under a larger umbrella to automatically harvest economies of scale, so the notion that the adviser is sitting on the same side of the investment table as you begins to deteriorate upon critical reflection.
For example, in a 2 percent AUM program of $1 million, you may pay $20,000 annually that is automatically deducted from the account. So are these "perks" worth, say, $200,000 over the course of a single decade? During the "golden age of medicine" in the '80s, or the raging bull market of the '90s, some doctors may have said yes. But what about during a bear market, or the projected market of lower-than-average returns that may be upon us?
Avoiding appropriate risk-management techniques/
equating insurance products with investment vehicles
Traditionally, physicians protected their families and practices with whole life, disability, malpractice, and business interruption insurance. But insurance products are not investment vehicles; they merely indemnify against catastrophic economic losses that typically are extinguished over time.
Behavioral economists suggest we tend to experience financial losses more intensely than gains. Physicians might prefer vehicles like the guaranteed minimum death benefit of variable annuities, the certainty that comes with disability or long-term care insurance, or traditional cash-value life insurance policies. But be alert to the associated higher costs, huge commissions, and lower returns. And beware of fear-mongering insurance salesmen.
Be open to new ideas that identify and provide solutions to the insurance problems of physicians. One chilling thought suggested by Yale University economist Robert J. Shiller, PhD, in his new book, The New Financial Order: Risk in the 21st Century, is protection from the "gratuitous random and painful inequality" of selecting the wrong profession. The solution? "Livelihood insurance," framed as a risk management contract.
Trusting Wall Street
Some stockbroker salesmen and big brokerage houses that underwrite and recommend stocks may have credibility problems, and physicians can get burned with the adrenaline rush of "self-directed" portfolios. Think tech stocks, Enron, WorldCom, HealthSouth. But for some previously "burned" physicians, it is almost as difficult to go it alone as it is to secure professional advice.
Be aware of the four most dangerous words on Wall Street: "This time it's different." We recommend using an independent financial adviser, fee-based, or fee-only adviser who charges by the hour, engagement, or pro re nata for advice.
Not developing a comprehensive financial plan
While many doctors have an investment portfolio, few have a comprehensive personal financial plan, especially one designed for medical professionals.
Typically such plans consider the risk-tolerance and timeframe of several standard components, such as insurance, taxation, investing, retirement, and estate planning. For today's practicing physicians however, attention should also be directed toward medical practice enhancement activities, contemporaneous risk management concepts, practice appraisal determinations, and medical practice succession planning. All should be interrelated in an economically sound manner not counterproductive to individual components of the plan.
Trusting your financial adviser carte blanche
Just as the prime duty of a physician is to his patients, the prime duty of a financial adviser should be to clients. Yet the very terms financial adviser, financial planner, or investment adviser have no real academic or consistent meaning in the industry. The only hurdle to becoming one is passing a simple securities industry, or state insurance sales licensing examination. Commissioned stockbrokers are fine to use if their fees and intentions are transparent, and they offer value to you.
If you receive advice from a stockbroker, he should be responsible for it, just as we physicians are liable for our medical diagnosis and treatment plan. Perhaps the ancient medical motto omnia pro aegroto should become the new financial services credo omnia pro doctor (all for the doctor-client)?
Selecting the wrong financial or investment adviser
Worry and depression from high management fees, poor investing results, unreturned phone calls, generic advice and sales forms, cold-calls and seminars, high-pressure sales tactics, rapid financial adviser turnover, etc. You deserve better.
Select a financial adviser who takes pride in his fiduciary responsibility, knows the medical profession, and eschews product sales commissions whenever possible. To determine if your current adviser is working for you, just ask to see the documents below:
Certified Financial Planners, Certified Medical Planners, some fee-based and fee-only financial advisers, and some independent financial advisers possess these licenses and certifications, as required. Stockbrokers, salesmen, intermediaries, insurance agents, or other financial "consultants" and "advisers" may not. All monikers suggest, but do not guarantee, impartiality and a lack of bias.
Often, successful investing is simply a matter of avoiding mistakes, rather than possessing investing acumen. A good rule of thumb is to pursue fundamentals over fads, seek wise counsel when required, and always remember, caveat emptor.
David E. Marcinko, MD, is a Certified Medical Planner(c), Certified Financial Planner(c), licensed insurance agent, and distinguished visiting instructor of finance at the University of Phoenix, Graduate School of Business and Management. He is also the Academic Provost for www.MedicalBusinessAdvisors.com, sponsor of the Certified Medical Planner(c) charter designation program, and author of Insurance and Risk Management Strategies for Physicians and Advisors, and Financial Planning Handbook for Physicians and Advisors. Dr. Marcinko can be reached at email@example.com.
This article originally appeared in the March 2005 issue of Physicians Practice.