Physicians who now work as investment pros tell you how to make smarter money decisions.
Physicians who now work as financial advisers tell you how to make smarter money decisions.
Who better to advise a doctor on investment strategy than someone who's walked the walk? We spoke with three physicians who, after years in the medical profession, became money managers. Two no longer practice medicine, but all have a dual perspective that helps them zero in on financial mistakes doctors commonly make.
We asked them to offer some advice to help you make wiser financial and investment decisions. Here's what they had to say.
"Doctors are targets for risky investments," warns former neurologist Shirley M. Mueller of Indianapolis. People seeking seed money or venture capital seek out doctors, she says, because their high earnings make them attractive investors. Many are also "qualified" to invest, according to SEC regulations, meaning that they earn more than $200,000 a year individually or $300,000 with a spouse, or have a net worth of over $1 million with a spouse to invest in certain ventures.
Physicians' colleagues and relatives often invite them to invest in medical and technology start-up companies, says Mueller. The scientific aspect may sound like a sure bet, but the concept is only one factor affecting a company's success. Doctors rarely have the financial know-how to assess the deal's potential.
"I know several doctors who invested in freestanding MRI centers," says Mueller. "The early investors did well, but then that market became saturated. Doctors who put money in later lost their investments. Thorough research could have shown that the demand had already peaked."
Mueller adds, "If you're being asked to put your money into an investment that doesn't require SEC scrutiny, ask why they're operating that way. The investment may be too risky, for too little gain."
When you're considering high-risk or start-up investments, get a financial professional or lawyer to review the deal and thoroughly investigate the venture and its key personnel.
"If you have $1 million or more to put into equities, you may save on investment costs with individual stocks," says Mueller. The average stock mutual fund management fee is 1.54 percent, and average turnover is 110 percent annually. High turnover may mean many profitable sales within the mutual fund. You'll pay capital gains or ordinary income taxes on the profit, even if the fund's return is down.
"By contrast, if you have a stock portfolio managed by a financial adviser and you invest $1 million or more, the management fee usually drops below 1 percent and can go as low as 0.5 percent," says Mueller. "Many individually managed stock portfolios also have lower turnover. Between those two factors, a portfolio of individual stocks can result in more money for you."
True, you can get low expenses and low turnover with most index funds, but you also forgo the opportunity to beat the market. So if you want to try to maximize your return, you'll likely do better with stocks, Mueller says.
But don't try to construct your own stock portfolio unless you're willing to devote at least 10 hours a week to following companies, monitoring business developments, and evaluating market conditions, she advises. "Guidelines for developing a portfolio are changing. Previously, conventional wisdom held that a diversified portfolio required 15 to 20 stocks. Now, many analysts say you need 35 to 40 stocks to fully diversify and reduce risk in your overall holdings. It's probably close to impossible to work full time as a physician and devote the time required to your portfolio.
"Unless you know how to determine your portfolio's annualized return," Mueller adds, "you can't tell whether you're managing it effectively, or how it compares with your objective."
When looking for an adviser, first verify his educational credentials and get references from other clients. If he passes muster, evaluate his investment expertise.
"Ask how he did in the last bear market, and request documentation," says Joe Duarte, a financial adviser and anesthesiologist in Dallas. "Find out what his recommended portfolios returned. If he won't give you those numbers, ask which mutual funds or stocks he invested in. Then, check their performance on your own."
You can verify mutual fund returns using Morningstar Mutual Funds, which may be available at your local library. Or you can visit www.morningstar.com or the fund families' Web sites. You can usually monitor stock prices through each company's investor relations department.
"Note whether the adviser's fund choices carry high front-end loads," says Duarte. "If he's using only one fund family whose portfolios carry a 5.75 percent load, for example, ask whether he's receiving a fee for recommending the fund. Keep in mind that many advisers charge a management fee as well."
If the fund he's recommended is one you would likely have found and invested in yourself, the adviser's fee may not be justified. The next question is whether the fund's performance justifies the load. Unless its performance is far superior to those of similar no-load funds, it probably isn't.
Being financially responsible is a must, says former internist Joel Greenwald of Edina, MN.
"Since new physicians have delayed gratification throughout medical school, once they graduate, they want cars and houses that are beyond their budgets. But the key is to live below your means.
"I know one radiologist in his mid-30s, married with children, who will have his entire mortgage paid off next year," says Greenwald. "Instead of making a lot of expensive purchases, the family simply saves the proper amount and enjoys simple things like hiking and biking. On the other end of the spectrum, there's a 58-year-old cardiologist with a total net worth of about $100,000. He'll have to delay retirement because he didn't get a handle on his saving and spending."
Joe Duarte cites another example: "One 32-year-old cardiologist had a ton of student loans. He made $120,000 in his first year of practice, but at year-end he had only $1,000 left; he'd lost the rest through day trading. What was this guy doing day trading, rather than paying off debts?"
It's tempting to procrastinate and tell yourself that you'll start putting more money away in the future, says Duarte. But if your income declinesand there's been increasing pressure on physicians' incomesit becomes harder to cut your expenses and squirrel away extra funds.
Joel Greenwald, 42, a former internist, became intrigued by finance listening in on the investment discussions his grandfather, also a physician, used to have. Greenwald practiced medicine full-time for 10 years, and although he loved it, he found the managed care environment frustrating. So he decided to switch to financial planning. While studying for his Certified Financial Planner designation, he worked as a planner three days a week and an internist the other two. Now, Greenwald's a full-time financial adviser with Raymond James Financial Services in Edina, MN. He's a Certified Financial Planner (CFP) and a Certified Employee Benefits Specialist.
Joe Duarte, a Dallas anesthesiologist, caught the investing bug in the fall of 1987, when the market plummeted and almost every doctor at his hospital lost money. Now president of River Willow Capital Management, a money management firm in Dallas, Duarte writes a syndicated column on investing and has published his third investment book, Successful Energy Sector Investing: Every Investor's Complete Guide (Prima Publishing, 2002). Duarte still works two days a week as an anesthesiologist.
Shirley M. Mueller, 60, a former neurologist, grew frustrated with the restrictions and paperwork that managed care brought. So she turned to investing, which had long been a challenging sideline for her: She was already handling the investment accounts for seven family members. Five years ago, Mueller became a Registered Investment Adviser and began managing portfolios for individuals with high net worth at Charles Schwab & Co. Now she has her own firm in Indianapolis.
Leslie Kane. Tips from MDs turned investment pros. Medical Economics 2002;20:24.