Be The Market: How Doctors Should Invest Their Money

As I continue onward in my journey writing a physician finance guide one chapter at a time, I wanted to tackle investing.  Part of being an intelligent investor is learning the most efficient way to invest your excess income wisely with as little effort as possible.  If you scour the internet, you will likely find an inordinate amount of websites and content creators claiming they have the solution to help you beat the market, guaranteed.

These claims are, of course, bogus.  No one can consistently beat the market; for the incredibly rare few who do, it is either luck or fraud.  So, with this chapter, I hope to briefly touch on the basics of market investing and describe why simple diversification and index fund investing are the most effective ways for busy clinical physicians and healthcare providers to invest with the expectation of long-term gains.  Don’t try to beat the market; be the market.  Create a simple and effective portfolio that lets market growth work for you. 

Doctor Money: A Personal Finance Guide for Physicians

Chapter 9: Be The Market

With the publication of Chapter 9 of our Doctor Money content series, we are reviewing how to approach stock and bond investing. Though there are many other forms of investing (e.g., real estate, Exchange-Traded Funds or ETFs, speculative investments, commodities, etc.), I will dedicate a chapter to real estate investing later in this book. However, all other investments are so nuanced that they will not be covered here. Other than real estate, most physicians will house their wealth in stocks and bonds.

However, it is nearly impossible to generate significant wealth without an introductory understanding of stock and bond investing, diversification, and risk tolerance.  My goal at the end of this post is to convince you that having a simple and appropriately diverse stock and bond portfolio that indexes the United States and International markets is the best way for busy physicians to begin to generate wealth and guard against market volatility.  Further, this simple approach can be your lifelong investing strategy or a springboard for further investment interests. 

Investing as a Busy Professional

Let’s begin by formally clarifying why I will lay out the following investment strategy.  Most clinical physicians are busy.  With increasing emphasis on patient turnover and documentation, all while navigating the complexities of billing and authorization, our jobs are stressful and time-consuming.  This will come as no surprise to most healthcare workers.  Add in the complexities of family life, child-rearing, and pursuing any interest outside of your career, and much of your time is spoken for.  How, then, can any physician find the time to research individual companies and make educated decisions on which publicly traded businesses are undervalued?  We simply cannot.  There are not enough hours in the day.

Do not worry.  As an investment vehicle already does all the leg work for us.  Instead of investing in individual stocks, why not buy all the most economically impactful stocks in a proportion that reflects an index of the market?  Enter the index fund. 

Index Funds

According to Investopedia, an index fund is a type of mutual or exchange-traded fund (ETF) that tracks the performance of a market index, such as the S&P 500, by holding the same stocks or bonds or a representative sample of them. 

Essentially, by mimicking their makeup, index funds mirror the performance of market benchmarks like the S&P 500, the Dow Jones Industrial Average, the Nasdaq Composite, etc..  These passive investments are largely considered a bland and unexciting way to invest.  This is largely why I (and so many others) advocate for them! 

As working professionals, we don’t need more anxiety. We want to know that our investments are simple, safe, and effective. Though this form of investing may fail to capitalize on single stock growth (think Apple, Google, Meta, Nvidia, Tesla, etc.), it wins in the long run by growing as the economy does. 

Market history has already demonstrated beneficial evidence in favor of index investing.  Here are a few reasons:

• Overwhelmingly, index funds have lower expense ratios because they are passively managed.  No significantly excessive charge is needed to manage a fund that just mimics a market index.  This saves you money.
• Index funds mimic a market index; thus, by their very nature, they are well diversified. 
• Since they replicate market indexes, their holdings are well-known and transparent
• Over the long term, most index funds have outperformed actively managed funds, especially after accounting for fees and expenses
• Lower turnover rates in index funds often result in fewer capital gains distributions, making them more tax-efficient than actively managed funds

If these points did not sell you on the idea, here is a graphical representation of index fund performance (since 1970) compared to other U.S. Assets over time:

As you can see, the S&P 500 alone significantly outperformed corporate bonds, U.S. Treasury Bills, and Real Estate over the past nearly four decades.  Given that many index funds use the S&P 500 as their index, they, too, have performed very well over the past 40 years. 

Index Fund Drawbacks

Of course, there are some drawbacks to be aware of with index funds. Given their diversification, they lack the flexibility to rapidly adjust to changes in market trends. Further, given that they mimic a market index, they often include publicly traded companies that may be over or undervalued, but that is the very nature of an index. 

Best Index Funds

Several investment platforms (Vanguard, Fidelity, Charles Schwab, USAA, etc.) offer index funds with low expense ratios.  For individuals looking to invest in index funds, according to TradingView (as of July 2024), here are the best index funds by name:

Diversification

Though index funds are diversified by their very nature, given their representation of a market index, our individual investment portfolios can better guard against market volatility with even broader diversification. Meaning: ‘Don’t put all your eggs in one basket.’

Diversification is a strategy for managing risk by holding different types of investments within a portfolio (e.g., stocks, bonds, real estate, ETFs, commodities, etc.).  The distribution of wealth across these different types of investments helps buffer one from any sudden changes in the market. 

The rationale behind diversification is that a well-constructed portfolio harboring different types of investments will, on average, yield higher long-term gains and lower the risk of any individual holding or security.  Multiple studies have shown that maintaining a well-diversified portfolio yields the most cost-effective way to mitigate risk in the market.  Diversification works to smooth out risk events in a portfolio so that the gains in some investments help to combat the losses from others.

So, how can a busy physician efficiently diversify their portfolio with as little time investment as possible?  This is where index investing flourishes.  See, an index fund that tracks the S&P 500 market index (like the Vanguard 500 Index Fund Admiral Shares (VFIAX), for example) is already a well-diversified selection of 500 stocks.  Volatility in any stock is often neutralized because of appropriate diversification amongst the other 499 stocks remaining in that fund.  However, being solely invested in the U.S. stock market, even if using index funds as your investment vehicle, is still not a healthy level of diversification. 

This is where bonds and international stocks come in.  Many, myself included, would argue that your investment portfolio should also include safer (less volatile) investments like bonds.  Since bonds are safer investments, they often have lower rates of return but are largely more stable investments.  Depending on how close you are to retirement or a big purchase, it can often influence the portion of your investments you may feel needs to be housed in bonds instead of stocks.  This is where risk tolerance factors in. 

Risk Tolerance

Everyone has a different risk tolerance. Though being 100% invested in U.S. stocks is not wrong, many would see this as risky.  It would be risky because all your investments depend on a single country’s economy.  Any unexpected turmoil like war, political unrest, recession, or depression in the market can lead to catastrophic losses.  You would not be at all shielded from these losses as your portfolio is not well diversified. 

However, individuals who are afraid of unexpected changes in any one market (domestic stocks, international stocks, housing markets, etc.) impacting their investments will likely feel incentivized to broadly diversify their portfolio.  This means they will keep a portion in domestic stocks, a portion in international stocks, a portion in domestic bonds, and (sometimes) a portion in international bonds.  Even more, they may diversify further and house some income in real estate, and so on.

Your risk tolerance, or how afraid you are of losing money, will influence what portion of your portfolio is housed in any type of investment vehicle.  For early career physicians, who ideally have decades of investment time ahead of them, they can often weather a recession or two.  This means they likely can be more aggressive by housing most of their portfolio in stocks.  Higher risk, higher reward. 

For physician approaching retirement, for example, the threat of a recession may loom heavily over their finances.  Unexpected losses could impact their quality of life in retirement and their withdrawal rate.  A doctor in this scenario may be more likely to house an increasing majority of their investments in bonds.  Let your comfort with risk and your financial timeline influence your diversification. 

On to the final questions.  How can busy physicians safely and efficiently invest their savings?

The Three Fund Portfolio

This is where we ultimately return to an investment strategy I have written about previously on this blog.  The Three Fund Portfolio, originally popularized by the Bogleheads’ community (a community dedicated to the practices and advice of Vanguard founder Jack Bogle), is a very simple strategy for intelligently investing your savings. 

It houses your investment in three essential funds, each of which is an index fund (thus broadly diversified) and across three broad investment types.  The Three-Fund Portfolio consists of three essential index funds:

• The Total U.S. Stock Market Index Fund
• The Total U.S. Bond Market Index Fund
• The Total International Stock Market Index Fund

This approach is critical as it offers diversification across domestic and international stocks and bonds.  The genius of this strategy lies in its simplicity, making it, in my honest opinion, the best (initial) starting portfolio for busy physicians.

Again, it works because each of the investments above indexes their respective markets and is intrinsically diverse by nature, and risk is spread across both domestic and international markets.  A win-win.  Again, determining the portion of your investments you wish to distribute to each fund will be based on your risk tolerance and your financial timeline.

Aggressive individuals may house 90% of their investments in stocks and 10% in bonds.  Less aggressive individuals may house 70% in stocks and 30% in bonds.  Perhaps individuals nearing retirement keep a 50-50 split between stocks and bonds.  It is entirely up to you and your comfort level.  But I encourage all busy clinical physicians to start here and build upon this solid strategy. 

Be The Market: How Doctors Should Invest Their Money

Lastly, let us return to the question at the core of this chapter.  How should doctors invest their money?  You are already a hardworking professional.  You spend your life dedicated to patient care while still hoping to leave work and have the energy to be mentally and physically present for your families and friends.  You deserve your hard-earned income to work for you consistently, with little mental bandwidth needed.

The last thing early career physicians need is to occupy hours of their days or weeks worrying about investments.  The investment process should be streamlined, simple, and free from frequent human involvement.  Follow the recommendation above as an initial strategy to house and diversify your investments, then build on it as you learn more.  Study after study shows that fortune favors those who try and ‘be the market,’ not those who try and ‘beat the market.’  You do not need to waste your money gambling on individual stocks, nor should you pay someone else to do it for you.  They are just gambling on your behalf and charging you for it.  Do not fall for this trap. 

Less Is More

Less truly is more in this scenario.  You can diversify your investments across three funds, then set and forget it.  The only maintenance that may be required is an annual re-distribution of your investments, so make sure it continues to reflect a ratio that you are comfortable with.  If your stocks grow significantly more than your bonds, then you may need to re-distribute some stock funds towards bonds annually. 

As time passes in your career and your wealth grows, the above investment strategy will afford you the opportunity to explore other forms of investing.  Maybe you dip your toes into real estate investing.  More on that later…  No matter what, if you build on an already diversified and efficient portfolio, you are bound to achieve long-term success and appropriately weather inevitable market turmoil better than most.  This is how doctors should invest their money.   

Stay motivated!

The Motivated M.D.

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This post (and hopefully its eventual publication) is designed strictly to inform and entertain. I am in no way, shape, or form a financial professional, nor does this site provide formalized financial advice. I do not provide nor engage in rendering legal, accounting, or other professional services. If legal advice or other professional/expert assistance is required, then the services of an accredited professional should be sought. I am not liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

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