Where Can Physicians Invest Money Aside From Annuities

An external file that holds a picture, illustration, etc. Object name is bumc0019-0071-fu01.jpg

William C. Roberts, MD

Of the 125 medical schools in the USA, only one of them to my knowledge offers a class related to saving or investing money. A superb book on this subject has just been published by cardiologist Robert M. Doroghazi, and I strongly recommend it to anyone interested in preserving and growing a dollar bill.

Bob Doroghazi's grandparents came to the USA from Hungary. Dr. Doroghazi paid his way through college and medical school (University of Chicago Pritzker School of Medicine). His internship and residency in internal medicine were at the Massachusetts General Hospital in Boston, and his cardiology training was at Barnes Hospital in St. Louis. Dr. Doroghazi has been in practice since 1982 with the Missouri Cardiovascular Specialists in Columbia. He has given greatly of his time and money: he is past president of the Great Rivers Council of the Boy Scouts of America, Columbia Northwest Rotary, and Advent Enterprises, and he has served on the boards of numerous other organizations. He and his wife have endowed teaching awards at the College of Nursing of Texas Woman's University and the University of Chicago Pritzker School of Medicine. His library numbers >700 volumes.

An external file that holds a picture, illustration, etc. Object name is bumc0019-0071-fu02.jpg

Now to his book. His observations are too numerous to summarize, but some of them are as follows.

Financial goals. For the long term, physician investors should anticipate a 10% annual return on noncash investments. With some work, common sense, and knowledge of where mistakes may arise, a 15% annual return on annual investments may be realized. The best investors are the best savers. Compound interest is the most valuable investment tool. Even seemingly small amounts of money have amazing potential. Lost money can never be recouped. The goal should not be to be rich but to have financial security.

Being a physician does not make one smart at investing. Dr. Doroghazi suggests that more money is lost in the hospital doctor's lounge or other similar settings where physicians con gregate and talk than anywhere else. It is in such situations, he emphasizes, that arrogance, ego, and greed overwhelm sanity.

Financial needs and goals must be identified before appropriate plans to achieve them can be made. Investing is a 3-step process: earn money, save money, invest money. Doroghazi states that the most important lesson is to learn to say, "This is too expensive. I cannot afford this." Another important statement is "I married a gold mine. My spouse is thrifty." The essence of thrift is to not waste any resource: do not buy things you do not make adequate use of, and use to the fullest things you purchase. Physicians should be able to save 25% to 50% of their after-tax income.

The mark. He tells of a cartoon showing 2 deer in the woods. One has a huge red symbol on its chest that looks like a bull's-eye. The other deer says, "Bummer of a birthmark, Hal." Many business people view physicians as being easy targets. Physicians are notorious for being poor negotiators. He advises hiring someone to negotiate for you. To be referred to as a "rich doctor" is a sign of disrespect.

Identifying and managing risk. Avoid long shots. They rarely pay. There is no reason to "risk" any amount of money.

Invest in what you know and like. Knowledge equals money. Being a successful investor requires hard work. Great investment ideas frequently come from daily life.

Make your own investment decisions. You may seek the advice of others, but you must ultimately make your own investment decisions. Never invest in anything just because someone else does. Do not allow your name to be used to induce others to invest. No one else should ever know that you are even interested in any investment.

Keep a budget. Be a good record keeper. Have a will. Keep a personal financial statement and update it yearly. Be conservative when estimating the value of assets.

Pay your bills in full and on time. Purchase a home that is within your budget at the earliest possible time. Resist the temptation to buy a home as large as that of your parents or your senior associates. Real estate is not liquid. If you have not saved a 20%down payment, you cannot afford a home. Take a 10-year (or at most 15-year) mortgage with no prepayment penalties, and have your home paid for by age 45. The early payoff of a home can be the equivalent of a lifetime of successful investing. Pay cash for remodeling or additions. Limit the number of times you move.

Funding children's education. Encourage your children to pay for as much of their educational expenses as possible. Take complete advantage of all financial aid and of tax options to fund your children's education.

Insurance. A physician's most valuable asset is not a home, car, or other piece of personal property but his or her capacity to work and produce income. In addition, the average person is almost 5 times more likely to become disabled as to die prematurely. Thus, disability insurance is the most important type of insurance for a physician. Purchase term rather than whole life insurance. No life insurance should be required after age 60. Have a long-term care insurance policy but consult a tax professional before purchasing it. Get medical insurance.

Funding retirement. The most expensive part of everyone's retirement will be medical bills. The average senior citizen currently pays $175,000 for out-of-pocket medical charges. Doroghazi's advice is 1) stay healthy, 2) save as much money as possible and intend to spend it on your health, and 3) have all major obligations funded before retirement. Have sufficient savings such that you can live off of 5% of your total assets per year. Do not purchase an annuity.

Debt. Debt is compound interest in reverse, working to the detriment of the borrower. Debt is seductive and can ruin your life. The longer the repayment period, the greater the burden of debt. Use unanticipated financial windfalls to pay off debt; there are few better investments. Do not lease a car. Never purchase stock on margin.

Fees. Fees are either money in your pocket or money in someone else's pocket. Even small fees can represent large amounts of money over time. Do not invest in any mutual fund that charges a "load." Core investment positions for all physician investors should include index mutual funds and no-load actively managed funds with a long-term record of superior performance. Full-service brokers rarely justify their higher fees. If you make your own investment decisions, execute your trades as cheaply as possible. Physicians are preferred customers. Use this advantage to minimize fees and obtain perks.

Investment areas to avoid. Avoid tax shelters; direct foreign investments; hedge funds; penny stocks; opportunities where all the potential investors are physicians; and limited partnerships where the general partner has not invested any money. Avoid owning a restaurant or any storefront business or investing in art or another collectible.

Bankers and loans. Deal with bankers on your terms, not theirs. Every word in a loan document is important. Read it closely. Do not sign a "callable" loan. Loaning money to a family member only to "help" them is actually doing them and you a terrible disservice. Only trust people you know well, who have earned your trust and respect.

Asset allocation and diversification. A reasonable asset allocation would be 65% stocks, 10% cash, and 25% fixed income. Doroghazi loves certificates of deposit (CD) and believes they should represent most or even all of the money allocated to fixed-income investments. There is no commission charge to purchase or redeem a CD, and CDs are not "callable." Most are insured by the government for up to $100,000 at each institution. Have CDs at several banks in town. Doroghazi views diversification with caution because it mandates investing outside your area of expertise.

Identifying investment opportunities. Real opportunities occur about once a year and should be so obvious that you never have to talk yourself into them. Keep your eyes open.

When to buy. Money is made when an asset is purchased. It is impossible to make money when overpaying for an asset. Never buyjust because the price is down. A sure way to be wiped out is to add to losing positions. Try to buy assets for less than they are worth. Buy when there is "blood in the streets," but this requires tremendous personal confidence.

When to sell. Take profits "too early." An asset must be sold to lock in a profit. When you are congratulating yourself on your investment genius, that's the time to sell. There are no one-decision investments. Do not fall in love with an investment. Aggressively sell nonperforming assets.

Miscellaneous. Donate at least 3% to 5% of your income to charity each year. Medical schools should offer courses on money management. Realize the financial consequences of changing practices. The most expensive part of a vacation is the income lost from not working. Avoid gambling: the odds against winning are too great and it can be addictive and destroy one's life. Doroghazi donates any honoraria received from speaking for pharmaceutical companies and for reviewing malpractice cases (only for the defense) to charity. This avoids being "beholden" to others. Cut your own grass: it helps a high-income professional such as a physician maintain perspective, and it is illogical to go out jogging while paying someone else to cut your grass.

He concludes that the 5 most important factors for obtaining financial security are thrift, compound interest, patience, discipline, and investing in what you know. The 5 most important factors that destroy wealth are greed, debt, fees, trusting everyone, and not making your own decisions.

I highly recommend this book! Bob Doroghazi is a wise man who will retire from practice in 3 months at age 54!

Footnotes

Note: A longer version of this review appeared in The American Journal of Cardiology.