After a new physician has completed the basic pre-investment checklist (see below), it is time to start investing towards their financial goals and retirement. Many newer physicians receive a ton of competing advice on how to actually invest, and as a result feel overwhelmed. In this blog, I will outline the three most common methods of investing using a dinner analogy, and the pros and cons of each. As always, keep in mind that I am not a certified financial planner, just a veteran MD who wants to see new grads reach financial independence.
Before you start investing:
Make sure that before you start deploying your hard-earned capital that you have already done the basics:
Set financial goals for the short- and long-term
Saved up an emergency fund equivalent to 3-6 months of living expenses
Decided your investing ‘risk tolerance’ based on your age, number of dependents, financial goals, earning potential and personal comfort levels (in other words, decide what kind of investments will let you sleep at night)
Learned about diversification with stocks, bonds, fixed income, real estate, etc.
The three main methods:
When describing the three main ways to mobilize money for investment, I use a dinner analogy when teaching the residents and fellows.
Option 1: Three Michelin star fine dining (= Full-service financial advisor or wealth manager)
Pros: Everything is done for you, from investing, tax and budget advice, retirement planning, facilitating insurance coverage, to estate planning. Generally, you meet with your advisor once or twice per year but can contact them anytime. They may reassure you to not panic sell after a drop in the market.
Cons: Expense – usually you are charged a percentage of the total amount you have invested, often 1-3%, which adds up quickly over time. This higher price tag doesn’t guarantee performance. According to conventional wisdom, over 70% of actively managed portfolios underperform relative to the overall market index after fees are taken out.
Who this is for: A good choice if you have little interest in financial matters, or conversely, even thinking about money makes you exceedingly anxious. A financial advisor is also suitable if you prefer having comprehensive service knowing that it’s going to cost more.
Option 2: Meal kits, where the ingredients and recipes are delivered to your door ( = Robo-advisor). A robo-advisor is an online investment service aimed at individuals that provides some advice and access to a limited number of financial products. They are often aimed at younger investors, or those with a lower net worth.
Pros: Generally lower fees than full-service financial advisors, with low account minimums, and easy to open accounts. The user-friendly interface look like a banking app, so they are not difficult to navigate. Robo-advisors provide access to common proven investing models that serve most Canadians.
Cons: The advice is not personalized – you are usually placed within one of a few broad categories after answering some questions on your goals and risk tolerance. There is no contact with actual humans (although some would consider this an advantage). There is generally no access to advanced investing strategies like leveraged options.
Who this is for: This may be a good pick for new investors who like the purely digital interaction, and those that may benefit from a limited number of investment options. Robo-advisors are often seen as a ‘gateway’ to moving to do it yourself investing after a couple of years.
Option 3: Going to the grocery store, then cooking at home (= Do it Yourself). Most proponents of DIY recommend exchange traded funds (ETFs) that own a small piece of many companies (stocks) or many types of bonds for good diversification.
Pros: The absolute lowest fees, which can add up to hundreds of thousands of dollars more in your portfolio by the end of your career. Since you are in charge, this is the most flexible option. There are no minimums, so you can start small.
Cons: You will not automatically receive advice on where to put your money, although there are good recommendations on the MD groups on social media. There is a bit of a learning curve when you first set up your account, and can seem intimidating. DIY is more time-consuming since you are selecting your investments and monitoring the fluctuations (on the other hand, this can actually be fun, and become a hobby). You need to be more disciplined, since you need to put aside emotion and stick to your plan if your investments go down in value.
Who this is for: This is ideal for those who like to control their own finances, and want to maximize their returns for retirement. DIY investing is also good for MDs with more knowledge who want to dabble with riskier investments like options (cautiously, of course).
Conclusion:
In the end, there is no wrong answer when it comes to how you choose to invest (outside of burying cash in the backyard). Ultimately, it comes down to your financial goals and level of interest in money matters. Almost any investment is better than ‘paralysis by analysis’ where you are sitting on cash that is doing nothing. Regardless of your method of investment, you should regularly review and adjust your portfolio as your personal and financial circumstances change over the course of your career, or at least once per year. If you go with the Do It Yourself route, meeting with a fee only financial advisor early in your investing career is worthwhile.
Author: Dr. Krishna Sharma, Director of Physician Engagement, Specialty Medical Partners
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