Financial Planning For Physicians
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From the Medical Spa MD Podcast, episode 3 on Financial Planning for Physicians with Dr. Setu Mazumdar
We added a new podcast episode with Dr. Setu Mazumdar recently in which we discussed how physicians tend to underperform the market with their self-directed investments. Here's an excerpt from the podcast that I thought was pretty relevant.
Question: What are the physicians who are more successful with their financial planning? What do they have in common?
Dr. Mazumdar: First of all, I think it’s a very small group. Most of the people I’ve met… Sure they might make high income [inaudible – 00:50:27], but having high income and being successful I think are two separate issues. If you’re spending all the money that you’re making, you’d probably not accumulate enough assets where you can call yourself financially successful. But the common traits that I see are one having a [inaudible – 00:50:47] of plan and place.
The second thing that I’ve noticed are people who basically say: “You know I’ve realized that I can’t pick the winning stocks. I can’t time the stock market. I can’t pick the winning managers. The best I can do and what all the academic research says I should do is, match the market.”
The third, of course, is staying disciplined enough to stay with the good times and bad. As well as kind of taking the approach: “You know, I really don’t know what the future holds. It’s completely uncertain. I don’t know what my income is going to be. I don’t know if I’m going to be disabled. So I’m going to leverage time on my side and, of course, increase my savings to make sure that I have enough to retire on.”
So it all sounds kind of basic, but you’d be surprised that most physicians don’t do those things.
Jeff: So you brought up another interesting point, which is matching the market. Why would I need a financial adviser? And why wouldn’t I just invest the money that I’m willing to put in the market, whatever percentage that is going to be, and have them match the S&P 500 or invest in a matching index fund?
Dr. Mazumdar: That’s a good question. I think if you look at all the data that’s done in this issue… exactly answering this question… OK, here’s a great study. It actually comes about once a year, maybe once every two years. It’s called the [Dalbar Study?]. Here’s what it basically says. It says: If you take the past 20 years and if you just stuck with the market, this includes 2008 & 2009 and all the bad things that happened in the past decade, if you take the past 20 years, you’re just basically stuck with everything. You still will have a pretty decent rate of return, around 8% a year.
It turns out that the average individual investor… their return in the past 20 years, and the way that it’s calculated is based upon mutual fund cash flows across tens of thousands of different accounts and different custodians, the average individual investor got a rate return under 2% a year. The market return of about 8% a year… the average individual investor got a return about 1.8% a year. It turns out that inflation is about 3% a year.
So basically the conclusion there is that investors, when they do it themselves, are getting in and out in the market exactly at the wrong time. They’re essentially buying high and selling low. And so one of the value of an adviser is basically discipline. And people tell me: “Do I really want to pay for discipline?” And my answer is: “Actually that’s the number one thing you should be paying for because your own worst enemy is usually yourself. And all the data show that.”
But then there are always other issues like: Investment is one thing, but how do you integrate that with state planning? How do you know if you have enough life insurance? How do you if you’re saving enough? How do you know this from the other? And it’s kind of like medicine. It’s too vast of a field for somebody who kind of sit down and have the inclination to do so and really figure it out.
Listen to the entire interview on the Medical Spa MD Podcast.
