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By Dr. James M. Dahle, WCI Founder
Doctors are notorious for being bad investors. There are a number of reasons for this, but none of them are insurmountable. Let’s go over each of them.
#1 A Different Starting Line
Doctors start their investing careers in a different place than most people. Most people start investing, or at least could start investing, at 18-22 years old with a net worth in the -$50,000 to $0 range. That’s not the case for most doctors. Most doctors start their investing career at 30-35 with a net worth in the -$100,000 to -$500,000 range. That’s a big barrier. Many doctors don’t even get back to broke before 40, only to discover that compound interest has been assisting their college roommates’ path to financial independence for almost two decades already.
The good news is that doctors also generally earn more than their peers, with the average physician bringing in around $275,000 and the average dentist making approximately $175,000. If they combine that income with a relatively high savings rate, they can get back to broke much sooner and can continue to rapidly build wealth. It’s hard to stay poor for long when you are putting six figures a year toward building wealth.
#2 A High Tax Burden
Unfortunately, our progressive tax system is skewed toward those who earn small amounts of money each year for many years and against those who earn a lot of money in just a few years. In fact, it is entirely possible to become a millionaire in this country without ever paying income tax. In 2021, when I originally wrote this piece, a family of four living in a tax-free state and taking the standard deduction could earn up to $62,500. If you maxed out a tax-deferred 401(k) at work, that amount increased to $82,000. That income got you into approximately the top 12% of all earners.
Investing $19,500 a year at 8% would cause you to become a millionaire in just over 21 years.
=NPER(8%,-19500,0,1000000) = 21.2 years
On the other hand, a doctor earning the average physician income of $275,000 pays more than $44,000 in income taxes, or about 16% of income—again assuming marriage to a non-earner, two kids, and the standard deduction while ignoring payroll taxes, state income taxes, sales taxes, and property taxes. At $500,000 of income, that figure rises to $115,000, or 23% of income. Whether 16% or 23%, that is simply a lot of income that cannot go toward building wealth.
While there is no doubt that earning more helps to build wealth (especially if you keep that savings rate high as discussed in #1), the real solution to the increased tax burden that doctors face is to minimize the taxes, especially those applied in the highest brackets. This is done using tax-protected retirement accounts, particularly those with an upfront tax deduction such as 401(k)s, 403(b)s, 457(b)s, 401(a)s, Individual 401(k)s, Health Savings Accounts, and Defined Benefit/Cash Balance Plans. Many doctors are eligible for two, three, four, or more of these accounts. Maxing these out can dramatically lower the tax burden. Consider that doctor making $500,000 and paying $115,000 in taxes. By maxing out two 401(k)s, an HSA, and an $80,000 Cash Balance Plan, this doctor can knock more than $200,000 off their adjusted gross income, lowering the tax burden by almost $62,000, or 54%. That’s $62,000 more that can be used to build wealth.
#3 No Formal Training or Business Expertise
Many doctors stink at investing and other financial tasks simply because they do not know how to do them. By the time typical small business owners are making six-figure incomes, they are typically very good at running a business, evaluating risks, budgeting, and negotiating. They understand how the financial world and the tax code work. That’s not the case for athletes, entertainers, artists, and doctors. Their high income comes from specialized skills or knowledge, not from any particular business or financial acumen. As a general rule, medical and dental schools and residencies teach next to nothing about personal finance, investing, or business to doctors. They are dumped onto the world with a high income and no idea how to manage it effectively to build wealth.
While there are many of us working on integrating some sort of financial training into the medical education system, the truth is that doctors are mostly on their own to learn this information. Luckily, it’s not that hard to learn, especially with resources like The White Coat Investor available to you. Whether you prefer a blog, email newsletters, a podcast, a videocast, an online course, live conferences, books, or forums, we’ve packaged up this information for you in your preferred format so you can learn it and apply it in your life. Knowledge is power, and the truth is that this is one of the easiest obstacles to overcome.
#4 Accredited Investor Status
There are a lot of what I call “Dumb Doctor Deals” out there. Most of these investments can only legally be sold to accredited investors. An accredited investor is presumed to be smart enough to evaluate an investment on their own (without the assistance of the SEC) and can afford to lose more money by virtue of their wealth. However, the actual definition of an accredited investor is solely based on income or wealth; there is no requirement for investment expertise. To make matters worse, the income level ($200,000) and the wealth level ($1 million in investable assets) were never indexed to inflation. So, most physicians coming out of residency are now technically accredited investors, despite having a negative net worth and little ability to evaluate an investment. They are whales ready to be harpooned by the nearest Captain Ahab hawking a dumb doctor deal.
The solution is to become a REAL accredited investor before ever touching an investment requiring that status. A real accredited investor has the knowledge and skills required to tell a good investment from a bad one, and they can identify investments that are likely to be scams. A real accredited investor can also afford to lose the entire investment. I would suggest that before touching these investments, you make sure you qualify on BOTH the income requirement AND the wealth requirement—and double both of them for good measure. If you’re making more than $400,000 AND you have more than $2 million in investable assets AND you have developed the ability and interest to objectively evaluate a private investment, then I think it is reasonable for you to include it in your portfolio. If you cannot check all of those boxes, then stick with a portfolio of low-cost, broadly diversified index mutual funds and possibly investment properties that you own and manage directly. There’s no need to get fancy to be successful.
#5 Being Overly Trusting
Doctors are taught to trust the other professionals in their hospital. They know that the pediatric nephrologist knows more than them about the workings of tiny kidneys, so they defer to their wisdom on those matters, trusting their advice completely. Unfortunately, they do not realize that the entire professional world does not recite the Hippocratic Oath prior to entering their field. They do not realize that not every financial professional has a fiduciary duty to them and that even many who do fail to abide by it. They also don’t realize that many financial professionals have little real financial training. This results in doctors getting a lot of bad advice and overpaying for good advice.
Learning how the financial services industry really works and putting on your business hat (the one that makes you skeptical and suspicious) rather than your medicine hat before interacting with financial pros is the only solution. As William Bernstein famously said:
“If you act on the assumption that every broker, insurance salesman, and financial advisor you encounter is a hardened criminal, you will do just fine.”
I’m not saying they’re all crooks (most actually aren’t), but an attitude of healthy skepticism is completely appropriate. Like with your teenager: trust, but verify.
#6 Being Overconfident
Doctors are trained to make difficult decisions quickly with limited information. They are also used to being the smartest person in the room. This leads them to make the classic behavioral error that just because they know a lot about one thing, they know a lot about everything. It is important to know what you know, but it is even more important to be aware of what you don’t know. Many doctors think that financial gurus have functioning crystal balls. Even worse, many doctors think they personally have a functioning crystal ball. It is a rare doctor who would not benefit from at least occasional high-quality financial, legal, and accounting advice.
Get advice when you need it. Learn enough about finance to recognize when you need it. Be humble about what you know and what you do not. Develop an investing plan that does not require you to accurately predict the future to reach your financial goals.
#7 Being Underconfident
On the other side of the scale, there are many doctors who are absolutely terrified of anything financial. While there is a lot to learn to function as your own financial planner and investment manager, there isn’t THAT much to the process, especially since you only need to learn those aspects of finance that apply to your situation. But some doctors give up before they even start and become dependent on professionals to do everything for them without even determining if they are getting good advice or whether they are paying a fair price.
Realize that basic financial skills are relatively easy to pick up and implement in your life. Most doctors can function as their own financial planner and investment manager if they have the interest and the will to dedicate a bit of time to the craft. It is clearly the best-paying hobby you can pick up. Successful do-it-yourself investors often discover that their confidence lagged their knowledge by about a year. You can do this and you don’t have to do it all on your own all at once from the beginning. Get help from others until you can fly on your own.
#8 Failing to See the End from the Beginning
Many doctors think they will be able to work forever. They view money as their most renewable resource. See a few more patients, work a few more shifts, or do a few more surgeries, and voila, more money in the checking account. Many doctors don’t realize that their career may end before they thought, that children cost more than they thought, or that physician burnout rears its ugly head for many by mid-career or even earlier. Many doctors realize they are different people at 35 or 45 than they were at 25, but they built a financial plan based around practicing full-time until age 70.
Doctors should prioritize their wealth-building activities early in their careers. Pay off your student loans in less than five years. Pay off your mortgage in less than 15. Become rich before you start acting rich. When your financial ducks are in a row, you will have the ability to make burnout-preventing and curing changes in your career—or even leave it completely if necessary.
Doctors are notorious for being bad investors, but this isn’t a terminal condition. They can overcome the obstacles in their way, build wealth, and live the “good life” where they can support their family, focus on their patients, eliminate financial concerns, give to good causes, and even pick up a few luxuries for themselves along the way.
What do you think? Why do doctors have a reputation as such terrible investors? What should they do about it? Comment below!