I've thought a lot about physician investing primarily because I spend a great deal of time on my personal investing. My education in investing stems from my father's instruction and personal education. (“Why Are Doctors Financial Idiots?” EMN 2013;35:1; http://bit.ly/17OLdK1.)
Physicians tend to underperform the indexes for the same reason the general population does. They follow the flawed advice of the press, television shows, and many financial advisors: trying to time the market, taking a hot tip, and getting in when the water cooler talk picks up about the prospects of stocks. Not surprisingly, these do not work.
Despite Warren Buffett's well-publicized success, “buy-and-hold” is not followed by most investors. The result is that people don't invest successfully.
I have been fortunate to benefit from Mr. Buffett's teachings. If you're not interested in stocks, read The Four Pillars of Investing by J.D. Roth, and you will do well. If you're interested in stocks, subscribe to the Motley Fool Stock Advisor, and you will probably do better but with more risk. Either way, you would be very likely to succeed in investing.
I've done my own investing and have been fortunate enough to get a bit above 14 percent annualized yearly return since I started in 2002, compared with 7.5 percent in the S&P 500. It can be unbelievably painful, however: I lost 55 percent of my money in 2008 and 2009 in six months while the general market lost 40 percent. The reason I came out ahead was my belief in long-term investing, and I never sold through the bottom. This is difficult because all organisms are hardwired to live for today and escape any immediate threat. This survival technique has worked for millions of years, but it kills you in investing.
The crux of my investing lies in five key points.
1. You have to stay in the market. There's a statistic that says something like your annualized return gets cut by one-third if you were out of the market on the top 100 up days in the past 20 years. No one knows which are going to be the big up days.
2. Own no mutual funds; buy exchanged traded funds (that mimic indexes) or stocks instead. Mutual funds charge 1 to 1.5 percent every year, which sounds like a small amount. It's not when the average return is eight percent for a portfolio. So mutual funds take a minimum of one-eighth of the investor's return (12.5 percent of the return year after year). The result after 30 years is the mutual fund portfolio is 50 percent less valuable than the ETF portfolio.
3. More than 90 percent of mutual funds are underperforming the indexes ETFs this year, and this year is like most years in this regard. No one can reliably time the market, and you don't want to pay someone money to almost-guarantee you underperform the market.
4. Every time you sell, you give 22.5 to 33 percent of your profits to the government. Try to sell very, very infrequently. When the government increases tax rates on capital gains, it will give everyone advance warning. It did it last year from 15 to 22.5 percent on long-term capital gains. It won't again for a few years.
5. The fundamental value proposition of the mutual fund industry lies in the belief that the previous four points are wrong and you would be stupid to follow them, but the data overwhelmingly support these four points. It's just difficult not to believe in the attractive person wearing a fine suit marketing for the mutual fund industry. I thought we physicians were supposed to be evidenced-based in our decision-making?
Matt Warden, MD