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Ignore The Rate Of Return Discussions

Focus On A Sound Investment And Ignore Its Rate Of Return


Each physician has their own outlook on personal finance. Personal finance being the state in which their finances are. While some are still busy accumulating debt others are aggressively paying them down. In the latter group there are those who also realized that they could drastically cut down their expenses without sacrificing happiness. It’s an evolutionary process.

Some love medicine, it’s their passion, they would do it for free and since it happens to make a very high income they spend freely and aren’t bothered by taking on debt. Their ideal retirement scenario is falling face first into an abscess they are draining at age 91.

It appears to me that those who start by cutting expenses, getting rid of debt, investing their savings and increasing their income in that order have the easiest path towards realizing a path to financial independence.

This post isn’t about lowering your expenses and it’s not about getting rid of your debt. These 2 topics are as straightforward as wanting to get into shape. If you want it then it’s just a matter of holding yourself accountable.

Instead I want to talk about investing your savings. As a doc you will likely have some cash savings to cover unexpected expenses. The rest you will hopefully not have in a savings account because the rate is simply too low. Most commonly you will have your money invested either in mutual funds, stocks, bonds or real estate.

When we invest our money we have a natural proclivity to expect the highest returns without being willing to take the highest risks. This is the topic of discussion, rate of return. You get a rate of return on the money you put in a savings account, it’s fucking abysmal but it’s a rate of return.

How about mutual funds? This one isn’t easy to answer. Some of my doc friends ask me how much I’m making by investing in mutual funds. My answer is 4-6%. Usually I get a bewildered look of why the hell I would invest in something with such little returns.

For me the answer is easy, I’m lazy as fuck and I want the least hands-on approach investment for the majority of my savings.

Back to mutual funds. It’s such a trendy thing to invest in right now, those passive index funds, so I thought I should just share my perspective on them. But before I do I will tell you why you, as a doc, don’t really need to care too much about the rate of your return.

Of course you should care what investment you are putting your money into. Choose something that has a good track record and makes sense to you and is valued appropriately. Mutual funds, CD’s, bonds, real estate and businesses are all example of ways to invest your money.

Recognize that your biggest way of growing your money is NOT your rate of return, it’s your income. There are very few professions out there that can generate such high incomes every-single-fucking-year. Sure, there are entrepreneurs who start a business which makes a lot of money for a while and then it dies down. A CEO might make a ton of money for a few years and they can be out of a job at the drop of a hat.

Even the software geeks got canned in herds when the tech bubble happened. Real estate guys/gals got their asses handed to them not too long ago. But what happened to docs when the affordable care act rolled out? I got a raise, nice.

You don’t make $50k, you make $250k. Your net worth change is affected far less by your investment’s rate of return than the amount you are actually putting into that investment.

I am posting my net worth spreadsheet which I’ve kept since 2010. Here is an excerpt from 2014… notice the last line, my net worth change. Those aren’t annual net worth changes, those monthly net worth changes. WTF?! How awesome is that … look at 3/22/2014, I went up by $32k in a little over a month.

What was my rate of return on my investments? I don’t give a crap. I mean of course I care that I am in a sound investment which should grow with time but I don’t get why a doctor would be worried about a 5% vs 15% rate of return when they have the potential to make their account grow by 30, 50, 60%.

From February to March of 2014 my net worth went from $52k to $84k. I had credit cards and student loans back then which I was paying down so my investments went up by only 20% but my net worth went up by 61%.

I couldn’t tell you how much of it was my investment returns, I’d have to look back at the historical numbers, I assure you it wasn’t more than a couple of percentage points.

I’ve had too much coffee so I’m jumping all over the place. I do feel that I’ve made my point though regarding your rate of return vs your investment’s rate of return. Now I want to talk about welding… jk, let’s go back to mutual funds.

So index funds are all the shit right? Everyone is investing in them. They are predicted to grow at somewhere in the 4-8% range. This is based on historical data while at the same time all legit investment gurus will tell you that past performance is not an indication of future performance. So, it’s basically a cluster fuck of what your actual returns will be.

One thing is clear, investing in stocks and bonds has a very high likelihood of making your money grow. How you execute this is important, mutual funds, especially lower fee and passive mutual funds, seem to be the better option for us novice investors. Do I know this for a fact? No. Is there a chance all my investments could be wiped out? Yeap, but it’s real fucking low. I also am not planning on keeping all my investments in mutual funds.

Currently $150k is in real estate, $350k in index funds and $50k in savings. The next step for me is to invest in a business. This is my bird’s-eye view of diversification.

We need to realize that mutual funds can also go down by 20, 30, or even 50% any given year. That’s the downside to investing on Wall Street. If you believe the investment is sound, which means if you believe that those running the companies in which you are invested know what the fuck they are doing, then those companies will likely come back up.

So, to sum it all up, I am of the opinion that with such a high and steady income the best rate of return in your net worth spreadsheet is the income which you convert into assets or investments. The rate of return you can expect from a set-it-and-forget-it investment such as an index fund is never, ever going to blow the thongs off your gluteal cleft. Focus on converting more of you income into investments, lose less of it to expenses and debt.

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