A friend wants me to invest with her in a laser hair removal clinic and that got me thinking about the purpose of investing. This post is a brief overview of the purpose of investing for physicians and other medical professionals.
After writing this post I have realized that the purpose of investing is first and foremost to maintain the value of our assets for the future. Once that is achieved then we can invest in ourselves or a business.
What is Investing
The more I get into the topic of personal finance the more I appreciate the difference between economists and financial professionals. The former, much like a medical scientist, is focused more on concepts and has an in vitro view of money.
In finance the concepts are defined as they relate to real world scenarios. Therefore, investing from a finance perspective is forgoing the use of an asset now for the purpose of generating income or appreciating its value in the future.
What We Need
What we need as physicians are assets in order to invest. This is our disposable income after we have paid for the overhead of our households.
We start our financial lives later than others and start out with far more debt than other professional groups. For this reason we have a harder time generating disposable income.
Physicians are spendy individuals – most of us want to live a glorified physician lifestyle. This guy took it too far and will be in jail for a long time without his $240M.
What We Need to Give Up
In order to invest we must give up access to the money in the present and we must give up some security, as in, we must take on some risk.
There is no way to shortcut the system from the years I have spent researching this topic.
Investing Spectrum
If you want to be a plastic surgeon then you must get better grades in medical school, hustle harder to secure a residency spot, spend more years in residency, and work harder than your fellow residents for a good attending position.
If you want to become a Family Medicine resident then you just have to do the bare minimum, as I did. In return, you get out of residency much sooner and you will start earning an attending income sooner.
Tradeoff of Investing
When it comes to investing you can either invest for a longer period of time and take on less risk or you can dabble in individual stock picking and shorten the investing time horizon.
Whatever you decide to do, you cannot have it both ways. A plastic surgeon won’t be able to get shitty grades and only do a 3-year residency. Just like an index fund investor won’t get persistent double-digit returns overnight.
Purpose of Investing
When I first started investing my goal was to make a lot of profits with my money. I started out with picking individual stocks and never was able to secure persistent profits.
I have since switched to index fund investing and haven’t looked back.
Income
Back to the definition of investing, I want to either earn an income from my assets and/or have the assets appreciate.
One way your investments can earn you a steady income is through dividends when we invest in index funds. Another example would be rental income from real estate investments.
Sometimes you don’t get to have dividends from your investments such as when you invest in small-cap funds which generally don’t pay much in dividends. The upside might be that your invested assets will appreciate much more in the future.
Appreciation
Appreciation is the other side of the coin – I invest my assets so that it can have a higher value in the future. Value, not price. I talked about the difference of that in previous posts.
Just because you sell a $250k home for $1M after 30 years of owning it, it doesn’t mean your investment appreciated in value – most of that is simply inflation. That $1M might have the same purchasing power in 2050 as $250k did in 2018.
A Little of Both
Your investments can provide you with both income and appreciation. A diversified portfolio might achieve just that. You could have a rental income property which appreciates in value and you might also have some index funds which provide you some dividend income.
Designing the right portfolio with the proper asset allocation that’s adjusted to your risk tolerance is what keeps you in the game longer. This proper investment portfolio will prevent you from having to do too much work or take on excess risk that might otherwise have you running for the hills during a market crash.
Realistic Expectations
Let’s look at professional investors out there. These individuals invest for a living – meaning, they spend 8+ hours per day looking at numbers, trends, and learning their trade.
Professional real estate investors who have 20 rental income properties are making cap rates of 5-10% annually. Their $1M investment, therefore, will earn them a $50,000-$100,000/year of income after they put their sweat and tears into it.
A professional day trader might enjoy average annual returns of 15-20% per year. Once again, this person would be spending a lot of time doing research, taking on a lot of risk, and have multiple 50% losses and hopefully many more 200% gains to reach that average return of 15-20%.
A land developer who buys an empty lot and hires contractors to build a massive sky-rise of commercial units or an apartment complex might see a 20% investment return. If they built a $120M building then they would have a $24M return.
Venture capitalists invest millions of dollars in various ventures hoping for large returns. After they tabulate all their losers and check off the winners they will be left with profits in the 20% range.
Why Do You Invest?
Why do you invest your money?
- to become rich?
- grow my net worth?
- save for retirement?
- maintain the value of my assets?
- have a steady income?
If you are hoping for 15-20% annual returns then you will need to quit medicine and become a professional investor because that’s what it takes in terms of time and expertise.
If you are willing to settle for 7-8% returns then you might be able to do some real estate investing on the side which would require you to take on a part-time job.
If you are okay with 3-6% average annual returns then you might be able to achieve that with index funds over the long-run. You would still need to learn the ins-and-outs of this investing strategy. You won’t have to leave medicine for this but it still requires skill.
Invest to Maintain Value
I am 40 years old and if I invest $100k in 2018 then I aim to have a spending power of at least $100k in 2050. My main goal is to maintain the value of my asset.
This might seem overly conservative but if I park that $100k in a savings account which returns only 1% a year then I will lose the value of my money because of inflation.
I am not an investor, I am an employee, at best an independent contractor. So I cannot put deals together in order to generate more income. At some point I will burn out, I will have less energy to work full-time, I will get sued, etc.
Therefore, as a wage-earning healthcare professional my main goal is to maintain the value of my assets which is already a huge accomplishment. If I can save $1M during my working years and have that when I retire then I could live off of that quite well.
Investing for Passive Income
If I invest in TIPS then I could maintain the value of my investments since these assets protect against inflation. However, my investments wouldn’t have a chance to grow in value.
Instead, I invest in stock index funds because even though it’s not guaranteed, I have a better chance that my assets will also appreciate in value and possibly allow me some passive income as well.
If my index funds appreciate at 5% per year on average then after factoring in the expense ratio of the index fund and inflation then I should have around 2% which I can take off the top while maintaining the value of my initial investment, year after year.
Risk
The purpose of investing for me isn’t to become rich or have millions of dollars in my retirement account from investing only $150,000. I realize that I would have to take far too much risk to achieve such multifold returns.
However, I can take a portion of my assets and take bigger risks with it. I wouldn’t consider this investing but more speculating.
I don’t consider cryptocurrencies or real estate crowdfunding worthwhile because their returns aren’t all that high. Any given year I would only be willing to take a high risk with a very small portion of assets, making a 10-20% average annual return not that enticing.
Instead of spending my time researching these investments and watching them closely, I would rather pick up a few extra shifts as a physician.
Investing in a Business
The purpose of investing might be to maintain the value of my assets over time and hopefully gain some passive income. Once I have enough invested then I can start venturing out further.
I can invest in myself or I can invest in business ideas. The purpose of investing in such endeavors isn’t to simply maintain the value of assets. I would be doing something I enjoy and gain valuable skills in return.
A Business Venture
If I invest the $50,000 that my friend wants me to invest in her laser clinic then I would also help her start the business, offer insight in managing it, and eventually have an income producing asset in my portfolio.
Ideally a business venture should be something I am interested in. This will make it easier for me to learn more about it and it will feel less like a job.
Investing in Myself
I have been investing in myself since 2016. I have been taking courses, I have been working on my writing, I have built a network of colleagues, and I have learned marketing skills.
The purpose of investing in myself is to be more resilient, less dependent on income, and be a better resource for those around me.