Emergency physicians say some strange things when they’re explaining their investment strategies. Here are four phrases to avoid.
Emergency physicians say some strange things when they’re explaining their investment strategies. Here are four phrases to avoid.
In a typical ED shift there are two reactions we have frequently when we see patients. The first is “Why did the patient show up to the ER for that?” We’re usually referring to things like viral URIs, diaper rashes, or anxiety from a teenage girl who just broke up with her boyfriend.
The second is “People actually do this?” Examples include the insertion of sharp objects in bodily exitways, bites from chasing venomous snakes in the forest (I didn’t think this was dangerous, did you?), and pistol whipping just for fun while drunk with a loaded gun.
While we might poke fun at the crazy things patients do and it’s great to tell those stories at parties, there are some similarities between that behavior and what many physicians do with their money.
Here are some examples I encountered recently, and lessons we can all learn from them:
“Low interest rates? That’s for losers!”
Last month I received a whopping $0.64 in interest from my checking account. Actually it’s less than that because I have to pay taxes. But that’s the market interest rate right now. Two physicians I know told me that several years back when interest rates on CDs were about 3%, one bank in the island of Antigua paid more than double that amount (around 7%). The promise from the bank was that the CDs were “super safe” and even safer than owning US government securities. These physicians each bought $500,000 of those CDs.
Let’s stop for a moment. An unknown offshore bank in a Caribbean nation is offering a guaranteed interest rate on a CD that is more than double what we can get here? Gee, that doesn’t sound fishy, does it?
Turns out this was a Ponzi scheme run by Allen Stanford who bilked billions of dollars from tens of thousands of investors. While these two physicians thought they were getting great returns, instead they were just funding Stanford’s golden toilet seat on his private jet.
Lesson learned: if it sounds too good to be true, it probably is.
While your personal portfolio probably isn’t involved in a Ponzi scheme, ask yourself if what you’ve been promised by a financial advisor goes against common sense and logic.
“Go for the gold”
Many investors lost faith in stocks after the 2008 financial crisis, and one physician I know decided that the stock market is “rigged” so it’s better to own hard assets like gold and real estate rather than paper assets like stocks and bonds. So he came across a financial advisor that researches other advisors called commodity trading advisors (CTAs).
The CTAs don’t actually buy commodities like gold and oil. Instead they buy and sell contracts (called futures contracts) on those commodities and make a profit on price changes of those contracts. This physician invested his entire retirement portfolio in a CTA, not knowing they usually charge 2% of the value of your portfolio plus 20% of any gains – essentially they are hedge funds. But that hasn’t stopped investors from pouring hundreds of billions of dollars over the last several years into CTAs. Why? Because some of them have mustered up huge gains of +50% or more in a year.
So what’s the problem? Studies have shown that over long periods of time, the returns of CTAs are nothing spectacular. But there are other, bigger problems: lack of transparency, conflicts of interest, and the speculative nature of their bets. Dumping your entire investment portfolio into this is pure recklessness. May as well join me in Vegas and bet it all on red at the roulette table – at least we’ll get some free cocktails and maybe a buffet.
“Stocks always go up in the long run”
A physician in his mid 50s who had built up a pretty good size investment portfolio of $2 million was getting nervous about handling his investments by himself. He had seen advertisements in popular financial magazines and on TV from a large private investment advisory firm that managed tens of billions of dollars for thousands of investors. The firm’s pitch was that stocks always go up in the long run so no matter what age you are, they invested every client’s money 100% in stocks — all big name US companies.
And of course there was the usual claim that the firm’s proprietary methods outperform the US stock market. So the entire portfolio was invested in 30 individual stocks.
I see multiple problems with this. While stocks have gone up in the long run, there is no guarantee that they will do so in the time frame that you need the money. For example, from 2000-2009, the so called “lost decade” in investing, US stocks lost -10% of their value. Or take 2008 when a portfolio of 100% US stocks lost -37% — or close to $750,000 on a $2 million portfolio. How likely is it that this physician would stay invested? And finally there are around 15,000 publicly traded stocks in the world. How can we be so sure that these 30 will outperform the other 14,970?
“The more advisors the better”
Finally, I recently reviewed a physician’s portfolio and noticed that he had a huge number of holdings — around 50+ mutual funds, 20+ exchange traded funds, and 100+ individual stocks. These were spread out across more than 15 different accounts and 5 different institutions. Here’s why. The physician didn’t trust a single financial advisor to help him manage his $1 million portfolio — instead he spread out his portfolio across 5 advisors, thinking that if one doesn’t do well then surely another one will. Or if one turns to be a fraudster then hopefully the others won’t be.
The problem is that the first guy doesn’t know about what the second guy is doing, the second guy doesn’t know what the third one is doing, and so on. Bottom line is that this isn’t an investment plan; it’s chaos. And you’re wasting your money. Either fire all of these advisors and do it yourself, or choose one to develop a holistic investment plan for you, consolidate accounts, and simplify your life.
Setu Mazumdar, MD, CFP® is board certified in EM and he is the president of Physician Wealth Solutions
1 Comment
After reading a number of articles on investment one thing seemed to be a recurring theme (besides diversify). Computer stock and bond surveillance of the DOW and S&P 500 outperformed human surveillance every time. Why? The computers don’t benefit from churning.