A swift kick in the pants to get smarter about your investment strategy in the new year
Stop making excuses and get smarter about your investment strategy
As 2014 winds down, I’d like to share with you some reader comments related to the Financial Consult articles I’ve written this year.
I write these articles not only to educate you about personal finance but also to try to challenge your way of thinking. Why? Because, admit it, many doctors hate being challenged about money issues. We think our ideas are always right — even when we don’t know what we’re talking about.
I heard an interesting quote recently: “Winners make commitments. Losers make excuses.” That’s a great way to summarize why many physicians are unsuccessful managing their money.
Look at the excuses some readers have made:
Reader comment: “You make the numbers seem so simple. I am 12 years post residency and haven’t been able to pay off my debt yet, which was about $125k”
I wrote an article showing how you can pay off $250,000 in student loans in less than five years after residency and still live a comfortable lifestyle. This reader claims he can’t pay off half that amount in more than double the number of years! Let’s do some quick math again. If he’s $125k in debt and he’s 12 years out of residency, he only has to pay $10,000 a year to pay it off in 12 years. That is easily achievable with your emergency medicine income. On a personal note, I had almost the same amount of debt when I graduated from residency, and I paid it off in less than 1 year. I worked my butt off and picked up extra shifts. I’m no mathematical genius but I do know simple addition and subtraction. If I can succeed so can you. It’s all about the proper mindset. Just do it.
Reader comment: “I’m still paycheck to paycheck…Living expenses, food, car payments, auto and home insurance; the basics eat up a sizable amount of that leftover money…I have many colleagues in EM who are still living paycheck to paycheck.”
Anytime I hear “living paycheck to paycheck” from someone making a couple of hundred thousand dollars in income, I wonder where the money is going. Basic living expenses, food, car payments, and insurance premiums should not eat up 100% of your after tax income. If they do, then you’ve got a spending problem, not an income problem. You need to hire Suze Orman. The reader goes on to say that he does not live lavishly but that he renovated his house and concludes that paying off loans is “just not realistic to most of us.” Wrong. What isn’t realistic is your definition of lavish. While you might consider the house upgrades to be necessary, I bet your retirement portfolio disagrees.
Reader comment: “We do provide an ‘incredibly valuable service,’ but not more so than police officers, fire fighters, social workers, teachers, etc. Yes, our education lasts longer and we accrue more student loans, but I still don’t agree that that justifies a disproportionately higher income. I, for one, am happy to pay my taxes.”
This comment refers to an article summarizing the new 2013 tax laws. No matter which part of the political spectrum you fall on, you simply cannot deny that taxes have gone up. The comment that we “accrue more student loans” than other professions is a huge understatement. Many residents are now graduating with $300,000+ in student debt. That, combined with higher income taxes on these dreaded “rich” doctors, and the fact that we start our careers in our 30s means that in my mind doctors are vastly underpaid. The reader admits that she claims deductions on her income tax return even though she is “happy to pay taxes.” That smells like hypocrisy to me. Any physician who is happy to pay more taxes should do the following (for those of you who want to pay less tax, do the opposite):
- Do not own any tax exempt investments like municipal bonds.
- Choose investments that pay only non-qualified dividends which are taxed at your highest rate.
- Sell any gains in taxable investment accounts in less than one year.
- Do not deduct any business expenses on your 1099 independent contractor income. This increases your income taxes and self employment taxes.
- Do not contribute any pretax money to a SEP IRA, 401k, or any other retirement plan.
- Do not fund a health savings account and do not deduct health insurance premiums
- Do not report and deduct your student loan interest.
- Do not deduct mortgage interest, medical expenses, property taxes, or state income taxes on your federal tax return.
Here’s what I want you to do. Go back to your 2012 tax return and transfer your numbers again to 2013. Then get rid of the above deductions and find out how much more in taxes you would pay. Then tell me you’re happy to pay them.
Reader comment: “F*** Wall Street and their fixed game. I’m buying real estate…the stocks that make up the market are not valued properly and therefore should not even be considered anything but gambling.”
My response: Looks like I hit a nerve when I wrote an article earlier in the year showing the spectacular investment returns you should have gotten over the past few years with a well diversified investment. While I agree that no one has a crystal ball and cannot predict the stock market, it does not change the fact that the returns I described actually happened. If you missed these returns which were there for you to take, then you can’t blame anyone but yourself. Simply put, you lack an investment plan whether you want to admit it or not.
Many people think that the market is rigged or fixed but then they have a hard time explaining what they mean by that. Do you believe the past century of gains are artificial and just fake money? If so, you do not understand how markets work. When you invest in stocks, you expect that capital markets around the world will grow over time, and you expect to participate in that growth with positive returns with the risk you’ve taken. Contrast that with gambling, which has an expected negative rate of return and relies on hope of positive returns instead of expectations.
Finally, millions of investors determine the correct price at any moment in time for the market as a whole. To state that the market is not valued properly is equivalent to saying that you are right and all these millions of investors that determine prices are wrong. The 2013 Nobel Prize in Economics was awarded to the founder of the Efficient Market Theory which disagrees with your view. Read about it, apply it to your portfolio, and stop gambling.
Setu Mazumdar, MD, CFP® is board certified in EM and president of Physician Wealth Solutions.