Q&A: Investing Tips for Young Physicians

For many young physicians, graduation from medical school brings an unexpected challenge: Disposable income. Doctors likely have a mortgage to pay and some hefty student loans, but it can often be difficult to know how to leverage their remaining money into a wise investment portfolio that will create financial security and, eventually, a comfortable retirement.

For answers, Physician’s Money Digest turned to Darren Bobley, CFP, senior vice president at Woodforest Financial Services Inc. Below, lightly edited, are his answers to a handful of questions focused on first-time investors.

Physician’s Money Digest: What are your suggestions for a relatively new physician considering planning his/her financial future for the first time?

Darren Bobley: Securing a comfortable retirement is a ubiquitous goal for many investors. For physicians, protecting assets from potential creditors is another. Fortunately, there are investment vehicles that can simultaneously accomplish these twin objectives. Qualified retirement plans and the cash value within insurance contracts are examples. Both of these investment vehicles have other potential advantages as well.

PMD: Interest rates are expected to rise at some point this year, and with that increase, there’s likely to be increased volatility in the equity market. Given that environment, what types of investments should individual investors consider if they’re seeking a return greater than what a CD or money market account would offer?

DB: Typically, fixed income prices (e.g. bonds, treasuries, etc.) tend to decrease as overall interest rates rise. However, there are certain kinds of income-producing investments whose prices may not be as volatile should rates begin to rise and could potentially offer higher current income (e.g. floating rate bonds, high yield bonds, and Treasury Inflation Protected Securities “TIPS”, etc.) While typically more volatile than bonds, there are many stocks whose dividends (income stream), have risen faster than inflation.

PMD: Many sophisticated investors make investments in riskier asset classes to generate returns that outpace those of the stock market and traditional investments. What is your view on alternative investments, and do they have a place in the individual investor's portfolio?

DB: Often, when one asset class (i.e. one kind of investment) increases, another decreases. Stocks and bonds, for example, often behave this way. Because of this relationship, allocating a certain percentage of one’s portfolio to stocks and a certain percentage to bonds, potentially reduces volatility of the overall portfolio. Sometimes—like in 2008—stocks and bonds can both decline together.

Alternative investments are those that do not necessarily increase or decrease in relation to stocks or bonds. For example, some alternative investments increased in value during the financial crisis. Adding alternatives to a portfolio may help create additional diversification. This in turn could potentially give the portfolio a “smoother ride”. Alternative Investments can be complex, so it’s important to work with a financial advisor to help match the right investment with an investor’s specific objectives.

PMD: What type of alternative investments are easiest for individual investors to invest in and which may also offer some risk mitigation?

DB: All these alternatives fall into their own specific framework. There are specific rules governing who is allowed to invest in them. Typically they are for higher net worth investors with extensive portfolios in need of additional diversification.

PMD: Do you have any general “rule of thumb” advice for physicians when it comes to the percentage of disposable capital allocated to equities, bonds, CDs, and money market accounts?

DB: Every person’s situation is truly different and therefore there is no one specific answer that fits every situation. A single physician with no dependents and a high adjusted gross income (AGI), could probably allocate a much larger portion of their disposable income to more risky investments than a physician who is married with small children and a mortgage. This is where financial planning comes into play. It’s critical for the client and their financial planner determine the appropriate amount of risk and therefore potential returns when developing the client’s portfolio.

PMD: What about those investors that may be more conservative leaning in their approach to investing, perhaps an investor who lost money in the financial crisis? Is there a way to structure a conservative portfolio and still generate above average returns?

DB: Until we look at a few types of risk, this is a difficult question to answer. Typically, investors think of 3 basic risk types—inflation risk, interest rate risk, and principal risk. In fact, there’s no such thing as a riskless investment. While US Treasuries guarantee a return of your principal, they are subject to inflation risk (the risk that a dollar today may be worth less than a dollar tomorrow). If you keep cash under your mattress, you not only have inflation risk but you also have risk of fire and theft. Stocks may potentially reduce inflation risk but have a higher level of capital risk (i.e. if you invest in stocks, you can lose money).

When you substitute one kind of risk, you open yourself up to another.

To answer your question more specifically—there are ways to eliminate or at least diminish certain kinds of risks while maintaining long-term objectives. An investor could simply not invest as much in vehicles that have risk to principal, like stocks. Or, they could allocate more money to principal-protected investments. Since investment returns are typically a function of how much risk you are willing to assume, the lower the risk, the lower the returns. That said, there are investments designed to give an investor some exposure to the stock market, while guaranteeing a stream of income during retirement. These typically have liquidity risk. In other words, you might not be able to access your money for a certain period of time.

How best to diversify? Ask a Financial Advisor.

Darren Bobley can be reached at darren.bobley@raymondjames.com or (832) 375-2112.