Investing for Doctors: Investment Fundamentals

When it comes to investing, there are different investment types and strategies. There are also some fundamental concepts every investor should understand, including diversification, passive investing, performance chasing, and staying invested, even during periods of volatility. Let’s review some of these to help improve your understanding of investing fundamentals.

Financial basics for investing while you’re still in medical school, a resident or an attending

Here are some common retirement accounts, investment types, and strategies:

Types of retirement accounts

• Retirement accounts, such as IRAs, 401(k)s or 403(b)s: Retirement accounts offer tax advantaged savings. Here’s a brief overview of some of the different types:
  • IRAs: You can deduct your contributions now but will have to pay taxes on withdrawals later.
  • Roth IRAs: You’ll pay taxes on your contributions now but receive withdrawals tax-free later.
  • 401(k)s: Offered to for-profit employees. 401(k)s offer similar tax benefits to IRAs.
  • 403(b)s: Similar to a 401(k) but offered to non-profit and government employees

Types of investments

• Equities: Often referred to as “stocks,” equities are investments that represent a fraction of a company, called a share. You can purchase equity in companies you think will increase in value. Equities can offer good returns but can also be risky investments.
• Fixed income: Often referred to as “bonds,” fixed income securities are debt instruments used by companies and governments to borrow money from investors. They have a maturity date, which is when the borrower will pay back the principal (amount of the debt) to you and they also offer a coupon, which is the annual interest on the principal, usually payable semi-annually. Fixed income investments are typically lower risk than equities but that varies depending on the type of bond and issuer.
• U.S. Treasury securities: Buying a U.S. Treasury security means you’re essentially lending money to the government. They’ll pay you back when the bond matures at its designated date. And they’ll pay you interest along the way which is generally exempt from local or state taxes. Most government bonds are low-risk investments and the interest they currently pay isn’t very high.
• Certificates of deposit (CDs): A CD is a savings account that you put money into with the stipulation that you won’t withdraw it for a set period of time (terms vary among banks). Interest rates on CDs are higher than most traditional savings accounts, but you’ll get penalized if you withdraw your money early.
• Mutual funds: Mutual funds are professionally managed investment portfolios that invest in different investment securities such as equities and fixed income. They charge a fee to investors and may charge sales fees as well.
• Exchange Traded Funds (ETFs): ETFs are securities that can track an index, a sector, or almost any other asset. They are bought and sold on exchanges like equities.
• Real estate: There are different ways you can invest in real estate, including:
  • Real Estate Investment Trusts (REITs): REITs allow you to invest in companies that own commercial properties. They pay high dividends but can be complicated to understand given the diversity of properties they own.
  • Rental properties: You can make money by owning and leasing out rooms in a rental property. However, this can be time-consuming to manage and expensive given the upfront costs.
  • Real Estate Investment Group (REIGs): A REIG is a group of private investors who pool their money to invest in real estate together. This can give you access to real estate opportunities you might not have otherwise but your success will be tied to the integrity and skill of those managing the investing process.
  • Online real estate platforms: You can invest in residential or commercial properties via real estate crowdfunding. These are like digital REIGs with the same benefits and risks.

Diversification

Diversification is a crucial concept in investing. It’s a way to reduce risk in your investment portfolio by mitigating losses. Diversifying your holdings among different asset classes and investment types will help you manage volatility and investment risk. Essentially, it means: don’t put all of your eggs in one basket.

Passive vs active investing

Passive investing is when you minimize your investment activity by buying and holding your investments for a long period of time. Active investing is when investors buy and sell securities based on what they believe they’re worth. They may hold onto their investments for a short, or a long period, but they have to monitor them closely for changes in price and respond to those changes. For busy doctors who don’t have time to actively manage their investments, passive investing can be a smart choice. An added benefit is that passive investing often outperforms active investing.

Performance chasing

Performance chasing is when investors make decisions based on the recent success of a stock, mutual fund, or other investment idea. It’s a trap that many investors fall into and isn’t a good strategy because as is commonly stated in investment disclaimers: “past performance is no guarantee of future results.”

Stay invested

Investors should resist the temptation to pull their money out of the stock market when the market’s value drops. It’s important to stay invested, because it’s very difficult to pick the right time to buy and sell. Remember: over the long term, the stock market has provided good returns over a long period. Hold tight and stay the course.