Investing for doctors is often a daunting subject. After all, you spent years, maybe even decades of your life, studying the human body. For this reason financial literacy for physicians is quite low. How are you supposed to be an expert on anatomy as well as the financial markets??
Conventional wisdom says that investing means investing in stocks. However, there are a number of alternatives to investing in individual company stocks. In fact, you may be more comfortable with several of these options. Proper financial planning as a physician is knowing your options so be sure and discuss these ideas with your financial advisor before making any moves. Let’s get started.
1. Index funds
An index fund is a portfolio that mirrors the components of a market index, such as the Standard & Poor’s 500. In general, your investment will perform roughly the same as the corresponding index. If the S&P 500 increases in value by 10 percent, your S&P 500 index fund should do likewise. Proponents of index funds call them the cheapest and easiest way to diversify your investment portfolio. After all, you do not need to pay anyone to actively manage the portfolio. An index fund also provides:
- Broad market exposure
- Low portfolio turnover
- Low expenses
2. Exchange-Traded Funds
An exchange-traded fund (ETF) owns underlying assets and divides ownership of those assets into shares. The assets may include shares of:
- Stock
- Bonds
- Foreign currency
- Commodities
ETFs are a great way to gain exposure in certain sectors, foreign markets and asset classes that you lack expertise in. These funds typically focus on a specific sector, asset class, or category. You can buy ETFs through a brokerage firm or stock exchange. A key differences between ETFs and mutual funds is how shares are traded.
- ETF shares trade like common stock on an exchange
- Mutual fund shares trade only once per day after the markets close
The price of an ETF’s shares will change throughout the day as they are bought and sold. ETFs can also offer lower operating costs and more efficient taxable accounts than traditional funds.
3. Real Estate Investment Trust
A real estate investment trust (REIT) is similar to a mutual fund. But instead of holding stocks, the fund holds real estate projects. Like a mutual fund, a REIT allows you to invest in a diversified portfolio of real estate. You do not have to incur the risk of investing in a single entity. You also do not have to worry about managing or financing the property. A REIT owns, operates and finances income-producing real estate, such as commercial property. REIT stockholders earn a share of the rent and lease income produced by the real estate holdings in the form of dividends.
4. Bond Funds
Bond funds are mutual funds that invest solely in bonds. Investing in a fund is a more efficient way than buying individual bonds. Buying a single bond fund only requires payment of an annual expense ratio. On the other hand, purchasing multiple individual bonds means paying transaction costs on each bond. Most bond funds feature certain types of bonds. Some funds invest in government bonds, while others invest in corporate bonds. A bond fund might invest in relatively safe government bonds. Others invest in high-risk junk bonds. An advantage of bond funds is they provide instant diversification for a low required minimum investment. Bonds funds are also managed by experts who research and analyze the credit worthiness of bond issuers. Investors in high tax brackets may opt for tax-free municipal bond funds. This will enable you to generate a higher after-tax yield than taxable bond funds.
5. State 529 College Savings Plan
If you have children or are about to become a parent, then 2021 is a good year to start saving for their college. You can do that through a 529 college savings plan. A 529 plan is a tax-advantaged savings plan designed to save for future education costs. They are sponsored by:
- States
- State agencies
- Educational institutions
The are authorized by Section 529 of the Internal Revenue Code. Most plans allow you to link them to you bank account or to contribute through automatic payroll deductions. Earnings in 529 plans accumulate on a tax-deferred basis. That means, unlike other investments, you don’t pay capital gains taxes on the growth in the account each year. Distributions do not apply to your federal income taxes. As long as you use the money for qualified education expenses, you will not pay income tax on withdrawals. This applies to tuition at:
- More than 6,000 U.S. colleges and universities
- More than 400 foreign colleges and universities
It also includes fees, books, equipment and supplies, and room and board.
6. 401(k) or IRA
To a new doctor entering practice, retirement feels like a lifetime away. After all, you finally get to enjoy some financial breathing room. Why not enjoy it? Because the more you save for life after practice now, the better off you will be when it’s time to hang up the white coat. If your employer offers a 401(k) plan, doctors should contribute as much as possible. Take advantage of any matching funds your employer provides as well. The money you contribute to a 401(k) does not apply to your taxable income. On top of the tax deduction you receive for your contributions, 401(k) plans grow on a tax-deferred basis. That means you won’t pay any taxes on the account assets until you begin withdrawing funds in retirement.
7. Certificate of Deposit
Do you keep a significant amount of cash in a bank savings account? If so, you may want to consider transferring some of it to a certificate of deposit (CD). With a CD, you agree to leave your money in the bank for a set amount of time — the term length. In return, the bank agrees to pay you a fixed rate of interest at the end of the term. A CD will pay a higher rate of interest an ordinary savings account. And the longer the CD term, the higher the rate of interest. Better yet, a CD is one of the safest investments you can make. The Federal Deposit Insurance Corp. or National Credit Union Association insures money in a CD up to $250,000! The only downside of a CD is that your money off limits until the end of the term. Withdrawing funds ahead of time means paying a penalty fee. Make sure you leave some cash in the bank for easy access.
8. Pay Down Debt
Another way to invest in your future is to pay down debt. This probably is not the first option that comes to mind when you think of investing. But having one less monthly debt payment will:
- Free up more money to invest elsewhere
- Save yourself from paying future interest on that debt
- Improve your credit score
If you have a significant amount of student loan debt, check your refinancing options through private lenders. This can lower your monthly payment and enable you to accelerate paying down your overall debt.
Key takeaways
It’s important to remember that the ultimate goal of your investing — to build your wealth, while protecting your assets. Discuss these eight investment ideas with your financial advisor and good luck! When done right, smart investing can pave the way to a financially free and independent future.
- Index funds
- ETFs
- REITs
- Bond funds
- 529 plans
- 401(k)s & IRAs
- CDs
- Debt repayment
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