Month: January 2018

Asset Classes, Part 1

Never forget these two axioms:

 

Money frees us, but its pursuit may enslave us.

It’s not about how much you have at the end; it’s how much you could have made.

ASSET CLASSES

OK! Now we will leave all the argy-bargy philosophical talk behind and start the nuts and bolts discussion of investing to preserve and grow your money.

 

First, some lingo…

 

In the good ol’ US of America, any kind of tradable financial asset is known as a security.

 

Securities are broadly grouped into the following:

 

Equity securities or equities (e.g., common stocks, mutual funds, exchange traded funds)

Debt securities (e.g., banknotes, bonds, and debentures)

Derivatives (e.g., forwards, futures, options and swaps)

 

 

Equities are what you’re most likely familiar with—stocks and mutual funds +/- exchange trade funds (ETFs).

You’re possibly familiar with bonds. But, banknotes may make you frown in puzzlement whereas the mere mention of debentures makes you squint in frustration.

And then we get to the wonderful world of derivatives….where the less said, the better for now.

 

Much, much more on all of this in a later post.

 

Stocks

 

Mutual Funds/ETFs

 

Bonds

 

 

These are your three basic building blocks—this is the backbone of your investment portfolio/mechanism of your retirement/conduit through which The Plan is executed.

 

Yes, you may buy a fast food franchise, commodities, do puts and calls and the obscenely named naked straddle option (much more on all of these and much more in future posts), but the above is the foundation—if not the entire sum of your investment portfolio.

 

Master these three and you will retire on Easy Street.

 

So let’s try to understand them better.

 

 

STOCKS:

 

You hear about them all the time in one form or another including DJIA, NYSE, NASDAQ, “the market”, blue chips, and foreign “markets”.

 

Let’s start with the basics of stocks and then build upward.

 

Owning stock means that you are actually an owner (possibly owning an infinitesimal amount) of the company you have decided to buy into. You can walk around the mall, stroll by an Apple store, and point to it exclaiming “Yeah, I own a piece of that.” and you’d be a 100% correct.

Like many people I know from school and even work today: Stupid, but definitely still technically correct.

 

Companies issues tiny pieces of themselves (called shares or stock) for sale in order to raise money which they will employ in order to expand operations (e.g., build factories, expand a work force, etc.) which will then (hopefully) make them far more profitable which will then make the stock price of the company higher.

 

Easy peasy lemon squeezy.

 

Companies however will not put up 100% of themselves for sale or some billionaire can suddenly own a majority of that company. In addition, with how much a company can be valued, millions or even billions of shares are offered for sale for any interested party (mutual funds, hedge funds, college endowment funds, etc. [known as institutional investors] or what are known as retail investors—guys and gals like you, me, and the guy in the tree—OK, not so much, the tree guy, but you and me anyway) to buy.

 

Let’s stick with Apple as an ongoing example through the stock section here.

 

Apple has issued a total of 5.13 billion shares for purchase. So…when you see someone walking through the mall and is humble bragging that they own a piece of Apple…well, they’re an idiot.

 

You could own 1,000 shares of Apple (approximately $174,000 currently—Woo hoo!! Now we’re talking real money; those of you scrambling to figure out when this written need not worry; it’s Thanksgiving Day 2017—yes, I care about you unknown people so much that I’m writing posts on Turkey Day as my wife cooks—she’s a saint!) and not even own one millionth of the company. (This shouldn’t make you feel small or insignificant [I mean…hey, $174,000 is nothing to sneeze at no matter who you are; if you think so, that’s a you problem, not a “that’s just not much money” problem], but rather give you an appreciation of how massive some of these companies are.)

 

Companies often want more stock issued for a variety of reasons (often because the shares are so highly priced that the company is concerned that mob psychology is inhibiting the buying and selling of shares thus causing the stock to plateau and not budge any further upward), so do to that but not give up the entirety of the company, they “split the stock” to issue more shares without giving up more of the company.

 

For example, if Company X is at $100/share and the company decides to “split the stock” in order to issue more shares, then the company must decide what the split will be. In other words, how many total shares do they want floating out in the world (known as “outstanding shares”)/what price are they shooting for to make it attractive to be bought and move the stock price with upward pressure of massive buying alone?

 

So, in what is known as a 2:1 stock split, in the $100 stock example above, if you owe 100 shares (total value=$10,000), then the stock goes from $100 to $50.

Dr. Scared: What?!?! I just got ripped off!! Isn’t this illegal?? For the love of all that is holy, somebody do something!

But then your shares are increased by 2:1 thus you would now have 200 shares at $50 each (new total value still=$10,000)

Dr. Scared: Oh, well. Why didn’t you just say that in the first place? Scare a guy, why don’t you?

 

Companies can split it in any way they so desire.

Apple and Netflix each split their stocks 7:1!

Companies can even do more exotic splits if they only want a slight increase in their outstanding shares such as 3:2 or 5:4 splits.

 

Sarcastic Reader (now and forever to be known as SR): Uuh…No one said they’d be math on this blog.

 

The key is to always to understand that the price of the stock goes down as much as the number of outstanding shares go up with your total value and the company’s total value not changing one cent.

 

There also is the dreaded “reverse split” which always signal a major (usually) company in major (always) trouble. This practice occurs when a company has fallen into such major financial trouble that their stock is in the < $1 range or is threatening to do so (not always, but often something like this) and they want to increase the price while consequently decreasing the number of outstanding shares.

So, a company with a stock with $1 dollar shares may undergo a 1:10 reverse split meaning that afterward, the stock will be $10/share with one tenth of the outstanding shares as before the reverse split. Realize even successful companies like Priceline (1:15), Citibank (1:10), and Nestle (1:10 multiple times, more on them later*) have done reverse splits over the years.

 

Realize that as an owner of a company’s stock (also known as a shareholder) has all of the rights and responsibilities as any owner of the company.

 

If your company gets acquired for a huge amount by an even larger company, congratulations!, you’ve made a nice bundle of money (proportionately of course).

If it goes bankrupt instead, congratulations again!, you’ve lost all of your money!!

 

Believe it or not, as a shareholder of even one measly share (come on, man, seriously, one share, that’s no way to live), you will get invited to the annual shareholders’ meeting in such exotic places like Omaha, Nebraska or Fort Worth, Texas or wherever the company is headquartered and are asked to vote on all company issues that are left to shareholders. (

Realize that many regular Joe investors like you and me—i.e., retail investors—never vote and, if so inclined, the company’s board of directors recommends voting in a certain way. This can all be done by mail rather than attending the meeting where the vote actually takes place/is counted. Also realize, this is not the time or place to be a contrarian or “stick it to the Man” as in this case, you are “the Man”. Say whatever else you want about the company’s board of directors, but they have the best interest of the company in mind and your interests align with theirs unless you have some bizarre revenge plot enacted against yourself. Ultimately, if you don’t have an understanding of the issue at hand, either vote as the board recommends or simply don’t vote at all.)

 

This also holds true for the absolutely wonderful feature of dividends.

Some blessed companies (very mature companies with excellently consistent earnings and seemingly little competition) reward you as a shareholder by paying you every quarter (i.e., every three months—usually), monthly (far less common), biannual (really rare), or even annually (rarer than Martin Landau Pez dispensers—thanks a lot, stupid Nestle!*). These payments, known as dividends, are paid by number of cents or dollars per share you own.

 

Therefore, let’s consider Apple again. Apple is paying 63 cents per share per quarter. If you own 100 shares, then Apple cuts you a check for $63 every three months just for being an owner and will continue to do so until one of four things happen that will influence the dividend being paid out to you.

 

1.) Apple (in this case, but it could be any company obviously) decides to raise the dividend to their shareholders (Yay!!) because business is going so great.

 

2.) Apple decides to decrease the dividend to their shareholders (Booo!) because business isn’t going so great or they need more money for product development

 

SR: Yeah, instead of iPhone 96, make something new, damn it!!

 

3.) Apple decides to cancel the dividend to their shareholders (Major booo!!) because business is brutal right now…or they’re just being pricks.

 

4.) Apple goes bankrupt. (Don’t laugh. There were rumors of this as late as 2002 when Apple stock was selling at [AKA trading for] $8 a share—yes, $8/share. Three months earlier, the iPod had come out in October 2001. Five years later, the iPhone came out and…well, the rest is/was history.)

 

(Much much more on dividend investing, dividend taxes, etc. on a later post.)

 

About companies (i.e., stocks), you never know. You think you may know, but you never really know, especially in the long term.

 

The one single thing to remember about stocks is simply this:

 

Think of companies and not stocks.

 

Think of the company, what it does, is what it’s doing important or useful, are you familiar with their area of business or is anyone you know familiar with it to give you insights, who are its competitors, and then do a SWOT (Strength, Weaknesses, Opportunities, and  Threats) analysis on it. Then and only then, you have at least the start of a good understanding of said company.

 

Never ever think of it as a stock alone that is “hot” or that everyone is talking about. Think of the actual company and your error rate will be greatly reduced (but never eliminated).

 

Future posts will discuss how to better evaluate individual stocks, how to actually buy stock, how to build a stock portfolio, and much more.

 

I think that’s enough for one day/one post for all of us.

 

 

I’d love to hear from any and all of you about your thoughts, so we can all learn from one another.

 

Talk to you soon.

 

 

*Nestle has been paying dividends since 1873 and annually since at least 1959 with few exceptions. Despite my earlier whining, it’s a fantastic company that has its fingers on many, many things. It’s not just a candy company any more. Seven of the top ten bestselling bottled waters in the US is owned by Nestle. Goes down nice with their candy making for a nice fat (pun intended) dividend each spring.

 

The Physicians We All Know, Part 4: Dr. Scared

Never forget these two axioms:

 

Money frees us, but its pursuit may enslave us.

It’s not about how much you have at the end; it’s how much you could have made.

 

 

In our ongoing series of physician archetypes, we’ve now rounded third and are finally headed home (Sarcastic Reader: Thank God! When is this bozo finally going to teach us how to make some money rather than waxing rhapsodically like a damn philosopher…I’ll show you my Critique of Pure Reason*, you pompous jerk!)…and into the last archetype, one any of us could fall into at any point (like, say, 2009…just to pick a random year as an example).

 

Dr. Scared

 

There’s conservative and then there’s scared…

 

The line isn’t that fine between the two, but the ones so scared of losses that they lose by not investing appropriately rationalize it is so.

 

3.22.

 

3.22.

 

3.22%.

 

That’s a good number to remember.

 

As you may recall  (and shame on you if you don’t), 3.22% is the average annual rate of inflation over the past century (1913-2013). That’s the rate at which your money is being eaten away at. At this rate, products will cost twice as much in just over twenty years as they do today.

 

The simple way to think of inflation is thusly (using this word makes you seem smart…even if you’re not…especially if you’re not):

 

If something costs $100 on January 1 and the inflation rate is…say, 3.22% (Gee, what an odd number…Where did he get that from?)…then exactly one year later, that very same product will cost precisely $103.22.

 

 

So…it’s not only a matter of growing your money, but doing so at a rate that is not leveled by inflation since what you can buy and your cost of living will be quite different than as you start out in your career.

 

{RLE #8: A couple I knew from medical school—who will be the subject of many future posts and RLE’s (Hi guys!)—were absolutely terrified of any fluctuations in the stock market since any loss was destruction of money they earned the hard way. Therefore, their investing style became 100% bonds and cash. Investing in only bonds and nothing else for 25 years has left them a nice amount of over a million dollars. But without accounting for inflation, they just got all their gains largely wiped out. They had just over a 6% rate of return in the past quarter of century vs. 10.72% [or a compound annual growth rate of 9.15%—more on this in a later post] with the S&P 500. Ouch.}

 

Don’t get me wrong.

 

The million dollars is still there, but its purchasing power is greatly diminished. This is the entire reason you want to gain the highest SUSTAINABLE (this wasn’t in all caps by accident; sustainability is the key here, not chasing some crazy ass [sorry to lose you in the financial technical jargon] high rate that won’t last even six months) rate of return as possible.

 

It’s not happiness that money can’t buy; it’s time.

 

And once you spend 25 years underinvesting, you can’t get that time back.

 

Ever.

 

There’s absolutely nothing wrong with a cash and bond only investing style…for a few…but not most everyone…and you need to know all the upsides and downsides of doing so. (Much, much more on this in a later post.)

 

 

Like I said multiple times before (and asked you to never forget—come on people, get it together!)…

 

“It’s not about how much you have at the end; it’s how much you could have made.”

 

You’re investing in the US and likely broader global economy. It’s been a great bet for centuries. That won’t change any time soon.

 

So get out there and make sure your money is working at least as hard as you are, if not harder.

 

I’d love to hear from any and all of you about your thoughts, so we can all learn from one another.

 

Talk to you soon.

 

 

 

*Critique of Pure Reason (1781) by Immanuel Kant is one of the foundational works of philosophy dealing with the limits of human knowledge and how/what we perceive and can truly learn. (*Whispers* Whoa, that’s not even a money thing. I’m going to be so smart reading this blog that I’ll read it forever and ever and recommend it to all my friends and all their friends…and…OK, this has gone from trivia to subliminal suggestion to outright begging…enough…my apologies.)

 

The Physicians We All Know, Part 3: Dr. Unwise

Never forget these two axioms:

 

Money frees us, but its pursuit may enslave us.

It’s not about how much you have at the end; it’s how much you could have made.

 

 

 

In our ongoing series of physician archetypes, we’re now heading into third…and into an archetype uncomfortably just like all of us from time to time…

 

 

Dr. Unwise

 

 

Most of us aren’t blindly arrogant or wasteful spendthrifts like the last two archetype posts. However, often, we fall into mistakes that we did not even see coming, but somehow unfolded in front of us and we then get trapped by.

 

 

{RLE # 7: A casual physician friend of mine at my hospital who is professionally successful, but a hot mess (as the cool kids say) in his personal life is a never-ending example of this. In fact, he is the reductio ad absurdum [you can look this up at your convenience] of this problem.

He and his wife hurriedly decided to upgrade their home and then before the end of summer (i.e., before their kids’ school started again), they purchased a terrific new house in a great part of town…without yet selling their first home. So, thirty-three (yes, 33!) months and counting along two downward revisions of their original selling price, they are the not-so-proud owners of two homes they are struggling to fit in their budget. In addition, two kids in two different private schools [don’t ask] with now driving each kid separately each morning and picking them up at the end of each school day [I said don’t ask!].

This has now translated into his non-physician wife having to go early for school runs each morning and not to her work early. These are all choices and sacrifices millions of us make, but for them it’s worse than that. Her early morning schedule prevents her from being at her work place by 7:30 AM which is what her dream job requires her to do with absolute rigidity. In turn, this has then prevented her from earning a higher income…which could be used to pay for that first home…or second home…or something…or anything. Forget the money being lost here. Think of the many invisible taxes penalizing this couple or even the entire family.}

 

The above may be an extreme example. It may not be either. I know way worse. Regardless, not any of these events happened simultaneously nor were they planned out in advance with the pros and cons of each decision weighed with an eye towards how each would impact other decisions or the family’s lifestyle. (Admittedly, buying a house before even preparing to sell the one you live in currently is essentially their fault and caused much of this cascade…but still…no need to be a hater.)

 

We all do this. We make the best decisions we can with the knowledge we have at the time we need to make the decision and hopefully not under duress. Inevitably, because the facts on the ground change and…well, life is messy…we are put in a fiscally disadvantageous situation that “2013 you” would have slapped “2017 you” for being in.

 

However, it’s your job to turn the ship around when you steered into choppy waters. Sell the house, get both kids in the same school, and figure out how your wife gets her dream job.

Get it together out there, people!!

 

WE ALL MAKE MISTAKES!

 

We don’t all have to continue them in perpetuity.

 

Fix the messes in your life. And don’t do it just for your financial security. Do it for your (and your family’s) wellbeing.

 

That’s your job.

 

I’d love to hear from any and all of you about your thoughts, so we can all learn from one another.

 

Talk to you soon.

 

The Physicians We All Know, Part 2: Dr. Spend It All

Never forget these two axioms:

 

Money frees us, but its pursuit may enslave us.

It’s not about how much you have at the end; it’s how much you could have made.

 

 

In our ongoing series of physician archetypes, I submit to you the guy/gal sadly we all know…and likely loathe…

 

Dr. Spend It All

 

“It’s not about how much you have at the end; it’s how much you could have made.”

 

An axiom I never forget.

 

The “Physician, Wealth Thyself” (henceforth PWT) Corollary to the above axiom is the following:

 

“It’s not how much you make, it’s how much you spend.” AKA RULE # 2

 

Another axiom I never forget.

 

Pro athletes who are fortunate enough to play for multiple years, particularly those who beat all the odds and play beyond their league’s average, still have a bankruptcy rate up to 80% five years after last paycheck as a professional athlete.

 

Think about this phenomenon for a second.

 

In the extreme worst cases,  you have guys that made over $100 million that had to declare personal bankruptcy only a few short years after playing.

 

The pattern repeats itself often with lottery winners. That bankruptcy rate is nearly 70%!

 

How in the world does this happen?

 

RULE # 2 is how it happens.

 

“It’s not how much you make, it’s how much you spend.”

 

Win $20 million? Hey, now, I can spend $10,000 a day and never run out!

 

Uh…no.

 

You can’t even make it six years at that rate.

 

At the physician level, we probably all know people who live very well—beautiful home, great cars, private school for the kids, amazing vacations, second/vacation home (Ugh!), maybe even a boat, etc.  We may wonder how they’re doing it. Maybe their practice is doing extremely well. Maybe they are an extremely shrewd investor. Maybe they have another revenue stream. Maybe they have “come from money.”

 

Lots of maybes, no definites.

 

Maybe…just maybe…

 

They’re massively in debt or living from paycheck to paycheck.

 

We associate that situation with poorer people and the uninformed. Well, I hate to break it to you, but that’s physicians to a large extent.

 

We are debt ridden from school loans as we start off in training and then unavoidably add to that debt burden with a house and cars (and hopefully nothing else).

 

As physicians, we are the very antithesis of the instant gratification society (i.e., the good ol’ US). We go to college/medical school for nearly a decade (or longer), then go into relatively lower salary years of training for three-nine years (or more if you’re a masochist), and only then start earning an income finally commensurate with the level of debt accrued.

 

This is not a path that you fall into, chance into, luck into, try for lack of anything better to do, or is one for the faint of heart. It’s hard—on purpose. There is a lot of stress, doubts, recriminations, sacrifices, and even guilt long the way.

 

So, inevitably, when you make it to the exalted status of being an attending, it’s natural to want to enjoy the finer things in life. You’ve worked extremely hard for likely decades, sacrificing many things along the way, and feel like it’s time to FINALLY enjoy yourself.

 

It especially holds true when everyone around you is seemingly buying BMW’s, Mercedes, and the like to drive, living in fabulous homes in the poshest neighborhoods, and are traveling in high style at a frequent rate.

 

I firmly believe Facebook, AKA everyone’s personal life highlight reel, has only worsened this situation. Now, you don’t even have to see people to know they went to Hawaii or bought teak furniture. They humble brag about it on social media. Hell, for some of these idiots, it’s half of the reason they did it anyway. And you’re now getting it shoved in your face constantly making it seem as if everyone around you is living the high life…except for seemingly…you and your family.

 

Add the above to the urge of finally tasting a little bit of the sweet life after decades of a spartan existence…and then you may have the perfect storm to spend unwisely.

 

As I often remind people, “the easiest way to appear rich is to be poor.”

 

In other words, finance everything, own nothing, be leveraged to the hilt, and be massively in debt.

 

Just make sure you smile and tell everyone how great your life is.because as we all know it’s stuff like Maseratis and Viking ranges that make life worth living.

 

Ultimately, no one knows anyone else’s debt structure unless you have seen their statements yourself. Everyone else who isn’t close family or true friend could just be a liar who is closer to bankruptcy than a net worth of ten million dollars (which is, by the way, the US Census Bureau definition of rich—the other criteria fulfilling this is making $1 million/year).

 

It’s OK to spend money and enjoy yourself. Do it. It’s the journey, not the destination.

Just two simple things to remember.

 

1.) Pay yourself/your family first. In other words, don’t let your spending (i.e., paying others) interfere with your investing (i.e., paying yourself/your family).

 

2.) Get value for the money you spend. WE ALL MAKE MISTAKES. But, once you realize you’ve made a mistake, don’t continue it out of pride (“I never make stupid mistakes…and admitting this would be just that”), self-rationalization (“Yeah, it looks like I’m wasting money, but you don’t get it…), or simply because of lack of analysis.

 

{RLE # 6:  An acquaintance from training bought an overpriced lot in a great area of town to build a gorgeous home that is arguably too expensive and large for their small family. Surprise: That’s all fine in my opinion. The problem ensued after the house was built…and then renovated…twice…in seven years…and then completely refurnished…three times in less than a decade. That’s not value; that’s reno hell.}

 

Early in my career, I heard conversations all the time from nurses about being anxious for their next paycheck and couldn’t believe it. Now, I feel that I hear these conversations more and more often among physicians (though I still hear it even more often among nurses).

 

I can’t imagine how terrifying it must be to be living from paycheck to paycheck knowing that half of the next one is already spent and that much of your waking hours is wasted on plotting how to make more (rather than spending less) to meet your expenses. I’d have an ulcer and never be able to sleep at night.

 

I’ve never been that person and never will be.

 

Do the same.

 

You’ll be much happier in the long run.

 

I’d love to hear from any and all of you about your thoughts, so we can all learn from one another.

 

Talk to you soon.

The Physicians We All Know, Part 1: Dr. Know It All

Never forget these two axioms:

 

Money frees us, but its pursuit may enslave us.

It’s not about how much you have at the end; it’s how much you could have made.

 

 

The next few posts will highlight physician archetypes we all know and often dread, especially the next guy who we all have to deal with in the hospital…

 

​Dr. Know It All

 

I’m always amazed at what is tracked, especially in the US.

Did you know federal regulatory agencies track small plane crashes by pilot occupation?

They do.

What a great country.

And physicians are number one.

Congratulations, doctors!

When researched, it was thought that doctors are so confident of their skills that they would assume things rather than go through the checklist that all pilots are trained to do. They were found to be over confident in their skills as well, particularly in bad weather. (Sadly, this is precisely killed JFK Jr, his wife, and sister-in-law when he flew as a non-instrument tested pilot in weather that should have grounded him otherwise.)

 

Unfortunately, we all know physicians that are so supremely confident in their skills that they have become blindly arrogant and assume that they are now great at everything they do.

 

Of course, I am. I’m one of the smartest people I know and I know a lot of really smart people.

 

No one can convince them they are wrong…ever…about anything.

They also rarely have an opinion left unspoken.

Why would you when you’re that smart?

Their greatest fear is dying with an opinion left unsaid and not shared with the world.

And that comes to investing as well.

Regardless of what type of investing they are in (spoiler alert: it’s never a mutual fund), that’s THE ONE to be in…and anyone who isn’t in it is a fool…which most people are in their perspective anyway. This is just further evidence confirming their suspicions.

 

{RLE #4: A physician I barely knew struck me up in conversation once and claimed—declared actually—that there was no money to be made in the stock market any longer (apparently we had all missed this halcyon era of easy riches) and the “real money” was only to be found in real estate. As he noted, “If you’re not in, you’re out. I’m warning you, boyo. Don’t ever be out.” Boy-o? What bad action movie did he learn his syntax from? Probably the same one that he learned his investing philosophy from. That absurd one where Arnold Schwarzenegger is a firefighter who somehow winds up fighting terrorism. Remember that one?*}

 

They aren’t always obnoxious or inflammatory. They may be popular, influential, or hold positions of authority in their respective groups, divisions, departments, or hospitals. And that’s the whole problem.

 

Even those of us skeptical of them as human beings gravitate towards their opinions as physicians. It naturally happens in the hospital, so it follows that it would in other spheres as well.

 

{RLE # 5: A well known braggart at a hospital I used to work at proclaimed how he sold all of his stocks and mutual funds and was pouring it all into real estate after holding it all in cash for 2 years, all because he didn’t “like how things look”…whatever that meant. He repeated multiple times how he sold all his stocks and mutual funds. He bragged loudly (it’s never softly, is it?) how proud he was that he owned not one share of one stock or one sliver of a mutual fund.

Forget the massive capital gains tax that would have to be paid for such a brash move.

Forget that real estate may have a much larger downside than the stock market.

Realize when all of this happened.

If you were to believe this narcissist, he sold out of the stock market in the summer of 2006 when it was high (but not nearly at its peak), held on for two years, and plunged “all in” into the residential real estate market in the summer of 2008… just before the crash months later.

But trust him, he’s a genius. Even he believes he is. And who can argue with him?

After all, he’s a genius.}

 

But think back to that physician pilot…

 

When you don’t do your job—a thorough evaluation—you’re risking your hard earned money to the whims and wishes of someone else who only remembers his successes.

 

Just because someone else doesn’t run through their checklist before a surgery, procedure, or flight doesn’t mean you should follow suit. In fact, that’s the point of time outs by OR teams. It eliminates all short circuiting by the physician. The thorough evaluation will be done no matter what.

 

In no way, shape, or form is money more valuable than a life. But there’s a lesson to be learned here.

 

Dr. Know It All is often arrogant and loud, not because he is great, but because he is insecure. He loves money not for the financial security like most of us, but for the perceived power, influence, and stature it provides him. Therefore, he doesn’t panic when things go sideways; he just amps up the volume on his braggadocio.

The only thing worse than not being rich for Dr. Know It All is having people know it.

 

Go ahead and feel free to listen to whoever you like or trust, even the idle chatter in Satan’s locus—i.e., the physician’s lounge in your local hospital.

 

Just evaluate what you’re being told. Don’t just blindly follow what others are doing.

 

No matter how smart, amazing, or trusted they are, do your job before any money is put at risk (and that’s exactly how you should think of it).

 

Invest smartly because you did your job, not just because someone told you to do so. They won’t reimburse you when you lose your money. They’re too busy trying to get out of their metaphorical plane crash to do so.

 

Remember RULE # 1: No one cares about your money more than you do.

 

 

I’d love to hear from any and all of you about your thoughts, so we can all learn from one another.

 

Talk to you soon.

 

 

*Collateral Damage, 2002.  (The film was actually delayed in its release from 10/2001 to 2002 because of the events of 9/11/01. Never forget.)

Give yourself a gold star for the day if you knew this without looking it up.

 

https://en.m.wikipedia.org/wiki/Collateral_Damage_(film)

 

Let’s Start at The Beginning…

Never forget these two axioms:

 

Money frees us, but its pursuit may enslave us.

It’s not about how much you have at the end; it’s how much you could have made.

 

 

What is The Plan?

 

Everyone needs one. It may change, but that’s the worst excuse in the known universe for you not to at least have a plan.

While that great philosopher of Western civilization, Mike Tyson, had a cogent point when he noted “Everyone has a plan ’till they get punched in the mouth”, you still shouldn’t enter the ring without knowing a few timeless classics from the sweet science:

hold your hands high, elbows low, and move your head when defending yourself,

don’t forget to hit him back,

and most important of all, don’t always wait for your opponent to finish punching before you start punching back

ANYWAY…there are way better boxing blogs than this one, so back to creating wealth for all who care to do so.

As the sainted Donald Westphall once opined (alliteration alert!; fair warning, this blog will be FILTHY with alliteration as it is my favorite literary device—also, fair warning, I rank everything—and, I mean, EVERYTHING) on St. Elsewhere, “diagnosis is less of a gamble if you start at the beginning.” The same is true of wealth creation.

Forget The Magic Number, that mystical net worth at which all your dreams, hopes, and goals are achieved, for a moment, but from then on…probably never forget it…probably.

 

Focus on this instead.

 

1.) What do you want?

That’s it.

It’s that simple…

And that mind numbingly complex.

Do you want to retire early? How early? Do you plan to do any work after you “retire”? What kind of work?

You want to get your kids through college debt free? How many? Grad schools also? State schools? Private?

Semi-retire and travel often?

The choices are dizzying which makes everyone’s Plan different than everyone else’s and should. How can you expect to have the same investment profile as someone else when your goal net worth is different because your post-retirement life goals are different?

Always keep that in mind when comparing notes with others.

 

2.) How much money realistically will it take to achieve #1?

 

3.) How long will it take realistically to get to that amount, ie The Magic Number?

 

4.) How will you invest to get to your Magic Number?

 

5.) How much risk realistically are you willing to tolerate to get to your Magic Number?

Is that safe? Does that even make sense?

 

Now on to my Rules of Finance…rules I live by…

 

 

Rules Of Finance

 

 

1.) No one cares about your money more than you do.

 

Sorry to alarm you, but here are some cold hard facts of your reality as an attending. You went into the field where you make a six figure salary.

So, whether you realize it or not, you’re now responsible for both protecting and growing all that money you earned. That’s your obligation to your spouse, your family, and yourself. That’s the other job (likely unwittingly) you signed up for when you signed your first contract.

So, you’ll hear this from this blog endlessly (I’m warning you now): DO YOUR JOB!

{REAL LIFE EXAMPLE/RLE 1: I’ve had a partner that have informed me that “Well, I just make the money. It’s my financial advisor’s job to take care of it and grow it.”

Let me put this delicately…that’s just stupid.

That’s akin to parents saying “Well, I just make the kids. It’s my pediatrician’s job to take care of them and grow them.”

No one (hopefully) cares about your kids more than you do. The same is true of your money.}

Yes, it’s in your financial advisor’s best interest to grow your money. Yes, he (likely—it’s quite a male dominated industry) is a nice guy, knows about your family, is a family man himself, and supposedly has the same interests as you.

{RLE 2: A colleague of mine once noted “I love my guy.  He’s great. He talks about boats with me all the time. He has a great one up at the lake.”

All I wondered was “Gee, how did he afford that boat?”

More troubling was that he had no idea how much his “guy” was charging him for managing his retirement account and talking about boats every quarter. Hopefully for him, those boat talks were included in the fees. }

That’s all great.

And doesn’t matter one bit.

They’re all nice guys. They’re supposed to be. They’re salesmen.

 

What matters is only the following:

 

A.) How much does he charge you?

B.) How did he do for you last year vs. the S&P 500 (the broad US stock market) after you subtract out the fees of your financial advisor? (in other words, the famous phrase “net of fees” such as “What were your returns last year net of fees?” or in regular English “How much did you make last year with your investments after your financial advisor took out how much they charge?”)

C.) Is that better than you could do yourself?

 

Much, much more on all of this in a later post.

 

 

2.) It’s not how much you make, it’s how much you spend

 

Always remember that.

Live not within, but below your means. Easier said than done, but monumentally helpful as you move along in life.

Don’t short change yourself. Get that Starbucks every day if you enjoy it, go on vacations, build a pool if you and your family will use it often—enjoy your life as you go along. You’ll regret it in your later years if you don’t.

It’s not just the destination; it’s the journey too. And for some of us, it’s only the journey, especially if the destination changes.

But, get value for your money. That’s what is most important.

Be smart with your money.

Once it’s gone, it doesn’t come back—not even for food, laundry, or more money like your college age kids.

The expression “Easy come, easy go” regarding money couldn’t be further from the truth. Remember that this saying comes from Vegas gamblers as they walk away from the table…after they lost…and  are trying to make themselves feel better…after they lost…

 

 

3.) Pay yourself first and early and often.

 

Be charitable. Spend what you have to and on what you need, even on what you want (within reason—no Lamborghinis though), but make sure you’re investing consistently.

 

Saving a little makes a massive difference later on in life.

 

Even saving $10 a day at a 9% rate of return (9% may sound high; it’s not, if invested solely in stocks—much much more on this in a later post) for 35 years (from age 30 to age 65) yields over$850,000.

 

Saving $1,000/month (i.e., $33.33/day) at a  9% rate of return for 35 years (from age 30 to age 65) yields over $2.8 million.

Now we’re cooking with Wesson!

Assuming the same above rate of return for the same length of time and saving $100/day (ie, $3,000/month), you’ll wind up with over $8.5 million.

 

Even a 5% rate of return with the same savings amount and same length of time, your final bounty at age 65 would be $3.6 million.

Therefore, more conservative investing, mistakes, big downturns in the market, etc. would still yield a very comfortable retirement…as long as you start early.

 

Let’s do the exact same calculations with 25 years of investing (i.e., age 40 to age 65) rather than 35 years (which are listed below in parentheses).

 

$10/day after 25 years of investing—-> just under $337,000 (vs. >$850,000)

$33.33/day after 25 years of investing—->  ~$1.1 million (vs. >$2.8 million)

$100/day after 25 years of investing—-> just under $3.37 million (vs. >$8.5 million)

And $100/day after 25 years of investing with 5% rate of return—>$1.83 million (vs. $3.6 million)

 

[All the above calculations are based on putting it into an investment account as one lump sum at the start of each year. Doing the same at the end of each year does affect the returns over the decades. Do the calculations and see the difference yourselves on this great compound calculator by a great, user friendly site called Moneychimp that has a lot of great calculators among other things there.]

 

http://www.moneychimp.com/calculator/compound_interest_calculator.htm

 

4.) Eliminate debt first or evenly with investing.

Also, do not get into more debt except for your primary home and necessary car(s).

 

Easier said than done, but focus on the small stuff first.

Rid yourself of all credit card debt immediately/as soon as humanly possible.

Pay all credit cards monthly in full before any late fees occur or any interest is charged.

 

The Rent-A-Center Rule:

Don’t finance for what you can pay for in full if you can just wait and save for the amount you need.

 

{RLE 3: Another physician I know lusted after having a home theater as he was building his new home. I advised him to have the basement wired for it, save some money up after the house was built, and then build out his home theater when he could. Instead, he had the whole thing built out as his home was constructed. So, in other words, he is now paying for his home theater…over thirty years…at a slightly over 4% interest/mortgage rate translating into tens of thousands of dollars beyond what the home theater actually costs.

Another way to think of this is you’re still paying for your original home theater while getting it re-done. With a thirty year time span, there’s no chance you’re not getting your home theater re-done—at least for the technology alone.

Bad, bad idea.

And totally avoidable.}

We all will make mistakes in investing, spending, etc.

All of us.

 

The key then is twofold in my mind:

 

To learn from your errors and take corrective action after recognizing said errors

To not make unforced errors like in RLE 3

 

Like in tennis, unforced errors in investing and especially in spending will kill you in the end.

 

5.) Remember this: Luck is the residue of design.

 

Hit singles or doubles.

Home runs will happen.

Just don’t try to hit them or you certainly won’t.

 

The lottery is not a financial plan. It’s a tax on the poor and uninformed (which are not mutually exclusive).

When used improperly, the stock market is a horror house and is worse than a tax on the uninformed.

 

DON’T TIME THE MARKET.

You won’t ever be able to sell high and buy low for many assets in the long term.

Please don’t try.

You’re far too busy taking care of your patients and then your family.

 

Save yourself a lot of stress and grief by putting together the Plan, sticking to it regardless of what the market is doing, re-assessing your returns each and every year, re-calibrating as needed, and then enjoying your life immensely stress free while sleeping heartily every night.

 

Don’t fret about the blowhard bragging about his “guy” or algorithm or the hot stock he’s riding to a yacht purchase or even the hotter stock tip he has. He’s probably lying or even if not misremembering his actual gains vs. the costs against those gains.

 

I’ve always said that the single worst place for financial advice in the world is the physicians’ lounge at your hospital.

 

When you run into that guy (and, let’s be honest, it’s always a guy, not a woman in my experience) and he is sounding off, just smile, nod, and say “Sure”. It’ll drive him crazy like nothing else you can say or do.

 

6.) Be disciplined, but know yourself.

 

Doctors are data driven in their professional careers and are well aware of where the gaps in that data are except in one area: their finances.

 

Don’t rely on yourself or spouse to make weekly, monthly, etc. contributions to your investment account.

Set up regularly scheduled contributions to your investment account right out of your checking and/or savings account, so that it happens and not as a function of any whim or current spending habits. Don’t let that vacation trip or other big ticket item disrupt your investing for the future. It’s too easy to stop payments to yourself “temporarily” and then restart them six months later.

Think of it this way.

Every time you stop contributions to your investment account, you decided to pay someone else rather than yourself and your family.

If you always approach it that way, you’ll guard those payments carefully.

Don’t get me wrong.

Enjoy your life.

Go ahead and spend—my wife and I love traveling and eating at great restaurants— but remember to get value for your money.

And don’t ever forget RULE # 3.

PAY YOURSELF EARLY AND OFTEN!

 

 

7.) One house, one spouse

 

The wisest financial advice my father ever gave me.

 

The easiest and quickest (and most likely most brutal) way to halve your money overnight is to get divorced.

If you both are making roughly the same amount of money (AND don’t have children AND it’s amicable), you might walk away with what you had before being divorced…and that’s with a lot of if’s with all of them going your way. (How often in life does that happen?)

If not…then things get expensive.

In addition, you may have alimony, child support, etc. as ongoing costs. And if you remarry (especially to someone with kids of their own), then the costs could easily double. Don’t get me wrong, financial considerations should never be the reason for keeping a marriage going.

But it might be consideration for you as you find a spouse.

If the person you are with is your financial polar opposite while you’re dating, you either need to have a potentially painful heart to heart talk about money (which I find never happens) or walk away as you two will fight constantly about money (a frequent source of arguments in young couples which is not ever solved by just a higher income level).

 

Let me be clear about one of my biases:

 

I’m not a second home guy—for any reason.

They contain many hidden costs that go unaccounted for when doing your analysis (assuming one was even done), aren’t used as much as we think they will be, and are not investments in any real sense of the word. (Real estate investing is an entirely different endeavor.)

Also, divorce is yet another reason (and by far the worst) that multiple homes are being paid for.

 

Much, much more on all of this in a later post.

 

 

8.) Understand what fees you are paying.

 

How much is your financial advisor charging you? Don’t know?

 

What are the expense ratios for mutual funds you own? Don’t know what that is?

 

Do you have load or no load mutual funds? Don’t know what that is?

 

There’s a lot more.

 

Much, much more on this in a later post.

 

Fees eat away at your gains. You must know precisely what they are or you’ll much more likely be victimized.

 

9.) Calculate how much you’ve earned only after accounting for taxes and fees and inflation.

 

Don’t look at how much you made last month, last quarter, or last year without subtracting out how much you have to pay your financial advisor, mutual fund, etc. and how much tax you have to pay.

If you’re comparing returns from five years ago or beyond, and assuming you’re not too depressed already, you need to factor in inflation in your returns.

 

The US Bureau of Labor Statistics has a slick inflation calculator where you can put in your amount of money from whatever month and year and see what amount of money that would have to be in the current month and year to be equivalent in today’s prices.

 

https://www.bls.gov/data/inflation_calculator.htm

 

Of note, the average US inflation rate in the past century  (1913-2013) is 3.22%.

 

Then, once you have your figure, compare that amount/percent return to the appropriate benchmark.

 

If it’s all stocks, the appropriate benchmark is the S&P 500.

 

There are many resources to look up the annual performance of the S&P 500.

Ycharts is one of them.

 

https://ycharts.com/indicators/sandp_500_total_return_annual

 

Each mutual fund has its own appropriate benchmark which will be listed with every monthly, quarterly, or yearly report you get. Pay attention to them!

 

 

Much, much more on this in a later post.

 

 

10.) Always be ruthlessly pessimistic in your calculations of future earnings or future

net worth.

 

Don’t use an up year in the stock market as what your annual gains will be year after year in perpetuity.

That’s not just unrealistic, but even dangerous thinking.

It will seduce you into reckless action like altering when you will retire, convincing you how much will you be worth or “should be” worth upon retirement, and, worst of all, altering how much and/or how often you pay yourself because you’ve falsely convinced yourself how rich you’re going to be even if you don’t keep paying yourself.

 

Much, much more on this in a later post.

 

11.) Enjoy the journey, not just the destination.

 

Consider this a repeat reminder.

 

You’re working hard, you’ve budgeted, you’re making good financial decisions now, and you’re checking your accounts regularly.

But you’ve got a long way to go.

It’s inevitable for some to tip the other way and become monomaniacal about saving, investing, and hitting The Magic Number faster than expected.

 

In the immortal words of the best QB in the NFL today (sorry Tom Brady), Aaron Rodgers, “RELAX…R-E-L-A-X”.

 

You’re doing fine and will keep doing fine. Just stick to The Plan and allow yourself to enjoy your pursuits, your family, and your life in general.

 

Don’t torture yourself or your family now and for years/decades in hopes to knock off a year or two to get to The Magic Number, especially when it may not even happen any earlier (life’s funny like that) than originally anticipated. Besides, you’re getting to exact same spot just a little later.

Giving up those morning lattes won’t buy you a Mediterranean villa even at your income level, so don’t sweat the small stuff. Just make sure your pleasure is not disrupting your cash flow to your investment account. But also ensure that your savings aren’t disrupting your pleasure.

Remember: Don’t pay others when you could be paying yourself instead.

 

 

12.) Trust yourself and stick to The Plan. But, check where you’re at once year every year (at least) to ensure that you’re still on target.

 

I check every account statement monthly, see what went up, what went down, how much of each, how the dividends are doing, and then still do a very rigorous assessment where I am yearly.

Call me a nerd, but I actually enjoy it.

I’m not asking anyone else to do that.

But, you should not be a stranger to your investment accounts. It’s not a great aunt by marriage that your parents force you to drop in on every few years and you’re left wondering “How much longer is this lady going to be around?”(but I digress); it’s the entire sum of when you can retire and how you will live once you retire.

Certainly, there are more important things in life, but the list of things above ensuring your investment accounts are in good shape is frightfully short.

 

 

13.) Understand the Rule of 72.  And 114.  And 144.

 

I know. I know. Rules within rules. Not fair. Who does this guy think he is?

Most people are familiar with the Rule of 72, the simple formula that can be used to estimate how long it takes to double your money based a certain expected interest rate. For example, you expect to get an 9% rate of return on your money. How long will it take to double your money at that rate of compound interest?

 

To calculate this, simply divide 72 by 9 to get 8 years.

 

This formula is fine for estimating how long it takes to double your money. But what about tripling your money?

 

Here’s the Rule of 114 to help you with that.

 

To estimate how long it takes to triple your money, divide 114 by your expected interest rate (or rate of return). Using the 9% return figure from the first example, the formula would look like this:

 

114 ÷ 9 = 12.67 years

 

 

Now for the Rule of 144

 

To estimate how long it will take to quadruple your money, substitute the number 144 for 114 or 72.

 

144 ÷ 9= 16

 

 

It should be noted that the higher the expected rate of return, the less accurate the formula is for any of these Rules.

And above all else, realize that these are estimates, not precision calculations. They’re just to provide you with ballpark figures to get a rough idea of where you’re at, nothing more.

 

 

14.) We all pay invisible taxes. All of us.

 

Your job is to make as many of them as visible as possible…and then understand their costs…and make sure you’re fine with paying for them…and why you’re paying for them.

 

You live in a non-major metro area and pat yourself on the back for all the money you’re saving, but every time you fly, you have to connect through other hubs to get to your final destination. Thus, just by virtue of where you live, you have increased your chances of missing your flight(s) and will always have to spend more time to get to where your vacation, conference, etc. is. There’s nothing worse in our day-to-day lives than wasted time.

Don’t have children?

You’re saving tons of money over the next few decades, but let’s not pretend there aren’t costs to that later in life.

Who will take care of you once you’re old and feeble?

And that’s not to mention the joy that children bring you every day of your life (I can practically hear the eyes rolling of my friends with kids right now).

These are just two examples of the invisible taxes we all may pay, but there are many, many more.

What are your invisible taxes?

Do you understand their costs?

Are you fine with paying them?

Perhaps, most importantly…Are you fine with why you’re paying for them?

 

 

15.) Above all else…have fun. If you don’t, then what’s the point of it all?

 

Don’t let the ups and downs of the market get you down.

You’re betting on the US economy and probably the broader global economy.

In the short term, it’s always a risk. In the long term, it’s a great bet.

You’re in a 25-35 year marathon.

Think of each year as a mile. If you’re behind your expected time in mile three of a marathon, you shouldn’t freak out. You still have over twenty miles to go.

 

Another thought exercise:

 

When the market is down, you’re buying great companies cheap. It’s like a big sale is going on.

When the market is up, you’re richer.

 

Be a Patty Positive, not a Debbie Downer, not even a Nancy Neutral.

 

17.) Approach all of life as investing and then invest in at least one thing other than money.

 

Invest in yourself also.

Whatever is most important to you that makes you a better person, do it.

Family, friends, church, personal fitness, reading, learning a new language, learning (or re-learning) an instrument, painting, volunteering…it doesn’t matter what it is.

 

It just matters that it matters to you and, most of all, that you dedicate it yourself to it and do it with the great passion you know you’re capable of.

 

I’m warning you now that you will hear all of these axioms (clichés?) again and again…endlessly?

 

 

Thank you for checking out my blog.

 

I’m honored and greatly appreciate it as I know from firsthand experience how limited and precious your time is.

 

I’m thrilled to start this journey together with you and look forward to learning from one another.

 

I’d love to hear from any and all of you about your thoughts, so we can all learn from one another.

 

Talk to you soon.