There are many things in life that we don’t know. However, there are a few things that we’ve picked up about personal finance, investing and money that we think can help clients and their families.
- The Jones family, next door, isn’t as rich or happy as you think they are…
- Luck is what happens when preparation meets opportunity
- Really rich people almost never attribute their success to getting lucky
- Get rich quick and get poor quick are two sides of the same coin
- The more complicated the investment advice, the more expensive and the less useful it is
- Spend less than you make. Always
- Ask about anything you don’t understand
- There is no such thing as job security in any industry
- Your personal residence is a place to live, not an investment. Stop watching HGTV
- Stocks tend to payoff because they are so volatile, not despite it
- Your mortgage broker is lying to you about how much house you can afford
- Never reach for yield. High dividend yields aren’t a good predictor of forward returns
- All fees erode investment performance
- Excess is never permanent
- You will never have enough money
- If it depreciates then avoid paying interest on it (I’m looking at you, cars)
- You don’t have to be rich to invest but you must invest to be rich
- Invest in your mind and your skills
- Splurges bring the greatest happiness and then diminishing returns
- If it seems too good to be true, it is. Full stop
- Einstein never said that thing about compound interest (see below). But it’s accurate nonetheless
- If you’re excited about an investment, it’s probably a bad idea
- A penny saved is more than a penny earned
- Market corrections come more regularly than birthdays – expect them
- Forecasting is for weather professionals – and even they suck at it
- The only sure thing about stocks is that there are no sure things
- A raise in your income shouldn’t mean a raise in your lifestyle
- Your life is a better benchmark than the Index
- There is an inverse correlation between performance and time spent watching financial news
Props to Khe Hy @khemaridh for the thought experiment
With this post, we’re hoping to address the challenges of transitioning from residency to an attending physician. There are plenty of businesses that want to sell you their services and our goal is to help you weather the sales storm.
Getting off to a strong financial start as a newly minted attending physician has a disproportionate impact when compared to any investments you could possibly make. The compounding effect of good early financial habits is second to none when it comes to your financial future.
“In your first few years as an attending spend like you’re a resident” – Wise, financially independent Doctor.
1) Create a Debt Plan
In medical school, you cannot really pay down your debts absent of a significant contribution from parents/inheritance. The best you can do is focus on not racking up more debt than required.
In residency, you have an income. Some residents can chip away at their debt, but the magnitude of it can still be overwhelming. Do your best to pay some off but it’s not uncommon for it to continue to expand.
Debt Consolidation – First we recommend that you look at your various debts (LOC, student loans, consumer debt) and consolidate them to the lowest rate available. This means putting it on your LOC in most cases, if you have the room. Most of our medical students/doctor clients can get a line of credit at prime minus 0.25% personally and in their corporation.
Some Advantages of LOC Consolidation:
- Simplicity – All your debt in one place
- Flexibility for payments – You can often just pay the interest if needed or make larger payments when able.
- Lower interest rates – Canada Student Loans are at Prime +2%, ASL/OSAP (insert province) is Prime +1%
Important Debt Considerations – Be aware that some banks send you a letter post-residency that your LOC will be changing from a “Medical Student LOC” to a “Professional LOC”. Be sure to read this and negotiate the best deal for yourself. (Prime -0.25%)
Debt Repayment Plan – Remove the desire to buy that new car or oversized house for the first little bit. Focus on reducing your debt and mitigating taxes paid.
2) Pay Down Debt or Invest?
There is an argument that with interest rates so low currently, that it is better to not pay your debt down. Rather, invest the money and earn a higher return. For example, a balanced portfolio of 60% equity and 40% fixed might return 8% while your debt is costing you around 4%. The arbitrage seems obvious. But…
Pay down debt first
- The average return of a 60/40 portfolio over the past 90 years has be 9% per annum. This return is random and fluctuates quite dramatically. “You can’t destroy risk, it can only be transformed”. Debt on the other hand can be destroyed. Therefore, for behavior and mental reasons, we recommend that our clients focus on what makes them feel the best. This is often in the form of debt reduction.
- With debt at Prime minus 0.25%, you need to beat a 3.5% bogey after-tax to outperform debt reduction on an absolute basis. Our clients are advised to fill their TFSAs and RRSPs then pay down that LOC and student debt.
- Paying down the LOC also gives our clients room to absorb the unanticipated costs and fluctuating income that is typical when starting a practice
3) Debt reduction + Investing
At GIM, we first set our clients up with all the tools they need to get started:
- Non-Registered accounts
- RESP (Registered Educational Savings Plan)
- RDSP (Registered Disability Savings Plan)
- Corp accounts if/when appropriate (wait until you’re keeping significant earnings in your corporation before. There’s no sense in paying unneeded accounting fees until debt is reduced and your personal accounts are full)
During the first few months, you’re going to notice that your income is higher than it was before, and for our clients we recommend making use of the above accounts in this order.
TFSA first – the sooner you start contributing to this account the longer you can enjoy the benefits of compounding.
RRSP second – reduce your tax burden; reinvest the tax refund; compound the growth on a tax-deferred basis.
Investment strategy at GIM is simple but tried and tested. We use an evidence-based approach of utilizing index ETFs accompanied by a geographic and sector tilt and systematic rebalancing. The evidence is overwhelmingly in our favor that high-fee, actively managed funds underperform a low-cost, passive ETF strategy. Many advisors out there will suggest that their mutual fund managers have the best chance to outperform the market. However, over a 20-year period, only 2% of managers have proven to outperform the index net of fees. Indicating to us that it’s incredibly difficult to pick the 2% of managers after the fact. We steer our clients clear of financial salespeople.
One of our greatest value-adds as an advisory team is our ability to deliver a repeatable process with competitive performance for the right price.
4) New Income vs. Resident Income – What to do
As a resident, you received a steady paycheque every two weeks. You paid your rent/mortgage and living expenses. Your financial life was predictable.
Now this all changes. As an attending physician, a financial buffer is more important than ever.
Income Volatility – As you know, your work load is lumpy – whether it be for locums or extra shifts to cover shortages. We’ve found that no one physician client is the same.
There is this image of the wealthy physician lifestyle that is very attainable for nearly everyone. But there is one thing that often gets in the way. It isn’t $4 Starbucks coffee. It isn’t a vacation to Europe or updating the wardrobe. It’s the big-ticket purchases that can derail success. Getting the big purchases right is incredibly important to ensure your financial freedom. We’ll never be the nagging advisors that tell you to cut out vacations or Starbucks coffee. But we will encourage you to get the big purchases right.
5) Insuring your biggest asset – Your ability to earn income
We find its imperative to review our client’s personal insurance. Going from residency to a full time attending comes with its own unique liabilities. When thinking of insurance, we want our clients to make sure that they have enough to cover their expenses and responsibilities.
Life Insurance – You want enough life insurance that if you were to die that your financial obligations of your family are met.
- Covering debts
- Leave enough money to pay for your dependents in your absence
Term life insurance is usually the most efficient way to insure these obligations. The premiums are cheaper than whole life insurance. Without complicating things, we don’t recommend a whole life strategy until there is a business protection, tax reduction or income reduction need for the client.
Keep it simple. Keep costs low.
Disability Insurance – With a longer-term disability, this type of insurance is to cover the loss of income. We recommend clients have “own occupation” insurance which ensures that they don’t have to go back to work in another field of work.
What to consider before deciding on the monthly amount:
- Paid with personal or corporate dollar
- Your business expenses
- Cost of personal Lifestyle
Umbrella Liability Insurance – This is an extension of your home or auto insurance. It covers for liability beyond those policies and payouts that exceed the usual coverage. Unfortunately, as high-income earners, Physicians are at high risk to be sued.
We at GIM hope that this article helps you get started in preparing for your new life. If you’re interested in hearing more from us then please reach out here.
Recently I was golfing with a friend of mine and his Dad. His dad runs a large local company and works with one of the big bank private wealth teams in the city. He asked me whether a specific small cap stock his advisor put him in recently was a good idea or not.
These questions put me in a very precarious situation and I almost always try to answer them the same way…
“Without knowing your risk tolerance and financial situation, I can’t say whether I think the stock is a good investment or not.” Yawn!
Unfortunately for his big bank advisory team, I had read a Warren Buffett Q&A with a group of MBA students at the University of Maryland the day before and I forgot my typical answer on the previous hole.
I decided to share buffets opinion on financial sales people – his bank advisory team – and why rich people should work harder on staying rich.
Buffet was asked in the Q&A what the most important skill in finance is:
“The most important skill in finance is salesmanship. That’s how you convince someone to marry you and that’s how you get a job. The most important quality to do well is temperament which would permit the control of fear and greed which have ruined many. Anyone who has become rich twice is dumb. Why would you risk what you need and have for what you don’t need? If you are already rich, there is no upside to taking on a lot more risk, but there is disgrace on the downside.”
The first part where Buffett mentions sales is very accurate. It’s something that I must admit I struggle with every single day as someone who’s building their business. However, being aware of this fact makes me very adept at recognizing sales tactics.
Being rich is a fantastic problem to have but is an incredibly difficult thing to maintain.
My Advice to him was as follows:
- Don’t invest in something you can’t explain in 140 characters or less. If you can’t break it down simply and understand it, you’re likely making a mistake buying it.
- If it sounds too good to be true, it probably is.
- If you’re already wealthy, you should overweight the need side of the Need/Risk equation. Elon Musk would tell you otherwise. But I suppose he’s going to wish he took that advice if and when Tesla crashes.
- Avoid concentrating your investments into one huge investment.
- Don’t worry so much about what your friends and colleagues are investing in and focus on the needs of your family and your situation; this is generally one of the hardest things to do, especially in this day and age when everything is immediately visible.
- When it comes to investing, boring almost always trumps exciting. There’s little need to make wholesale changes when things aren’t immediately going your way. Jealousy is not a trait of a strong investor.
- If you’re reaching your later years career wise, take that into consideration when you’re pushing all-in on an idea. Human capital and time are the most important consideration when considering your timeline and risk profile.
I do understand the desire to take risk as an investor and entrepreneur. This is especially difficult for those that have had so much success taking risks with their businesses. Changing your behavior from risk on to risk management is a difficult thing to do and the fear of missing out is a difficult feeling to suppress.
Risk and reward can be summed up in several ways and stories, but none ring truer to me than the story of Jesse Livermore.
Many serial entrepreneurs such as Elon Musk and Jesse Livermore can and do get rich twice, but I’m with Buffett on this one:
“Why risk what you need and have for what you don’t need?”
If you’ve already won the game, why risk everything trying to it win again? seems irresponsible to me; then again, I’m not in the “1%” and I’m merely agreeing with one of the world’s foremost minds on investing.
Don’t make yourself get rich twice. Find a team that is capable of managing your family’s financial situation properly.
If your financial advisory team is investing in high priced mutual funds and moonshot stock picks, I recommend you give the GIM Team shout.
Trading and Investing is now a commodity. Robinhood, Wealth Simple, and Scotia iTrade understand the power and value of building a user base before capitalizing on the user itself. Since Robinhood’s start back in 2013 they have amassed over 4 million customers with no intention of making any money. Recently they dropped a new customer acquisition product: The 3% interest savings account. Which was quickly retracted, and they were fined $250,000. But they don’t care. They’re all about cheap customer acquisition. They’re absolutely killing it.
However, not to be outdone, the banks are following suit creating free trading accounts…
And why not? Equity trades have basically been free for retail investors for a decade. What’s changed is that now they’re a worthless commodity, a loss leader for banks like the Hotdog and rotisserie chicken is for Costco.
The new bank and Fintech business model:
“Come for the free trades, all the while we will get you to trade options, use margin or as we maintain custody on your account, we’ll lend your shares to the short-sellers. In JPMorgan’s case, here are a hundred free stock trades, and here’s a credit card offer every two weeks while we lend out your cash 15-1 to borrowers. Thanks for playing.”
Last summer one of my wife’s coworkers who is a FIRE physician asked me if I was worried about Robo-Advisors, the cheap ETF indexing options and freemium investing services available.
It was clear that she thought the industry was dead, as many investors who do not have good advisory team in their corner believe.
Here’s why GIM doesn’t care about their free trades and free index funds. We aren’t even a little scared:
The Investor data that gets compiled every year suggests that individual investors (people) are on their worst behavior at the worst moments when it comes to investing. This cycle is inexorable. It is why markets function the way that they do. If markets and market participants were rational, there wouldn’t be massive sell offs and run ups. People must lose and people have to win. It’s a mathematical fact. If we all behaved rationally we wouldn’t see massive sell-offs and rallies.
Example: Apple added $286 billion in market capitalization over 73 trading sessions (1/3/2019 – 4/18/2019) That’s $10 million every minute. There are only 11 companies in the United States with a higher valuation than what Apple managed to tack on to their market cap in a 73-day period. Recap: The biggest stock in the world gained 43% in under four months, and nothing materially changed. How does something like this happen in a world where people are behaviorally rational?
Investors must lose and the masses have to lose massively at major turning points. And they do – every time.
The dollar-weighted returns of even the best performing funds prove this every year. The freeness of a portfolio thus becomes irrelevant, a triviality in the shadow of our colossal inability to act professionally.
Of what consequence are 75 basis points when we can barely maintain an awareness of our elemental cognitive deficiencies?
“oh no, I won’t sell at the bottom or buy at the top this time. I know better.” Yes, you will. You can’t help yourself. When people obsess about the costs of a fund or of an investing strategy, I must bite my tongue. Absent the context of an investment plan, it’s a meaningless conversation. The true cost – that of an aimless, lawless course of investing, replete with emotional leniency and non-descript, objectives – is probably going to bury the freemium self-directed investor anyway. “Everyone’s rational, calm and self-directed until the economy blows up and punches them in the face.” – Mike Tyson probably (JK)
As Nick Murray writes in Simple Wealth, Inevitable Wealth:
“A portfolio is not, in and of itself, a plan. And a portfolio that isn’t in service to a plan is just a form of speculation; it can have no other goal than to beat most other people’s portfolios. But “outperformance” isn’t a financial goal. An income you don’t outlive – to cite one critical example – is a financial goal. If your portfolio “outperforms” mine, such that I run out of money when I’m 76, and you don’t run out of money until you’re 82, it isn’t going to matter much when we’re both 85, sitting on a park bench without two nickels to rub together between us.”
A true financial plan involves a Swiss Army knife portfolio calibrated to deliver what your unique plan calls for over your family’s lifetime. The financial plan involves calculations and assumptions. A proper financial plan utilizes statistical facts and educated guesswork. It creates scenarios and populates them with probabilities. It involves decision making with trusted advisors on:
- cash flow
- living care
A plan, no matter how you price it is not a product, it’s an ongoing service. It’s alive. It doesn’t just exist on paper. It requires revision as your life changes. What a plan should do is demand rational, deliberate behavior on the part of the investor and his or her trusted advisory team. Focusing on the performance or cost of a portfolio absent a plan is putting the cart before the horse. While having a fast and cost-effective cart is incredibly important, don’t focus on one without having the other. Making poor decisions – even if at a low cost or even no cost – won’t do you any good. Everything in the investment business is free now. But nothing that comes free has any value. Don’t get me wrong, I’m clearly very biased but a well executed and strictly adhered to financial plan is imperative. And that isn’t free.
If you’re interested in building a financial plan and working with a team that is focused on your financial heath, don’t hesitate to reach out.
I’m intimidated by my financial adviser, he knows how little I know.Daniel Kahneman Nobel Laurite and author of Thinking Fast and Slow
The Wall Street Journal shared an interesting piece about Bill Gross’s old fund with Janus Capital back in 2015. Investors poured in $1.1 billion, which is an important threshold for attracting institutional clients, into his brand-new unconstrained bond fund. That’s a decent haul, but the real scoop here was that more than $700 million of those inflows came from the same Morgan Stanley office in California.
And it just so happens that this is the office that one of Gross’s financial advisors works.
The thing I find fascinating about this is not that this money came from Gross himself, but that Bill Gross, the Bond King, has his own financial advisor, from Morgan Stanley no less. Gross is worth 2.5 Billion dollars, so he could have his own family office if he wanted to. But I think it would surprise people to discover that one of the greatest investors of all-time has the need for a financial advisor to help manage his investments.
There are several reasons for Gross having a team of financial advisors in place — tax considerations, trust and estate issues, insurance planning and many of the other financial planning complexities that come with having a huge portfolio.
But what we find at GIM is that most successful people, even those that are successful in the world of finance and business, get their own financial advisor to keep themselves out of trouble. Intelligent people understand the benefits of having an independent third party there to make sure they don’t make huge mistakes.
In the book “What Investors Really Want”, Meir Statman shared the following story about Oracle CEO Larry Ellison whose net worth is a measly $60+ Billion (emphasis mine):
Documents in a trial revealed that Mr. Ellison lives well. His annual “lifestyle” expenses amount to $20 million. A villa in Japan costs $25 million, a new yacht costs $194 million, and preparations for America’s Cup cost $80 million. The documents include emails to Ellison from his financial advisor. One email said, “I know this email may/will depress you. However, I believe it’s my job to address issues you’d prefer not to confront. You told me years ago that it’s OK to raise the “diversification issue” with you quarterly…. Well, I’m doing it. View this as a call to arms.
Not everyone needs a financial advisor.
But there are many people out there that could benefit from a call to arms on occasion to keep themselves honest. This is true of successful fund managers, financial advisors, corporate CEOs and anyone else that recognizes they’re not infallible when trying to make wise financial choices.
There are plenty of financial issues most people would prefer not to confront. A good advisor should be able to help you take on those challenges.
If you’re interested in adding some checks and balances to your financial life, then please get in contact with us.