Q. I just sold an investment and will need to pay taxes on the gains in a few months. Should I put the proceeds into Tesla stock or Shiba Inu cryptocurrency until then?
Explore This IssueACEP Now: Vol 41 – No 02 – February 2022
A. I write this as I return from the 2021 ACEP Scientific Assembly. It was great to be all together again in person and to speak with many of you face-to-face about your specific financial situations and questions. Hundreds of you came to my two presentations, and I recorded two podcasts: one with the Emergency Medicine Residents’ Association about financial tips for residents and another for the ACEP Frontline Podcast with Ryan Stanton MD, FACEP, about inflation and cryptocurrencies.
When I started The White Coat Investor more than a decade ago, the tagline was “Helping those who wear the white coat get a fair shake on Wall Street.” More recently, I’ve described our work as “Helping docs stop doing dumb stuff with their money.” In recent months, I am getting an increasing number of questions about ideas that I would consider “dumb stuff.” Just like in medicine, there is no such thing as a stupid question, just controversial topics in the financial world. However, some of the financial mistakes doctors are doing or considering doing these days are the equivalent of treating a gastrointestinal bleed with a combination of coumadin and heparin. These unforced errors are likely to end very badly.
Many young physician-investors have no personal recollection of a serious downturn in the stock or real estate markets. With the exception of three very brief drops, stock prices have been rising consistently since the Great Recession struck in March 2009. The price of housing and real estate investments in general has also been skyrocketing in many areas of the country for most of the last decade. More than 6,000 cryptocurrencies have been invented; many of them have had spectacular returns so far. Even bonds have had better-than-expected returns over the last decade. Meanwhile, due to government policies, interest rates have been kept artificially low to the point that the current yield on a 10-year treasury bond is four percent less than the current rate of inflation. Most physicians have mortgages at rates under four percent, and many have not made a student loan payment in nearly two years.
The appetite for, and tolerance of, both market risk and leverage risk in the financial markets right now is ridiculously high compared to most of financial history. Many doctors have made terrible financial decisions and not only gotten away with them but been massively rewarded for taking on unwise risks. This trend will not continue forever—trees do not grow to the sky.
Here, I discuss three unforced errors that investors, including physician investors, commonly make and seem to be making more frequently in the last couple years.
1. Investing Short-Term Money in Long-Term Investments
Stocks, bonds, and real estate are long-term investments. If you need money in a few months to pay off a loan, buy a car, make a house down payment, or pay your taxes, it has no business in any of these investments. That’s what a savings or money market account is for. In this situation, the return of your principal matters a lot more than the return on your principal. The price volatility of these investments dramatically outweighs any benefit you might see. You are essentially gambling and are nearly as likely to lose money in the short term as to make it. If investing short-term money in solid long-term investments that produce earnings, interest, and rents is just gambling, where does that put speculating into precious metals or cryptocurrencies? You might as well take next quarter’s estimated tax payment down to the roulette table in Las Vegas and put it all on red.
2. Taking on Too Much Debt
The mathematical benefits of investing with leverage—especially fixed, long-term, noncallable, low–interest rate debt—cannot be denied. However, just because a little bit of something might be good does not mean that a lot of it is better. Given the higher than historical investment returns in all asset classes over the last decade and interest rates less than the rate of inflation, I cannot recall a more tempting time to invest with borrowed money. Physicians sometimes do this unknowingly by delaying the payoff of a mortgage or student loans, or do it deliberately with cash-out refinances and margin loans. Either way, the effect is the same, and it works until it doesn’t. If you have borrowed half of the money you have invested and the investment drops 50 percent in value, your entire investment is wiped out. If you borrowed 80 percent of the money you have invested and the investment drops 50 percent in value, you may find yourself in front of a judge declaring bankruptcy. Be careful how much you borrow to invest.
3. Putting Serious Money into Play Assets
Many investors enjoy learning about their investments, doing research, and investing on the cutting-edge of technology. Maybe they’re trying to time the market, picking individual stocks, dabbling in precious metals, or speculating on which cryptocurrency the world will eventually adopt for widespread use. While I view my entire portfolio as serious money and do not do any of this stuff, I certainly agree with most financial advisers who think it is fine to do this, so long as you only do it with “play money.” Play money is five percent or less of your portfolio—total. If you want to put five percent of your portfolio into cryptocurrencies like Bitcoin, Cardano, Solana, or even Shiba Inu, knock yourself out. But if you put five percent into each of those and another 20 percent into GameStop or whatever the latest meme stock might be, you will violate the basic tenets of investing. History has shown that doing so does not usually end well in the long run.
You have worked hard to learn how to be a physician. You work hard now for your paycheck. If you want to be financially secure, you need to make sure your money is working as hard as you. Doctors make enough money that they do not need to hit home runs or optimize every single financial decision to have a comfortable retirement as a multimillionaire. They do not, however, make enough money that they can do foolish things with their earnings and expect their generous salary to always bail out bad decisions.