Grabbing the Brass Ring Doctors are doing very well for themselves these days, according to Medscape's 2017 Physician Compensation Report. Over the past 6 years, physicians have seen their average income rise from $206,000 in our 2011 Compensation Report to $294,000 this year. In addition to strong earnings, doctors have historically tried to supplement current income with payouts from smart investments—including everything from individual stocks to real estate to putting money into start-up companies. Their track record, similar to that of most investors, has been hit-and-miss. Not even smart, respected wealth managers, for that matter—the same people doctors hire to make many of their investment decisions—have a perfect batting average. As part of our 2017 Compensation Report, we asked physicians to tell us about their worst investing mistakes. We shared their responses with a few sharp financial planners and then picked their brains for what these unfortunate doctors could have done differently. Here are five common investing mistakes that our survey revealed—and what you can do to avoid falling into the same traps. 1. Sinking Money Into a Start-up When it comes to investing, everyone likes to be in on the ground floor, part of the elite group that will enjoy the greatest gains if the company takes off. But many times the proposition is often a half-developed idea, doesn't have any real financial backing, or is part of a scam to defraud investors. Scores of respondents to our survey said the endeavor they invested in eventually went bankrupt. "I put $100,000 into a start-up that fizzled." "I've invested in several start-ups over the years, with no return." "We put a large investment into a start-up clothing company that went bankrupt. I did get a nice T-shirt, though." "I invested in a new medical EHR [electronic health record] company that didn't succeed." "I gave money to a med-school friend of mine to invest in a start-up that turned out to be fraudulent." Several doctors said they had lent money to friends or relatives to finance new ventures. New restaurants were particularly popular; many doctors reported sinking cash into a trendy eatery in their community, only to lose most or all of it later. Other respondents who were seeking a bit of the spotlight invested in movie-production companies that either frittered away their financing or went belly-up. Another physician put money into a Broadway show that flopped. "If you're lending money to someone, make sure you have an agreement in writing," says Karen C. Altfest, PhD, a principal with Altfest Personal Wealth Management in New York City. "If not, you and your friend may have different recollections of how and when you'll be repaid. You should have a legitimate repayment schedule and charge a realistic rate of interest." How to lessen your risk. You can make money off a start-up company, but it requires an incredible amount of due diligence, including examining the finances and track record of the principals behind it. Have they had similar successes in the past? Can you speak to other investors in those businesses? Is there a written business plan that you can share with your financial adviser? What experience does the management team have, not only in management but also in production and marketing? "It's also critical to understand the ownership structure," says Kathy Stepp, a founder of Stepp & Rothwell, a financial planning and investment advisory firm in the Kansas City area. "The general partner usually gets to make all of the decisions, including how the income and any profits are distributed. As a minority partner, you may have no say in anything at all. We had a doctor who invested in a very successful sporting goods chain but never made a profit for this very reason. The deck was stacked against him." Is It Knowledge or Luck? 2. Trying to Catch a Falling Knife Nothing gets the juices flowing quite like chasing a "hot" investment. Plenty of doctors who responded to our survey did just that, only to get burned. Some lost a little, some lost a lot, but all of them bought when the price was too high and pretty much had nowhere to go but down. "I invested in a dot.com mutual fund 2 months before the 'tech bubble' burst." "I thought Martha Stewart [Living] stock would do great. It failed." "We purchased stocks of companies that eventually went bankrupt." "I bought a bunch of high-yield stocks that ended up doing badly for 2 years. I cashed out at 60% less than my initial investment." "I traded options on the S&P 500. I expected the stock market to go down. Instead it went up." Many investors take a bath on hot stocks because they fail to do their homework or otherwise heed warning signs to stay away. Overconfidence can come into play as well. Stepp remembers a cardiologist who made $75,000 on a single Internet stock, only to plow all of his profits back into the same stock after its price dropped by half. "He bought it back again—then rode it all the way to the bottom," Stepp says. "He thought it was skill the first time, not luck." Even financially conservative doctors who don't chase hot investments, and who have done very well over the years, admit that they've laid an occasional egg. "I had a mutual fund that lost half its value before I sold it," one doctor confessed. Another said, "I waited too long to sell a declining stock," without elaborating on the extent of his losses. A particularly frustrated doctor recalled the pain of "too many stupid high-tech investments." Matthew Kelley, president of Gold Medal Waters, a Colorado-based financial advisory firm, recalls a surgeon who came to him after a series of bad investments. "He had followed along with what a lot of his physician colleagues were doing," Kelley says. "As a result, when he got to us he was invested in two illiquid real estate deals, one triple-leveraged inverse ETF [exchange-traded fund] and a bunch of individual 'hot' stocks. After having lost a lot of his net worth, he admitted that he didn't know what he was doing and that he had followed the herd." How to lessen your risk. Create a diversified portfolio that doesn't rely too heavily on a single class of investments. Then set targets for selling within each allocation; for instance, if foreign stocks are supposed to make up 10% of your portfolio, have a plan to sell some of them when their value exceeds 10% and reallocate those funds to an underperforming asset. You could do the same for individual stocks as well, selling after a rise of, say, 30%. "Targets force you to reallocate from overperforming to underperforming classes—essentially buying low and selling high," Stepp explains. "And because you have a plan, it takes the emotion out of it." Read Also: For Doctors: How to make money online 3. Investing in Bricks and Mortar Real estate has always held great appeal to doctors looking to diversify away from cash holdings, stocks, bonds, and mutual funds. Like start-ups, however, real estate can cause you to lose a bundle even if you take every step to make sure you don't. For instance, the declining value of a good house in a good neighborhood might be part of a general (or catastrophic) downturn in the real estate market, as lots of investors discovered in the past decade. In time, you might be stuck with something that can't cover its own costs, even if you're lucky enough to find good renters. "I invested in real estate in Florida about 13 years ago. Then the bubble burst. Prices dropped." "We bought a vacation home that's currently worth $350,000 less than we paid for it. But it's paid off, so we're making the best of it." "Our beach condo gives us a lot of pleasure, but we'll be lucky to break even on it." "I owned too much house early in my career and ended up losing money when I sold it." "I purchased a lot that we later found out we can't build on. Now we can't sell it." "We bought, then rented, a condo. The renter never paid us and it took 9 months to get him out. Eventually we sold it for a loss." Despite the horror stories, many investors, including doctors, have made good money on real estate over the years. They took the time to understand their local market and bought when prices favored buyers, which enabled them to weather the dips. Even if you do all of the right things upfront, there's no guarantee that you'll be able to sell when you want to or get the price you expect. For example, several doctors said they bought distressed properties, hoping to rehab and flip them, only to have the process take longer or cost more than they had expected. "If you plan to flip, you probably won't do well until you learn the ropes," cautions Altfest. "Some doctors have told me, 'By the time I rehabbed my fourth or fifth house, I knew what I was doing and made $20,000.' Think of your time and what you get paid before you decide if it's worth the time and effort." Finally, timeshares have proven to be an albatross for many doctors. "I hate it, I never use it, and I can't get rid of it," one frustrated respondent said of his timeshare. Altfest has heard this woe many a time. "Resale of vacation shares is notoriously difficult," she says. How to lessen your risk. If you're looking to earn rental income, have someone review the deal, including the property's rental history, before you sign anything. Your accountant or financial planner should be able to do that for you. Also, if you own your medical building, there may be an opportunity to lease some of your space to another practice or a hospital system, ensuring a low-risk, steady stream of income. "We have some retired physician clients who are doing just that," Stepp says, "and it's working out really well for them." Don't Assume That Medical Ventures Are a Sure Thing 4. Partnering With Fellow Doctors This is a twist on the start-up theme, except that the investing stays largely within the medical community. The thought here is: Who better to evaluate medical technology or a medical venture than the folks who will actually be involved with it on a day-to-day basis? While that approach has some merit, it tends to blow up when the prospective investors—largely doctors, in this case—fail to do their due diligence, including whether the project, device, or therapy is feasible and whether there's room for it in the current marketplace. It might be a great idea but is doomed to get crushed by the competition. "I put $250,000 into an idea to start an HMO and lost it all." "I invested in a health insurance organization run by doctors, which was supposed to be more ethical than insurance companies. I lost every cent!" "The patent holder died, and the company dissolved with no return." "The surgery center I invested in hasn't made any money over 9 years. Technically, I haven't lost any money, but neither do I expect to make any money or get back my original investment." We invested in a treatment that insurance companies wouldn't reimburse for." "My partner screwed me." One respondent recalled how he had invested in a new surgery center that "went broke almost immediately," leaving him owing $200,000 on equipment worth $40,000. Several other physicians said they sank money into unprofitable hospitals that later went bankrupt. Another doctor mentioned a "laser clinic" that bombed. Medical devices that never panned out were also a common lament among respondents. "The company had a defective product and got sued," one doctor complained. Another respondent said of the device he invested in, "We never got a patent." Likewise, other products never got to market and took the hard-earned dollars of their investors with them. How to lessen your risk. Do your homework, including asking your financial adviser to speak with the principals directly. Your adviser's impartial approach can help you gauge the likelihood of the project succeeding—before you hand over any money. Once you've agreed to invest, "stay involved!" Stepp insists. "Ask for updates if it's a new technology, or for financial reports if it's an established business, which you should then ask your financial adviser or accountant to review." Despite the respondents to our survey who reported being burned on surgery centers, some doctors—at least in the Midwest—have done extremely well with them. "They're straightforward: easy for us to understand, and easy for the doctors to understand," says Stepp. "There might be a 'bubble' in surgery centers at some point, but right now they're cash cows." 5. Gambling on a 'Can't-Miss' Investment There's an old saying among seasoned investors along the lines of, "If you want to gamble, go to Vegas." The problem is, many doctors and other investors wind up wearing blinders when the lure of easy money is dangling in front of them. The pitch sounds legitimate enough, but that's all it is—a pitch, and sometimes a criminal one at that. "I invested in a company that was going to have free-standing imaging centers and it was a total scam." "I was talked into a foreign-exchange money market fund that turned out to be a Ponzi scheme." "I bought cattle. They were stolen." "Wine futures... I lost big-time on those!" "We invested in a real estate limited partnership that turned out to be a scam." In addition, dozens of respondents reported losing money on "low risk" oil and gas partnerships, complaining of dry wells, fluctuating prices, and corrupt ownership, among other woes. While some investors have enjoyed good returns in these partnerships, they require a great deal of research before committing any money to them. Doctors have also been given the hard sell on life insurance policies as "sure thing" investments, particularly whole life policies. Several physicians reported that they had lost money on such policies or paid high premiums to maintain the coverage and/or penalties to cancel it. One MD said that he had purchased expensive whole life insurance for his kids, which, if it isn't an outright scam, is awfully close. "We had a physician who was about to sink a very large chunk of his money into an insurance policy that was being touted as an investment," Kelley recalls. "When we evaluated his current insurance coverage and his existing insurance needs, we learned that this 'investment' wasn't warranted." How to lessen your risk. Lean on your advisers—hard. "Anyone can come up with a slick offering memorandum," Stepp warns. "Let your accountant or financial adviser—even a friend or relative who works in corporate and understands balance sheets and financial statements—take a look at the documents before you invest." An in-person meeting between the principals and your investment adviser is also wise, Altfest adds. Trust your gut, too. The old saying "If it sounds too good to be true, it probably is" has saved the bacon of many investors over the years. So don't ignore that inner voice if it starts whispering in your ear. Conclusion Plenty of doctors have failed to look before they leapt into any number of investments that, unfortunately, went south. "Doctors who can't make ends meet sometimes make poor choices out of desperation," Altfest says. "We know many physicians who lived like rock stars when they were younger and are still financially stretched in their later years." Even financial planners and wealth managers make mistakes, but that doesn't mean you should disregard everything these professionals say. They can save you from yourself by helping you to take the emotion out of an investment decision while contributing their wealth of experience and business acumen. If you have any doubts before handing your money over to someone—and even if you think you have no doubt—your financial adviser is the person to call first. Source
