My beloved custodian Fidelity Investments is the world’s largest chaperone of 401(k) assets. They recently looked at how some 5,000+ physicians allocate the assets in their plans, giving us a further opportunity to poke fun at their misadventures (which we alluded to in The Affluent Investor). Diagnosis: Physicians should be crackerjack investors, but they are not. Overconfidence and gullibility make them easy marks for financial salesmen, whom they mistakenly assume to be seriously credentialed professionals like themselves, and not boiler-room bunco artists. Physician contact information is readily harvested and then their habits and preferences are carefully analyzed, the better to transfuse their assets into the broker’s pockets. Doctors are too smart for their own good, because they assume that their high I.Q.s will lead them On Old Olympus Towering Top of the investment hit parade. Unfortunately, this head bone isn’t connected to that wallet bone. Extenuating Factors: The history reveals several complicating factors. First, given the prolonged education required to become a physician and train in one’s specialty, entry into the labor force is often postponed until after age 30. While salaries ramp up fast, there is the inevitable lost decade when savings otherwise could have been compounding. Second, given the skyrocketing cost of medical school, doctors now come to the starting line with saddlebags of student debt at a non-trivial rate of interest. The returns on money invested in financial markets are variable and uncertain, but this loan interest is inexorable and certain, making a strong argument for discharging the debt as soon as possible. Predisposing Conditions: There is the unwritten expectation of a “doctor lifestyle,” which includes the doctor house, the doctor car, and the doctor spouse (often sold together). A succession of doctor spouses pretty much will demolish any efforts at wealth management. There is no shortage of anecdotal evidence that doctors are susceptible to goofball investment schemes like extracting gold from sea water, etc. Anything that promises sizzling returns with no taxes seems to loom large in their thinking. As we wrote in The Affluent Investor, “Doctors can go from one dodgy idea to the next without ever alighting on a sensible approach that puts them in the way of making money.” I worked in a hospital for years (Mt. Sinai Cleveland) and have always revered doctors, so please file this observation under “tough love.” Positive Indications: Did I mention that salaries ramp up rapidly? In addition, there is very low unemployment in medicine, little danger of most specialties being outsourced to China, and most important of all for purposes of this discussion, the fact that demand for medical services is unrelated to the performance of the larger economy and its bewildering cycles of expansion and contraction that bedevil the rest of us. In other words, being a doctor is low-beta and low-volatility. This is gives them an edge, if they would use it. Which they don’t. Laboratory Findings: The Fidelity study shows that many doctors do not max out their 401(k)s up to the annual $17,500 contribution limits. Of course Fidelity wants people to invest more money with them, so this might be seen as self-serving advice. Nevertheless, the point is well-taken. These are hundred dollar bills that doctors leave lying on the waiting room floor. Fidelity next compared the percentages that doctors invested in stocks with the allocation in the Fidelity target-date funds recommended for their age group. The idea behind target-date funds is that they start off investing aggressively when we are young and then pull back as we get older by gradually shifting the stock/bond mix. You might call them a reasonable first approximation of an optimum lifecycle investment. Ben Stein and I have written critically about this type of fund in Barron’s, but as far as financial products go they are one of the more benign offerings out there in investorland. Here’s the rub. Doctors are not like everybody else. They are low-beta and low-vol. They have very steady, high-paid work. This means they can afford to take more risk in their investment portfolios. The fact that they are getting a late start also points up this need. The Fidelity Freedom Fund for people in their 30s is allocated about 87% to stocks. Doctors this age should probably be all-in. In fact, they should be overweighting value and small company stocks that are even higher-beta than the stock market as a whole. Instead, Fidelity finds that 37% of physicians have less than 77% allocated to equities at this age. What? Am I advocating some kind of reckless thrill-ride to Hell? Not at all. We have to take into account the whole doctor, which includes not only his fledgling stock portfolio but also his imputed lifetime labor income, which is like a gigantic annuity. While an ordinary life-cycle investor might want to start tapering his or her 100% equity exposure by age 35, my guess is that a generic M.D. can keep his equity dial set on 100% until age 45 or even longer, provided he can steel himself to ignore the fluctuations (admittedly, a big ‘if’). If the doctor hits the jackpot at along the way, he should immediately scale back to a safe portfolio that can sustain him throughout retirement. Otherwise, as that happy valley draws near, he needs to start shepherding his portfolio more conservatively whether or not he has hit his magic number. With no labor income in front of him, to that extent he becomes just like any other retiree, and should be at about a 40/60 stock/bond portfolio by the time he gets within sight of the gates at Leisure World. If the doctor can work part-time in retirement, he can invest more aggressively if he so desires. Compared with the average Joe, Dr. Joe keeps his asset allocation higher in stocks for longer, and then has a steeper descent from stocks to bonds, until average Joe’s and Dr. Joe’s portfolios converge at 40/60 perhaps five years before they retire (because big losses in a big portfolio at this point will become very difficult to recoup once withdrawals begin). Yet what do we find? According to the Fidelity study, 42% of doctors age 60-64 have more than 64% equities in their portfolio. This is too aggressive. My guess is that five years in a bull market makes them feel like geniuses and so they want to let their chips ride for another spin of the wheel. Big mistake. Treatment Plan: The doctors’ investment decisions shown in the Fidelity study are not life-threatening but susceptible to improvement through diet, exercise, and a modest adjustment to the stock/bond allocation. With proper follow-through, the physician not only will be healed but well-heeled. Source
