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SECTION E: MONEY



Note: This section is from The House Officer's Survival Guide: Rules, Laws, Lists and Other Medical Musings, by Lawrence Martin, M.D. Although originally written for doctors in training, this material has proven of interest to anyone starting out in a career or seeking basic advice about investing (please read disclaimer). A link is also provided to Dr. Martin's popular "Question of the Week" on Personal Finance (see above).
WHAT SHOULD YOU DO WITH YOUR MONEY is in 3 parts. By clicking on one of the links below you can go directly to any part, or to the bibliography or summary.



CONTENTS OF SECTION E
How Much Do Doctors Make?
What Should You Do With Your Money? Part 1
What Should You Do With Your Money? Part 2
What Should You Do With Your Money? Part 3
What to do With Your Money - Bibliography
Summary: Generic Investment Advice
Disclaimer


How Much Do Doctors Make?

Surveys of physician incomes, which often appear in the popular media, do not answer this question except in the broadest statistical sense, e.g., to show that, on average, primary care doctors (pediatricians, family medicine, internists), along with psychiatrists, earn less than medical specialists and surgeons. So what else is new? While this stratification of incomes seems consistent from year to year, the actual figures differ greatly among surveys. Such difference is probably due to variations in the way data are collected and reported. Unfortunately, surveys rarely state how the data were obtained, making them of little value to truly gauge doctors' incomes. (As example, in the year preceding publication of this book the "average" or "median" physician income was reported in three different places as $90,000, $120,000, and $150,000.)

Published reports of physician incomes present the following problems.

1) They tend to lump together physicians who work a wide range of hours, anywhere from 30 to 80+ per week, and who see a variable number of patients, anywhere from none to more than a hundred per week. In one report the average annual income among cardiovascular surgeons in the U.S. was listed as $270,000. Yet in a single city it is known that the range of annual income among CV surgeons is $175,000 to $1.5 million. Does the published U.S. average include all military, VA and academic cardiovascular surgeons? Does it include those surgeons doing research and operating perhaps once a week, as well as those who operate on patients daily? The surveys never say. Similarly, the income of "full-time" psychiatrists is published in one survey as $110,000, but in the same city it ranges from $50,000 to $380,000. The former salary is for a psychiatrist working in an outpatient mental health clinic 35 hours a week, which is considered full time; the latter is for a busy private practice psychiatrist who works more than 70 hours week, including providing mental health services to a large nursing home.

2) Published surveys don't take into account other sources of income that physicians generate by virtue of their M.D. degree, from ownership of medical equipment to writing to consulting work. For example, the mean salaries for academic physicians in internal medicine are $108,000 for assistant professors, $129,000 for associate professors and $153,000 for full professors (see NEJM 1996;334:184-6). However, these mean salaries do not include additional income common to academic physicians, such as speaking fees, writing royalties, work on legal cases, and visiting professorships. (Nor, of course, does the survey reveal how many hours a week the academic physicians actually work on their salaried job, as opposed to being away from the institution pursuing other remunerative activities.)

3) Published surveys don't take into account significant benefits available to some salaried physicians, e.g., health insurance, tuition rebates, employer pension contributions, etc. The value of tuition rebates for some medical school professors is as much as $25,000 a year. The value of health and other insurance benefits can easily top $10,000 a year, but these figures, like the tuition rebates, aren't included as income in any surveys.

4) National surveys usually don't take into account the specific location of practice. An internist in Manhattan will likely have much higher living expenses than one in Des Moines. As a result, an annual income of $150,000 will give much greater buying power to the Iowa doctor compared to the one in New York.

5) Finally, no survey can predict rapidly changing economic variables, including supply and demand of a particular specialty, trends in Medicare reimbursement, capitation arrangements, etc. Thus, not only are published incomes unreliable for determining who makes what, they may also have little predictive value. For example, current statistics may show that anesthesiologists average $200,000 and internists $120,000 a year, respectively, but on finishing your anesthesia training you may find no jobs for anesthesiologists but lots of opportunities for internists; in other words, the $200,000 figure is history, and for you might as well be zero. Another example: you could be ready to enter the practice of internal medicine but be unable to find a position in your city for more than $80,000 a year, with only small yearly increments in the future. The $120,000 figure is simply unrealistic for what you want where you want it.

So what's the point of all this? Three points, actually.

Physician incomes based on surveys are of value only in the broadest statistical sense. Don't allow these reports to unduly influence your career choice. While it is true that the lowest paid specialties have been, and are likely to remain, primary care and psychiatry, some non-primary care specialists are beginning to experience a major fall in income. If you want to know how much doctors in your specialty make, ask them directly. Ask the ones who do the work you plan to do, in the geographic area you plan to work. And remember: things can change. Yesterday's high-pay, in-demand specialist may not find a ready job market in the next few years. Enter a field you like, both in terms of life style and intellectual challenge, but be willing to relocate for the best opportunities. There will always be a demand for quality physicians, and they will always make a decent living. However, you must like what you are doing and have some flexibility about where you will do it. If you insist on being a high-priced specialist in an area with a surfeit of them, you will likely be disappointed economically and, perhaps, professionally as well. Now that I've told you "how much doctors make," read what to do with your money.


What Should You Do With Your Money? Part 1


What Should You Do With Your Money? Part 2
What Should You Do With Your Money? Part 3
What to do With Your Money - Bibliography
Summary: Generic Investment Advice
Disclaimer

What money, you say? Well, you may not have any loose change to spare right now, but soon you will be saving: for a home, for the kids' education, for retirement. And you will likely find everybody has some advice on "where to invest." Be careful. It's a minefield out there in investmentland.

You will likely receive some investment advice from friends and relatives, i.e., personal advice from people who don't stand to profit from what they tell you. Half of it will probably be good advice, and half will be bad, but you won't know which half is which.

Other advice you will receive can be called generic: intended for people in your demographic group (e.g., people between 25 and 35, about to embark on a career) but not for you personally. Generic advice is what you can read in any number of magazines, books (including this one), newsletters and financial advice columns, or hear on TV talk shows. Although not personal, generic advice is, surprisingly, often sound as long as the advisor is not trying to sell anything. (However, there are some egomaniacs in generic land, so be wary).

Generic advice is usually sound only because there aren't that many different categories of investors, and the type of advice given by mainstream publications for each category tends to be conservative; if you figure out what category you are in and you follow the generic advice for your group, chances are you will come out ahead. ("Category of investor" includes not just your age, but also how long you plan to leave your money invested and how much risk you are willing to take; more about that later.)

The third type of investment advice is what I call "personal and for profit." It is personal because the advisor is speaking directly to you (in person or by phone, less commonly by letter). It is for profit because the advice, if followed, will guarantee a profit to the advisor, not to you. Now if the advisor is truly divorced from selling you anything except advice (and this is a rare breed, despite all the hype about fee-only planners), and the advice giver is knowledgeable, experienced and level-headed, the advice may be sound and worthwhile. That's a lot of ifs.

Far, far, far more prevalent are personal advisors whose advice is heavily biased by the fact their advice generates a large commission. What you don't need at this stage of your life is biased advice; it is going to cost you more than you can imagine, and certainly more than the advisor will reveal. This large group of commission-based sales people includes:

  • insurance brokers (anyone who sells insurance)
  • stockbrockers or anyone with the name "account executive"
  • real estate agents
  • sellers of "tax shelters," no matter what their title
  • financial planners or financial consultants who wish to sell you anything but advice
  • commodities and precious metals salesmen
  • anyone who calls you on the phone, or solicits you in any other way, to sell any investment product

At the risk of opprobrium from this large group of advisors, brokers and financial planners, I will give some hard-earned generic advice. Understand that what you are about to read is really mainstream advice. It is what you yourself would ultimately learn on your own from reading the personal finance magazines (Money Magazine, Worth, Kiplinger Personal Finance, SmartMoney), personal finance sections of The Wall Street Journal or The New York Times or any large daily paper, or the books listed in the bibliography -- if you but had time to peruse these publications.

Unless and until you feel you are a sophisticated investor -- one who understands the differences between stocks and bonds, between no load, low load and high load mutual funds, between front-end, back-end and 12b-1 mutual fund fees, between small cap and big cap stocks, between interest-rate-sensitive and fixed- income investments, between dividends and capital gains, between universal and term life insurance, between fixed and variable annuities -- unless and until you understand these things, avoid like the plague anyone who wishes to sell you something "as an investment." Avoid them, run the other way, hide. TAKE YOUR MONEY AND RUN.

WOW! Why this seeming paranoia over people who want to sell you investments or give you advice about your money? Aren't these people smart? Don't they know more than you do? Can't they help you grow your money?

My answers: Yes. Yes. Probably not as well as you can accomplish on your own.

There are three explanations for my answer to the last question:

1) the "too good to be true" theory; 2) the "random walk" theory; and 3) the "cost factor" of any investment.

1) The "too good to be true" theory is just what it sounds like. If someone wants to sell you a "great" investment opportunity -- a stock that's bound to go up, a piece of real estate that will make you rich, or gold coins that will zoom in value, ask yourself one obvious yet simple question: WHY YOU? If it is such a great investment, why are they telling you about it?

If you knew of a great stock that was bound to go up, would you tell everyone, including strangers? Why would you pay for direct mail, newspaper, TV or radio advertising to tell people about your great idea? Would you hire people to make phone call after phone call to inform perfect strangers about your great investment knowledge? Why not just invest yourself and cash in? Why not, indeed? Well, perhaps the investment isn't so 'sure-fire' after all. This point may be obvious, but it is amazing how many millions of people fall for sucker scams every year, buying investments on hyped-up promises. Salesmen working in "boiler rooms" (so-called because they are sometimes window-less, stuffy basements), using nothing more than the telephone, bilk Americans out of billions of dollars yearly selling "great investments" that turn out to be anything but.

But the sales person doesn't have to hide out in a boiler room and the investment doesn't have to be phony. The pitch could come in the form of a direct mail solicitation asking you to buy precious information. Usually glossy and well-written, the solicitation screams out its message: "XYZ newsletter will help you to TRUE WEALTH! Send now for a No-Risk 1-Year Subscription!"; or, "The John Genius Stock Selection Method can't fail! Subscribe now for just 6 months and watch your wealth grow!"

These and similar solicitations are certainly intriguing, not least because they only ask you to buy information usually a subscription to a "can't fail" newsletter for anywhere from $50 to $500 a year. You will likely receive dozens of sophisticated direct mail ads over the next few years. What should you do? Re-read my advice in the box.

Hardest to ignore, perhaps, is solicitation from a broker, a flesh-and-blood person who works in a local office, most likely an agent of a national firm, who seems very knowledgeable. Perhaps this is even someone who has been recommended to you by other doctors. But ignore you must, unless and until you consider yourself a sophisticated investor. No matter what anyone tells you, no matter how fancy the title or large the company, the stock broker is only a salesman (or saleswoman) whose job is to sell, period. If they don't sell they don't earn a decent living (and if they continue not to sell they don't earn any living). Because their livelihood is based on commissions, their advice is (obviously) going to be biased.

If for one minute you believe that the stock broker has any other interest than to sell you commission-based products, that his or her job is anything other than to generate fees by selling products no matter what their merit, then you might as well put this book down and go read fiction. If, on the other hand, you understand this point, you are one step ahead, and on your way to making sound financial decisions.

By chance, some of the products the sales person may wish to sell you may be worthwhile, but not by chance, the majority will not be the best choice for you. For example, the broker may wish to unload a "dog" stock, one that the brokerage firm owns and that no one (knowledgeable) wants to buy; or a mutual fund so loaded with fees that only the broker can hope to profit; or a limited partnership that has about the same odds of success as winning in Las Vegas. Strictly speaking the investments won't be phony, but they may not be (likely won't be) in your best financial interest.

The point is the same, whether the solicitation is from a boiler room operative, a direct mail ad, or a recommended stock broker.

People push investments because the selling commissions are paid no matter how the investment performs.

The only reason you will be solicited for any investment is that the seller seeks a profit: either all at once from the selling commission; gradually, from very high expenses built into the investment; or in some less obvious way, such as driving up the price of a dismal stock by unloading it on naive people like you.

Wait a minute (you might say). What's wrong with the broker getting a commission? Or with the financial planner receiving a percentage of what he sells? After all, a doctor or lawyer gets paid for his/her advice, why shouldn't a broker or financial planner? Well, the differences are fundamental.

  • First, a patient consults a doctor or lawyer because, usually, there is no other way to access the information needed to manage the problem (medical or legal). But there are many ways for non-professionals to learn about investing and to buy excellent investments without paying unnecessary fees. It is simply not necessary to use any "middle man" to buy excellent, long term investments.

  • Second, the doctor and lawyer are professionals, with standards, exams, and state licensure. Not so for people who give financial advice. Yes, there are some training programs, and of course many knowledgeable and ethical advisors, but the plain fact is that anyone - repeat anyone - can call himself or herself a financial planner without an ounce of training, and solicit your business. You may be putting your life's investments into the hands of someone with no formal investment training, who may not even be a high school graduate. Yes, you can investigate these people, but there are so many smoke screens they can throw up that an earnest investigation simply isn't worth your time. (One example: some financial planners advertise themselves as "advice only," neglecting to mention that they are also "fee-based." Thus in addition to charging you by the hour they also sell financial service products on commission. You can bet their advice will be biased toward their expensive products.) Instead of investigating the advice givers, investigate the end products. Take the time to learn about sound investments you can make without involvement of an (unnecessary) middle man.

Certainly if the broker's or financial planner's commission meant better performance, their advice would be worth the added fees. But the broker's and financial planner's commission means, usually, worse returns, worse performance, than you can achieve yourself. The commission they receive means, almost invariably, high-priced investments that can be bought cheaper elsewhere. It just takes a little time to learn where and how.

It is a time-worn but true observation that most people spend a lot more time shopping for a car than they do researching an investment even though, ultimately, the investment will cost many times the price of any automobile. Unless you are willing to leave yourself at the mercy of someone who cares nothing about your money (except how to transfer it into their pockets), assume responsibility for your own investments.

2) The random walk theory states that someone who randomly picks stocks and holds on to them will do as well as someone who studies stocks and actively manages a portfolio, buying and trading "on knowledge." This observation is supported by many academic studies, including that of Nobel-Prize winning economist Dr. William Sharpe at Stanford University, who won the 1990 Prize in economics. It has been popularized by (among others) Burton Malkiel, a Yale Professor whose book A Random Walk Down Wall Street has gone through several editions since first published in the 1970s.

Still, economics being what it is (the "dismal science"), you can always find studies to prove anything. It is certainly possible to beat the market, and year after year a certain percentage of people do (though they are not the same people year after year). They have a mixture of luck and, invariably, hard work ferreting out sectors that will outperform.

The fact remains, most professional, highly paid money managers don't even match returns of the S&P 500 Index. In the period 1985-1998, the S&P 500 outperformed 80% of all actively managed stock funds. In 1998, 17.2% of actively managed general equity funds (excluding index and sector funds) outpaced the S&P 500. The only way this can happen is for most managed funds to do worse than the stock market average. Which is exactly what happens.

Above all, don't get yourself embroiled in any debate with someone trying to sell you an actively managed fund. He or she will likely be twisting the facts to suit his/her purpose, and you will just as likely come out on the short end if you invest. Just remember: the market-beaters you hear or read about are after the fact; there is no guarantee they will do as well in the year or years after you invest your money. If you choose to branch out into a non-index stock fund, do it because you have researched the fund and feel comfortable with your decision, not because someone sold it to you.

There are several reasons active managers by and large don't equal or beat the stock market averages. One is simply that everyone knows and trades on the same information. Thus it is almost impossible for a manager to learn more about stocks than the guy he wants to buy from or sell to. In the long run stocks go up when companies grow and boost earnings, and because stocks give a better overall return than prevailing fixed interest rates. During periods when interest rates are high, or company earnings fall, stocks go down.

There are of course day-to-day, month-to-month, or year-to-year aberrancies, and these aberrancies do give some managers transient opportunities to "beat the market." But, ultimately, since for every buyer there is a seller, and vice versa, it is highly unlikely that any manager can outsmart his colleagues year after year. Some very rich investors have lost a lot of money signing on with a "hot" money manager, one whose next feat was to under perform the market because of speculative investments.

Since everyone trades on the same information, then all other things being equal, over time one half of active managers should perform worse and one half better than the stock market average. So right off the bat chances are 50-50 that you will under perform the stock market by signing on with an active manager (i.e., buying an actively managed stock fund). But all other things obviously aren't equal, since more than 50% do worse than the market average.

Several factors work against active managers. One is that, being active traders, they often try to time the market, which means investing heavily when they think the market will go up, and pulling back when they think it will go down. But experience shows that such "market timers" usually under perform because they miss sudden, unexpected rallies in the market.

Another factor working against most active managers is that they try to divine which broad sectors are "hot" (e.g., technology, consumer goods, transportation) and shift money into them to catch the upswings. The problem is, sectors can turn on a dime, and no manager can continually guess the right trends.

But perhaps the most significant reason active managers usually under perform the market has to do with fees, the cost factor of any investment.

3) Every investment, no matter whether it is a certificate of deposit or a U.S. Savings Bond, carries costs. You must pay someone for handling the transaction, for printing the paper, for writing brochures, for storing the account information, etc. Banks are housed in expensive buildings, paid for by profits on depositors' accounts. Salesmen and brokers are also expensive to the companies who hire them, and these people can only survive by making large profits on what they sell. If you are a naive investor (only in the sense you haven't learned much about different types of investments), you are at the mercy of sales people, brokers, real estate agents and advertisers who know much more about what they are selling than you do. And these people will naturally seek to take advantage of your naivete to make a large profit. This happens all the time; it is not illegal, it is not evil, it is just a reality of the market place.

Now it stands to reason that the more money the sales person or broker or advisor makes, the less you, the investor, will make. If you invest $10,000 into a mutual fund with a 5% load, right away you are actually investing only $9500; you have to earn $500 just to break even.

If your investment earns 10% a year and the financial advisor keeps 1% as his fee, you will only clear 9%; if the advisor keeps 2%, you will only make 8%, etc. After several years these "small percentages" add up to very major dollars.

Fees are one major reason why most investors make less money investing with full service brokerage firms and financial planners (who all charge loads and/or high fees) than if their money simply tracked the stock market without the broker's commission (which is possible in an index fund). The large fees mean that the stocks or mutual funds have to out perform the market by a significant percentage in order to equal the market's return. And that is hard to do (see random walk theory, above).

But make no mistake. There are fees in no-load funds and other products sold by discount brokers, though seldom to the extent charged by full-service brokers and financial planners. The average actively managed stock mutual fund charges 1.35% of assets per year; the average actively managed taxable bond fund 0.97%. That's a charge of $135 and $97 per $10,000 invested per year, respectively. By contrast, a typical stock index fund (one that tracks the market) charges less than $50 per $10,000 invested (.50%) and some much less than that. (It should come as no surprise that full-service brokers don't sell true index funds. The fees such funds charge are simply too small to generate enough of a sales commission.)

Unless and until you feel yourself knowledgeable and sophisticated (i.e., know enough to speculate), don't buy any mutual fund with annual expenses larger than 1.35% (for a stock fund) or .97% (for a bond fund). The fees for all funds are listed in each fund's prospectus, and published on the internet in most cases. They are also published quarterly listings in the WSJ, and many other places. In other words, they are easy to find out, but first you have to ask.

High fees are also one reason any purchaser of life insurance as an investment comes out poorer than buying term life insurance and investing the difference on his own. The huge cost of buying insurance through a sales person guarantees not only much higher cost for the insurance than otherwise, but also a poorer rate of return when compared to an investment without the thick crust of fees.

So, what should you do? I will answer this question in Part 2.


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The material in this book is offered for education purposes only and should not be construed as offering advice for any specific individual or circumstance.

Copyright © 1996-1999 Lawrence Martin, M.D.
Revised: March 1999