So after this first round of finance Friday posts we’ve gone through the basic definitions and established general priorities. Now I want to step back and remind everyone of the philosophy.
Most, if not all of you, are young physicians or other highly educated young professionals. My investment philosophy is mostly tailored toward you because well, I am a young physician who went through the opportunity cost of 4 years of medical school and 6 years graduate medical education (GME). In that decade I learned a ton about my specialty of choice and how to be a good physician. I learned little if anything about being a good investor. So what did I do? I researched and I found the investment philosophy which makes the most sense to me:
I am a Boglehead, or at least a variation of one.
This investment philosophy is basically what John Bogle, the founder of Vanguard believes. It works for just about anyone, but I believe it is particularly well suited for young physicians. As physicians, as long as we keep our own spending in check we should have no problem maximizing our 401k/403b options even when contributing to a pension or a 457 plan. Still want to save even more? Backdoor Roth IRA and then a self-funded IRA would be the next steps on the hit list.
All the information about being a Boglehead is right there on the site. When/if you have time I would recommend you browse their wiki and their forums to educate yourself some more. Armed with the basic definitions I provided you in my previous post, you will understand the Boglehead mindset very quickly. However, I do realize you are a busy resident and wading through their forums and wiki would take awhile. So, if I was to summarize the Boglehead philosophy in one short phrase, it would be stay the course.
To provide an analogy:
Let’s say you are playing a variation of baseball. The rules are similar, but not 100% the same. There are no strikes or balls. There are no infielders or outfielders. It is just you, the batter, against the pitcher. The pitcher will pitch you the ball 26 times a year. You can decide to either swing for the hit or just watch it go by. Every ball that goes by is worth $1 and every ball you hit has a chance to be $2. But if you swing and miss it’s worth $0. Now, you can not control your ability to hit the ball and no amount of practice makes you able to hit the ball more consistently.
A) Watch all the balls go by and collect your $26?
B) Swing away and hope you make more than $26?
A Boglehead would immediately say “A”, lock in their $26 for the year, for the 30 years or so that they work, and then go fishing or something completely unrelated to investing.
Why? You could make way more than $26! Yes… But you could also make significantly less.
By the way… why 26? Well… I am assuming you will get paid bi-weekly, so an average of 26 paychecks a year.
Bogleheads don’t care about making significantly more or significantly less than anyone else in their investments.
Their investment philosophy is to simply track the market (with index funds), which over a long periods of time, will almost certainly outperform any actively managed fund. You can pretty safely assume 6-7% interest on your investments over a long period of time (30 years). Some years an actively managed fund may be a whopping 30% and some years it might make an abysmal-30%. An actively managed fund is a gamble that a particular fund can consistently outperform the market enough to offset their additional costs (higher expense ratios, loads, etc.)
I know what you’re thinking. But what if I am in my 29th year of work with plans to retire in my 30th year, and then suddenly the stock market crashes like it did in 2008? If you followed the Boglehead philosophy, by your 29th year of work you will have already re-balanced most, if not all, of your investments out of stocks and into bonds. So even if the stock market did crash, you most likely had approximately 70% bonds and 30% stocks at that point anyway and it wouldn’t really effect your retirement much. This is the “age in bonds” or “age-10” or “age-20” crude starting point that many people (like John Bogle) talk about.
As I stated above, as physicians we make enough money to maximize our retirement accounts as long as we keep our own spending in check… ie. we don’t need to swing, we’ve already won.
All of the posts for Finance Fridays will focus on setting you guys up for my “Simple Doctor Plan” post.
This will be a quick cheat sheet for what to do during graduate medical education and at your 1st job.
I am a Boglehead, or at least some variation of one.
Watch all the balls go by and collect your $26. You don’t need to swing, you’ve already won.
Stay tuned for my Simple Doctor Plan.
Agree? Disagree? Questions, Comments and Suggestions are welcome.
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