Doctors' Worst Investments Ever

Dennis G. Murray, MA

March 16, 2012

Introduction

You might have thought that investors had learned their lesson after losing money in the technology stock crash, when sizzling Internet companies and other high-fliers, such as Enron and WorldCom, saw their market value vaporize. It was easy for investors to get caught up in the hype back then, and physicians were no exception.

In recent years, however, many physicians have thumbed their noses at Wall Street, deciding instead to pull their money out of the stocks of faceless corporations and pour it into more tangible investments, such as local real estate and new ventures started by friends and colleagues.

However, in their haste to follow a well-intentioned tip that would fatten their investment accounts and possibly change their lives, some physicians have failed to do their homework, with painful and costly consequences.

We asked financial experts what sorts of poor investment choices their physician-clients have made, and what you can learn from them.

The "Can't Miss" Investment

In times of market turmoil, everyone seems to have an elixir -- a single investment that will revive a sagging portfolio. In many cases, the magic bullet is raw land, based on the argument that "no one's making any more of it." Although that logic is tough to contest, land is generally considered highly illiquid, meaning that it is not as easy to cash out on your investment in land as it is with, say, stocks or mutual funds.

One dermatologist learned that the hard way. She began purchasing large tracts of land near several ski towns out West, until their value made up one third of her entire investment portfolio. When the real estate market went south and she needed to raise cash to cover some debts, she was unable to sell any of the land without taking a sizable hit.

"We were forced to sell some rather promising stocks from her portfolio, at a loss," says her advisor, Matthew Kelley from Gold Medal Waters, a Boulder, Colorado, investment advisory firm. "It was a terrible time to have to sell." The dermatologist still owns all of the parcels of land some 10 years later, he adds.

Another physician-client called Kelley, ready to sink nearly $300,000 into DVD rental kiosks similar to those seen in many supermarkets, drugstores, and other high-traffic areas. Planned as a competitor to Redbox, an industry leader, the company charged investors upward of $50,000 per kiosk. The physician ordered 6 of them.

"There was no business plan, no financial statements for us to review," Kelley recalls. "[The physician] said he already owned one, and that it was 'breaking even.' Never mind that he wanted to put the new kiosks in small apartment buildings, some with as few as 10 residents. We tried to talk him out of it, but he wouldn't listen. Thankfully, the amount he spent didn't destroy or detail his retirement plan."

The lesson: Avoid investments that will not be easy to sell, especially if you expect you might need some cash in a hurry. As Kelley's dermatologist-client discovered, you might have to sell an otherwise good investment in a down market, increasing the pain of an already bad situation.