Doctors' 5 Most Frequent Investing Mistakes—and How to Avoid Them

Dennis Murray, MA

Disclosures

May 03, 2017

In This Article

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."

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