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

Dennis Murray, MA

Disclosures

May 03, 2017

In This Article

Is It Knowledge or Luck?

2. Trying to Catch a Falling Knife

Nothing gets the juices flowing quite like chasing a "hot" investment. Plenty of doctors who responded to our survey did just that, only to get burned. Some lost a little, some lost a lot, but all of them bought when the price was too high and pretty much had nowhere to go but down.

  • "I invested in a dot.com mutual fund 2 months before the 'tech bubble' burst."

  • "I thought Martha Stewart [Living] stock would do great. It failed."

  • "We purchased stocks of companies that eventually went bankrupt."

  • "I bought a bunch of high-yield stocks that ended up doing badly for 2 years. I cashed out at 60% less than my initial investment."

  • "I traded options on the S&P 500. I expected the stock market to go down. Instead it went up."

Many investors take a bath on hot stocks because they fail to do their homework or otherwise heed warning signs to stay away. Overconfidence can come into play as well. Stepp remembers a cardiologist who made $75,000 on a single Internet stock, only to plow all of his profits back into the same stock after its price dropped by half. "He bought it back again—then rode it all the way to the bottom," Stepp says. "He thought it was skill the first time, not luck."

Even financially conservative doctors who don't chase hot investments, and who have done very well over the years, admit that they've laid an occasional egg. "I had a mutual fund that lost half its value before I sold it," one doctor confessed. Another said, "I waited too long to sell a declining stock," without elaborating on the extent of his losses. A particularly frustrated doctor recalled the pain of "too many stupid high-tech investments."

Matthew Kelley, president of Gold Medal Waters, a Colorado-based financial advisory firm, recalls a surgeon who came to him after a series of bad investments. "He had followed along with what a lot of his physician colleagues were doing," Kelley says. "As a result, when he got to us he was invested in two illiquid real estate deals, one triple-leveraged inverse ETF [exchange-traded fund] and a bunch of individual 'hot' stocks. After having lost a lot of his net worth, he admitted that he didn't know what he was doing and that he had followed the herd."

How to lessen your risk. Create a diversified portfolio that doesn't rely too heavily on a single class of investments. Then set targets for selling within each allocation; for instance, if foreign stocks are supposed to make up 10% of your portfolio, have a plan to sell some of them when their value exceeds 10% and reallocate those funds to an underperforming asset. You could do the same for individual stocks as well, selling after a rise of, say, 30%.

"Targets force you to reallocate from overperforming to underperforming classes—essentially buying low and selling high," Stepp explains. "And because you have a plan, it takes the emotion out of it."

3. Investing in Bricks and Mortar

Real estate has always held great appeal to doctors looking to diversify away from cash holdings, stocks, bonds, and mutual funds. Like start-ups, however, real estate can cause you to lose a bundle even if you take every step to make sure you don't. For instance, the declining value of a good house in a good neighborhood might be part of a general (or catastrophic) downturn in the real estate market, as lots of investors discovered in the past decade. In time, you might be stuck with something that can't cover its own costs, even if you're lucky enough to find good renters.

  • "I invested in real estate in Florida about 13 years ago. Then the bubble burst. Prices dropped."

  • "We bought a vacation home that's currently worth $350,000 less than we paid for it. But it's paid off, so we're making the best of it."

  • "Our beach condo gives us a lot of pleasure, but we'll be lucky to break even on it."

  • "I owned too much house early in my career and ended up losing money when I sold it."

  • "I purchased a lot that we later found out we can't build on. Now we can't sell it."

  • "We bought, then rented, a condo. The renter never paid us and it took 9 months to get him out. Eventually we sold it for a loss."

Despite the horror stories, many investors, including doctors, have made good money on real estate over the years. They took the time to understand their local market and bought when prices favored buyers, which enabled them to weather the dips.

Even if you do all of the right things upfront, there's no guarantee that you'll be able to sell when you want to or get the price you expect. For example, several doctors said they bought distressed properties, hoping to rehab and flip them, only to have the process take longer or cost more than they had expected.

"If you plan to flip, you probably won't do well until you learn the ropes," cautions Altfest. "Some doctors have told me, 'By the time I rehabbed my fourth or fifth house, I knew what I was doing and made $20,000.' Think of your time and what you get paid before you decide if it's worth the time and effort."

Finally, timeshares have proven to be an albatross for many doctors. "I hate it, I never use it, and I can't get rid of it," one frustrated respondent said of his timeshare. Altfest has heard this woe many a time. "Resale of vacation shares is notoriously difficult," she says.

How to lessen your risk. If you're looking to earn rental income, have someone review the deal, including the property's rental history, before you sign anything. Your accountant or financial planner should be able to do that for you. Also, if you own your medical building, there may be an opportunity to lease some of your space to another practice or a hospital system, ensuring a low-risk, steady stream of income. "We have some retired physician clients who are doing just that," Stepp says, "and it's working out really well for them."

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