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

Dennis Murray, MA

Disclosures

May 03, 2017

In This Article

Don't Assume That Medical Ventures Are a Sure Thing

4. Partnering With Fellow Doctors

This is a twist on the start-up theme, except that the investing stays largely within the medical community. The thought here is: Who better to evaluate medical technology or a medical venture than the folks who will actually be involved with it on a day-to-day basis? While that approach has some merit, it tends to blow up when the prospective investors—largely doctors, in this case—fail to do their due diligence, including whether the project, device, or therapy is feasible and whether there's room for it in the current marketplace. It might be a great idea but is doomed to get crushed by the competition.

  • "I put $250,000 into an idea to start an HMO and lost it all."

  • "I invested in a health insurance organization run by doctors, which was supposed to be more ethical than insurance companies. I lost every cent!"

  • "The patent holder died, and the company dissolved with no return."

  • "The surgery center I invested in hasn't made any money over 9 years. Technically, I haven't lost any money, but neither do I expect to make any money or get back my original investment."

  • We invested in a treatment that insurance companies wouldn't reimburse for."

  • "My partner screwed me."

One respondent recalled how he had invested in a new surgery center that "went broke almost immediately," leaving him owing $200,000 on equipment worth $40,000. Several other physicians said they sank money into unprofitable hospitals that later went bankrupt. Another doctor mentioned a "laser clinic" that bombed.

Medical devices that never panned out were also a common lament among respondents. "The company had a defective product and got sued," one doctor complained. Another respondent said of the device he invested in, "We never got a patent." Likewise, other products never got to market and took the hard-earned dollars of their investors with them.

How to lessen your risk. Do your homework, including asking your financial adviser to speak with the principals directly. Your adviser's impartial approach can help you gauge the likelihood of the project succeeding—before you hand over any money.

Once you've agreed to invest, "stay involved!" Stepp insists. "Ask for updates if it's a new technology, or for financial reports if it's an established business, which you should then ask your financial adviser or accountant to review."

Despite the respondents to our survey who reported being burned on surgery centers, some doctors—at least in the Midwest—have done extremely well with them. "They're straightforward: easy for us to understand, and easy for the doctors to understand," says Stepp. "There might be a 'bubble' in surgery centers at some point, but right now they're cash cows."

5. Gambling on a 'Can't-Miss' Investment

There's an old saying among seasoned investors along the lines of, "If you want to gamble, go to Vegas." The problem is, many doctors and other investors wind up wearing blinders when the lure of easy money is dangling in front of them. The pitch sounds legitimate enough, but that's all it is—a pitch, and sometimes a criminal one at that.

  • "I invested in a company that was going to have free-standing imaging centers and it was a total scam."

  • "I was talked into a foreign-exchange money market fund that turned out to be a Ponzi scheme."

  • "I bought cattle. They were stolen."

  • "Wine futures... I lost big-time on those!"

  • "We invested in a real estate limited partnership that turned out to be a scam."

In addition, dozens of respondents reported losing money on "low risk" oil and gas partnerships, complaining of dry wells, fluctuating prices, and corrupt ownership, among other woes. While some investors have enjoyed good returns in these partnerships, they require a great deal of research before committing any money to them.

Doctors have also been given the hard sell on life insurance policies as "sure thing" investments, particularly whole life policies. Several physicians reported that they had lost money on such policies or paid high premiums to maintain the coverage and/or penalties to cancel it. One MD said that he had purchased expensive whole life insurance for his kids, which, if it isn't an outright scam, is awfully close.

"We had a physician who was about to sink a very large chunk of his money into an insurance policy that was being touted as an investment," Kelley recalls. "When we evaluated his current insurance coverage and his existing insurance needs, we learned that this 'investment' wasn't warranted."

How to lessen your risk. Lean on your advisers—hard. "Anyone can come up with a slick offering memorandum," Stepp warns. "Let your accountant or financial adviser—even a friend or relative who works in corporate and understands balance sheets and financial statements—take a look at the documents before you invest." An in-person meeting between the principals and your investment adviser is also wise, Altfest adds.

Trust your gut, too. The old saying "If it sounds too good to be true, it probably is" has saved the bacon of many investors over the years. So don't ignore that inner voice if it starts whispering in your ear.

Conclusion

Plenty of doctors have failed to look before they leapt into any number of investments that, unfortunately, went south. "Doctors who can't make ends meet sometimes make poor choices out of desperation," Altfest says. "We know many physicians who lived like rock stars when they were younger and are still financially stretched in their later years."

Even financial planners and wealth managers make mistakes, but that doesn't mean you should disregard everything these professionals say. They can save you from yourself by helping you to take the emotion out of an investment decision while contributing their wealth of experience and business acumen. If you have any doubts before handing your money over to someone—and even if you think you have no doubt—your financial adviser is the person to call first.

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