The single best book on investing
Unfortunately, physicians are viewed by financial professionals to be easy targets. Despite all the years of education and training, little time is spent learning even the most basic personal finance concepts. For this reason, wealth managers see physicians as individuals that can be easily exploited. Physicians are particularly attractive because of their relatively high incomes. I was completely clueless when it came to personal finance and investing throughout most of my time in medical school. During my fourth year, I decided to make a change in my life and I started educating myself on all things personal finance and investing. It was during this year that I read John Bogle’s The Little Book of Common Sense Investing. This book completely changed my view on investing, and is literally worth millions of dollars in the form of future stock market returns. Here are the main takeaways:
Bogle argues that investing in low cost index funds is the most prudent way that an individual can buy into the stock market. The index fund is designed to mimic the performance of the overall United States stock market. By investing in index funds, individuals are able to capture 100% of the stock market’s returns. As opposed to mutual funds, index funds are much lower in fees and are not actively managed. For this reason, they are much cheaper.
Over the long term, index funds have consistently outperformed even the most successful of mutual funds. The reality is, mutual fund managers cannot consistently pick winning stocks. It is much safer to invest in the entire stock market in the form of index funds.
You will be more successful in investing by focusing on minimizing fees rather than picking the “winning funds.” The costs of mutual funds and portfolio managers really add up. A lot of portfolio managers charge 1% to manage investments. One might think: “Wow, only 1%? That’s nothing!.” Think again. 1% compounded over many years actually can become hundreds of thousands of dollars in fees. Mutual funds have similarly high fees that add up as well. Better to invest in an index fund that is both low fee and much more likely to outperform the portfolio manager or average mutual fund.
The stock market itself is just a giant distraction. The stock market focuses on speculation and investor expectations. Yes, there are people like Warren Buffett who have profited immensely off the stock market. But, Buffett is the Michael Jordan of investing. It is very difficult to pick winning stocks consistently. As we have seen during the coronavirus pandemic, the future is nearly impossible to predict and major events can completely derail an individual investor (think of those highly invested in airline companies). Warren Buffet himself is a major proponent of index funds. Buffett made a bet with a group of hedge fund managers whether they could not outperform an S&P index fund over 10 years. Guess who won?
Take the advice of financial advisors with a grain of salt. It is in their interest to manage your money for that 1% commission. As a physician, you’ll have a high income and thus that 1% could be quite substantial. In the words of Bogle, “if an advisor promises to find a fund that beats an index fund, he or she is lying.” It is in your best interest to invest in index funds on your own. By doing this, you’re eliminating middle men and saving yourself thousands of dollars in fees. You’re also guaranteeing returns that’ll outperform nearly every single mutual fund manager over the long term.
Long story short, invest in index funds! You won’t regret it and will save hundreds of thousands in fees over your many years of investing. I highly recommend Bogle’s book if you’d like to learn more. The best thing you can do, regardless of where you are in your training, is to learn personal finance. It is much easier than medicine. That, I can promise you.