When investing, it’s best to keep it simple. This blog piece will be ultra short for a reason. I don’t want you to complicate things or get bogged down with the mechanics. This is too important. Don’t overthink things.
When you first enter the profession, it is important you save a minimum of 15% of your pretax income. If you qualify for a Roth vehicle, do it. You will not pay tax on the withdrawals. Invest regularly and invest in ETFs. ETFs provide diversification and are far more cost-effective.
The S&P 500 index or a Total Stock Market index will do the trick. You have all heard that Warren Buffett has recommended to his heirs to invest in the S&P 500. I’d probably listen to him. The S&P 500 ETF with Vanguard has the ticker VOO. Expense ratio of 0.04% with a 10-year annualized return of 12.8%. The Total Stock Market Index has a ticker symbol VTI. Expense ratio 0.03% with a 10-year annualized return of 12%.
Rule of 72
72 divided by the interest rate yields how many years it takes for the investment to double. With these two ETFs, your investment will double every 6 years. Not bad! Remember, as a dental student, you have already lost 8 primary earning years with no savings compounding, so you lost 6.33 years of doubling. This timeframe represents one doubling in your compound interest life. You can’t afford to wait to begin saving until after your student loan debt is gone. I know too many dentists who delayed saving and are now working into their 70s. This is a tragedy. People are living longer today, so you will need to stay in the market longer. Inflation will not come down. Interest rates are normalizing at this higher rate.
Financial Services Industry / Money Managers: Elephants in the Room
You have the option of using a money manager rather than going it alone. The manager typically takes 1%-2% of net asset value, while the mutual fund company takes another 1%-2%. The retirement plan administrator also takes a cut. This 2%-4% going to the financial services industry absorbs as much as 50%-70% of your return. They put up zero capital, have zero risk, yet take a large portion of your return. These people generate great wealth managing your hard-earned dollars.
When I was mid-career, I was pitched by an accounting firm to place my company 401K with the money management arm of their company. I went into a room with an accountant and a couple of money managers. There were cameras in the room. The full-court press was on! I was told I would not have to pay for my accounting services if I allowed them to manage my 401K and retirement accounts. That gives you an idea of how much revenue they earned from managing money. I told them that I only wish I would have gone into that business.
CFP Professional
Use fee-only certified financial planners (CFPs). Pay them by the hour to map out a plan and go with low-cost index funds. Active managers can’t compete. I met with a large money manager who was pitching broad diversification among many asset classes. This was in the 2000s when the ten-year return for the S&P was zero. Money went in, fees went out while the market went down. Remember 2008-2012. Two of the principals of the investment company told me that because of this lost decade, they personally went all in. They were losing money in their diversified bucket. They were not making any return managing their money in the same way they were managing their clients’ money. They were not going to broadly invest across all asset classes like they were doing for their clients. They told me they decided to invest solely in the S&P 500 index. These two individuals were CFPs. They knew the returns. Don’t just listen to them. Look at what the pros are doing.
Several years ago, Congress tried to pass legislation requiring money managers to act in a fiduciary way. The client’s interest should come first. Makes sense. This common-sense legislation couldn’t survive the lobbying effort of the financial services industry. The law never passed. You really are on your own.
Visit the White Coat Investor website. They have a blog posted on January 21, 2020, titled “Best Investment Portfolios – 150 Better Portfolios Than Yours.”
Must Reads
- Don’t Count On It by John Bogle
- Your Money Ratios by Charles Farrell J.D. LL.M.
- Baker’s Dirty Dozen by Joe Baker
- The Lies About Money by Ric Edelman
Order them on Amazon. You have to educate yourself.
I am an Amazon affiliate and receive compensation from sales using the links above.
Please remember this is not investment advice. Everyone’s situation is unique. I hope this was helpful!