CHAPTER 10

Start learning the basics of investing. It will save and earn you money.

On the topic of investing, there are many great books (and many completely insane books) on how to go about it. We know you’re short on time, so we’ll do our best to distill these concepts into a clear and digestible philosophy for you. Let’s call it “how to invest in things.”

Buy different kinds of things. Buy diverse things. Don’t buy risky or exotic things. If you’re young, buy aggressive things. As you get older, buy more conservative things. Don’t buy and sell often. Don’t sweat the market day in and day out. Don’t try to time the market. Don’t give your money away to fees and advisers. Know that risk and reward are inextricably linked.

For now, that’s really all you need to know! If you have the interest and patience to delve into these topics, by all means, you should. But the above advice will serve you well and keep things simple for you. Although there are many, many schools of thought on how to invest successfully, the average person, even a financially literate one, is not going to consistently beat the gains of the average market over time. Even managers of actively managed funds don’t consistently do this and they are literally studying the market as their full-time job. That’s why it’s best to keep things very simple.

To be slightly more specific, the simplest and best option for most residents is to buy index funds or targeted retirement funds. The important thing to know is this: with very little effort on your part, these kinds of investments allow you to diversify broadly, take on an appropriate level of risk for your age, keep your costs low and remove the pressure to tinker, buy and sell or try to time the market. In short, they cover the above philosophy and give you a sound and straightforward investing plan with just a few clicks.

There are basically only two things that you need to know about the investments you’re choosing.

How is the mutual fund managed? In general, mutual funds are either actively managed or passively managed. Actively managed funds tend to pay fund managers very high salaries (with your money) to attempt to beat the market. Almost all of the time, this doesn’t work and you’re stuck paying for some guy on Wall Street to vacation in the Hamptons with your money while you answer another consult at 3am. The alternative is a passively managed fund, which tends to pay the fund manager a relatively modest amount to invest in a set allocation, like the top 500 biggest companies in the US (the S&P 500), for example. Obviously, this takes a lot less time and money to execute this investing strategy (sometimes it’s even done by a computer), so you don’t pay the manager as much money.

So, which makes more sense? Attempting to beat the market by paying a premium for an actively managed mutual fund? Or settling with a boring passive fund? The passive fund, by a long shot. We get into this in great detail in Chapter 10 of our book Advanced Wallet Life Support: How to Resuscitate Your Finances (And Your Sanity) During Medical Training.

What does the mutual fund or ETF invest in? There are thousands of different options to choose from. You can find ones that invest in tech stocks, smaller-than-average companies, or cigarette companies. You probably don’t want these. You want a fund called an index fund. These funds invest in a broad “index”, such as the S&P 500 (the largest 500 companies in the US) or even the total US market (which invests in all publicly traded companies in the US). Index funds cost very little to own and on average make more money than investing in individual actively managed mutual funds (or even worse, trying to pick stocks!). Because these mirror the market as a whole, they tend to move in concert with the market. When the market goes up, your fund gets more money. Yes, when the market goes down, you will lose money, but over a long period of time, the market almost certainly will go up. Your money might not be entirely in the next Google, but it won’t be entirely in the next Enron either.

We have much more investing advice and information in Chapter 10 of our aforementioned book, Advanced Wallet Life Support: How to Resuscitate Your Finances (And Your Sanity) During Medical Training. (We’ve even created some portfolios for you to make it super easy to get started). But for now, we’ll leave you with this:

Do not pick stocks. You are a physician. You are not a stockbroker with a  PhD in Finance, sitting in London with a supercomputer calculating stock trades. That person gets paid $2 million a year to do their job (and, as discussed, even then isn’t always great at it). You are not going to be better than that person, so don’t try. You can do just fine with index funds and diversified investments with less associated risk.

Trying to pick stocks and time the market to make huge gains is essentially the same thing as gambling. You can sink a lot of time and effort into it and you can even develop a certain degree of skill at the game. But you are still just gambling. You could win big, you could lose big. If this notion still floats your boat, we recommend that you set aside a small portion of your investments (say, less than 5%) to play. Personally, however, we are more partial to blackjack.