3 Essentials Physicians Need For a Successful Investment Portfolio

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Physicians face unique financial challenges throughout their lifetime. They’re high-earners with high amounts of debt and often lack the time to plan for the future. Because of this, implementing innovative investment strategies is critical to building a solid financial foundation — especially with big goals such as retiring early, opening your practice, or paying for a child’s college education.

But how can physicians establish intelligent investment strategies and build a portfolio for success? Below, we’ve identified three essentials every investment strategy should have, along with a few tips and tricks for physicians looking to improve their portfolios.

Essential #1: Diversification for Risk Management

You’ve likely heard the phrase, “Don’t put all your eggs in one basket.” It’s almost become a cliche, but for good reason. Diversification refers to varying (in other words, diversifying) the type of assets within your portfolio. It’s why investors don’t typically put all of their capital into one stock, no matter how popular.

Sure, you’d be a millionaire if you invested all your money into Apple when it first went public in 1980. But Apple’s explosive growth was never guaranteed. It would have been just as probable that the value of Apple’s stock would decline over time, and if that did happen, your portfolio would undoubtedly be in jeopardy. This is called being overconcentrated, and it creates unnecessary risk.

Diversification isn’t just about not investing too heavily in one company, as it’s possible to be overconcentrated in any asset type, sector, or geographic region. Your portfolio may lack diversity in today’s global economy if you only invest in U.S.-based securities. 

Diversification creates a natural cushion from market volatility. If one asset class (say stocks) experiences a downturn, your whole portfolio won’t suffer — only the portion invested in that asset class. But the other sectors, like bonds, cash equivalents, or alternative investments, may still be experiencing positive returns and cushioning the blow from poor performance elsewhere.

Diversification Strategies for Physicians

As a physician, creating an intentionally diverse portfolio is especially important. Your income sources are unlike traditional employees, meaning how much you make can fluctuate significantly based on your hospital system’s compensation structure. 

Therefore, you rely heavily on your portfolio’s long-term performance to achieve your goals. Without diversification, your portfolio takes on more risk than necessary, which could cause significant losses over time. But when you and your advisor develop an investment strategy incorporating diversification based on your unique tolerance for risk, you’re more able to weather potential storms and ride out poor performance without sacrificing your more significant goals.

Overconcentration comes in many forms. Since you’re well-versed in healthcare, perhaps you’ve been naturally drawn to investing in healthcare-related investments. As a result, your portfolio may have gradually grown overconcentrated in this sector. Or perhaps your spouse receives equity compensation from their employer. Again, they may now have too much employer stock in their portfolio, unintentionally adding more risk than necessary. 

Diversification isn’t a set-it-and-forget-it investment strategy. It must be consistently reevaluated over time and with your evolving life circumstances or goals.

Essential #2: Tax-Efficient Investing Strategies

Taxes are a necessary evil, but that doesn’t mean you can’t implement investment strategies that help minimize your tax liability. Nobody wants to pay a dollar more to the IRS than they have to. But not everyone knows how to reduce their tax obligation. It takes extensive research, time, and a deep understanding of tax law. For those reasons, many high earners work with an experienced tax or financial professional who can help them identify and implement these tax-minimizing strategies. 

Given your high-income status, tax depreciation is essential — especially if you’re on the cusp of the next tax bracket. A few thousand dollars could make the difference between paying a significantly higher (or lower) tax rate.

Different investment strategies and asset types will impose potential tax implications. If you sell a capital asset (such as a stock, bond, or piece of property), you will either earn capital gains or capital losses on that investment, which refers to the difference between how much you bought the investment and how much you sold it for. If you bought a stock at $100 a share and sold it for $300 a share, you’d earn capital gains of $200.

The IRS requires investors to pay tax on these capital gains (in the example above, you’d have to pay tax on the $200 gain). If the investment is held for less than a year, investors pay a short-term gains tax (which is taxed at their regular income tax rate). If the investment is held for longer than a year, they’ll pay long-term gains tax, which is typically a more favorable tax rate than short-term.

As all of this relates to tax-minimization strategies, one common strategy is holding on to investments for longer than a year to take advantage of the more favorable long-term capital gains tax rate.

Tax-Efficient Investing Techniques

The tax-minimization strategies you use will depend on your unique portfolio makeup. Your advisor can work with you to discuss specific options, such as tax-loss harvesting — a common strategy of selling some securities intentionally at a loss to offset the capital gains of other investments. Certain investment funds like index funds or ETFs will also offer tax advantages. Again, your advisor can discuss your greater financial picture with you.

In addition, tax-advantaged savings accounts can help lower your tax liability either now or later in retirement. If your hospital system offers a retirement savings plan, like a 401(k) or 403(b), you can automatically contribute pre-tax dollars to the account. This, in turn, lowers your taxable income for the year the contributions are made. However, once it’s time to withdraw from the accounts in retirement, you will be responsible for paying income tax on both the initial contributions and any growth within the accounts. 

On the other hand, Roth 401(k)s or Roth IRAs allow physicians to contribute post-tax dollars. While this doesn’t reduce your taxable income for the year contributions are made, it does mean tax-free retirement withdrawal on both the initial contributions and growth.

If you’re eligible to contribute to a health savings account (HSA) as a part of your High Deductible Health Plan (HDHP), these plans also offer triple tax benefits. Contributions are deducted from your taxable income, funds grow tax-free within the account, and withdrawals are tax-free (as long as they’re used for qualifying medical expenses).

Essential #3: Long-Term Focus and Goal Alignment

Few things are more personal to you than your portfolio. So, when you see headlines about market downturns or watch a portion of your portfolio take a hit, it can certainly be an anxiety-inducing experience. When managing your investments independently, it’s easy to let these emotions get the best of you and make impulsive, short-sighted decisions (like selling off impacted investments or buying the latest ‘hot stock’).

However, when your portfolio is calibrated by a financial professional and built to reflect your future goals, making impulsive decisions can create long-term negative consequences. Market downturns have always eventually recovered, meaning the stock market has historically maintained an upward trajectory. Pulling your money out of the market early because of short-term volatility locks in your losses and limits your ability to recover.

If you ever feel the urge to succumb to short-term market fluctuations, remember this Warren Buffet quote: “The stock market is a device for transferring money from the impatient to the patient.”

Long-Term Goals and Investment Planning

Rather than try to beat the market or grab the highest returns possible (which means taking on more risk than recommended), your portfolio reflects your personal financial goals, such as retiring comfortably, opening up your practice, or funding a child’s college education.

To ensure your portfolio stays on track through varying market conditions, you must review your progress regularly — ideally with a knowledgeable financial professional. Your goals may change over time, as well as your immediate financial needs. A financial planner can help you account for these changes within your portfolio and ensure it reflects your current needs and desires.

Ready to Work With a Trusted Financial Partner?

The world of investments may seem overwhelming at first glance, especially when considered alongside your complex financial landscape. But before making any changes to your portfolio, review these three investing essentials.

Your investment strategy consists of many factors, so careful planning is required. Our advisors here at Partners in Financial Planning can help you build and execute a tailored investment strategy that considers diversification, tax efficiency, and your long-term goals. We encourage you to prepare your portfolio to achieve your goals proactively and always seek professional guidance when needed.

Schedule an appointment today if you’d like to learn more about working with us.

About Us

Partners in Financial Planning provides tax-focused, comprehensive, fee-only financial planning and investment management services. With locations in Salem, Virginia and Charleston, South Carolina, our team is well-equipped to serve clients both locally and nationally with over 100 years of combined experience and knowledge in financial services.

To learn more, visit https://partnersinfinancialplanning.com

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