After trusting a lot of the wrong people, emergency physician James M. Dahle learned the hard way that smart investing starts with following the money.
"Once you understand how everyone else gets paid, the whole system starts to make sense," he says.
In general, James says that doctors like him save too little, buy too much house, rush into employment contracts rather than seeking an ownership position, get bad financial advice from commissioned salesmen who are usually peddling loaded mutual funds or whole life insurance, pay too much for good advice, and have disorganized investing plans.
To help his colleagues, James started The White Coat Investor, a blog that offers doctors and other high-income professionals advice on personal finance and investing. He recently checked in with us to share some of the smartest money management tips he's learned over the years. Here's what he had to say:
Can you tell us the story behind The White Coat Investor?
I became interested in learning about personal finance and investing after getting ripped off repeatedly by financial professionals including realtors, lenders, appraisers, financial advisors and insurance agents. I realized if I never learned this stuff myself I would continue to lose money to "Wall Street." So I started learning everything I could from books, websites and online forums. Basically anything I could get my hands on. I actually started reading the academic investing literature. After a while, I realized I was spending more time helping other docs than I was learning.
Then I realized that most physicians have no idea how the financial world works since we receive no training on this in medical school and residency. So instead of typing the same stuff in over and over again into online forums, I decided to start the site so I could just post a link. Since I started it in May 2011, it has grown into the most widely read physician-specific personal finance and investing website in the world. The truth is that 95 percent of it is applicable to anybody, especially other high-income professionals.
You work as an emergency physician. How did you become interested in personal finance?
One thing about emergency medicine is you mostly work in the evenings, nights, weekends and holidays. So that leaves me weekday mornings with nothing to do since my kids are at school, my wife is busy, and my friends are at work. You can only mountain bike and ski so much, so I use that time to do The White Coat Investor.
In what areas of money management do you think medical students, residents and doctors struggle the most?
The hardest thing for most doctors is to manage the jump from a resident salary to an attending salary. They think it is a bigger jump than it really is and rapidly grow into their new income. If they would just live like a resident for two to five years after residency, they could pay off all their loans, save up a down payment for their dream house and jump-start their retirement savings, allowing them to practice medicine on their own terms or even retire early if they start to hate it.
Doctors are also entirely too trusting of financial professionals. We assume that other "professions" have similar training and ethics. Unfortunately, that usually isn't the case. Many "financial advisors" have little to no actual financial training. All their training is in sales.
What have been some of your go-to resources for learning about personal finance?
The library is a far better source of information than anything on TV.
I keep a list of recommended books on my website. Good investment information is surprisingly timeless. Nothing wrong with reading a five-year-old book; the world just doesn't change that fast.
Most Internet forums and blogs are terrible, but there are a few good ones out there. The Bogleheads forum is probably the best as far as investment information. BiggerPockets has a lot of good stuff on real estate investing. The Fairmark forum is smaller, but very good for tax issues.
What advice do you have for finding a reliable, trustworthy financial advisor? What questions should we make sure to ask?
How do you get paid and how much do you get paid are probably the best place to start.
The best advisors tend to put that information in an easily accessible location on their websites. You want a low-cost, fee-only advisor who will sign a fiduciary agreement with you. That ensures he will do what is right for you, even if it costs him money. Your advisor should also have a good understanding of the academic investing literature, which means most of his (and your) money should be invested in low-cost passively managed mutual funds. The real bang for the buck in financial advice is in the financial planning piece rather than the investment management.
What are your favorite types of investments?
I prefer that investors use a broadly diversified but fixed asset allocation of low-cost, passively managed equity and fixed income mutual funds, rebalanced periodically. I'm also a big fan of real estate, although it is much tougher to keep that low-cost and passively managed.
What types of investments do you steer clear of?
I'm not a big fan of precious metals, hedge funds, and mixing insurance and investing in annuities and cash value life insurance.
Why is insurance an important component of shoring up your finances?
The most valuable asset most people have, especially a highly educated, high-income professional like a physician, is her ability to earn money. That needs to be protected with large quantities of disability and, if anyone else depends on that income, term life insurance, at least until you become financially independent.
Protection from lawsuits using malpractice and umbrella insurance is also important, as is health insurance. But in general, I favor high deductibles, low premiums and self-insuring with an emergency fund whenever possible. You don't need to insure your iPhone. Just insure against true financial catastrophes.
What advice do you have on shopping for insurance?
Buy your insurance from an independent agent who can sell you the best insurance for you, no matter what company's policy it may be. Remember how the agent gets paid, though. The more insurance you buy, and the more bells and whistles on the insurance, the larger his commission. While it is OK to listen to the agent's recommendations, you should have a pretty good idea of what you want and about what a good price for that is when you walk in the door, especially with life insurance.
Check out The White Coat Investor for more information and advice!