Planning for retirement may seem like a daunting task, but physicians who have a good understanding of the basic instruments of investing-stocks and bonds-need not worry.
Las Vegas-When it comes to planning for retirement, most physicians are put off by what they perceive as its complexity and turn the job over to a financial planner. That is a costly and avoidable error, however, said Gary S. Weinstein, MD, an oculoplastic surgeon and expert in retirement planning.
Dr. Weinstein, a contributor to the J.K. Lasser Pro Expert Financial Planning reference book, told attendees at the joint meeting of the American Academy of Ophthalmology and the Asia Pacific Academy of Ophthalmology here that by understanding the basics of financial planning, ophthalmologists-and anyone else-can save thousands of dollars and manage their own money as well as 90% of financial professionals.
"You can lose a lot of your net worth [in fees and other investing costs] very quickly if you're not careful," Dr. Weinstein said. "You have to appreciate that very small costs compound over time into very large costs. This is a business where, if you can make an extra percent a year, you can dramatically increase your retirement savings."
The first step in sound financial planning is to spend income prudently.
"Think net worth, don't think doctor lifestyle," Dr. Weinstein advised.
"You want to define success by your net worth, not the kind of car you drive or house you live in. You want to lead a good life, but you want to find a balance and make sure you have enough money to invest."
Building a sound portfolio also requires understanding the basic instruments of investing: stocks and bonds.
Stocks represent equity in a corporation. They are subdivided into classes such as growth or value; U.S. or international; and large, medium, or small capitalization.
Bonds are loans to a government or corporation that pay a fixed rate of return for their life span. Bonds can be either taxable or tax-free and come with varying degrees of risk. The higher the risk, the higher the rate of return.
In general, Dr. Weinstein said, investors should diversify across both individual securities and asset classes. The best way to do so is through indexing. Indexes are baskets of securities-either stocks or bonds-that investors can purchase. They can be exchange-traded funds or passively managed. Their advantages, Dr. Weinstein said, are low cost (usually less than 0.2% annually), reduced capital gains (which are taxed at a high rate), and diversification. Most importantly, over time indexes outperform 90% of money managers, he said.
"Indexing is the key to understanding how to cut your costs and diversify your portfolio so you can concentrate on practicing medicine and not worrying about the stock market all the time," Dr. Weinstein said.
Bond funds are useful for their liquidity and because fund managers have access to the highest-quality bonds. Dr. Weinstein recommended purchasing indexes of municipal funds with maturities of 5 to 7 years. "If you own long-term bonds, you're not getting rewarded for the risk you're taking on by holding them," he said.
Tailor your portfolio
When it comes time to begin designing a specific portfolio, Dr. Weinstein explained, several elements are important to keep in mind. Among these:
Risk-Standard deviation, or how much a security goes up and down. Investors can minimize overall risk by diversifying and adding small amounts of "non-correlating assets," such as gold or real estate, which respond to different market forces from stocks and bonds.
The "efficient market hypothesis"-All public and private information about a security is factored into its price. "The market knows basically what the asset is worth. Therefore, you should buy the market, and this supports the concept of indexing," Dr. Weinstein explained.
Minimizing fees-This can be done by not using stockbrokers and avoiding funds that charge "loads," or fees.