Physicians: How to Convert Your High Income to Wealth

By Financial Advisor Carrie McDonnell

What physicians and other high income earners may know is that high income does not necessarily equate to wealth. Building wealth is different from earning a monthly salary - it involves sound and strategic investment decision-making over long periods of time. While high income earners do have great potential to become wealthy, those with demanding and time-consuming jobs may find it challenging to prioritize financial literacy specific to investing.

To be fair, the financial industry does not make it easy to be a successful investor ... the industry is riddled with subtle fees, generally lacks transparency and is not always designed to put clients’ interests first. For this reason, investors of all types can fall victim to high fee, low performing products and investments that undermine efforts to build wealth.

Beyond that, the study of behavioral finance tells us that human behavior is yet another hurdle to successful investing. As American journalist Jason Zweig puts it, “Investing isn’t about beating others at their game. It’s about controlling yourself at your own game.” When it comes to money, we humans tend to act emotionally and irrationally, despite our best efforts to make objective and data based decisions.¹

Investing Strategies for Physicians

In short, there are a lot of reasons high income earners, like physicians, fail to maximize asset growth. Thankfully, a little education (and related action!) can go a long way in changing the trajectory of your savings. Here are a few key strategies you can implement immediately:

1. Pay attention to the cost of advice: Working with a fiduciary financial advisor is often a great option, especially for busy physicians with significant cash inflow and outflow due to high salaries and medical school debt. However, no one can afford a financial advisor charging high fees. If an advisor is charging more than 1% a year, it’s too much. Those fees eat away at your returns and can significantly impact the value of your investments over time.
2. Pay attention to the cost of the funds you hold. Managed funds (like mutual funds) and passive funds (like ETFs) carry an annual fee called “expense ratio”. Generally speaking, ETF costs are much lower than mutual funds. Just like a high advising fee, high expense ratio fees can have a significant impact on your investments over time. See here. A simple google search of the fund name or ticker symbol can help you identify a fund’s expense ratio. Try to avoid funds that cost more than 0.3%. There are many great index ETFs that cost less than 0.1%.
3. Diversify your investments. Low cost index funds provide broad exposure to hundreds of companies. As John Bogle famously said, "Don't look for the needle in the haystack. Just buy the haystack!"
4. Keep your behavior in check. For one, stop watching the financial news - it is designed to trigger human emotions and can lead to poor decision making. Stop trying to predict or time the market. Looking at data going back to 1930, if an investor missed the S&P 500′s 10 best days per decade, total returns would be significantly lower than the return for investors who stayed the course.²

1. https://www.blackrock.com/lu/individual/education/behavioural-finance
2. https://www.cnbc.com/2021/03/24/this-chart-shows-why-investors-should-never-try-to-time-the-stock-market.html