Top 10 Personal Finance Lessons Learned from Medical Training

We’re thrilled to have our friend Alexi from Miles Dividend M.D. guest posting today.  Alexi, who is more formally known as Dr. Alexi Zemsky, is an electrophysiologist (a heart doctor who specializes in abnormal rhythms), and he’s also one of the most interesting personal finance bloggers around!

He writes from the unique perspective of being a medical doctor who is focused on financial independence, early retirement, and maximizing travel rewards.

We strongly suggest you add Miles Dividend M.D. to your list of websites to visit on a regular basis!

Here’s Alexi’s post on the Top 10 lessons he’s learned from medical training that can help you in your journey towards financial independence:

It’s a huge honor to guest post on Richmondsavers.com

When I first discovered this blog (after Brad and Laura were featured on Million Mile Secrets), I was struck by how very similar our world views were.

With that in mind I thought it would be interesting to use this post to focus on a small way that our world views are slightly different, namely my being a doctor.

If you’re interested in passive investing, or in early retirement, you will undoubtedly find that doctors are disproportionately represented on forums like bogleheads.org.

Why is this? I can’t be sure, but that’s the question that I thought I would investigate further here.

So without further ado: The Top 10 lessons learned from medical training and practice which have helped me (and can help you) pursue financial independence.

Lesson 1: Delay your gratification:

When you decide to become a doctor, you’re essentially agreeing that you’re going to work very hard when you’re young, in exchange for a long career of personal fulfillment and financial stability.

You’re saying that you’re willing to study hard as an undergraduate in order to get into medical school.

You’re saying that you’ll study hard for four more years of medical school to get down the basics of human anatomy, physiology, and pathophysiology.

Then you’re saying that you’ll work long hours and low wages in training for a bare minimum of three more years, so that you will be exposed to as much as possible, before you’re on your own.

I’m in practice now, and I can say that from my perspective it was all completely worth it. I have zero regrets about becoming a doctor. Which is not to say that it wasn’t very hard.

The agreement to pursue early retirement, similarly requires one to forgo the immediate pleasure of purchasing things, for the delayed gratification of early financial independence.

A dollar saved and invested for 30 years is worth conservatively 1.8 times as much as a dollar spent today. And the more tax advantaged the savings, or the higher your income, the greater the relative value of your saved and invested money becomes.

So why not pay your dues upfront? You will be paid off in spades for your patience.

Lesson 2: Trust the evidence:

Modern medicine is based on the principles of “evidence-based medicine.”

The genesis of this philosophy was the CAST trial who’s hypothesis was that giving patients abnormal-rhythm-breaking-medications prophylactically after heart attacks, would save lives.

The idea was intuitive because the most common cause of death after heart attack is arrhythmia.

Interestingly, the idea was also dead wrong. The patients who received the rhythm control medications actually died at a greater rate than those who did not.

So without the study, a lot of well-meaning doctors would still be doing the wrong thing for their patients.

How does this pertain to financial planning?

Well, it is also intuitive to think that you should trust experts with your money. And that you should let them pick your stocks for you. And let them buy and sell them at the right time.

But there are a wealth of studies that have looked at active versus passive investing strategies. And the data is unequivocal.

Passive investing wins 60 to 70% of the time against it’s risk matched active competition. And even when the active funds win, they don’t win by enough to justify their lower odds of winning.

So pay attention to the data. It’s really not in question. You should invest your savings passively.

Lesson 3: Pay attention to risk:

To be a doctor is to be painfully aware of an unfortunate fact. Stuff happens.

Young people get rare diseases and die. Unexpected illnesses happen to healthy people and are devastating.

And the lesson is clear here. You should hedge your financial risk with insurance.

Insuring against low probability events is pretty cheap, so a term life insurance policy is probably a good idea if you have a family.

And if your current wealth is in the form your career’s future earnings, disability insurance might be something worth looking into.

Lesson 4: Avoid avoidable risk:

Although unexpectedly bad things do happen, bad things happen more frequently to people who take unnecessary risks.

Anyone who’s worked in the emergency room knows that motorcycle riders and gun owners are disproportionately victims of trauma.

And anyone who has worked on an oncology ward or coronary care unit knows that smokers are making a small down payment on a severe illness with each cigarette that they smoke.

When it comes to investment, unnecessary risk is called “uncompensated risk.” The best example of this is investing a lot of your portfolio in a single stock, (particularly your own companies stock,) as opposed to investing your portfolio in broad-based index funds.

The risk is that the company will do badly, and the risk is uncompensated because you don’t get any higher expected returns for your trouble.

The take home here is to avoid motorcycles, cigarettes, guns, and non-diversified portfolios whenever possible.

Lesson 5: Read!

Medicine is an ever evolving body of knowledge that waits for no one.

I had 20/15 vision before starting medical school, but after my first year I was wearing glasses. I wore my eyes out with books!

At first, medical students drink from the firehose of knowledge by reading textbooks.

But even in practice one must continue to read journals to keep up with the ever changing science of medicine.

With investments it is also crucial that you develop your own philosophy before jumping in.

Why? Because the world is a jumble of useless (or even harmful) information when it comes to investing. People who change their philosophy based on what they’ve heard lately are doomed to buy high and sell low.

Better to read a minimum of three or four good investing books and settle on your own philosophy that will be able to withstand the test of bear markets. Your self education will act as your armor against your own irrational impulses later.

Lesson 6: Sales people are a poor resource for advice:

As an electrophysiology physician, I routinely implant devices that cost north of $18,000 each.

Medical device companies sales people are only too happy to provide me “helpful” information about evolving evidence in my field.

But our interests are not aligned. The sales people want me to use more of their own product, and I want to use the best (and most cost-effective) product for each individual patient.

Similarly, if you decide that you need help with your investments, you should seek out a fee-only financial advisor who is kept to a fiduciary standard. These advisers charge you a set fee regardless of what investments you choose and are bound to give you advice tailored to your own needs, not theirs.

Commission based advisors on the other hand get paid variably depending on what investments you choose. So their incentive is usually to steer you towards the most expensive funds that will give them the highest commission. Talk about misaligned interests….

Lesson 7: Become aware of the power of small changes over time:

My patients often come to me in a health crisis. They wake up one morning with a dangerous arrhythmia and want it fixed.

But the arrhythmia is often just a manifestation of a deeper problem.

Perhaps they have over eaten for 40 years and are now morbidly obese with sleep apnea.

Or maybe 10 to 40 times per day for the last 40 years they’ve chosen to smoke a cigarette and now have a scar in their heart that is irreversible.

Over eating once or twice almost never causes a problem.

Having a single cigarette rarely causes disease.

But small, bad decisions repeated over and over again over long periods of time have the ability to cause profound and irreversible damage.

Similarly, small changes in expense ratios in the funds that you invest in can have profound effects on your ability to accumulate wealth.

As an example did you know that a 1% increase in the expense ratio of a total market fund over 40 years will cost you one third of the eventual value of your investment?

Lesson 8: Remember that happiness is not necessarily associated with great wealth:

One of the great things about medicine is that it is very democratic.

Illness affects rich and poor, black-and-white, Old and young.

So I get to spend time with all different types of people, and I’ve seen that happiness is not strictly a function of wealth.

To be sure being very poor creates great stress and costs happiness, but past a certain point, more money simply does not create more happiness.

More important, it seems, is developing meaningful relationships with other people, and having diverse interests, a sense of humor, and a sense of purpose.

The financial lesson?

Don’t waste your happiness trying to accumulate great wealth. Figure out what you need, and what truly increases your happiness and focus on that.

This will give you more time to concentrate your efforts on what’s truly important; living a full, meaningful, and happy life.

Lesson 9: Give yourself room to grow in all directions:

One of the best parts about being a doctor is talking to patients about their unique lives.

One thing that I’ve noticed is that my patients who appear to be happy tend to be the patients who can talk to me for a long time about their interests. Whether it be gardening, taking care of their animals, cooking, or an academic pursuit, they’re passionate about it, and they want to share.

The point I would make here about financial planning, is that if you don’t enjoy the minutiae of investment theory, that’s okay. You should just keep it simple, Invest in a basic portfolio, and rebalance it once a year.

Here is a Bogleheads wiki with several lazy portfolios to choose from.  (http://www.bogleheads.org/wiki/Lazy_portfolios)
You’ll still outperform most stock pickers, and you’ll have plenty of time left to pursue your true interests, whatever they may be.

Lesson 10: Keep your eye out for Zebras:

In medicine 99% of what you see is bread-and-butter. But once in a while a strange presentation of a rare disease (A zebra in the midst of a pack of horses) will show up on your doorstep masquerading as another run-of-the-mill case.

If your antennae are not up, it is easy to miss the diagnosis, to the detriment of your patient.

Similarly in financial planning it is important to keep in mind that we are rewarded for taking risk.

And risk tends to show up in exotic ways. Be it 9/11, an Internet bubble, A housing bubble, or a world war,  stock market crashes are by their nature unexpected.

But we must plan our portfolio as if exotic disasters are forever around the corner (because they are.)

This means you must determine your portfolio’s appropriate percentage of bonds/CDs/cash and stick to it, even when the stock market is ripping, as it was last year.

So there you have it, 10 lessons learned from four years of medical school, seven years of specialized training, and 4 1/2 years in practice.

I can only hope that my years of training and your minutes of reading, were both time well spent.

May your health be good, and your financial reserves forever sufficient.