Why Smart Doctors and Dentists Make Dumb Investors

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Over the years, I've reviewed thousands of portfolios, and the worst I've seen were the ones held by doctors and dentists. That seemed odd to me. After all, these are highly intelligent professionals with big incomes. Why would they be such bad investors?%%DynaPub-Enhancement class="enhancement contentType-HTML Content fragmentId-1 payloadId-61603 alignment-right size-small"%%Preoccupation and overconfidence are two reasons. Doctors and dentists are busy people who don't have the time to focus on their investments. In addition, many of them believe that, since they are high achievers in their professions, they have the ability to select brokers and advisors who will leverage their savings and provide for their retirement.

However, the real culprit is something much more subtle: affinity marketing.

Financial planning firms target these specialists (and others) by focusing their efforts on their professions. There are advisory firms whose entire practices serve doctors or dentists. Some even have investments that are sold only to members of these professions.

It's a good marketing ploy. We all like to deal with people who "understand" us. Unfortunately, it can be a fatal mistake when making investing decisions.

Intelligent investing is the same for anyone, regardless of their occupation. It should focus on asset allocation and the use of low cost index funds to put together a globally diversified portfolio. It's not very complicated.

If you are a doctor or dentist (or any other smart investor), here are some warning signs to watch out for:

  • Have you been sold "alternative investments" like hedge funds or limited partnerships? More often than not, these investments benefit the promoters and operators at the expense of investors. They are also illiquid and have few of the safeguards of publicly traded mutual funds.
  • Are your investments structured in an offshore entity? Be wary -- this permits the promoters to avoid SEC scrutiny.
  • Do you know how much you would have to earn, after fees, to break-even on your investment? Few professionals do. It should not be more than 1.5%. I have seen limited partnerships where that number was in excess of 5%. This would mean that, in order for you to earn a 5% return, the investment would have to earn 10%.
  • Are the only other investors in an asset members of your profession? Why would you want to invest in something where all of the other investors are your colleagues? Instead, follow the really smart money, like large pension plans and trusts. I would rely on my doctor for a recommendation for another doctor. Her views on investment professionals would carry no weight.
  • Are your investments audited by one of the big four major accounting firms and subject to full SEC scrutiny? If not, look elsewhere.
  • Is the custodian or trustee of your investments fully independent and a household name, such as Fidelity, Charles Schwab or T.D. Ameritrade? If not, reconsider. Remember Bernard Madoff!
  • Does your advisor tell you he can "beat the markets"? All of the data indicates that he will most likely fall far short, and that you would be better off aiming for investments that capture market returns.
Advisors who "talk your talk" are often engaged in a marketing ploy designed to capture your assets -- and your money. Don't be fooled.
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