Investing passively in the stock market via broadly diversified, low cost index funds outperforms active investing strategies involving timing the stock market or stock picking. That much really should not be up for debate. However, we cannot totally discount the active investment decisions in any investing strategy, even passive ones like I use.
Evaluating Passive Real Estate Partners
This recorded session breaks down how passive real estate has evolved from single asset risk into diversified fund structures, and why structure, alignment, and discipline matter more than headline returns.
It is designed for physicians and professionals who want to evaluate the people running the investment, not just the outcome they advertise.
I credit a friend of mine, Brett Janis, who is also a financial advisor for bringing this concept up to me. We would argue all the time about active versus passive investing. While he similarly lamented most active investing strategies, he argues that we actively make investing decisions all the time that impact our investment outcomes. Even when we think we are investing totally passively.
And you know what? I think he is right.
Even when we invest passively via index funds, we still make several active and highly impactful decisions. So, even though passive investing is largely hands-on, it is not completely so.
Let's examine the 5 most impactful active investment decisions we make even when we invest passively.
5 Active Decisions Physician Investors Are Making (Even When You Invest Passively)
1. Choosing an Overall Asset Allocation
Asset allocation, specifically how you divide your portfolio between stocks and bonds (and maybe real estate), is one of the most powerful determinants of your long-term investment success. Bonds are the “ballast” that keeps your portfolio stable during market turbulence, while stocks carry growth potential.
Your ideal mix depends on three core factors: your risk tolerance, your time horizon, and your need for diversification. For example, a younger investor with decades before retirement may lean heavily toward stocks for growth. Meanwhile, someone nearing retirement might shift toward bonds to preserve capital and dampen volatility.
There are also considerations unique to physicians including late career starts, higher income, burnout risk, and an active malpractice environment. We need to balance these factors along with the ones listed above to determine what we want our asset allocation to be.
Importantly, once you determine your target allocation, the best approach is simple consistency. Stick to your plan and resist gut-driven timing moves based on market fads.
Ultimately, asset allocation is not a one-time decision. It's the foundation that shapes your portfolio’s performance, stability, and resilience over decades.
My asset allocation between stocks and bonds is 90/10. Other common approaches depending on your individualized circumstances are 70/30, 80/20, and 60/40.
Your asset allocation is the most important active decision we make that will significantly impact our investment outcomes. This guide can help you create yours.
2. Selecting Asset Location for Tax Efficiency
Even when we invest in index funds, we have to actively decide where we place those investments. As investors, we have at our disposal a bunch of tax advantaged accounts that work to reduce the tax impact of the investments held within.
These broadly divide into pre-tax accounts (401k, 403b, 457b, traditional IRAs) and tax-free accounts (Roth IRA, Roth 401k, Roth 403, basically anything Roth). Pre-tax accounts allow you to contribute money without being taxed. The investments then grow and are taxed upon withdrawal. Tax-free accounts are the opposite. The money you contribute gets taxed up front but then is never taxed again. Here is a full guide to all investment accounts.
These are in comparison to a taxable investment account where you pay taxes (via income tax) on money contributed as well as more taxes upon withdrawal (via capital gains taxes).
The first way that asset location actively impacts your investment returns lies in the decision to maximize tax advantaged accounts before investing in a taxable account. This is obvious. Why pay more in taxes than you need to?
Secondly, however, once you start investing in a taxable account (which all doctors will if they have an appropriate savings rate), your asset location can impact investment outcomes in another way. Some investment types are more or less tax friendly. For instance, traditional bonds and REITs are tax inefficient. Municipal bonds, on the other hand, are very tax efficient. By making the decision to preferentially place tax inefficient passive investments in your tax advantaged accounts and tax efficient investments in your taxable account, you can minimize tax drag and optimize your investment returns.
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• The money shows up right away in PayPal or gift cards.
• It’s by far the easiest side income I’ve come across and one I actually use.
3. Choosing When and How to Rebalance
Rebalancing means periodically adjusting your portfolio to restore your original asset allocation. So, if your chosen allocation is 70% stocks and 30% bonds, your goal long term is to keep it at that chosen ratio. But, because different asset classes (like stocks and bonds) tend to perform unevenly over time, a once-balanced portfolio can drift into an unintended allocation and, by extension, risk profile. The answer is to rebalance back to your chosen allocation by either contributing more money in a distribution that restores the intended allocation or selling a bit of what has outgrown its share (“sell high”) and buying what has lagged (“buy low”).
Thus, by rebalancing, you:
- Maintain your desired risk-return balance,
- Avoid overexposure to overly-hot assets,
- Stay diversified, and
- Follow a disciplined “buy low, sell high” strategy without trying to time the market
The result: a steadier path toward long-term financial goals with less emotional decision-making.
The question though is when and how often to rebalance. Doing so too frequently could result in higher fees and taxes. Doing so too infrequently could result in an off kilter risk tolerance. These decisions can have a significant impact on returns.
The two most common approaches are calendar-based vs. threshold-based rebalancing. In a calendar-based approach, you rebalance at a set date, usually once or twice a year. With a threshold-based strategy, you rebalance any time an allocation percentage reaches a certain threshold above or below its chosen value. For instance, rebalancing any time your stock or bond allocation is 25% higher or lower than desired.
Personally, I use a calendar-based, once a year rebalancing approach.
4. Determining Contribution Rates and Savings Strategy
Especially early on in your investing career, the amount of money that you save and invest will be the most important decision and determinant of your investing success long term.
Creating an adequate savings rate starts with deciding what portion of your gross income you will set aside regularly, not just what’s “left over.” For many physicians, a baseline savings-rate goal of 20% of pre-tax income provides a strong foundation for future financial security.
From there, you can accelerate toward bigger goals: paying down debt, funding retirement, building real-estate investments, or growing a nest egg for early retirement. The beauty of a consistent savings rate is that it's a lever you control directly. It often has a far greater impact on long-term wealth than small differences in investment return.
While a 20% savings rate is a good rule of thumb for doctors, your personalized decision needs to be based on how long you want to work before retirement, the lifestyle you desire in retirement, as well as your other life goals. For instance, if you are starting out investing later in your career, a higher than average savings rate becomes a key cog in your retirement wheel.
Once you determine your savings rate, it's important to automate the process of putting your savings rate to use. This means automatic withdrawals from your bank to pay your debts and invest in your retirement accounts.
5. Deciding Which Index Funds to Use
Ok, so you are going to invest passively via index funds, which has been shown to outperform active strategies like stock picking and timing the market…Great!
But which index funds are you going to choose?
Your asset allocation will help you determine this in some regard as you will invest a certain percentage in stock index funds and a corresponding percentage in bond index funds. But still, which ones?
The key is to decide which index you want to mirror with your investments and finding an index fund that does a good job of actually mirroring that index. Do you want to mirror the entire US stock market? If so, VTSAX is a great index fund for you. Or would you like to mirror the S&P 500 index? Then, VOO is the index fund for you. You also want to make sure that the index fund you choose is actually low cost with a minimal expense ratio and is an actual index fund with a low turnover rate (not an active fund pretending to be a passive one). Morningstar is a great resource for this research.
You can even get more into the weeds and decide to have a portion of your allocation go towards small value stocks in a corresponding index fund, for instance. The key however, is to avoid adding unnecessary complexity by slicing and dicing into a ton of different funds.
• I’ve found I can use my medical expertise to earn money in less than 10 minutes.
• During downtime, I knock out quick surveys and get paid for it.
• The money shows up right away in PayPal or gift cards.
• It’s by far the easiest side income I’ve come across and one I actually use.
The Bottom Line: Passive Investing Still Requires Active Investment Decisions
No matter what, there are active decisions that you will make that will significantly influence your investments and your path to financial freedom. Even when you follow the sage advice of investing largely via passively managed index funds.
By thoughtfully determining your asset allocation, asset location, rebalancing strategies, savings rate, and index fund choices, you can set up your passive investment strategy for long term success. The goal here is to reduce ongoing decision making that can be all-too susceptible to mitigating behavioral and emotional pitfalls.
My goal for you is to create a simple, rules-based strategy tailored to your career path as a physician that places you firmly on the path to financial freedom so you can practice and live on your own terms.
And the ultimate manifestation of this if you have a personal, written financial plan. My most updated financial plan is included right here. If you don't have one yet, use mine to help create your own. It will make all the difference!
What do you think? Do we make active investment decisions, even when investing passively? What are they? How can we optimize them? Let me know in the comments below!
One Response
nice article as always Jordan. There was an article by Vanguard Aug 2025 which stated:
“A truly passive portfolio would be one that tracks a total stock market index. Even a portfolio that holds a large-cap growth index fund to capture exposure to US equities would be an active portfolio relative to the US total market.”
Anything that deviates from the total stock market index, by definition, is active. However, I think the key is not paying more than you absolutely have to for these active decisions. My small cap value tilt only add a few bps in expense ratio compared to just doing VTI or ITOT. You don’t want to PAY for active management more than you have to.