I initially crafted this post in June 2021. I am now re-visiting it in June 2022. The reason that I am doing this is largely because I caught a lot of flak with this post. In laying out the 3 most tempting investments to avoid at the time, a lot of people called me boring, unimaginative, or other less “safe for work” names.
With this in mind, I think it will be fun to examine how these investments to avoid (in my opinion at least) held up. My crystal ball is certainly not clearer than yours. And overall, the market has certainly gone down over the past year. So it’s not like my broadly based index funds did fantastic. But I am happy that they did not do “more bad.”
So first, let’s revisit my original premise…
I’ve said it many times. The path to financial well-being and financial freedom for high income earners like physicians is simple. The problem is that sometimes it is so simple that people either get bored with it or think they need to be “doing more” to be successful. And then they succumb to tempting investments. The type of investments that are best avoided and actually can do serious damage to your wealth building.
That’s what this post is all about.
And to review the simple path to wealth for a physician
- Save at least 20% of your income
- Invest those savings in broadly diversified low cost (passively managed) index funds
- Retire when your nest egg equals 25x your expected annual expenses for retirement
That’s it. Truly.
If you would like to see more in depth discussions and case examples of these principles and how they work, check out these posts:
- The 7 Step Basic Formula for Wealth as a Physician
- Defining the Most Important Variables in the FIRE Equation
- How Much Is Enough Retirement Savings?
- Stress Free Stock Market Investing Is Easier Than It Seems!
- The Simple Habits That Will Make You Financially Successful
- What Do You Need to Include in Your Savings Rate?
There are of course other paths that work…
For instance, my path incorporates more strategies that the simple path. For instance, I invest actively in real estate. The reason for choosing to add other strategies is usually to accelerate one’s wealth building. That is my reason at least. Plus I also like it…so win-win.
But the point is not that the simple path to doctorly financial freedom is the only way to get there. The point is that it is a super simple (way more simple than more doctors will ever realize) way to get there.
So, as a baseline, this is where you should start out.
Anything added on top of this baseline, like my real estate investing, needs to function in a similar manner to the tenets laid out in the simple path:
- It needs to be based on an investing strategy that does not rely on having a functioning crystal ball
- It should fit your overall financial plan i.e. it should help you reach your financial goals
- The risk needs too meet but not exceed your risk tolerance
That’s really about it. 3 simple criteria. However, this excludes the majority of investments. It especially excludes fad investments, of which there is always an abundance. Regardless of time, place, person, or country.
So here are my top 3 most tempting current investments to avoid (as laid out in June 2022)
And I’ll be brutally honest from the get-go. I have definitely been tempted by all of these investment options. So much so that I have talked to Selenid about them.
But, what has stopped me is that our written financial plan calls for a 3 month waiting period before any changes can be enacted. In all cases, within 3 months of my initial interest, cooler heads have prevailed and I recognized that these investments did not meet my 3 simple criteria presented above.
So, let’s get into them…
Oh yeah. You all knew that this was coming. The queen of all tempting investments to avoid in my book.
Cryptocurrency is the hottest investment opportunity/strategy/whatever you’d like to call it in our lifetimes so far. And I’m not going to go into exactly what it is or what it purports to be. But I do want to explain why it comprises exactly 0% of my investment portfolio.
First, I’m way too late
People love to look back and say “Oh wow, if I’d invested $100 in Bitcoin 10 years ago, I’d be a ba-gillionaire right now. Well, that is a classic example of a retrospective bias. We could do this all day with horse bets, sports wagers, or anything else. It doesn’t change the nature of the next bet you place…it’s still a bet. and I can’t go back in time and get in on that action. I missed it. Oh well.
Second, cryptocurrency is a currency
It’s a way of buying goods and/or services. I don’t invest in currencies. They are notoriously fickle. And that is what crypto is at its core.
Third, there is way too much risk involved
Risk that I and any high income earner does not need to reach our financial goals. Just look at Bitcoin prices the past year. Do you really want to own an investment that is going to spike or free fall based on Elon Musk’s tweets? I hope not! Its volatility is well established but that is about all of it that is established. It’s above my risk tolerance and should be above yours.
People will argue that crypto is the way of the future. It might be. I have no idea. I also have no horse in that race. So it doesn’t matter. I win either way. If you wager your financial future on being right about this, you can win. But you also can lose…big.
SPACs are another super hot investment out there right now. SPAC stands for Special Purpose Acquisition Company. No idea what that means or describes? Perfect! It’s just another investment designed to make others wealthy off of your money by making something seem much more complicated than necessary.
Here’s the bare bones version of what SPACs are. And they have been around for a long time. So don’t get fooled into thinking this is some mega new innovation that can’t fail. They’ve actually failed before already…
Anyway, SPACs are companies that buy private companies, take them public with an IPO, and then merge with them. If the company fails to go public, the investors get their money back. But…if it does go public, the fate of the investors’ money is the same as the fate of the company. Good or bad…
Why would such companies ever need to exist? Valid question. Well, the premise is that they are comprised of managers and personnel that can do a better job at taking a company public than the company’s own people. This means they theoretically can raise money better and faster and optimize operations among other things.
This right here raises a few flags:
- Don’t most IPOs fail and lose money after going public…yes, they do
- If a company was so good to be taken public, shouldn’t they be able to/want to do it themselves without diluting their profits by merging with a SPAC…hmmm, I would think so
- Isn’t this pretty much the same as stock picking or investing in an individual company, with increased risk and a complete lack of diversification…you are again correct
This is why I do not invest in SPACs. And interestingly, a well known person within the physician finance community is currently emailing their mailing list touting an opportunity to invest in a SPAC with them…so this can definitely come to your doorstep as a wolf dressed in sheep’s clothing.
3. Actively managed mutual funds
And this is the real wolf in sheep’s clothing. They seem so benign. It seems so simple. You find a mutual fund, like the ARKK fund, and it has amazing gains in the past few years. Gains that really look impressive compared to the overall market (which would be captured in broad index funds).
Of the three, this is the one that seduced me the closest to actually investing in it. Mind you, I was considering a very small percentage. But still, why would I dedicate even 1% of my portfolio to something that has been proven to be worse than my other investments time and again?
What could be wrong with jumping on the train? Just a little bit?
I’ll tell you exactly what is wrong!
Let’s keep ARKK as the example fund here. Cathie Wood, the found of ARK and its funds, has done very well over the past few years. Her fund(s) has outperformed the market. She has been part of the 20% that outperforms the market in a given year. And she’s done that a few times in a row.
Does this mean that she has the formula to best this trend?
I’ll save the suspense. The answer is no. NO! There have been many Cathie Woods before her. and there will be many more. Her besting the market one year, even three years, gives her exactly the same chance of doing it again the following year…20%. That means that she still has an 80% chance of losing. So, I’m still going to place my money in the 80% every.single.time.
And, just because I am not investing with her during her winning years, it doesn’t mean that I haven’t been winning. I have been. Because I’ve been approximating the market. True, I haven’t won as much, but I still won.
However, when she loses…and she will lose…I will not lose. But those that invest with her will.
So the options are:
- Win regardless by investing in index funds, or
- Maybe win, maybe lose by investing in anything else
In the words of Jay Rock, “Win, win, win, win, f*ck everything else, win, win, win, win.”
And I still haven’t even mentioned taxes and fees
Actively managed funds make many more trades. Because they are actively run based on the whims of a human being. So they incur more fees. This also means that they incur more taxes.
Throughout a 30 year investment career, this will cost you hundreds of thousands of dollars. Is your fund going to consistently beat the odds and outperform the overall market by enough to overcome all of these fees and taxes? I’m not counting on it.
There are other tempting investments that I avoid
Like individual stocks, real estate investing for appreciation, commodities, stock options and puts, and many more.
But these were the investments that I saw tempting so many people in general one year ago. Especially high income earners. I see “financial advisors” cold messaging, calling, or e-mailing physicians touting these “incredible” opportunities that are not to be missed.
Honestly, it’s scary. Because without my financial education, I may have fallen for them. Heck, even with my financial education, these investments were tempting to me. But thankfully, I marked them as investments to avoid in my financial plan.
So that is why I want to point these ones out in particular and explain why I don’t (and you shouldn’t) invest in them!
Let’s now examine how these “investments to avoid” have fared in the past year!
Basically, not well…
Take a moment to look at the above chart. Yes, the overall market as proxied by the S&P 500 here has gone down.
But the dip has been so minor relative to other investments…most of which happened to be in my list!
- Actively managed funds like those focusing on tech stocks or meme stocks went down 2-3x more than the average market
- Cathie Wood’s ARKK fund went down ~3x the overall market!
- Bitcoin dropped about 2x the market
Not included on this chart is the following:
- 6 month post-IPO returns were -14% in 2021, down from an average of +14% according to CNBC.
These are the IPOs that would be represented in SPAC offerings. In fact, after hearing all about SPACs in 2021, I have not heard a nary mention of them lately…
What am I trying to prove?
There must be something…right?
I suppose this is my point. In the time between when I write this post (June 2022) to when it is published about a month or so later, Bitcoin may recover. ARKK could soar. Some IPO you invest din through a SPAC could make a killing. I really have no idea.
But neither does anyone else.
And that is why these investments to avoid are just full of more risk than you need to take. Especially as a high income earner and physician.
All of us need to balance our need to eat (reward seeking) with our need to sleep (risk tolerance).
Thankfully, you can get the reward needed to retire and live on your own terms, without losing the equivalent of RIP Van Winkle’s snooze by saving your money and investing for the long term in the overall market.
Looking to start or enhance your financial education? Look no further!
- Financial Education 101: How to Finally Get Started on the Path to Financial Well-Being
- Financial Education Needs To Be Tied Into Medical Education
- (Before My Financial Education) I Only Did 3 Things Right…Here They Are:
- The Importance of Financial Education as a Trainee
What do you think? What are your investments to avoid? Did you invest in them? What stopped you? Do you still invest in some of these? Why? Let me know in the comments below!
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