When you get your first attending physician paycheck, everyone will give you the same advice. “Live like a resident!” “Save Half!”, but what they don’t tell you is what to do with that money you’re saving. Do you put it in a bank account? Can you invest it?
Doctors can invest in the stock market. There is no rule that prohibits them from doing so. There are a number of physicians who have become wealthy through multiple types of investments, including real estate, businesses, and the stock market.
If physicians can invest in the stock market, do they? Are they good at it? What should a new attending physician know to understand the best way to invest in the stock market?
Should Doctors Invest in Stocks
If you don’t have a great background in finance, investing in the stock market can seem incredibly overwhelming. There’s a lot to understand when you first look into it and there’s a lot of pitfalls and ways you can make costly mistakes. However, there is a simple path for physicians to minimize their investment mistakes and successfully invest in the stock market.
Before I dig in to how exactly a new or seasoned attending physician can get started with investing, I’d like to show you why every doctor should invest.
Saving Doctor vs Investing Doctor
Let’s take a look at two different physicians. Both Jimmy and Katie graduated residency at the same time from the same program. They also both founds jobs at the same hospital. Jimmy and Katie make the same salary, about $300,000 per year. They also go the same advice from their attendings in residency: “Live like a resident. Save half”. So they do.
To make this simple, we won’t account for taxes and assume that neither doctor has student loans. So Jimmy and Katie both spent about $150,000 per year and save $150,000 per year. The difference is that Jimmy learned that the stock market is risky and is afraid to “gamble” on stock. So he puts his savings in a high interest savings account. Katie, on the other hand, has read a few personal finance books and knows the best way to become wealthy is to invest in the stock market.
After 10 years, this is the difference in Jimmy and Katie’s net worth.
| Katie | Jimmy | |
| Salary | $300,000 | $300,000 |
| Savings | $150,000 | $150,000 |
| Interest Rate | 8% | 1% |
| Net Worth After 10 Years | $2,346,823.12 | $1,585,025.20 |
That’s a huge difference! Over $760,000 in 10 years!
Let’s dig in a little deeper. Why did Katie end up with such a higher net worth than Jimmy? There are two reasons for this: Risk vs reward and compound interest.
How Taking On Higher Risk Can Make You Rich
Both of our doctors tried their preferred strategies to making money. Jimmy is very risk averse and knew that his money would only be safe in an FDIC insured savings account. Maybe he’s like Mrs. Average Doctor and has a family member who “lost everything gambling in the stock market.”. But Jimmy knew that higher interest rates generated more money, so he put his savings into a high yield savings account. The highest rate he could get? 1% annual percentage yield (APY)
Katie, on the other hand, knows that the stock market is risky, but also knows that she can minimize those risks as much as possible and still do well. “Stocks go up and stocks go down,” she says. “But they seem to always go up over time.” She also diversified her investments by investing in low cost index funds like VFIAX which tracks the SP500 index.
From 1957 through 2018, the SP500 has returned 8% per year.
Even though the stock market doesn’t always go up, taking that risk has historically led to much higher yields compared to savings accounts.
In total, Katie invested $1,500,000 of her own money and ended up with $2,346,823. An investment gain of $846,823.
In contrast, Jimmy also invested $1,500,000 of his own money, but ended up with $1,585,025. An investment gain of $85,025.
The Power of Compound Interest
The other factor working in Katie’s advantage is compound interest. To best explain compound interest, I have to do a bit of math. But here are the basics.
With compound interest, the interest that you gain from your investments automatically adds to the principle, or the original amount. Any new gains are then based on the newly generated amount. This is in contrast to simple interest where interest is only gained on the initial investment and does not get added. For example:
If I invest $1000 over 10 years at a rate of 10%, I’ll generate $100 in the first year, making a total of $1100. But I’ll have different amounts at the end of the 10 years if I invest with compound interest or with simple interest.
With compound interest, I’ll have $2,593.74 after 10 years.
With Simple interest, I’ll only have have $2,000.
Here’s that same experiment in table form.
| 10% Compound Interest | 10% Simple Interest | |
| Initial Investment | $1,000 | $1,000 |
| Year 1 | $1,100 | $1,100 |
| Year 2 | $1,210 | $1,200 |
| Year 3 | $1,331 | $1,300 |
| Year 4 | $1,464.10 | $1,400 |
| Year 5 | $1,610.51 | $1,500 |
| Year 6 | $1,771.56 | $1,600 |
| Year 7 | $1,948.72 | $1,700 |
| Year 8 | $2,143.59 | $1,800 |
| Year 9 | $2,357.95 | $1,900 |
| Year 10 | $2,593.74 | $2,000 |
As you can see, not only does compound interest result in a higher amount at the end of 10 years, but the yearly gain with compound interest actually increases every year. That means with compound interest, your money is working for you.
Going back to our two doctors, Jimmy and Katie.
Both Jimmy and Katie generated compound interest. So both of their investments were working for them. But because Katie generated 8% per year in stocks vs Jimmy’s 1% per year savings account, her investments worked harder and generated more money per year, faster.
In fact! To show just how powerful compound interest is, I want to show you one more experiment. What if both Katie and Jimmy didn’t add any more money to their investment accounts, but kept what they already had in their accounts invested for 10 years, what would that look like? Let’s take a look.
| Katie | Jimmy | |
| Initial Investment | $2,346,823.12 | $1,585,025.20 |
| Year 1 | $2,534,568.97 | $1,600,875.45 |
| Year 2 | $2,737,334.49 | $1,616,884.21 |
| Year 3 | $2,956,321.25 | $1,633,053.05 |
| Year 4 | $3,192,826.95 | $1,649,383.58 |
| Year 5 | $3,448,253.10 | $1,665,877.41 |
| Year 6 | $3,724,113.35 | $1,682,536.19 |
| Year 7 | $4,022,042.42 | $1,699,361.55 |
| Year 8 | $4,343,805.81 | $1,716,355.17 |
| Year 9 | $4,691,310.28 | $1,733,518.72 |
| Year 10 | $5,066,615.10 | $1,750,853.91 |
Even without adding a single penny to her investment account, Dr. Katie is able to turn $2.3 million into over $5 million using the power of compound interest.
Now, it is possible that the stock market could tank all the way down to $0 per share and Katie’s investment would go there with it. But in that situation, we probably have a lot more to worry about than stock prices. I’ll go into detail about the different risks of investing in another post.
Why Doctors Should Invest In the Stock Market
Should doctors invest in the stock market? Well, if you want to make a lot of money and you’re willing to accept the risk, it’s a much better option than putting your money into a savings account. Of course, there are other ways that you can invest your money, like real estate, bonds, commodities, currencies, and even bitcoin. And I can’t guarantee that any one investment class will have better returns over time than any other.
What I can say is that investing in stocks can be surprisingly simple, especially compared to the complexities over other asset classes like real estate. To get started, all you have to do is open an account with a stock broker like Vanguard or Fidelity and choose to invest your money in something simple like a Target Date Retirement Fund or a Total Stock Market Index Fund.
Then set yourself up to automatically invest at regular intervals and watch your money grow, with compound interest, over time.
Of course, if you want to create your own portfolio and do it differently, or learn more about other ways to invest and potentially make higher returns, I’ll be covering that in a different post.
But for doctors who want a simple, proven way to invest and compound their money over time: Yes, doctors can invest in the market. And yes, they should.
Do you live like a resident and live on half? And do you invest in the stock market? Let me know your strategies in the comments below.
Nice blog. I’m a 50-year-old pediatrician who appreciates many of the topics you’ve written about. I’ve done my own investing for retirement and the book I learned the most from was “The Four Pillars of Investing” by William Bernstein who actually was a neurologist. I would highly recommend that book to anyone who wants to understand how to approach investing in the stock market.
I work 4 days a week. I just paid off my 140,000 in school loans and plan to decrease my work week to 3.5 days then 3 days over the next year or so. I view my career as more of a job than a passion. I’m passionate about working with children but the “busyness” and EMR stuff is not as much fun. Thanks for sharing your blog. Pat