Physicians' Investment Decisions Magnified Due to Earnings Potential Uncertainty

Many physicians are feeling the earnings squeeze amidst the tectonic shifts in the health care system and changing US demographics.

In a 2009 study of physician compensation, The Lewin Group estimated that medical practice incomes would decline 15% to 20% if greater numbers of Americans were allowed to participate in government health care plans modeled on Medicare payment rates.

Even if physician incomes do not fall, they may not experience the high growth rates of past eras. Recent experience supports this trend, with many physicians reporting little increase in overall compensation levels in the past five years. Some practitioners have sustained their income only by operating more efficiently, working longer hours or both.

All of this is occurring at a time when Medicare’s financial sustainability is in serious doubt and the US population is experiencing negative real wage growth. These and other forces are obscuring the economic future for doctors of all ages and specialties.

Traditionally, young doctors have entered their practice years with a heavy load of educational debt, meager savings and the prospect of initially working long hours for relatively low pay during residency and training. But the hardship seemed worth the pain, as doctors understood that, over time, they could reliably convert their knowledge and training into a reliable, growing stream of lifetime earnings.

Their future earnings potential provided the motivation and security to buy into their medical practice, take business risks, spend on lifestyle, and hold speculative investments while also saving enough for retirement. But this growing income potential is no longer a sure thing for doctors in today’s market. In fact, many are feeling the earnings squeeze amidst the tectonic shifts in the health care system and changing US demographics.

Investment decisions: more important than ever

The changing earnings landscape for physicians means that investment decisions are more important than ever. As a result, doctors need to have a keen understanding of the following factors:

Attitude toward risk

Slower earnings growth should make many physicians more risk averse in their investment decisions. In the event of a major loss, they will not have enough surplus income to quickly replenish their portfolio. To make up for lost time, some investors may be forced to take excessive risks, thus increasing the odds of an unfavorable outcome.

Consequently, physicians should consider strategies that eliminate or at least reduce the possibility of experiencing unrecoverable investment losses, while also positioning their portfolio to pursue expected returns above the rate of inflation. In general, they should avoid:

• Owning highly speculative investments — for example, those relying on high debt to generate returns (often related to real estate, commercial or residential properties)
• Taking large, concentrated positions in start-up companies, individual stocks or asset groups
• Chasing new or unconventional investment ideas offering high returns with low risk, which is a sure sign of a false hope
• Holding unproven, illiquid investments whose outcome will be unknown for many years

An immutable law of investing is that risk and return are related, and investments touted with having high returns bear the highest risk of failure or significant loss. Modern financial theory and academic research indicate that it is possible to minimize the likelihood of certain types of investment losses by choosing to accept only those risks that have shown a consistent long-term reward — then diversifying broadly to reduce the impact of a single negative performer on your portfolio.

Personal saving decisions

In the traditional income model for doctors, high earners could spend a larger portion of current earnings on lifestyle and push their saving efforts to their later years. Today, a large loss from speculation, professional liability or another unfortunate event can ruin these plans.

Physicians should consider moderating lifestyle spending until they have established a sufficient retirement portfolio that can begin working for them early in their career. This early investing bias reinforces good spending habits and allows a more balanced, long-term investment approach. You can still invest in an aggressive, diversified portfolio of stocks and bonds, but in a way that avoids the unnecessary risks of market timing, forecasting, overconcentration and other speculative methods.

Investment strategy

Doctors can build a portfolio that has an academic basis for earning higher expected returns relative to the market. The portfolio may hold asset classes with a documented history of performance in different economic and market environments. Other strategic actions may include:

• Overweighting the portfolio to small company stocks inside and outside the United States, and to high "book-to-market" (value) stocks in every asset class
• Avoiding concentrated stock portfolios in favor of highly diversified global asset class portfolios that hold thousands of securities
• Investing the majority of the portfolio in readily marketable and transparently priced investments that you can monitor in real time
• Further dampening overall portfolio volatility through high quality, shorter-term bonds

Preparing for earnings uncertainty

The lifetime earnings equation for a doctor is under pressure and will likely change dramatically over the next decade. The ultimate financial impact is uncertain due to the dubious state of federal health care policy, the increasing costs and risks associated with practicing medicine, shifting US demographics, and the unknown number of individuals who are unprepared to fund their own medical care in the future.

This uncertainty should lead physicians to take early steps to prepare for and protect their financial future. Their actions may include adopting practice risk management strategies, protecting themselves from large losses and investing in academically proven, non-speculative vehicles offering a relative high probability of long-term success.

Kent Kramer, CFP, is a partner of Foster Group, a wealth management group based in West Des Moines, Iowa. Kent works alongside clients to help them identify and achieve their most meaningful financial and related goals. Drawing on his varied experiences as a communicator, elected official, financial adviser and portfolio manager, Kent uses his unique abilities to describe and connect clients’ financial goals with strategies that will lead toward success.