Setu Mazumdar, MD, CFP

If you’ve ever played blackjack, you know that at certain times you can double down on your original bet. Unlike the table games in Vegas where it could take seconds, doubling the value of your portfolio can take many years. Recently I discussed this reality with a physician, and here’s the response:

“It just seems that 10 years to double is a long time from what I have heard even with fairly conservative management.”

Let’s examine this claim from a few perspectives and see if it’s true.

First let’s look at the average annual returns of three investment classes — US stocks, international stocks, and US bonds – and also two diversified portfolios – 100% stocks/0% bonds and 50% stocks/50% bonds. I’ll use the past 20 years of data because that time frame covers many emergency physicians:

*Portfolios are equally split between US and international stocks

Using the above data, the following chart shows how long it would take to double your initial investment:

You can see that almost all asset classes and portfolios took at least 10 years to double your initial investment. Even if you were invested 100% in US stocks, which had the highest rate of return, it would still take you almost a decade. So the idea of doubling your money even with “conservative management” in less than a decade doesn’t hold.

Doubling your money also depends on when you initially invested the money. Suppose you invested $1 million in US stocks at the beginning of 1996 versus at the beginning of 2000. Here's how long it would take to get to $2 million:

If you were lucky and you invested your money in 1996, then it took only three years to double up, but if you were unlucky and started in 2000, you would’ve had to wait almost five times as long (15 years) — and the first 10 years from 2000 to 2009 was painful because you saw a net loss for that decade.

While many physicians and financial advisors focus on portfolio performance (which is unpredictable) and beating the market averages through stock picking and market timing (both of which have a very low chance of success), an often ignored aspect of building wealth is the synergistic effect of savings combined with returns.

Going back to the time frame 2000 to 2015 in the above example of US stocks, let’s say you started with $1 million and then added $50,000 annually to your portfolio. Now let’s see how long it would take to double your money:

Well, it still took almost 12 years, but then you almost doubled it again a few years after that. For the entire time frame you almost quadrupled your portfolio in about 15 years. That’s assuming you had the guts to stick out the bad times — which not many investors have. Without the discipline it takes even longer to double your money.

The bottom line is that you must have realistic expectations of investment returns and the patience to capture those returns to build wealth.

Setu Mazumdar, MD, CFP® is board certified in EM and he is the President of Financial Planner For Doctors. 

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If youâ€™ve ever played blackjack, you know that at certain times you can double down on your original bet. Unlike the table games in Vegas where it could take seconds, doubling the value of your portfolio can take many years.

Doubling Your Money: Fact vs. Fiction

You don’t have to be a math whiz or use fancy spreadsheets to understand many parts of your personal ï¬nances. Sometimes it’s just a matter of elementary school math: basic addition and subtraction.

Let’s take a look at a few simple formulas you should be familiar with and some ï¬nancial lessons you can learn from them:

You’ve heard the phrase “pay yourself ï¬rst” but many physicians reverse this equation to look like this:

That’s known as “pay yourself last” — it’s one of the big reasons so many physicians wonder why they have to continue working full time into their 60s. I’ve said it many times and I’ll say it again: if you’ve practiced medicine full time for the past 25+ years, and you have not built up a multimillion-dollar retirement portfolio, you probably haven’t saved enough.

One reason may be overspending on your home. Here’s how you can apply this equation to ï¬guring out how much you should spend on your home. Take 20% of your gross income — that should be your savings rate. Then whatever is left over after taxes is what you can spend, including your mortgage. You can then calculate out the maximum value of the home you can buy based on terms of the mortgage.

I’ve met many asset-rich physicians who are actually poor. This usually means they’re carrying a ton of debt. Here’s an example: you buy a $1 million home and carry $900,000 of mortgage debt. There are physician home loans out there that you can get with very little down payment. I’m not saying those are a good deal, but I’ve seen physicians take the bait — especially physicians who recently graduated from residency. When you factor in other debt such as student loans, you can see that it’s possible to accumulate a large amount of assets but have a negative net worth. Your goal should be to maximize net worth not assets to build wealth.

Taxable Income = Total Income - Deductions 

There’s a misconception that your income tax is based on your total (gross) income. If you look at the federal income tax brackets you’ll see it’s based on the taxable income, which is calculated after a number of deductions and exemptions. How do you maximize your deductions and minimize your taxable income? Here’s a partial list of deductions that may apply to you as an emergency physician:

*on Schedule A of federal income tax return 

If you’re an independent contractor, your largest deduction will likely be your retirement plan — typically a SEP IRA or individual 401(k). Depending on your age, income, and type of plan, you can sock away up to $59,000 in 2016 pretax. Assuming you are in the 33% tax bracket (married ï¬ling jointly) the contribution lowers your taxable income for tax savings of around $20,000.

Total Return = Capital Gain + Dividends + Interest 

You might disagree with me on this one, but hear me out. A popular investment strategy touted by many ï¬nancial advisors and followed by many investors is to have greater exposure to dividend-paying stocks. You might even think that the value of your retirement portfolio you need to build up should be based only on the dividend payouts. The idea is that you don’t touch your principal and instead live off the dividends.

The reality is that the only return that matters for any investment is the total return, not just the dividends. Here’s a hypothetical example. Suppose you have two investments A and B. Investment A pays 0% in dividends and has a price gain of 10%. Over the same period of time, Investment B has paid 4% in dividends with a price gain of 5%. Which investment would you rather have? Obviously there are other factors to consider, but the point I’m making is that your investment decisions and your ability to withdraw money during retirement should not just be based on dividends. Money is money whether it comes from price gains or dividends. In the end, it’s total return that matters.

After Tax Return = Total Return - Taxes Paid 

Taking the previous equation one step further, one of the goals in your investment portfolio should be to maximize after-tax returns, not necessarily minimize taxes. For example, which would you rather have? Investment A, which has a total return of 10% and you pay 2% in taxes, or Investment B, which has a total return of 6% and you pay 0% in taxes. Don’t let taxes dictate all of your investment decisions, and be especially careful of investment products (usually sold by commission based ï¬nancial advisors) that entice you with the phrase “tax free.”

Setu Mazumdar, MD, CFP is board certiï¬ed in EM and he is the President of Financial Planner For Doctors. 

You donâ€™t have to be a math whiz or use fancy spreadsheets to understand many parts of your personal ï¬nances. Sometimes itâ€™s just a matter of elementary school math: basic addition and subtraction.

5 Simple Math Equations You Simply Must Know

Does this sound familiar? You graduated from your residency more than 10 years ago. You switched jobs a few times. Sometimes you were an employee and other times an independent contractor. You got married and your spouse also had a few different jobs along the way. Now you have kids and don’t have much time to manage your ï¬nances.

One day, you decide to take an inventory of your investment portfolio, which might look like this:

Now you realize that instead of having an investment plan you have investment chaos. Here’s how you turn the chaos into harmony:

 Asset allocation is the process of constructing an investment portfolio through various investment classes to meet your ï¬nancial goals and risk and return objectives. A big mistake I’ve seen many physicians and ï¬nancial advisors make is that they don’t create a uniï¬ed asset allocation across all of their accounts. Instead, each account has a separate allocation. In the end, only the overall asset allocation of the portfolio matters, not what each account is doing.

Step 2: List all accounts you own by type of account.

 This is shown in the table above, but you should add the custodian and balances of each account. Common types of accounts include: IRA, SEP IRA, Roth IRA, 401(k), 403(b), 457, deï¬ned beneï¬t, and taxable.

Step 3: Break down each account by tax category.

 Make this simple by grouping accounts into three tax categories: tax deferred, tax free, and taxable. This is important because you may want to consider placing tax inefï¬cient investment classes in tax-deferred accounts.

Step 4: List all investment choices for each account.

 If you have an employer-sponsored retirement plan, you may be restricted to certain mutual funds, but in other accounts you might be able to access almost any funds. For the latter wide open accounts, you’ll have to determine which speciï¬c funds to use. If you’ve got multiple funds within the same investment class, look at the internal expenses of each fund and rank them from low to high. Generally, the lower cost funds tend to perform better.

Step 5: Match all investment choices with speciï¬c investment classes.

 Remember, you’ve already created your asset allocation, which should include the proportion of your portfolio you want in speciï¬c investment classes. Now you need to match each fund with its respective asset class.

 You are now ready to allocate each speciï¬c fund you’ve chosen to speciï¬c accounts categorized by tax status and taking into account the fund choices within each account.

Step 7: Maintenance, maintenance, maintenance.

 You’ll probably realize from the previous step that much of what I told you conï¬‚icts with each other. For example, let’s say you want 30% of your asset allocation to be in international stocks, but the accounts you want them to be in happen to offer very high-cost funds. Or perhaps you just run out of room to place certain investment classes in certain tax categories. In those cases you’ll have to make a decision and may have to adjust your asset allocation altogether and go through this exercise again. On top of that, you’ll have to consider future contributions into each account and factor in all of this again. Then, what if the investment choices change?

The bottom line is that you’ll have to do this on an ongoing basis to make sure you’ve got a real investment plan.

Setu Mazumdar, MD, CFP, is board certiï¬ed in EM and he is the President of Financial Planner For Doctors. 

Take a big-picture look at all of your investments. Do you see a clear strategy, or is it investment chaos? Here's how you turn the chaos into harmony.

To Create a Successful Investment Plan, Coordinate Your Assets

So you made your New Year’s resolutions last December, but I’ll wager you probably won’t follow through with many of them, especially the ones dealing with money. One reason may be that you just don’t know where to begin. The ï¬rst step I recommend is to create your personal balance sheet, which is an inventory of everything you own and everything you owe.

I usually like to break this down into three categories:

 This includes everything from checking accounts, savings accounts, money market accounts, emergency fund, and equivalents such as bank CDs for short term goals Investment and retirement assets (includes all of your investment accounts for you and your spouse such as: 401(k), proï¬t sharing, 403(b), 457, traditional IRAs, Roth IRAs, deï¬ned beneï¬t plans, pension plans, taxable brokerage accounts, partnership interests, and illiquid investments) 

 Includes ownership interests in medical practices and other ventures

 Home (primary residence), cars, rental homes, land, and any other major assets

You’ll have to list the market value of all of those assets and also notate other important items such as percent ownership and interest rates.

 This includes credit card balances (though you can exclude this if you pay them off every month. If you don’t, shame on you!) and any loans you will pay off within one year.

 This includes student loans, mortgages, business loans, and any other debt you think you’ll pay off more than one year from now

Just like the list of assets, document the balances and other important items such as interest rates, terms of the debt, original loan balances.

Add up the value of all your assets and subtract the value of all of your debt and you’ve got the bottom line — equity in yourself or net worth. In my opinion this is a better measure of wealth than your investment portfolio. It can also be a big wake up call. While you might be “worthless” in the ï¬rst few years after graduating from residency, my very nonscientiï¬c rule is that your net worth should be at least $1 million a decade after passing your board exam. If it’s not, you’ve made some serious mistakes and need a kick in the pants to get you moving in the right direction.

Finally note that you need to update all of the above periodically, and if you’ve hired a ï¬nancial advisor, he should be doing this for you rather than just looking at your investment portfolio. Here’s a sample of what this looks like:

That should be a great start to organizing your ï¬nances. One more piece of advice: Don’t do this exercise while you’re working in the hospital or in your clinic because a patient might think you’re a “rich” doctor, though you can easily remedy that by only showing the “Debt” column.

Setu Mazumdar, MD, CFP® is board certiï¬ed in EM and he is the President of 

To truly take charge of your finances, you first must have a realistic snapshot of where you stand. This guide will help you accomplish that goal. 