Investors of all shapes and sizes make mistakes. Young investors are prone to similar mistakes. In this article tackle three of the most common mistakes.
Investors of all shapes and sizes make mistakes. It doesn’t matter if you’re young or old, experienced or naïve, too risky or too risk-averse. There are potholes in every road. Young investors in particular, including physicians just entering medical practice, tend to make similar kinds of mistakes. Let’s tackle a few of them here, and give a prescription for each.
Mistake: Lingering in Debt
Physicians often begin their careers carrying a heavy load of debt from medical school. We looked in depth at some strategies for getting out of debt here. But the key point to remember is that accumulated debt is one of the key obstacles to a good saving and investing strategy, because potential investors often consider holding off on their retirement savings strategy until they are out of debt. This is generally a bad idea; the sooner you start saving for retirement, the better off you’ll ultimately be.
Prescription: Address your debt as swiftly and directly as you can, but not at the expense of future planning. Differentiate between long-term, “good” debt, and high-interest rate “bad debt;” the latter should be paid off as quickly as possible, whereas the former can be managed alongside a solid investing strategy. In the meantime, make sure you aren’t accumulating new debt, as it will completely counter your strategy.
Mistake: Failing to Plan for Contingencies
A bad budget may have an allocation for “miscellaneous expenses,” but it generally underestimates the amount and frequency of these expenses. This is dangerous for many reasons, but among them is the fact that funneling a portion of your investment income into a contingency fund has a positive overall impact on longer-term savings. If a situation does arise, you can tap your contingency fund instead of siphoning off other investment income.
Prescription: Keep a portion of your investments in liquid holdings, such as a savings or money market account. Even relatively less liquid investments such as certificates of deposit give you more options than investing in only long-term corporate bonds or hedge funds. Your contingency fund doesn’t have to yield explosive growth or even have growth potential. What matters is that the investment is safe and relatively easy to get to on short notice. Having that money set aside frees up your other investments to take advantage of the inverse relationship between risk and reward, as well as the benefits of compound interest that build up over time.
Mistake: Misunderstanding the Relationship Between Risk and Reward
If you’re new to the physician profession, chances are that you’re relatively young. In thinking about their retirement, many young investors think in terms of avoiding risk. Who wants to “risk” their future happiness? But the simple truth is that because of the longer time window for your investments to grow, you can bear more risk than those who are closer to retirement.
Risk and return naturally go hand in hand in your investments. Generally speaking, the bigger the risk of an investment, the bigger the potential return. Because low-risk investments earn only modest returns, inflation can erode the purchasing power of the funds invested. Your investment amount won’t go down, but the value of that investment may.
Prescription: Don’t think of your investments in terms of avoiding risks. Instead, think about how to manage that risk and use it to your advantage in your investments. Here are a few ways to do that. Set and stick to your investment goals, understand the relationship between risk and time, and diversify and adjust your portfolio depending on those goals and your time window until retirement.
One final word: even experienced investors make mistakes. If you can relate to any of the mistakes listed above, don’t beat yourself up. Work with your advisor, adjust your strategy, refine your budget, and get back on track.