Forum Mailbag: Million Dollar Doctors, Fear of Missing Out, Writing Options, and More!

There is so much great information on personal finance forums. I regularly participate on several message boards, including Bogleheads, White Coat Investor, and Rockstar Finance. This is a roundup of my favorite discussions happening around the internet.

1. White Coat Investor: Million Dollar Doctors

Question: WCI forum regular hightower noticed a thread on Bogleheads where a newly minted physician was making $1.4 million and $1.8 million in his second and third years out of practice (after finishing training at age 35). He was wondering what specialties or situations enable physicians to make this kind of money.

WSP’s Take: Certainly it is atypical for doctors to make more than a million dollars. According to the Doximity Physician Compensation Report, three specialties (neurosurgery, thoracic surgery, and orthopedic surgery) have average salaries of greater than $500,000. It is certainly conceivable that a hard-working specialty surgeon (e.g. spine surgery) could make north of a million dollars.

Another way for a physician to make seven figures is to have ancillary income through practice ownership. This can consist of employing other physicians or mid-level providers and paying them a salary while keeping their collections. Alternatively, they can have ownership of technical services, e.g. hospitals, ambulatory surgical centers, laboratories, that supplement their clinical income.

You could also generate passive income sources, such as through real estate or stock investing. For example, a 15% return on a $4 million portfolio would add $600,000 to your clinical income. It takes money to make money.

While interesting to read about other physicians making a million dollars, it is unrealistic for physicians to expect this type of income. The Bureau of Labor Statistics says physicians and surgeons have a median pay of $206,000. It takes business savvy, hard work, and a little bit of luck to generate this type of income. And always do your due diligence before investing in things like hospitals and ambulatory surgical centers. While they can offer spectacular returns, they are still investments with possible downside.  Investing in surgical centers, office buildings, diagnostic centers, and medical centers were all listed by physicians as part of WCI’s Stupid Doctor Tricks. You more often hear about the success stories than the failures with these investments.

2. Bogleheads: Fear of Missing Out on Amazon, Netflix Stock

Question: Pascal knows the Bogleheads philosophy of index funds and the three-fund portfolio, but he has had water cooler conversations with colleagues who have bought into Amazon, Netflix, and Tesla, which have risen at a blistering pace over the past few years. He was wondering whether any Bogleheads feel the temptation of chasing some of these momentum stocks.

WSP’s Take: I’ll admit, my father has been giving some of his Amazon and Google stock to my kids as birthday gifts over the past few years while I invest in a three-fund portfolio. Maybe he should be the one writing an investing blog.

But it seems so easy to make really great returns by buying stocks of companies that are very popular and have great name brands. You love shopping on Amazon and you know everyone else loves shopping on Amazon, so why not buy Amazon stock? You are on the waiting list for a Tesla Model 3, so why not buy Tesla stock?

The problem is that for every Amazon and Netflix, there are other great brands that have not outperformed the market. Apple stock has essentially performed the same as the S&P 500 in the past 5 years (with much more volatility), and Twitter is down over 50% from its IPO price. Also, technology stocks are more volatile than the rest of the stock market, so when we have a long bull market like we’ve had from 2009-2017, you start hearing people talk about their high-flying tech stocks.

Of course, technically when you invest in index funds, you are buying small pieces of the best-performing stocks like Amazon, Netflix, and Tesla. So when someone says that they made a ton of money on Netflix stock, you can say that you own Netflix, too.

3. White Coat Investor: Writing Options

Question: cc was wondering whether anyone on the White Coat Investor forum sells (writes) covered calls or naked puts to generate income.

WSP’s Take: For the basics on stock options, check out my introductory article on options. I cannot advise physicians to “create” income using this strategy. The strategy seems so simple.  With a covered call strategy, you sell out-of-the-money (strike price above the current stock price) calls, collect a premium, and when the stock is flat or goes down, you keep the premium. Similarly, in the naked put strategy, you sell out-of-the-money puts, collect a premium, and if the stock falls below the strike price, you get a discount on a stock you were interested in buying anyway.

The problem is that options are derivative contracts and have no inherent value. In fact, the expected value of writing options is slightly negative (unless you invest the option premium), since you have essentially borrowed money from the buyer of the option.

Selling naked puts seems like an easy way to collect some extra cash. Unfortunately, it’s like picking up dimes in front of a steamroller. Most of the time, you are able to pick up the dimes before getting run over. But when you get steamrolled, the (financial) consequences are not pretty.

4. Rockstar Finance: Too Much Cash?

Question: Joe_5700 has $200,000 cash in a $1.2 million portfolio. He was told by a Vanguard advisor that he “has too much cash.” He feels like he needs this much cash cushion in case he and his spouse lose their jobs. They would also be able to pay off their mortgage in that scenario.

WSP’s Take: While I completely understand sleeping well at night as a motivation to hold a large cash position, I think there are better ways to manage his portfolio than holding a sixth of his portfolio in cash. The standard recommendation is to hold 3-6 months of expenses in an emergency fund in the case of a job loss. He is holding well more than this in cash reserves because he states that he would also like to be able to pay off their mortgage if he were to lose his job.

There’s no reason why he couldn’t sell part of his stock portfolio to pay off his mortgage if he were worried about losing his house. It is inefficient to hold cash in his account for years earning zero interest when he has plenty of reserves to protect himself even if he and his spouse were to lose their jobs.

He could also consider just paying off the mortgage with his cash reserve right now. At least the cash will be invested in the house instead of earning minimal interest in a savings account.

Wall Street Shares: 5 Articles I Enjoyed Reading This Week

1. Dads, Dollars, and Debts:Being in private practice makes me a better doctor — an interesting perspective from EJ, who’s been on both sides of the academic / private practice divide.
2. Budgets Are Sexy: The Mayonnaise Jar — I used the jar example when talking about simplicity in personal finance, but this perspective was a different twist on this analogy.
3. White Coat Investor: Your Secret Weapon — the 4% withdrawal rate is completely adequate if you’re willing to utilize your secret weapon if necessary
4. Big Law Investor: Money Before 59½: 72(t) Distributions — a nice method for early retirees to access their money before “retirement age.”
5. Chief Mom Officer: It’s OK If You Don’t Want to Quit Your Job to Travel the World — Everyone in the FIRE movement wants the FI (Financial Independence) part, but the RE  (retire early) part is optional for many people.

What do you think? Do you agree or disagree with any of my responses? What’s your take on the topics in this week’s forum mailbag?