How fear of the stock market quietly costs doctors a million dollars [PODCAST]

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Doctors spend over a decade training and then quietly leave a fortune on the table when they handle their own money. In this episode, economics professor Hernan Moscoso Boedo explains why high income and years of schooling do not make physicians good investors. He compares the way doctors avoid the stock market to the way some people distrust vaccines, not because they understand the science, but because they do not trust the system protecting them. This episode is based on his article “Why your doctor invests like a vaccine skeptic,” published on KevinMD. You will hear why physicians invest like people who earn half as much, why so many default to real estate, and how overconsumption, high advisory fees, and poor allocation can cost roughly 29 percent of retirement wealth. You will also hear his practical fix: open a brokerage account, start small, and let a simple diversified fund compound. Press play to hear why the money doctors lose is money they earned, and how little it takes to keep it.

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Transcript

Kevin Pho: Hi, and welcome to the show. Subscribe at KevinMD.com/podcast. Today, we welcome Hernan Moscoso Boedo. He’s an economics professor. Today’s KevinMD article is “Why your doctor invests like a vaccine skeptic.” Hernan, welcome to the show.

Hernan Moscoso Boedo: Thank you for having me. I appreciate it.

Kevin Pho: All right, so just tell us a little bit about your story and why you decided to share this particular article on KevinMD.

Hernan Moscoso Boedo: It’s kind of personal. So I’m an economics professor specialized in macroeconomics, but I’m married to a physician. And so socially I interact a lot with physicians, and coming from the economics world, many times the conversation goes towards finance, or it’s like, “Hey, what should I invest in?” And about two months ago, we’re invited to a dinner party full of physicians, and the conversation went to investments.

One of them was thinking about buying a vacation house in Florida. And then they started asking me, “What should I do with my money?” And so on. And so very fast I learned that doctors or physicians are not very sophisticated investors, which many people are not, but this is a very interesting group because this is a group with high income.

So I came back home, started to think about if there’s some commonality here. It’s not just an anecdotal, you know, dinner party conversation. And I went and looked at the data. And yes, we find that physicians tend to underperform as investors and their high levels of education do not predict doing well as an investor.

And again, going back to my relatively close relationship with the medical world, and I’m kind of in the front row seeing the investment and human capital that physicians go through, it kind of felt like, hey, you guys do all this effort. You go through medical school, you go through residency, you go through maybe a fellowship, you work extremely long hours, and then you leave money on the table by under-investing.

And so that’s basically what drove the question of the paper. And yes, we see that the high levels of education, years of education, do not predict performance in an investor. And so I produce a theory which has to do with what a former Nobel Prize in economics called the lemons problem.

He started thinking about the used car market. So when I know that I’m buying a used car from somebody that I know knows more about the car than I do, I know that they will not tell me something wrong with the car. So what do I do? I do not engage in that transaction. I retract from transacting with that person.

And of course, in the used car market, we have all the Carfax, we have a lot of things try to put the two together and allow for the transaction. A lot of that happens also in the financial markets. But I perceive that the physicians, so people that are far from finance, do not see how those institutional arrangements protect the investor in this example.

And then I start to think about what would the physician understand and how would this analogy work? And then I ended up falling into the vaccine skeptical person. It’s like, if you’re a layperson, you don’t know about vaccines, and here you have this stranger, the physician, asking you to, you know, give the baby and inject some strange substance.

And we, society, expect the mother or the father of this baby to trust the system. The FDA, the medical world, everybody says, “OK. It’s OK. It’s a good idea.” And so we have that similarity between those two worlds. And so people that do not vaccinate because they, you know, mistrust the pharmaceutical companies.

And they say, “Well, the FDA is not safe enough.” Well, we end up talking about their ignorance about the protections in the institutional arrangement. We don’t expect them to know about biology and how vaccines work. We expect them to trust the system. Something similar happens in the financial world.

We don’t expect the lay investor to know about martingales and extremely sophisticated PhD level in finance papers. But it would be nice if they knew that the FDA-like arrangement exists in the financial world. And so I went ahead and tried to measure what the impact of not participating in the financial markets is for high-income people.

And so we end up finding that savings rates are lower. So you do not participate in the financial markets because you think it’s obscure. You don’t trust it. And so there’s a couple of things that you do. You consume more. So one way to avoid managing savings is not to have savings.

And the way you don’t have savings is to buy an extremely expensive car, for example. That’s one way is going to increase consumption. Another one is pay somebody to do it for you. The 1 percent financial advisor. That’s 1 percent of your stock of savings per year. Over your lifetime, it’s huge. And then suboptimal allocations, meaning that you don’t invest in the more efficient financial products like an ETF, a very cheap ETF, and just follow the S&P 500.

You invest in something that you could understand, and that’s where the real estate story comes in, right? So sometimes if you’re far from the financial market, you tend to mistrust the financial world, and then you buy a house. And real estate has some beautiful characteristics, but also its problems, right?

So for example, the lack of diversification, right? So actually one of these physicians that was in the dinner party bought an apartment in Puerto Rico and got hit by Hurricane Maria. That’s an example of the risk involved in the real estate investment.

Kevin Pho: So there’s a lot to unpack there, and I think on this show and on KevinMD, we talk a lot about physician financial literacy and how, in general, that financial literacy, to put it kindly, is lacking in the medical profession. And one of the things that I like to do is to talk about finances explicitly because that is something that physicians don’t have a lot of training in, as you said. One of the things that caught my attention from your introduction was you actually looked at the data. You said that physicians as a group generally underperform when it comes to investing.

So, you may not have the study in front of you, but in general, give us some rough numbers when you say that physicians in general underperform when it comes to investing. What kind of underperformance are we talking about?

Hernan Moscoso Boedo: So how much do they participate in the stock market? And again, you don’t have to pick the winner. Sometimes people think about participating in the stock market as I have to pick the right stock. You can buy the whole stock market through a diversified ETF, an exchange-traded fund. So what the data shows is that physicians participate in the equity markets just like people that earn, on average, half of what the physicians earn.

And so we tend to think that the higher income you have, the more you invest. But physicians invest like somebody that earns roughly half of what they earn. And so that’s kind of the measure. And they also over-invest in real estate as a group do.

Kevin Pho: And you’re saying as a consequence for that relative under-prevalence when investing in equities, they either over-consume, they either not have enough savings, or they focus on alternative investments like real estate rather than just going for the equities. Now, from your research and from the data, what can you speculate are some of the reasons why physicians in general are under-involved in the stock market?

Hernan Moscoso Boedo: So what I did is went to look at different measures of distance to the finance world. In the economic literature, sometimes we just think about education as the driver. So the more educated you are, maybe you are more capable of understanding complex stuff, and so then you invest in complex alternatives.

That’s not what we see in physicians. If you measure years of education, this is the highest group too. So this is the highest group in education and the highest group in income. And again, they are underperforming in many dimensions. And so what I tried to do is try to look at distance to the finance world in three measures.

One of them is how many people you work with are finance-related, right? So if you go to a hospital, how many people are involved in the finance department? And those are very small, right? So the physicians do not interact talking about investment opportunities. That’s one way. Another one is looking at the curriculum of the medical schools versus other activities.

How much did they learn about finances? And as you said, there’s nothing in medical school that basically teaches physicians anything about finance. And again, I’m not talking about very sophisticated things. Here we’re talking about convincing the vaccine skeptic that the FDA is doing something right. Not perfectly, but that would bring their trust. Or gain their trust. And the other one was about this measure, this Bureau of Labor Statistics database that measures how much math you use in your work, and physicians are relatively low in that.

And so the novelty here would be it’s not education per se, it’s distance to the finance world. And again, I think if you win the lottery and you invest it wrong, I don’t think it’s such a big deal. Here, a physician, that’s where my personal part comes in. This is income that was gained through a lot of investment and a lot of long nights at the hospital, a lot of hard work.

And then leaving money on the table seems like a big cost that should be relatively easy to fix with just investing in a broadly diversified ETF that would not require, and you would just buy it online for free. There’s almost no cost. The fee that the most common ETFs charge is about 30 times less than what the financial advisors would charge.

And so the other thing is I try to measure of a million dollars at the end of your life. So imagine a physician reaching retirement and let’s say that they lost a million dollars through being inefficient. How much is overconsumption? How much is investing in the wrong thing? And how much is the advisory fee? This 1 percent that compounded over your lifetime. About half is the advisory fee, and then about 38 percent is the reduced savings, the increased consumption, and the rest, about 15 to 16 percent, is about the suboptimal allocation. Meaning you didn’t participate in these ETFs and you bought a rental house in Florida.

Kevin Pho: And in terms of alternative investments, I see this a lot. Physicians default to real estate as an alternative investment. Why do you think that is? Why do they reflexively choose real estate?

Hernan Moscoso Boedo: Because it’s easy to understand. You don’t need to trust the institution. You don’t need to know who the SEC, what are they doing, how they are protecting you. You don’t need to understand how money is flowing in the market. You can touch the house, right? So you can live in the house, you can enjoy the house. And so that one is relatively easy to understand. Doesn’t require a little bit of training or a little bit of time spent researching these issues.

Kevin Pho: Now, from your economic perspective, what is the greatest impact when it comes to intervention? When and how should we intervene in a physician’s journey to hopefully steer them towards better impact investing? What kind of interventions would you recommend?

Hernan Moscoso Boedo: I think it’s two things. One of them we are doing. So the 401 programs that you basically don’t even see the money and it gets an automatic pilot. That automatic pilot is the efficient investment opportunity. So it’s not true that physicians are not doing it 100 percent, right? So because on their 401, it’s being managed, for the most part, in this default opportunity, in this default allocation.

Now, on the other money, it would require maybe an hour or two of training from a trustworthy source, right? So you don’t want to be trained by somebody representing a bank, right? So this is not marketing. So I’m saying, “Yeah, hey, you should do it for free. You should just open a brokerage account that is basically linked to your bank account.” Everybody has a bank account. You just need to add a brokerage account and slowly buy the most plain vanilla diversified ETF portfolio and not try to beat the market. Don’t try to time the market, just let it compound over however many years.

That would do a couple of things. You’d save on advisory fees. The other one is that you’ll see a higher return on your money, right? So when you see that your money is growing at 10 percent instead of growing at 1 percent, now buying that fancy sports car has another cost, which is, wait a minute, I could have put it. So if I decide to spend this money here, the real cost is higher because now I’m giving up those 10 percentage points of gains on the value of the car next year. So maybe my car is now good enough. I don’t need to do it.

If you think that your interest is low, like investing in a savings account, you say, “Well, there’s no interest here. I get nothing by saving.” So the incentives to save are affected by only saving in very low yield-producing accounts.

Kevin Pho: I talk to a lot of physicians, and there is a group that don’t have the time, energy, or interest to learn about finances. For this group, is there a place for paid financial advising?

Hernan Moscoso Boedo: Probably it’s more and more with AI. We have those automatic advisors too. I would say a couple of things about that. One of them is that investing in real estate is more time-consuming, right? So if you buy a vacation home in Florida, let’s say from Ohio, sometimes you need a plumber. You need to call a plumber to go to Florida, and that’s very time-consuming, right? So I agree that physicians are very busy, but the most widely used investment channels are super easy to do. So the only thing would be the time spent in learning from a trustworthy source. A couple of details in the institutional framework that show how protected we are as an investor.

Of course, there’s the Warren Buffett. I’m not saying you should be a Warren Buffett. I’m saying you should be the wife of Warren Buffett and follow Warren Buffett’s advice to just calmly invest in the S&P 500 in that example and just do something else with your time.

Kevin Pho: Now, we’ve been talking a lot of theoreticals about what physicians should be doing and how much money they’re losing by not allowing ETFs to compound over time. Now, maybe give us some case scenarios just so we can illustrate some of the things that we’re talking about. How much money have you seen physicians lose by either not investing into the stock market via an ETF, just having it all in savings account, or investing in real estate? What are some things that you’ve seen through your research or talking with colleagues, talking with your friends about some of the potential losses or lack of gains that physicians lose by not doing what we’re talking about today?

Hernan Moscoso Boedo: Yeah. So I took a conservative scenario and a really simple accounting exercise. It’s about 29 percent of your end wealth. So about 29 percent of your wealth the day you retire. So when, whether you’re planning 65, 70 years, so that day, if you had been following the efficient route versus the non-efficient one, you would have 29 percent more in your wealth. So this usually, this conservative computation would say that the physician ends up with two and a half million instead of three and a half million. The good thing about the physician is that they end up with millions, right? So but there’s one million that they don’t see.

It’s not that they end up poor, and probably that’s why it’s not a dramatic, they don’t feel it as an existential issue. Another group of people that have the similar problem is professional athletes. The difference with them from physicians is that they have a very short career, and so how they manage their wealth producing that very short career, it’s critical for the rest of their life.

What physicians have is a much more stable income throughout their career that hides the problem, that they can say, “OK, yes, I retired and I have two and a half million dollars, and I can live off of that,” let’s say. And this exercise says, “Yeah, but you could have three and a half.” So that’s kind of the number. So it’s about 29 percent in lower wealth at the end of your career, and that is split because of those three reasons. You overconsume because you thought that the return on savings was low. You paid somebody too much to try to invest your money, and when you invested, you invested in things that sometimes break, like a house.

Kevin Pho: So we’ve talked about potential solutions during training, a one or two-hour financial literacy course where we talk about some of the things we’re talking about today. What about already established physicians? Maybe they’re listening to us for the first time, and you’re getting them to think about how they’re investing, and maybe they fall into some of the categories that we just talked about. Tell us the next steps they should think about in order to not miss out on these future gains. What’s the next step they should take?

Hernan Moscoso Boedo: I would suggest they open a brokerage account and play with a little bit of money, and then they learn by getting their hands dirty. It’s like medical training, right? So it’s a residency. You’re training by getting your hands dirty. That was my suggestion to this group of friends. Don’t take my word. I think you’re making a mistake. I would not buy that house in Florida. But don’t believe me. Just slowly invest a little bit, and have fun with it a little bit, and then you start seeing how it accumulates, and usually that’s the way people accept these things.

Kevin Pho: We’re talking to Hernan Moscoso Boedo. He’s an economics professor. Today’s KevinMD article is “Why your doctor invests like a vaccine skeptic.” Hernan, let’s end with some take-home messages that you want to leave with the KevinMD audience.

Hernan Moscoso Boedo: So I would suggest value your investment in human capital, right? So you did spend all those nights at the hospital. Don’t give up the fruit of that work by following wrong advice, by being fearful of the unknown, by claiming that you just don’t understand. Physicians understand very complex issues all day long. So this is something relatively simple. And so I would hate to see physicians end up leaving money on the table that belongs to them through all those long hours in training.

Kevin Pho: Hernan, thank you so much for sharing your perspective and insight. Thanks again for coming on the show.

Hernan Moscoso Boedo: Thank you.

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