The Magnificent 7 Investing Decisions


I’ve previously written about My Not so Magnificent Investing Mistakes. Well, my investment decisions haven’t been all bad. There are a few things that have got me to where I am today. Hopefully, after you read these, you will take a minute and remember what you’ve done to get where you are today as a high earner If you are earning a high income, you probably did a fair number of things right.  Give yourself a pat on the back and then keep on working and learning so that you keep succeeding. The trick is making that high income work for you instead of you working for it. I present these investments in no particular order.

 

1. High Value Education

I started school very early. I was five. Ok, that probably doesn’t impress anyone but when I was finishing residency and my kids would ask what grade I’m in, I would reply the 24th grade. The kids’ jaws dropped and their eyes bulged open.

When you are young, school seems never ending, but evidently, I couldn’t get enough of it. Thankfully I was also paid to go to school for my last four years (although it would be less than minimum wage if paid hourly.)

The other important aspect of my education was its high value. I went to a major flagship state university that provided me just as much opportunity to go to a professional school as any other elite school and at a very reasonable cost. The fact that my family could finance the school and I could work to pay my room and board was another key component to the value. If I had started out with student loans for undergrad and then added more during professional school, I would have been in a much more difficult situation when I finished my education.

The fact that my family could finance the school and I could work to pay my room and board was another key component to the value. If I had started out with student loans from undergrad and then added more during professional school, I would have been in a much more difficult situation when I finished my education.

I think this is more important than ever when it comes to our kids’ education. College isn’t an automatic sure-in to the job of your dreams. I don’t know if it ever was, but it certainly isn’t going forward. High value education is the cornerstone of the investment we are making in our own kids currently. It’s also what I’m teaching them to seek when planning for their futures.

2. Pay Off Student Loans

I’ve spoken about whether it’s the right choice to pay down low-interest debt in Paying Down Debt or Building an Emergency Fund.  I’m much more comfortable with arbitraging interest rates to increase my rate of return on investments. I may have dodged a bullet by paying down my debt though. I started paying off my student loans in late 2007 and made the final payment around the beginning of 2009. If I would have put that money in the market I would be dollar cost averaging over the highs of the stock market and right before the crash.

I don’t know what I would have bought if I wasn’t paying down loans, but If I was buying SPY (or an S&P index fund), my average cost would be around $123 a share. At the end of that period, around March of 2009, the S&P hit a low of 683.38. That translates to around $68 a share of SPY, almost half my dollar cost average amount.

Even though my student loans were consolidated to 3.25%, I wouldn’t have that return at the end of the period it took me to pay off the $80,000+ in student loans. This was my most successful market timing and it was pure luck.

The real reason I didn’t want those loans hanging over my head is I didn’t like the idea of loans that weren’t dischargeable in bankruptcy. I was in the most vulnerable financial time of my life. We had the most debt with a young family and that was my reasoning for getting rid of it ASAP. I doubt I would do it the same knowing what I know now but it turned out to be a pretty smart/lucky decision in hindsight.

 

3. Getting Married

I had no idea what I was getting into when I asked my wife to marry me, but I’m very glad I did. This is a finance blog so I’ll concentrate on the financial aspect but that is truly a small part of the benefit of marriage.

Sharing our earning potential, housing, food, entertainment and hundreds of other costs is an amazing way to avoid debt, encourage savings, buy investments and live healthier and happier lives overall.

Granted, you need to find the right person to accomplish these things. If selfishness is a problem, then none of the other benefits of marriage will materialize. The faith that we share and practice are a You need the will to serve and please the other person to be front and center. Then all the great financial stuff naturally flows from that.

A big part of the cause of my financial education stems from wanting to make good money decisions so that I can bring happiness and take care of my wife and now our children.

4. Renting Before Buying

We moved back to my wife’s hometown after finishing training. We didn’t quite know what we were going to do but we figured we should rent so that we could get established, find a neighborhood with good schools and pay off debt.

I combed the internet resources and couldn’t find an ideal home for my family. My father-in-law gave us the local newspaper from our future town and said we could look through the classified section for rentals.

We rolled our eyes and say,

Who uses the newspaper classifieds to rent a home anymore? Everything is on the Internet now!

We looked through the paper to humor him and sure enough there, was a listing that met what we wanted. My wife called the owners. They were great folks and the house fit our needs perfectly.

Renting that house for the first two years we moved to the new city allowed us to save money for student loan payments. We also took our time finding the right neighborhood that met our needs and school choice.

5. Continuing to Learn About Finance

There are more resources than ever about finance. I’ve been studying personal finance, investing and the economy since 1995. The problem is I didn’t know where to start. The Internet was in its infancy at that point and the good literature was still difficult to find, at least for me.

Now there are entire forums like bogleheads.org entrusted with delivering quality financial advice. The financial service industry has had the veil ripped off and we have seen the big wart on its nose called high fees and expenses. We have books like The Little Book of Common Sense Investing. This book and others like it open up doors of opportunity.

I think it’s a difficult task to learn intelligent investing techniques because it’s somewhat counter intuitive. When we need medical advice, we go to a doctor. When we need legal advice, we go to a lawyer.

Going to an investment broker for investment advice would seem like the intelligent thing to do. The problem was and still is in some cases that investment product companies pay the broker to sell you products you probably don’t need. The other problem is the products that pay the broker the biggest commissions to sell are most likely some of the worst products for growing your net worth.

Continuing to grow my finance knowlegde and handling most of the heavy lifting myself have paid hansomly over the last decade.



6. Buying Investment Real Estate

I’ve bought my own homes in the past but when we had an economic downturn, especially with real estate in 2008-2009, homes lost a lot of value. By that time I’d been following the stock market for 13 years. I’d seen the internet boom and bust. I saw the post 9/11 crash and we were just finishing up the lost decade for stock investing.

I vaguely remember home prices taking a dive in the 1980’s with the oil bust. Medial pundants were saying that real estate had never taken this big a dip in 2009.

Real estate takes a while to recover. It’s an illiquid asset so it takes time for foreclosures and other bad real estate transactions to work their way through the system. I decided to dip my toe in the waters of real estate investing around the end of 2011.

My own biases were that everyone needs a place to live, regardless of the economy and the job situation. I decided to focus on single family homes. I wanted mid priced single family homes that a large part of the population could afford. Target rents were around $1000 if possible and home prices less than 100 times monthly rent.

I was able to find a couple 3 bedroom, 2 bathroom homes in my own town that fit the bill.

The homes were updated. Their amenities weren’t fancy but they were functional and served the purpose that a renter would need.

The first home has been a real winner. The same tennant that moved in early 2012 is still there today. She’s been a great tenant and the stuff that landlords dream of. She’s never missed a payment and always calls right away if she thinks something needs to be fixed. I’m sure there are several little things she has done herself just to avoild the trouble of waiting for a service person to show up. The other home is not as good but was still a winner.

The process of hiring a property manager and understanding leases has been invaluable. Looking at dozens of potential properties and learning what works and what doesn’t has prepared me to buy other properties in the future. While I work, I wanted my real estate investments to be a passive as possible. I can see this type of investing paying a higher percentage when I’m retired. This is especially true if  I am willing to do some of the real work myself. We will see when that time comes.

7. One Job, One Residence, One Wife

Moving from one huge decision to the next can become costly. These three tend to be the big ones in our lives. For medicine, the one job part tends to be a smart choice. There usually isn’t a lot of upward mobility when it comes to practicing medicine. For me, the longer I stay in this job, the more benefits I receive.

After becoming a partner, I keep more of the revenue I generate. I have more control of my schedule and I make more decisions about the direction of our practice.

If I were to jump ship and run for another job with possibly greener pastures, there would be a period to build these things back up. There is no guarantee I would be able to find all the benefits I have again.

I already have more house than I need but it has been a great place to live. The couple of acres we have allows the kids to run, play and discover right on our own property. The home allows us to entertain and help others in our community. It’s a big expense but I know several colleagues that have lake homes or mountain homes they rarely use. Those become money sinks and would only limit our ability to achieve retirement in the timeline we wish.

Sticking with the same spouse through thick and thin is the soundest financial decision I could make. I hate to even talk about it in a financial context because that is one of the minor benefits, but it is a benefit. That commitment and continued dedication to my wife has been and will be the best financial and overall decision I could ever make.

I hope to make many more magnificent investment decisions in the future. These are the big ones for now but as new ones come up, I hope to write about then.



What are some of your great financial decisions? What makes them that way?

 

Tom
Tom is a doctor, husband and father of five with a passion for parenting and finance. When he isn't skateboarding, riding BMX, or jumping on the trampoline with his kids, he is reading and writing about personal finance. He helps high income parents educate and mentor their kids to become financially, emotionally, and intellectually self sufficient.

9 Responses to “The Magnificent 7 Investing Decisions

  • That is a really good list. I completely agree with the finding a good wife aspect.

    I would add starting to invest in low cost index funds early and automating the withdrawals so we never see the money.

    And paying cash for our gently used cars.

    • Those are very good too. Once I started paying cash for our cars, I’ve never looked back on that decision. No car payments should be the standard.

      Tom @ HIP

  • Nice work HIP. For me, 3 homes and a wedding (like 3 men and a baby) have been my worst financial mistakes. The costs of selling homes led to losses in all of them and the wedding was way over priced. Sure our friends and family enjoyed it, but for us the value added was not greater than a simple night out with friends.

    The house and spouse I am in agreement with. The job can be more complex. I actually wrote a post waiting to be published on this. For us, moving jobs made financial sense. The match, benefits, pay, and pension outweighed the upfront cost of moving and the higher taxes for living in California. So each job has to be looked at as far as long term goals.

    • I’m glad to hear you’ve had some better opportunities in the job department.
      I did get a pretty good deal as I moved to a city where partnership was still an option. I know a lot of my fellow anesthesiologists don’t have that option when it comes to moving somewhere based on family or another decision. I think it would be very difficult for me to find as flexible and well paying job as I have now in another city. That’s why it was a good decision for me and possibly most of my specialty.

      Tom @ HIP

  • Another great HIP post.

    To your second point about paying down debt. Yes there is interest rate arbitrage. Other have posted on the dangers which briefly are: no guaranteed of market return, not putting the money into the market and actually spending, interest on loans changing, etc.
    My wife and I are both in medicine. We paid all debt down asap including house for those reasons and also because like you say, we felt so financially vulnerable. It was the most anxious time of our young lives. New job, huge debt, new kids. The psychological benefits of zero debt are worth any perceived monetary gain from arbitrage. We have no regrets even though we probably would be ahead if he still had debt. To me, the point of investing in not end sum of money. It’s much more nuanced and personal.

    I also am encouraged by your rental property point. I have a rental property by accident. We couldn’t see our house when I moved a few years ago so it’s rented. But I love the passive income and sense of small business ownership. I just don’t know anything about it. Like should I make an LLC? Etc. Any books do suggest? Do you have any posts you’ve made on your rental experience?

    • Thank you.
      I don’t fault anyone for paying off debt, regardless of the interest rate. I’ve said before that there are a lot worse things you could do with your money, I just think I would be more aggressive in investing now.
      I was just thinking about writing up my rental investment property experience hoping it would help some others after writing this post. I will definitely do it in the future.
      I listened to the Jason Hartman podcast about real estate investing. I wouldn’t recommend their network but I like the ideas he speaks about.
      I think an LLC is optional until you truly have a business. If you just have one or two properties, it’s not necessary.
      You can always set an LLC up later if you find that you really like being a landlord and want to make it a big part of investment income.
      I would get an EIN because you can get some advantages with that, like setting up a solo 401k.
      If you are really interested in real estate, you can always start small. In my case I put down about $20K on a 3/2 and jumped right in. I made some mistakes but even if I lost the property it wouldn’t devastate my retirement. I figure it is cheaper than any guru is going to charge you. I’ve heard of people paying $25K to get “inside” information from a master. It might help, but you could just buy a small property and get a ton of experience after you read and listen to some podcasts yourself.
      I wouldn’t recommend this tactic to everyone but most high earners can afford to make a mistake or two on a lower cost property.
      I don’t know where you live and this low level might not be feasible but if you are willing to buy like someplace in Texas or Memphis, you could probably find a cheaper property like I was referring to.

      Tom @ HIP

  • I completely agree with #5 about lifetime learning about investments. Becoming a DIY Investor is extremely beneficial. Even if you work with an advisor, you will be much better off if you can understand the advisor’s methodology and ask great questions. Like you said, the incentives in the industry are not always in the individuals best interest.

    • It has saved me a ton of money since I found the right investment information. Thanks for stopping by.

      Tom @ HIP

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