Financial literacy tips for young surgeons

by John D. Kelly IV, MD

This month, I interviewed Tim Towler, a financial coach and registered representative of PFS Investments Inc., and a member of the Financial Industry Regulatory Authority. Towler is also an adjunct professor of economics at Connecticut State Community College Capital campus in Hartford, Conn.

He incorporates economic literacy curriculum into his introductory economics courses, so I asked for his best financial advice for young surgeons. I hope you’ll pluck some pearls of wisdom from our conversation.

Kelly: What advice would you give to the young surgeon who graduates with student loan debt at or in excess of $300,000?

Towler: My advice to a young surgeon is to have and execute a rock-solid plan to protect your income and build generational wealth. The foundation of one’s plan is that financial literacy is a basic appreciation of — to a working knowledge of — how money works.

Income protection: We protect our possessions (ie home, cars and cell phones). Your life is priceless; can you afford not to insure it?

An income protection/investment strategy recommends that you buy term insurance and invest the difference. There are two types of life insurance: whole life cash value and term. Financial literacy equips one to differentiate and make a wise investment.

Generational wealth: There is a proverb that says: “A good person leaves an inheritance to their children’s children.” Financial literacy equips the investor to realize this proverb through the “3 Ds” of money management (more on those below).

With respect to student loan debt, learning and employing debt reduction strategies (ie debt stacking) are valuable.

Kelly: Should early career surgeons invest “aggressively”?

Towler: In order to determine an investment strategy, the client must answer the following three questions from the Investment Profile Questionnaire:

What is your investment goal?

Growth: To have my principal balance grow over time.

Growth and income: To have some principal growth over time as well as provide current income.

Income: To generate and provide income.

When do you plan on taking money out of the account?

In more than 7 years

Within 3 to 7 years

Within 3 years

What level of risk are you comfortable with?

High/comfortable

Medium/somewhat comfortable

Low/not comfortable

Based on the client’s response, their financial adviser would develop a portfolio that meets their needs and is in the best interest of the client. The portfolios range from “income” to “aggressive growth.”

A concept called “the time value of money” states that the earlier the investment begins, the value over time will be greater than waiting. Whether aggressive or conservative, start sooner rather than later!

Kelly: Can you explain the concept of “dollar cost averaging”?

Towler: Dollar cost averaging is when an investor makes consistent contributions, the same amount of money at regular time intervals (ie, weekly, monthly, quarterly), and purchases occur at regular time intervals regardless of the asset’s price.

Dollar cost averaging represents the third “D” in the investment strategy:

Discipline: buy and hold;

Diversification: don’t put all your eggs in one basket; and

Dollar cost averaging.

The best illustration of dollar cost averaging is an investor riding the up escalator in the mall while playing with a yo-yo. The escalator represents market growth. The yo-yo reflects the business cycles (bull/bear) over time. Dollar cost averaging takes full advantage of the business cycles. At the yo-yo low point, shares are purchased at a discount. At the yo-yo high point, the price per share has appreciated.

Kelly: Can you talk about index funds for young investors?

Towler: An index fund is a type of investment that tracks a market index, like the S&P 500 or the Nasdaq 100. Index funds are designed to match the performance of the index. As such, index funds seek market average returns. My recommendation, based on the outcome of the client’s Investment Portfolio Questionnaire, is to invest in actively managed funs via retail brokerage.

Kelly: What about managed funds?

Towler: Contrasted with index funds, a managed fund seeks to outperform the market, thus delivering a greater return. Managed funds are just that: managed by a professional funds manager. Mutual funds range between 50 and 150 equities (ie, stocks) and bonds in the portfolio.

Kelly: What should a young investor look for in a financial adviser?

Towler: Prior to agreeing to employ a financial professional, as the following three questions, then assess your feelings about their response.

1. How much do you charge, and what will the total cost be? 

You should obtain total clarity on all costs and charges involved with financial planning and have an understanding of what you should expect to receive in return.

2. What are your qualifications? 

Confirm they are life insurance and securities licensed in your state of residence.

3. How will our relationship work?

Understand the degree of access you will have to the advisor, the frequency of your meetings (ie, quarterly, semiannually, annually) and their ability to receive phone calls or emails outside of prescribed appointments. It is critical that you determine whether the advisor is committed to help you improve your financial literacy.

Kelly: Any final words for our young investors?

Towler: Bear in mind that you have invested a tremendous amount of time, effort and resources to answer your calling. There are wolves lurking to devour your well-earned income by taking advantage of financial illiteracy.

To the young surgeons and all in the medical profession, I sum it up in two Latin words: Caveat Emptor! This means, “let the buyer beware.” The phrase describes the concept in contract law that places the burden of due diligence on the buyer of a good or service.

About the author:

John D. Kelly IV, MD, is a professor of orthopedic surgery at the University of Pennsylvania.