You’ve spent the better part of your life in pursuit of knowledge. And you’ve achieved success in one of the most demanding professional disciplines imaginable. To say that you’re generally one of the smartest people in the room isn’t ego—it’s fact. So with a little studying, you could easily master the challenges of financial planning and investing, right?
Welcome to what's known as "Overconfidence Bias"—perhaps the most common behavioral bias that plagues physicians. We’re all susceptible. But ask a room full of physicians to rate their medical skills as either below average, average, or above average. It’s a pretty safe bet that most (if not all) are going to categorize themselves as above average.
Overcoming cognitive biases
Despite extended periods of market turbulence and volatility, over the past twenty years the S&P 500 Index® managed a 9.9%percent average annual return. Yet during that same period, the average individual investor realized a 5.2% average annual return on their portfolio.Disclosure 1
Why such a tremendous discrepancy? It’s not so much about fees and expenses as it is about attitudes and behaviors.
From the groundbreaking work of pioneers Daniel Kahneman and Richard Thaler in the late 1970s and 1980s, to new practical approaches for improving retirement outcomes being designed by next generation leaders like Shlomo Benartzi, we’ve come to understand a lot about the various cognitive biases that serve as impediments to success in investing and wealth management.
As a successful physician, you’ve earned the right to be supremely confident in your skills. Your tendency to be highly optimistic—believing in your ability to shift the balance of probability to make “good things” rather than “bad things” happen—is a bias that usually serves you well.
But in wealth planning, it often leads to sub-optimal results. Overconfidence can create a sense of invulnerability. You see yourself solely as a curer of the ill; never seriously considering (and planning accordingly) that you might potentially join their ranks. In addition, your individual identity and your profession often become so intertwined that the idea of retiring can seem like a totally foreign concept. These are tendencies that often lead to financial planning procrastination and delays.
- Can’t I focus on paying down debt right now and deal with maximizing my retirement savings somewhere down the road?
- Why should I bother planning for long-term care expenses?
The other major bias that physicians seem particularly susceptible to is "herding bias." Humans are social animals. There’s a definite safety and comfort that comes with following the pack—even when the herd may be acting counter to its best interest. Take the current investment industry-wide race to the bottom on fees, as well as the huge flight from actively managed funds and separately managed accounts into low-cost ETFs. As voracious consumers of financial information—from websites such as The White Coat Investor to publications like Forbes and Barron’s—doctors have been near the vanguard of these trends.
But are they sound practices?
At first blush it seems like paying minimal or even no fees (by extracting the middleman) would lead to better results. In reality, though, you often get what you pay for. Having a trusted advisor to guide you—especially when markets head south—can make all the difference. The same holds true with active versus passive investing. “There are managers out there who are consistently beating their benchmarks and adding considerable value,” explains Truist Wealth Medical Specialty Group advisor Michael Rutler. “This is because when and if the market, a particular sector, or a certain stock shows signs of weakness, active managers have the freedom to reduce or eliminate positions. ETFs, on the other hand, can’t mitigate risk by trimming back; they have to mirror their index.”
The willingness to stand alone and move counter to the prevailing wisdom is a rare quality—what sets investors like Warren Buffett apart from the crowd.
Other biases to keep in check
In addition to overconfidence and herding, physicians should pay particular attention to a few other biases that can negatively impact your long-term financial plans if not avoided.
We’re all familiar with the ubiquitous “past performance is not indicative of future returns” disclosure. But most of us fail to heed it. Behavioral studies show that people expect whatever’s occurred recently to continue happening in the future. It’s why we tend to chase the latest investment trends rather than trusting in time-tested asset allocation and diversification strategies. Because of your high income, physicians are often solicited to participate in funding start-ups, questionable commercial real estate investments, and highly illiquid hedge funds / private equity. Make sure you have a trusted advisor help you vet these riskier opportunities (no matter how well they’re currently performing) and try to keep them to no more than 5-10% of your total portfolio.
In almost every aspect of our lives, we tend to experience the pain associated with loss far more intensely than the pleasure associated with gain. It’s the reason why, despite the potential tax disadvantages, investors will often choose to sell their winners while holding on to their losers. “I can’t tell you how many hours I’ve spent on the phone with wealthy physicians eager to chase the latest investment trend,” recalls Matt Bracewell, another advisor with Truist Wealth Medical Specialty Group. “Their focus is on the high potential reward, so it’s my job to point out the even higher potential risk. Most heed our guidance. Those who don’t, often compound the mistake by refusing to sell when the investment begins declining—holding on in hopes that it will someday come back.”
Illusion of control bias
Every day when you drive to and from your practice, you feel a sense of control behind the wheel of your car. But are you really in control? Each time you pass through a green light, aren’t you trusting that multiple other drivers will adhere to traffic laws and not run their red light? In your profession, you have an ability to exert an incredible degree of control over life and death—the health and wellbeing of your patients. Your mind has been trained to make rational, disciplined, and evidence-based decisions. But this can sometimes be a drawback when it comes to the irrational, variable, and unpredictable nature of financial markets.
“Biases aren’t inherently bad,” explains Joe Sicchitano, Senior Vice President and Head of Financial Planning for Truist Wealth. “But it’s vital to understand those biases and how they impact your decision-making, so you don’t allow a single emotion-based moment to undo years of thoughtful planning.”
Having a trusted advisor to guide you through the good years is helpful. Having one to prepare you for and guide you through the down years is essential. Whether it’s a propensity for overleveraging yourself, or some other negative behavioral tendency, an advisor can help you avoid distractions and stay focused on your most important long-term goals.