Investing for Dentists
By Cecil Staton, CFP®
Investing for Dentists: A Guide to Building Wealth Beyond the Chair
Are your investments on track to help you achieve financial independence? The best investment a dentist can make outside of their own practice is usually into a broadly diversified portfolio of stocks and bonds. We’ll outline the best ways we’ve found to grow your net worth and achieve a high return.
Many practice owners decide to combine commercial real estate ownership with an investment portfolio. We’ll outline the pros and cons of both investment opportunities. In conclusion, we’ll outline our view of the optimal path when we’re advising investing for dentists.
Arch Financial Planning is a dental-focused financial advisor that helps dental practice owners nationwide. Be sure to read our guide and hire the right team of advisors who can assist with building and selling the practice you’ve built to empower your retirement plan.
Why Focus on Investing?
Investing is a crucial aspect of achieving financial security and success. For dental practice owners, the ability to grow wealth is not just about managing the day-to-day cash flow of the practice but about securing a future that goes beyond the lifespan of their ability to practice. While real estate investment, such as owning commercial properties or rental properties, has traditionally been a popular choice for dentists, there are compelling reasons to consider broadening your investment horizon.
The Limitations of Real Estate Investment
Real estate investments, including owning your practice’s building or investing in rental properties, offer tangible assets and can provide rental income and potential tax benefits. However, these investments often require substantial capital upfront and ongoing management, which can detract from the time and energy you can devote to your practice and patients. Moreover, factors such as fluctuating interest rates, maintenance costs, and varying tenant issues can add unpredictability to the expected returns.
Overstating Real Estate Investment
Some dental practice owners tend to overstate the financial returns of their real estate portfolio. In reality, real estate performance can sometimes fall short of expectations due to unforeseen costs such as maintenance, management fees, and fluctuations in property values and rental markets. When compared to a well-diversified, low-cost investment portfolio that includes stocks and bonds, real estate might not always keep pace.
These portfolios, especially those constructed with a focus on small cap, value, and profitability factors, often provide broader diversification and less intensive management, leading to potentially better and more consistent returns over time. This makes a strong case for dental practice owners to consider these simpler and often more reliable investment avenues to achieve their financial goals.
Embracing a Smarter Investment Strategy with Arch Financial Planning
At Arch Financial Planning, we advocate for an academic-based investment philosophy that focuses on long-term growth through smart investments in the stock market. By targeting small cap, value, and profitability factors and utilizing low-cost funds from trusted fund families like Dimensional, Avantis, and Vanguard, we tailor investment portfolios to meet dentists’ specific financial goals.
Key Components of Our Strategy:
- Diversification Across Market Factors: Unlike the heavy capital concentration in large-cap stocks, investing in a globally diversified portfolio and adding a mix of small-cap, value, and high-profitability stocks spreads out your risk and increases the potential for higher returns over time.
- Low-Cost Funds: We focus on minimizing costs that can erode your returns. By investing in low-cost mutual funds, we ensure more of your money is working for you.
- Passive Income Through Dividends: Similar to rental income from properties, dividends from stocks can provide a steady stream of passive income, which is crucial for long-term financial stability.
- Tax Efficiency: Our investment strategies consider the tax implications of investing, helping you minimize of capital gains and other tax drags.
Long-Term Expectations
Our investment philosophy is grounded in the belief that this strategy will likely outperform real estate investing and concentrated portfolios of large-cap stocks over long periods. This expectation is based on historical data and the inherent growth potential of the equity markets. As dental practice owners, the transition towards investments that offer the potential for higher returns and require less active management can provide the financial freedom to focus more on your practice and less on managing investment properties.
Paying Off Student Loans vs Investing
For many dentists, managing student loan debt is a significant financial challenge early in their careers. A strategic approach to this issue is to utilize income-driven repayment plans, which adjust monthly payments based on your income and family size. This method is particularly effective when the student loan balance significantly exceeds your income, allowing for more manageable payments. The advantage of this strategy is that it frees up more cash flow during the crucial early years of your career, enabling you to invest in expanding your dental practice or in retirement savings. You can allocate resources towards high-impact investments by making your debt payments more affordable, leading to substantial wealth growth over time. This approach helps maintain a good quality of life and sets a solid financial foundation, ensuring you’re not overly burdened by debt as you grow professionally.
Best Practices Investing for Dentists
Owning the real estate where their practice operates and potentially investing in surrounding buildings can be a sound financial decision for dentists. This ownership offers control over the premises, potential appreciation in property value, and stability away from the uncertainties of leasing. This allows your practice to make mortgage payments and take tax deductions for expenses such as property taxes while not paying rent.
However, beyond these specific commercial property investments, it’s generally wise for dentists to diversify their assets to mitigate risks and enhance returns. A broad, diversified portfolio of stocks and bonds is advisable, serving as a fundamental strategy for long-term wealth accumulation. This approach spreads out potential risks associated with the volatility of real estate markets and provides exposure to various economic sectors and global opportunities. By balancing real estate with stocks and bonds, dentists can create a robust financial foundation supporting their immediate business needs and long-term financial security.
Keys to Investment Success
Successful investing isn’t about the allure of picking individual stocks or attempting to time the market to make quick gains. Academic research supports the notion that higher expected returns over long periods are more reliably achieved by adopting a disciplined approach. This includes resisting the urge to chase after past performance, avoiding the pitfalls of market timing, and steering clear of attempts to outsmart market trends.
Instead, investors should focus on factors within their control, such as maintaining a diversified portfolio, minimizing costs, and sticking to a well-thought-out investment plan. It’s also crucial to disregard sensational market headlines that can provoke emotional reactions and lead to impulsive decisions. By adhering to these principles, investors can foster a more stable and potentially more profitable investment experience. The key to successful retirement planning is to stay invested over a long period of time.
Conclusion: Your Path to Financial Success
As your financial advisor, our mission at Arch Financial Planning is to guide you through the myriad of investment opportunities available to you. Whether your goal is to secure financial security for your family, prepare for retirement, or simply increase your wealth, our strategies are designed to align with the unique needs of the dental industry. By choosing investments in small cap, value, and profitability factors through respected fund families, you are making a smart investment that promises not just returns but a solid foundation for your financial future.
To learn more about how we can help you achieve your financial goals and discuss your investment portfolio, please contact us at Arch Financial Planning, where your financial success is our commitment.
Author: Cecil Staton, CFP® CSLP®
I'm a fee-only financial advisor for dentists serving clients nationwide.
I left the large financial institutions to start my own RIA. I did it so people could pay for real planning and not just an agenda to sell a hidden product. As a fiduciary, Arch Financial Planning, LLC was built on that promise by delivering non-cookie-cutter plans that provide solutions to achieve their goals.
Who do I serve?
Typical: Dental practice owners
Goals: Pay off student debt, start/sell a practice, and grow their wealth
Location: Virtually anywhere in the U.S.
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Disclaimer:
This website (the “Blog”) is published and provided for informational and entertainment purposes only. The information in the Blog constitutes the Content Creator’s own opinions and it should not be regarded as a description of services provided by Arch Financial Planning, LLC or Cecil Staton, CFP® CSLP®.
The opinions expressed in the Blog are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product. It is only intended to provide education about personal financial planning. The views reflected in the commentary are subject to change at any time without notice.
Nothing on this Blog constitutes investment advice, performance data, or any recommendation that any security, portfolio of securities, investment product, transaction, or investment strategy is suitable for any specific person. From reading this Blog we cannot assess anything about your personal circumstances, your finances, or your goals and objectives, all of which are unique to you, so any opinions or information contained on this Blog are just that – an opinion or information. You should not use this Blog to make financial decisions and we highly recommended you seek professional advice from someone who is authorized to provide investment advice.
