Individual stocks and bonds afford greater control. For example, you can buy bonds that mature in the precise year you need the cash. Or you can target specific attractive stocks-perhaps you know a company that makes a promising new medical device or drug. Individual stocks also offer a tax advantage, as you can delay paying taxes on capital gains until you sell. If you don't know much about investing but want to learn, a good option is to join an investment club. The National Association of Investors Corp. (810-583-6242) is the umbrella group for thousands of local stockpicking clubs.
The flip side is that individual securities also mandate heightened responsibility. With the speed at which stock prices can change these days-sometimes rising or falling by more than 25% in a day-you have to keep a watchful eye on your portfolio. "If you really enjoy [practicing] medicine and psychiatry, there isn't enough time to become a great expert in specialized fields of investing," says Chaffin, who primarily sticks with mutual funds.
Fredman believes it's easier to mess up trying to select individual companies. "With individual stocks, it's too easy to speculate on what you hope will be the future Microsoft and wind up losing a bundle." He too favors mutual funds. It can be especially challenging and expensive to buy and monitor dozens of individual stocks, especially those in certain categories such as embryonic domestic firms or foreign corporations, as information on these companies can be hard to obtain and trading costs may be steep. You can get instant diversification in such exotic areas, including real estate, by investing in a single mutual fund.Funds
Funds also offer other benefits that are difficult to come by with individual stocks and bonds. These include the ability to reinvest dividends into additional shares and the ability to switch money from one fund to another with a phone call-two services typically offered at no cost. While brokers might try to interest you in hiring a professional money manager to oversee a customized portfolio of individual stocks-assuming you have investible assets of $250,000 and up-you probably won't enjoy significantly better results than with mutual funds. The latter are highly visible portfolios counting millions if not billions of dollars; consequently, they attract the best managerial talent.Deciding Who'll Help
Another key decision you must make involves seeking professional help on another level. Should you hire a broker or financial planner to draw up an asset-allocation plan, dispense advice regarding specific investments, monitor your holdings and tell you when to sell? You can save fees doing it yourself, and no adviser will ever have more concern for your money than you do. Conversely, good advice can be worth the cost. Whitson believes medical doctors in general and psychiatrists in particular typically don't make model investors. "[Doctors] know their fields well, but when they get a little information in another area, they think they can do anything," he says. "Psychiatrists are there to help clients make decisions, yet it may be difficult for them to make decisions on their own." Your decision on seeking professional advice also hinges on whether you have the willingness, ability and time to manage a portfolio.
More than half of all mutual funds traditionally have been purchased by people seeking advice and willing to pay a sales charge or "load." The rest are bought by do-it-yourselfers dealing directly with no-load families such as the Vanguard Group in Valley Forge, Pa.; T. Rowe Price Associates in Baltimore; and Fidelity. If you decide to work with a broker, ask for referrals from friends and colleagues. Then interview several and check the disciplinary record of each by contacting your state securities department or the National Association of Securities Dealers (800) 289-9999. You also can get referrals through professional groups such as the National Association of Personal Financial Advisors (847) 537-7722. Also, find out how your adviser gets paid-by commissions, a flat fee or both. "We feel fee-only advisers are better because they offer more objective advice," says Whitson.
One final note involves retirement plans. Needless to say, there's a huge incentive to defer taxes whenever possible since this allows for faster compounding. Plus, you can reduce your taxable salary by the amount you kick into a workplace retirement plan. "Everyone needs to understand the importance of having a retirement plan," says O'Neill. If you run your own practice, a retirement program also can help you attract and retain good employees.
The range of retirement programs is sizable. Here, it probably is wise to seek help if you have authority to establish a plan at your company. So-called 401(k) plans, Keoghs, SIMPLE retirement accounts and other programs each offer different wrinkles when it comes to how much money you can invest, in what manner, at what cost and with what administrative burden. These are examples of "defined-contribution" plans, which set limits on how much you can sock away in any given year.
"Defined-benefit" programs are another option-usually costlier to administer but allowing you to sock away more dollars each year. "Defined-benefit programs can be good for people who haven't done a lot of retirement planning," says Mark Luscombe, a tax analyst at CCH Inc., a tax-information firm in Riverwoods, Ill. "You can set one up later in your career and still put away a pretty good sum for retirement."
The key is to get started. "It's tremendously important to keep adding to a pension fund," says Chaffin. "Sadly, many psychiatrists I know haven't done so."