Expert take: Why index funds are a smart investment for physicians
Key Takeaways
Index funds recapitulate the components of a financial market index such as the S&P 500.
A potential downside of index funds is that the underwhelming performance of a few mega-cap stocks can tank returns.
Physicians may be interested in index funds because they are a low-cost, low-maintenance, and high-performing investment choice.
Making a profit in the market can be complicated, with opaque investment vehicles adding to the difficulty. Many physicians prefer to stay in their lane and concentrate on their patients. In making important investment decisions, they rely on their financial planners. But there is a class of investment that is easy to appreciate, relatively hands off, low cost, and well-performing: index funds.
Index funds explained
Index funds—including mutual funds and exchange-traded funds (ETFs)—comprise a portfolio intended to match or track the components of a financial market index such as the Standard & Poor’s 500 Index (S&P 500), according to Investopedia.[] Index funds offer broad market exposure at low overhead and minimal portfolio turnover. They yoke with their benchmark index regardless of market conditions.
In a bid to better understand index funds, we interviewed Lewis J. Altfest, PhD, CFP, CFA, CPA, PFS, at Altfest Personal Wealth Management, over email.
MDLinx: What are index funds, and why are they trendy?
Altfest: They are investments that enable you to clone overall market performance, often less a very low fee. They are trendy because they have performed well on balance for a number of years.
MDLinx: What's the difference between index-passive mutual funds and active mutual funds?
Altfest: Index funds don’t depend on the expertise of a manager who may be better or worse than average. Non-index mutual funds select and promote either a manager, a research department, a concept, or the overall management company.
MDLinx: What are the upsides and downsides of investing in index funds?
"The upside is better performance than many other investment vehicles. The downside is weaker performance than investments made by really good portfolio managers."
— Lewis J. Altfest, PhD, Altfest Personal Wealth Management
Altfest: The overhead cost of the non-index mutual fund is generally moderately higher than some index funds and significantly higher than others. Also, many index funds are based on the S&P 500 Index, the return of which is weighted by market capitalization of the stocks within the index. Poor returns of a few mega-cap stocks could undermine the return of the index.
MDLinx: Does the current economic milieu make investing in index funds riskier than other vehicles such as bonds or money-market accounts?
"Stock index funds are riskier than bonds or money market funds. Bond index funds have the same risk as bonds. "
— Lewis J. Altfest, PhD, Altfest Personal Wealth Management
MDLinx: Should docs still invest in index funds in light of recession fears stemming from tightening interest rates, inflation pressures, and the recent collapse of some banks?
Altfest: The question for stock index funds is the same as for stocks. Inflationary pressures, the collapse of some banks, and higher interest rates create an environment for a recession. Government actions on banks and a moderation or elimination of interest rate hikes can help reduce the impact on the economy.
MDLinx: With the recent pullback in stock prices, is now the time to buy index funds “on the dip”?
Altfest: Buying some on the dip can make sense for those who have little in stocks. My overall recommendation is to be conservatively postured, to maintain money in stocks but to wait until the economy and the bank situation become clearer. I would have a material position in Asian emerging markets and, for the first time in years, in quality bonds.
MDLinx: What resources can physicians use to learn more about index funds?
Altfest: They can Google information on index funds or go on websites of the two largest index fund companies, Vanguard and BlackRock.
MDLinx: What is a long-term strategy for investing in index funds? Should physicians buy and hold?
Altfest: The long-term strategy is to buy and hold.
"To buy and sell on whim or sell when the outlook is dim undercuts the index approach. Moreover, it is usually wrong—even for highly intelligent doctors."
— Lewis J. Altfest, PhD, Altfest Personal Wealth Management
MDLinx: Do index funds make investing easier?
Altfest: Index funds can make investing easier—particularly if a hands-off approach is used.
MDLinx: Any other thoughts?
Altfest: If you want to really partake, hire an investment advisor, preferably one who provides fee-only financial advice. Some actually use index funds in part or, less often, in full. Another recommendation is to include some real estate in your portfolio, particularly real estate that is not traded on stock exchanges, which reduces the diversification potential.
A financier’s favorite index funds
On a final note, we asked Dr. Altfest to provide us with a list of some of his favorite index funds. They include:
Vanguard 500 Index
Vanguard Small Cap 600 Index
Vanguard Developed Markets Index
Vanguard Emerging Markets Stock Index
Vanguard Total Bond Market Index.
What this means for you
Index funds are trendy due to a history of positive performance with little time commitment on the part of the investor, making them a popular investment decision for busy physicians. While collaborating with a financial expert may result in loftier returns, monetary gains are not guaranteed with any investment strategy. Physicians may refer to places like Vanguard or BlackRock if they are interested in making a low-commitment investment.