Ignorance risks financial future

When my middle son graduates from medical school next year, he and his wife will transition from a meager student income right into a six-figure salary. So lately I've faced the fact that my little boy is all grown up and we still haven't had "the talk."

GETTY IMAGES/THEGOODLY

No, not that talk. I've spent a lot of time trying to figure out how to present "the talk" without making his eyes glaze over since he has never in his 20 years of education been formally introduced to the concepts of saving, investing, debt management or budgeting. I know energetic young doctors out there are way more likely to watch late night television than switch on CNBC, so I'll give you some financial facts and opinion á la David Letterman: Here's my "Top 10 List of Things Young Veterinarians Must Know to Reach Their Financial Goals."

No. 10: The government is not—repeat, not—looking out for you. If you're planning to own a house, finance a college education for your kids or maintain a decent lifestyle in old age, you're on your own. Don't bet on Social Security or Medicare being around when you're ready to retire. They'll exist but won't be nearly as available or generous to the middle class as they are now—to think otherwise is an exercise in self-delusional "fuzzy math."

No. 9: The time to take chances financially is early in your career. You can afford to make financial mistakes when you're young. You have the energy to bounce back from financial setbacks and the ability to work extra hours, develop side businesses and cultivate a veterinary practice. For example, if you buy a practice and subsequently mismanage it, or the neighborhood goes belly-up and the business fails, you have time to buy another one and use what you've learned to eventually flourish.

No. 8: Financial ignorance is anything but bliss. In the not-so-distant past, young associate veterinarians could fall back on their employer's defined-benefit pension plan. After recent tax reform legislation, however, few clinics offer these. Young docs also used to be able to afford high investment management fees to big financial firms to handle their savings. Today, salaries are skimpier, so paying an investment "pro" a big commission on stock trades can torpedo the long-term return on invested savings. Newly minted veterinarians must educate themselves about the basics of stocks, bonds, mutual funds and such commodities as gold and silver.

No. 7: Don't invest in an annuity until you understand the product cold. Annuities are complex financial products underwritten by insurance companies. Some masquerade as "guaranteed return" products. (Which they very well may be—until the underwriter goes bankrupt or inflation swallows up the promised return.) Others dress themselves up to look like "tax-deferred stock mutual funds." They're tax-deferred, all right. But you frequently pay an outsized amount—often more than the tax benefit—to get that tax savings. Take-home point: Annuities occasionally are an appropriate investment for a young or middle-aged veterinarian, but rarely. So learn all you can about the costs of these products.

No. 6: Stocks are not too risky for you to invest in for your future. The fact is that stocks are probably the only investment category that offers a realistic route to financing your kid's college or your own retirement. Bonds won't do it. Cash won't do it. Gold might, but that's a crapshoot. Once you embrace rule No. 8, you'll understand why this is true.

No. 5: Individual stocks are for fun; stock mutual funds are for achieving goals. I've been investing since law school, but I was 45 years old before I realized that picking individual stocks is a waste of time. More than two-thirds of professional mutual fund managers (whose job it is to buy a "basket" of individual stocks) fail to even match the broader market as measured by the S&P 500. And that's after spending 80 hours a week studying stocks using phenomenally sophisticated software. Think you'll do better?

No. 4: Choose financial advisors carefully. My father's stockbroker came to work at E.F. Hutton after a minor league baseball career. My first insurance agent (who also works with exchange-traded funds and variable annuities) neglected to tell me that my practice vehicle's insurance company had gone bankrupt and let me drive around for a year with no coverage. Bottom line? Do extreme due diligence before entrusting your money with a financial "expert."

No. 3: Pursue every existing legal option to minimize taxes. Thanks to an unimaginably complicated tax code, there's a lot to know about tax deferral and legal tax avoidance. Step one is to take full advantage of tax-deferred or tax-exempt accounts, such as IRAs and Roth IRAs. Workplace 401(k) and 403(b) plans should also be maximized, especially if the employer makes a matching contribution. Not all such accounts may be used concurrently, so familiarize yourself with the rules.

No. 2: If investing a lump sum, do it gradually. Every market has its ups and downs—if you owned a house in 2009, you know painfully well what I mean. As far as stocks, bonds and metals, it's almost always best to spread out purchases over time to avoid catching the market at its peak.

And the No. 1 way young vets know they can reach their financial goals: Never, ever invest money into a security, metal, currency, duplex, strip mall, mineral rights contract, stock, bond, mutual fund, ETF, Bitcoin deposit, credit default swap, mortgage-backed security, warrant, land subdivision, oil well, distressed debt security, or ownership interest in a veterinary hospital until you clearly understand the investment, risk, potential return and penalties for getting out of it in the future.

Dr. Christopher Allen is president of Associates in Veterinary Law, which provides legal and consulting services.