Alternative investment options for doctors

Oct 1, 2018

As a medical professional with a high income (or trainee with the potential for high income), you’ve probably given some thought to diversifying your investments. After saving up an emergency fund, paying off high-interest debt, and maxing out your retirement accounts, you may be in a good position to consider alternative investments for a small portion of your portfolio.

Alternative investments

‘Alternative investment’ is a broad term, though it generally refers to any number of investments that fall outside of traditional stocks and bonds.

Alternative investments include:

  • Investing in private companies (such as startups)
  • Peer to peer lending
  • Real estate and real estate crowdfunding
  • Investing in assets that have value (such as precious metals)
  • Hedge funds
  • And others

Many alternative investment offerings are restricted to accredited investors. An accredited investor is someone with a net worth of at least $1 million or who has an income of at least $200,000 per year.

Contrary to what the title suggests, an accredited investor doesn’t have to fill out an application, undergo review by an organization, or pay a fee. Rather, if you simply meet the net worth and/or income criteria, you’re an accredited investor.

When making an investment, you’ll likely be required to “self-certify” your status as an accredited investor by checking off a few boxes indicating that you meet the criteria. In some situations, you may be asked to verify your status by showing documentation such as a recent tax return.

All of this is put in place by the SEC to ensure that individuals don’t put money into high-risk investments when they can’t accommodate losing the entire investment.

This leads to a good rule of thumb when it comes to high-risk, alternative investments:  Losing your entire investment should be acceptable to you. How do you determine what’s “acceptable” or not? This varies from person to person based on risk tolerance, life goals, the rest of your financial portfolio, and other factors.

The best way to help determine what is acceptable to you is to know yourself, your situation, and your financial data.

The benefits of alternatives investments:

  • They can perform well regardless of what the stock market is doing
  • They diversify your portfolio
  • They provide a hedge against inflation
  • They can have higher returns than traditional investments
  • They offer new opportunities and exposures

The downsides:

  • They have low liquidity
  • They can be difficult to understand
  • They are risky
  • They can require in-depth and costly due diligence
  • They sometimes are associated with legal constraints

Choosing between types of alternative investments

I listed off several types of investments above. Choose just one to get started. Having any alternative investment in your portfolio is a means of diversifying. You by no means need more than one type right off the bat.

If you already have interest in a certain time, by all means pursue it. Otherwise, consider choosing a type of investment that:

a) Doesn’t confuse you
b) Is interesting to you

Where enthusiasm comes into play is twofold. First, you’ll be more thorough in your initial research of a possible investment. Second is your own psyche after handing your money over as an investor. If you’re keen on what you’ve invested in, you’ll feel better while your money is tied up. You can still feel good knowing that you contributed the money to an organization or pursuit that aligns with your values, even if the investment doesn’t turn out to be profitable to you.

Alternatively, if you’re using a financial advisor or are able to take emotion entirely out of your investments, point b) may be less important.

With that said, keep in mind that the general alternative investment type you choose is less important than whether you make a strong choice regarding an actual investment.

Popular alternative investment options

What follows is a short description of just a few of the more popular alternative investment types, and why they may be appealing to you as a physician.

Real estate

Real estate is quite popular right now – not just because we get inspired by flippers on HGTV, but because real estate is (in many cases) a smart thing to invest in. Real property will continue to be valuable. Moreover, most of us own real estate for our personal use, so it’s an area that we’re not clueless about when we start to think about it from an investment standpoint.

Real estate crowdfunding has really picked up steam over the past couple of years because it allows you to invest in real estate without knowing a huge lot about the real estate market. Crowdfunding also makes large investments, such as condo buildings, resorts, or college dorms, accessible to ‘average joe’ investors.

From a doctor’s mindset, real estate investing can be attractive and interesting when it involves hospitals or practice centers.

So requirement a) above is met for most physicians when it comes to real estate investments. If real estate doesn’t meet item b) for you though, keep reading.

Private equity and seed/angel investing

As a medical professional, you may want to consider angel investing in biotech startups, which – like real estate – can be done through crowdfunding or other means. This is an appealing option for many physicians, since the topic area hits close to home. This falls under the umbrella of angel investing.

Private equity is broad. From a high level, a private equity investment is ownership interest in an asset that’s not publicly traded. Funds are usually set up as partnerships in which investors contribute to a pool of funds that is used to invest in other companies. As an investor, you might choose to contribute to a pool based on the type of company it will invest in, but you may leave the details to the partnership manager.

Private equity can be ideal for physicians who are interested in startups within the healthcare or biotech field. If you love to see innovation in healthcare and want to participate in moving the field of medicine forward to a greater extent than you can accomplish in your everyday work, you can do so through a financial investment in private equity.

Hedge funds

Hedge funds are pooled investments that are used to hedge against market fluctuations. As with private equity, the term encompasses a range of fund types. Various management strategies and philosophies can be utilized in a fund. The fund can invest in a wide variety of assets like currencies or real estate. A common strategy is to use borrowed funds or leverage to increase returns. While this increases risk, it can amplify returns.

This option can be a good options for physicians with a high net worth looking to diversify and wanting to opportunity for potentially large returns. As an investor, you’re unlikely to be involved in the day to day management of the fund. So requirement b) above is less applicable as with some other types of alternative investments.

Physician investing when it comes to alternatives

It’s okay to stick with traditional investments. You may not have the desire, time, or interest to extend your portfolio beyond this. For most high-income and high net worth physicians, though, alternative investments are worth considering. Most doctors will find some type of investment that appeals to them, given the breadth of options within alternatives.

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