The Optometry Money Podcast

Four Common Investment Mistakes Optometrists Should Avoid

• Evon Mendrin • Episode 146

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Episode 146 – Four Common Investment Mistakes Optometrists Should Avoid

As an optometrist and practice owner, you’ve got enough on your plate running a household, practice, and career - but what about your investments?

In this episode of the Optometry Money Podcast, Evon Mendrin, CFP®, CSLP®, walks through the four most common investment mistakes he sees optometrists make when they come to his firm - mistakes that can quietly cost you over your career.

You’ll learn:

  • Why a “junk drawer” portfolio is not a strategy (and how to create a clear investment approach).
  • The difference between owning more funds and actually being diversified.
  • How complexity for complexity’s sake often adds cost and confusion without adding value.
  • Why simplicity can lead to better outcomes, even for high net worth ODs
  • Why asset location - putting the right investments in the right accounts - can save you significantly in taxes over time.

These aren’t one-off missteps - they’re patterns Evon sees over and over with ODs nationwide, and by avoiding them, you can create a portfolio that’s simpler, more efficient, and better aligned with your financial goals.

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Other Episodes Mentioned:


The Optometry Money Podcast is dedicated to helping optometrists make better decisions around their money, careers, and practices. The show is hosted by Evon Mendrin, CFP®, CSLP®, owner of Optometry Wealth Advisors, a financial planning firm just for optometrists nationwide.

Hey everybody. Welcome back to the Optometry Money podcast. We're helping ODs all over the country make better and better decisions around their money. Their careers and their practices. I am your host, Evon Mendrin, Certified Financial Planner practitioner, and owner of Optometry Wealth Advisors and independent financial planning firm just for optometrists nationwide.

Evon:

And thank you so much for listening. Really appreciate your time and your attention today. And on today's episode, I wanna walk through the top investing mistakes I see optometrists make as they come to my firm, as they want to get advice and management over all aspects of their finances. I wanna talk about the, the most common mistakes I see. As I look through new family's investments and start to create a game plan of, of how to improve it these mistakes or maybe better said, areas of improvement, these opportunities of improvement come up time and time again and they can Quietly cost you over your lifetime, over your career. And so I wanna talk through those common areas of improvements with families' investments and, um, how we might approach improving that So let's go in and dive right in. Mistake number one is not having a clear investment approach. Many families that I see come to me with sort of a, a junk drawer portfolio. And this is very often when they've been handling the investments themselves. And, and what I mean by that is it's just a random collection of funds kind of thrown together without any sort of unifying plan. and, one account has, you know, one accounts may have a target date fund, another accounts may have a different year's target date fund. There might be index funds in another accounts and maybe some random, industrial or commodities fund in another. There's really no rhyme or reason of why the, the certain funds are picked. It's just sort of a random collection over the years and. Without a strategy, you're not really investing, you're just sort of collecting products. And so where I like to start, and, and this is probably the easiest thing to address and to improve on, uh, where I like, I like to start, is to create a clear investment approach. And if you've listened to some of my past episodes on investing, which I'll, uh, throw into the show notes, I, I want to start with a clear investment approach of how we're going to handle the investments. What you hear in earlier episodes is that, I believe based on the evidence and research we have available to us, that a passive style of investing makes sense, meaning investing not based on, a manager's intuition or my own intuition and trying to select the individual investments I feel will do better, or trying to time swings in markets. I, I think the better approach is to invest broadly. In a broadly diversified way based on a clear, transparent set of rules and trying to minimize costs and taxes where, where we can, and one example of this is index fund investing. I have an episode all about, uh, the merits and research behind why index investing makes sense. but I also consider, factor-based investing to be a part of that as well, having rules that tilt towards certain characteristics like smaller companies and. cheaper or value companies and more profitable companies relative to the index as a whole. And so I wanna start with a clear approach. What is our, what is our approach to investing as a whole? And then we go through the process of figuring out, okay, based on. Uh, where your family's at in your career based on the goals that you're investing toward your time horizon before you need to use the, the funds, what is the right mix of stocks versus other things like bonds that makes sense for you. And then knowing our approach, knowing that mix that my firm is targeting and, and maybe you're targeting as well, then we can start to say, okay, which funds do we use? Which investments do we use to fill those categories? Stocks versus bonds, US versus international stocks, large versus small and different characteristics. So you start with an approach that, that makes sense, an overarching approach, uh, that is evidence-based. You, you narrow down into the right mix of different categories that make sense for you, and then you then that leads to using the right products, the right mutual funds or ETFs, and all of your accounts should be. Managed together. I look at all of a client's household accounts that are going towards the same investment goal, retirement, for example, or financial independence, a s one big investment household investment pie, and each account is a different slice of that pie, but I want to invest all of the different accounts together. In, in a, a unified plan and rather than having sort of a random mix of investments and funds and individual stocks and all these different accounts, and so not having a clear investment approach or a clear reason why certain funds are selected over the years. is, is area of improvement number one, mistake number one, and maybe one of the biggest symptoms of not having a clear plan is this next mistake, which is thinking you are diversified broadly when you're really not. And so mistake number two is a, a lack of broad enough diversification. And you know, what is diversification? It's spreading out your investment dollars across as many unique sources of risk and return as possible so that if one risk shows up in your investments, you know, for example, if one stock, if one corporation goes belly up, well that doesn't impact all of your invested dollars because you are broadly invested. And it's, it's really a measure. It's really a, a way to manage risk in your investments. And, and so rather than invest in only one company, one corporate stock, you get invest in All of the companies in that industry, and instead of all of your wealth being tied to the, to the performance or lack thereof of one industry, you can invest in all industries. and so you can start to go and build out and spread from there, uh, including US and international. Sometimes this shows up as a, a client, as, as a family, as an optometrist, holding too many of individual companies and not really having broad diversification. other times I see this show up where the family will own a lot of like industry or trend specific index funds kind of thinking, Hey, it's an index fund. Like, shouldn't I be broadly diversified, like healthcare, for example, or industrial or defense index fund or something like that. But they're really just concentrated bets on that one industry. so that's, that's another way that that shows up is really concentrated bets on certain, industry, uh, specific index funds. but more often it's really that they own a bunch of funds, mutual funds or ETFs that really own the same thing. So, for example, and this is the most common example, is you might own a bunch of mutual funds, you know, 5, 6, 7, 8 mutual funds. But they really all own large US companies, large US stocks. That's probably the most common thing I see is they own a few different funds. You know, they could all be index funds too, but really when you look at what's inside of them, they're all just US large corporations. and as I've talked about in other episodes, for me, the starting point, true diversification and, and just common sense starts with investing globally at the global market. And that's where we start our approach and our due diligence. And if we feel like we need to adjust away from that, if we have evidence that tells us to do that, we'll adjust from the global market. And so that's our starting point and I think that should be the starting point for your due diligence as well. And and so when I see a bunch of funds that all own the same large US corporations, I would say that is under diversified. And, and, and there's a, a common misconception that if you own more funds, that should mean you're more broadly invested. And it, it's not necessarily about the amount of funds you own, it's really more about what's inside of those funds, what's underneath. And as you add it all together, is there a whole bunch of overlap or is it really actually diversified? And so a lack of diversification, having a bunch of funds that really invest in the same stuff is mistake number two. Mistake number three is, is something I see more often where the, the family's coming from another, you know, let's just say X, y, z, large financial institution, but, the second one is complexity for complexity sake. Having too much, far too much complexity in the accounts of, of the optometrist. And this show shows up in two really common ways that I see. Number one is having a huge list of funds unnecessarily. And very often when I look at an account statement and there are 10 to 20 funds. Mutual funds, ETFs in this single account. And if that same family has multiple accounts with this institution, there could be a Roth IRA, a Traditional IRA, a taxable brokerage account. They all have roughly the same boilerplate, templated list of 15 to 20 accounts, or 15 to 20 funds in each of these separate accounts. So when you add'em all together, we're talking about. 30 and more funds to deal with as a whole. And there's often a ton of overlap in between, very often with really highly active mutual funds that, that are very expensive and, and often tax inefficient. And it, it's just unnecessary complexity because very often you can replicate the, the investment mix underneath all of them. Meaning if you looked at what, what was actually under the hood of all these funds added all up together, you know, let's just say it's 80% stocks, 20% bonds, and X amount to US versus international. Like when you actually look at what's underneath, you can replicate that same mix. Very often with far fewer funds and far fewer complexities, and very often with, with lower cost, you know, you, you can often replicate with three to five funds, for example, or in some cases if it's all stocks with one fund. A nd so very often there's far too many funds in these accounts, even with really small dollar amounts. and which seems to me like just complexity for the sake of complexity or complexity is job security. And, and very often it's unnecessary. You can simplify the mix of funds, still get the same, underlying mix of investment categories and, and very often at a lower cost. It makes it difficult, especially where taxable investments are involved. it makes it difficult to unwind because you have capital gains to consider across a whole bunch of different investments. it's very easy with retirement accounts'cause there are no tax consequences to selling and reinvesting, but it's, it's those taxable accounts where it starts to get, it starts to get annoyingly complicated to unwind. And so that's number one. That's area number one where I see complexity come in, uh, with really long lists of often boil plate. funds selected and very often expensive, actively managed funds at that. the second way I see this coming is from the products themselves, meaning there are overly complicated products being used with the clients. So that could be, interval funds or, uh, buffered ETFs, for example. it could be things like indexed universal life policies or indexed annuities. Uh, it could also be things like private investments like, privately traded REITs or real estate syndicates. It could be, uh, different versions of alternatives or or private equity. And when we ask the question, why, why are these investments there? What is the purpose of the investments? What goal or issue are these often high fee or high cost investments solving that you couldn't have solved with a simpler investment option. And very often when you, when you start to peel back, like what is the real purpose or what issue or or problem are they solving? There's not really a clear answer. And, and very often they're just sort of pitched to the investor because that's what investors with that size of investments, uh, are drawn toward. And what's frustrating is that very often they are sold or pitched with this sort of pitch that you can get market returns with lower risk, sometimes higher returns than something else with lower risk. and, and very often when you, when you put that to scrutiny, very often those claims don't stand up to scrutiny and even more, the complexity hides a lot of the fees sometimes. It..and makes it difficult to evaluate them, and it makes it difficult for you as an investor to have good expectations, of what to expect. And so, the products themselves or the, the things that are invested in, are very often, overly complex. And I've seen across a range of net worths from very humble beginnings of the net worth side in early in the optometrists' career to later in the optometrists career with, multiple million dollars of net worth. You can invest wisely and successfully, without unnecessary complexity. You don't have to layer on complexity as your net worth gets larger. You don't have to be drawn to things that, that are overly complex. You still can be successful as an investor, and invest simply. And so whenever you are drawn to something or pitch something, that is, that is offering another layer of complexity that is offering market returns with lower risk or something like that. I would look at those things with a healthy amount of skepticism and I would ask yourself, you need to be very clear on what issue, what problem, or what goal is this particular thing solving that I wouldn't have solved without it. and a lot of times when you start to peel back the layers and, and apply some scrutiny, what you start to see is those claims often don't stand up or you start to see that you just don't need the complexity in your life. And so, mistake number three is a, is complexity for the, for the sake of complexity, overcomplicating the investment mixes and, and the investment options and products. and then number four, the wrong investments in the wrong accounts. What do I mean by this? Well, if you look at all of your different investment accounts, you have, different accounts with different tax characteristics. You might have pre-tax retirement accounts in 401 Ks and in traditional IRAs, uh, you might have Roth retirement accounts in the 401k and Roth IRAs where the, the dollars are after tax, but assuming we follow the rules in retirement, we can draw from it tax free. Uh, we might also have taxable brokerage accounts, where the investment income that that's kicked off from those accounts ends up on your tax return each and every year. And when we. Sell funds at a higher amount than we, than we bought'em for. we have to consider capital gains with potentially different tax rates. Uh, or we might have HSAs which have sort of a triple tax advantage where the dollars you put into it federally speaking at least, are, are deductible. if you invest it, that investment growth doesn't end up on your federal tax return. And when you inve, when you withdraw from it for qualifying healthcare expenses at any point throughout your life, it comes out tax free as well. And so you have all these different accounts that hold investments. All have their different tax characteristics and what we'd like to see are that we are putting the right investment categories in the right type of accounts because, and, and we're matching them up from a tax and growth perspective. For example, we know that. Corporate bonds, treasuries, for example. Those type of bonds kick off interest that's taxed at ordinary tax rates, just like your wages, just like your practice profit. So 12%, 22%, 24%, 35%, so on and so forth. So that's really Tax inefficient income, we, we'd like to see that not end up on your tax return. So with bonds, for example, we might look at bonds in your pre-tax retirement accounts, like the 401(k)s, traditional IRAs. real estate investment trusts, REITs funds that invest in REITs. we'd also like to see that income stay off of your tax return if possible. So we're looking at, tax advantaged accounts like retirement accounts as well. Roth IRAs, we'd like to see Roth IRAs hold the highest pot, the highest growth potential assets. We'd like to see that tax-free growth be as high as possible with our investment options. With stocks on the, on the other hand, stocks very often kick off qualified dividends, which are taxed at long-term capital gains rates, uh, which could be 0%, 15%, 20% depending on your income. And when you sell them, assuming you're selling these, these stock funds, or the stocks themselves, assuming you've owned them for longer than a year, that capital gains are taxed at those capital gains rates. So those tend to be more tax efficient. And those are investments we're more comfortable holding in taxable investment accounts, And that isn't always the case with stocks. You're gonna see some differences in the United States versus international, with international stocks. Uh, foreign countries may withhold taxes before they pay the dividends out, and you could potentially recoup that in a foreign tax credit if that's held in a taxable brokerage account. So there's some differences in United States stocks versus international stocks. and there are also different differences too. If you are taking a, like really high yield income yield approach, like really high yield dividend funds or something like that, those are not tax efficient. You are forcing more dividend income onto your, tax return by holding those in taxable brokerage accounts. And so, you know, there are some considerations depending on the way that you are investing in stocks. But generally speaking, we'd prefer to see more tax efficient, broad-based index fund or factor-based stock funds inside of taxable brokerage accounts. And very often ETFs are more, tax efficient just due to the way that they're structured than mutual funds. they tend to kick off less capital gains, at the end of the year. And so, we'll try to target ETFs versus mutual funds where possible. So those are some of the considerations. And again, the way we'd approach that is we look at all the client accounts, the family accounts going towards the same goal as one big family household investment mix. Each account is just a slice of that, and knowing the target percentages of different categories like stocks versus bonds in US versus international and all of that. Uh, we can look at all these accounts and say, well, which categories do I wanna place in each account? And we'd buy those funds in that particular account. And we call that asset location, right? Just putting the right investments, the right assets in the right category of accounts, and. That only works if you see everything together in harmony. it doesn't work if you look at all these, each separate account in its own silo. And very often what we see with a new family that we're working with is that we'll look at their accounts and we'll look at the statements and each account is handled individually on its own in a silo. And we'll very often see, with taxable brokerage accounts, inefficient investments, we'll see taxable bonds in those accounts. We'll see REITs in those accounts. Uh, we'll see high income dividend funds in those accounts, and we will also see very active, very tax inefficient, mutual funds in those accounts. And so, very often those accounts are tax inefficient, kicking off more income onto your tax return each year than is necessary. And then even in terms of retirement accounts, we'll often see in Roth IRAs, for example, bond funds in those Roth IRAs where we would prefer not to see those. By looking at all of your accounts together, you can take a more efficient approach with where you place each category of investments and Even slight tax cost, if, if you look at those tax costs, even slight tax costs over several decades can have a, can have a pretty substantial impact on, on wealth over time. And so these are the four most common sort of areas of improvements that I see with client investments. Even though for the most part clients aren't coming to us with concerns about the investments, it's very often things related to a cash flow in the household or in the practice. It's related to student loan planning. It's related to more proactive tax planning. It's, it's wanting to see more progress towards goals like financial independence. So very often we're not really getting to the investments until, you know, maybe three to four conversations in, but there's very often opportunities to improve the investments. And so these are some things you can think about as well. And if we were to think about next steps from here, what I would look at is. I would, I would think about for yourself or if you're working with an advisor, what is our overall investment approach? What is our philosophy here? what is our targeted mix of stocks versus bonds? And then within things like stocks, US versus international, uh, large versus small, growth versus value in different things like that. What are, what are our targets? And then once you have those things, you can start to say, okay. Which funds do I want to use in order to fill those categories, those targets, and which accounts should I hold those in? And be careful about thinking that more funds automatically equals more diversification. and be careful about thinking that more complexity automatically leads to better outcomes. Very often, simplicity, lower cost can lead to better outcomes versus the alternative. Talk with your financial advisor about the investment approach that makes sense for you. Obviously, I cannot give investment advice to, uh, hundreds and hundreds of people I've never met. but hopefully that's helpful for you. And for the listeners, I put together a free PDF resource for you about what issues you should consider when you're reviewing your investments. And you can find a link to that in the show notes. Along with this episode, that should be a helpful tool for you to take a look at what's under the hood in your investment accounts and see if you need to be making improvements, adjustments, or, or anything like that. And if you're feeling overwhelmed, if you're not sure where these opportunities for improvement are or what to make of all the investments in your different accounts, I'll throw a link in the show notes and you can pick out a time to schedule a short, no pressure introductory call. We can talk about what's on your mind financially, and we can share how I help optometrists and practice owners navigate those same decisions all over the country. And with that, appreciate your time. We'll catch you on the next episode. In the meantime, take care.

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Evon Mendrin CFP®, CSLP®

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