Smart Investing Strategies for Cash-Strapped Medical Residents

Like residency, investing can often offer delayed gratification. Sacrificing current cash for your future self might be hard to swallow, but your future self will thank you when there’s a substantial nest egg to draw from when you need it.

Even with a small income, there are steps you can take to choose an entry-level investment strategy that is right for you. It’s never too soon to start letting your money work for you.

We’ll cover three investing tactics you can use to begin: leveraging robo advisors, using roundup apps, and DIY or self-managed investing.

First-up, robo advisors.

Using Robo Advisors: A Hands-Off Investment Strategy for Residents

Robo advisors, also called digital advisors, are great for those new to investing in addition to the pros. Examples include platforms like Wealthfront, Betterment, and Ellevest. They’re called robo advisors because they leverage AI to accomplish what regular (human) financial advisors do: they pick and manage investments based on your financial goals, timeline and how comfortable you are with risk.

How to Get Started with Robo Investing

The first step is simple. You’ll fill out a questionnaire about your life goals, like having a baby, retiring at a certain age, buying a home, paying for education etc. Based on your inputs, the algorithm will build your portfolio.

Digital advisors adjust your portfolio asset allocation, or the ratio of stocks to bonds, automatically over time. Based on an account holder’s time horizon, meaning how long they have to achieve a goal, robo advisors may shift your allocation between higher risk investments, like stocks, and lower risk ones, like bonds. For example, if you are looking to see fast returns on your investment, the portfolio may favor stocks, which can be higher risk. If you are working towards a longer-term goal, say purchasing a home within 10 years time, your portfolio may be more evenly distributed between stocks and bonds.

Robo Advisors vs. Financial Advisors

• Robo advisors are cheap to set up and maintain. Whereas working with a traditional financial advisor often entails working with a minimum amount of investible funds (often several thousand dollars worth), robo advisors have no required account minimum, so you can start investing with little money in the bank.
• Robo advisors offer a passive way to invest. This is helpful for busy doctors who don’t want to spend time and energy following the stock and bond markets. Once you set up your account, the platform manages it by investing your funds in specific vehicles (often a combination of ETFs and bonds) that are aligned to your goal(s) and timeframe. You don’t have to spend time studying the stock market and adjusting your portfolio as it shifts.
• Robo advisors require minimal fees. Financial advisor fees are usually 1% of your assets under management (AUM). Robo advisor fees are typically 0.5%.

Robo Investing: Potential Downsides

• Robo advisors cannot create custom financial plans. Most financial advisors can advise you through creating a highly personalized financial plan that accounts for your unique circumstances and goals. Perhaps, for example, you are working to pay off med school debt while saving to buy a home, pay for your kids’ college and also retire comfortably. Robo advisors can effectively manage investment accounts that are aligned to your goals (grow wealth, earn income, or both) but can’t advise on a more robust, bigger picture plan.
• Limited portfolio customization opportunities. If actively managing and customizing your stock portfolio is important to you, then using a robo advisor may be frustrating. While some platforms allow you to invest in funds focused on ESG, cryptocurrency and commodities, the options are limited and may require an additional fee, depending on the platform. Most robo advisors leverage mutual funds, ETFs and bonds. If you want to invest in companies or specific funds targeted at technology, medical research etc., know that you may not be able to through these platforms.

Round-Up and Cashback Apps Make Investing Affordable and Effortless

When you pay with a debit or credit card, you don’t get physical spare change. However, round-up-style apps like Acorns and Stash allow digital spare change to be automatically invested. For example, if you buy a $18.50 movie ticket, the remaining 50 cents is added to your investment account through the round-up app.

Similarly, some credit cards from companies like Cash App, Fidelity and Money Lion allow you to automatically invest the money you would get from your cash back benefit. Both options are great for residents who want to allocate very small amounts of money to their investment efforts, but come with some fees worth considering.

Benefits of Round-Up and Cashback Apps

• Round-up apps can be customized according to your investment goals. For example, Acorns allows customers to multiply their round-ups, so that spare fifty cents mentioned above could be adjusted to pull up to ten times the change (that’s $5) from your checking account instead. Stash lets customers choose which individual stocks they’d like to invest in.
• Small amounts can add up over time. Micro-investing has a very low barrier to entry. Start investing with just a few dollars a day.
• Automation requires little/no management. This strategy fits into how you already use your money by investing your (figurative) spare change.

Drawbacks of Round-Up and Cashback Apps

• For cashback apps, you must pay your full credit card balance each month. Why? Because most credit card interest rates on purchases are at least 12% — sometimes over 25%! Meanwhile, the average S&P 500 stock market yearly return is 10%. So if you let your balance accrue, the interest costs will probably outweigh any investment gains.
• Round-up apps often require fees. They are usually subscription-based and range from $3 to $12 a month (see Acorns and Stash for examples). This may sound modest on paper, but it can add up quickly. For example, if your monthly round-ups total $60 and you pay $3 a month to use the app, that’s a 5% fee. That’s way more than you’d pay for a robo advisor (around 0.5%) or an index fund (perhaps 0.12%).
• Some apps don’t offer investing into retirement accounts, which could make the attending version of you not too happy. As such are not ideal for long-term investment goals, but are great ways of getting started with investing.

DIY Investing: Control Your Own Portfolio

Detail-oriented, financially curious, or simply a control freak — no matter how you self-identify, DIY investing could work well for medical resident investing. In fact, it was a Michigan based medical resident who made one of 2023’s best short calls on Signature Bank before it crumbled.

“DIY investing,” otherwise known as self-directed or self-managed investing, is exactly what it sounds like. Everything from opening a brokerage account, transferring in cash to invest, picking said investments, and deciding when it’s time to sell would be all up to you. As such, this strategy requires more attention. You can set up a self-directed brokerage account at legacy firms like Fidelity, Charles Schwab, and Vanguard. There’s also newer startups, like Robinhood and Webull, made for self-managed investing.

If this sounds overwhelming, it doesn’t need to be. There are ways to simplify your approach. You can set up regular transfers that are automatically invested into a fund of your choosing, such as in an index fund or an exchange-traded fund (ETF). Many funds have very low fees, such as at Fidelity, which offers hundreds of index funds with expense ratios lower than 0.13%. Compare this to a typical robo advisor’s management fee of 0.5% and the savings are clear.

Benefits of DIY Investing

• Customizable to your investing preferences. You can invest in whichever funds, companies, asset classes you want. So your portfolio directly reflects your preferences and values.
• Lower expense ratios since there is no assets under management (AUM) fee.

Drawbacks of DIY Investing

• Requires time and paying careful attention to market trends to maximize impact. Actively managing your portfolio requires effort!
• Increased risk. Limitless customization could encourage frequent trades, which inherently increases your risk of incurring losses. After all, you might be a master at the Henderson-Hasselbalch Equation but medical school doesn’t exactly teach you how to decipher company fundamentals

Bottom Line

For most residents, or anyone looking to begin investing with little income or capital, robo advisors may be the simplest and most cost effective investing tool. Still, it’s best to know all your options. It's never too soon to start let your money work for you.

• Robo advisors offer low effort, inexpensive investing using AI.
• Round-up apps can be the most expensive investing style because of its fee structure, but are easy to set up.
• Self-directed investing can be the least expensive option, but requires research and management, which is labor and time intensive.

Join the Discussion

What questions do you have about investing, especially if you're on a tight budget? What's keeping you from getting started and how can we help you move forward? Let us know in the comments.