Building Wealth Beyond the Chair: Investment Strategies for Dentists, Rooted in Academic Principles

Jeff Vistica
CFP®, ChSNC®, AIF®
October 31, 2023

Dental professionals are adept at crafting beautiful smiles, but achieving a financially secure future requires a different skill set.

A financial portfolio designed to help sustain your desired lifestyle requires much more than just putting money into a savings account or buying a few stocks. Utilizing academically based investment principles can significantly improve the odds of financial success over the long term.

Here’s how a qualified investment professional can help.

The importance of evidence

Dentists use evidence-based practices to provide optimal patient care. They rely on empirical research and established principles to create treatment plans that meet their patient's needs.

Similarly, investment advisors use evidence-based strategies to create portfolios tailored to their clients' financial goals and objectives. They use their expertise to create investment portfolios that can potentially generate higher returns while minimizing risk helping to increase the odds of sustaining your ongoing success.

In both fields, relying on evidence-based practices helps professionals make informed decisions grounded in rigorous research and analysis. By taking an evidence-based approach to investing, advisors can offer their dentist clients a disciplined, structured, and well-informed strategy.

Asset Allocation

“Asset allocation” involves spreading your investments across various asset classes like stocks, bonds, and real estate. For dentists with a high earning potential but equally high educational debts and business costs, a suitable asset allocation strategy can offer a blend of risk and reward tailored to your financial situation.

Studies indicate that asset allocation can explain more than 90% of the variability in a portfolio's returns.

A financial advisor who follows the evidence will prioritize determining your proper asset allocation.

Asset Location

Not to be confused with asset allocation is “asset location.” Asset location is the practice of placing less tax-efficient asset classes like fixed income or real estate in tax-advantaged accounts and holding tax-efficient asset classes such as equities in taxable accounts such as a living trust. Over time, asset location can help reduce the amount of taxable income generated by your portfolio and thus can help improve after-tax returns.

Global Diversification

Global diversification refers to investing in a wide range of assets across various geographic regions worldwide. It’s based on the idea that different economies and markets perform differently.  Investing globally can reduce the risk of exposure to any region or market.

By investing in a range of assets across different regions, dentists can benefit from the growth of economies and markets outside of their local area, which can help offset any declines in their local market.

Low fees

Dentists already face significant operating costs in their practice. Like those costs reduce your profits, high fees charged by mutual funds and other investments can erode your returns.

Index and exchange-traded funds (ETFs) typically have lower fees than actively managed funds.

Actively managed funds require a team of investment professionals who continuously research, analyze, and trade securities in an attempt to outperform a benchmark index or achieve higher returns than the market. These professionals charge high fees to cover the costs of their research and management.

Index funds and ETFs track a benchmark index like the S&P 500. They don’t require as much management or research, so their fees are lower. These funds also incur fewer transaction costs because they don’t frequently buy and sell securities, contributing to their lower fees.

A competent advisor is familiar with research showing that low-fee funds will likely outperform higher-fee funds.

These advisors are guided by this wisdom from Vanguard founder John Bogle:

“In investing, you get what you don’t pay for. Costs matter. So intelligent investors will use low-cost index funds to build a diversified portfolio of stocks and bonds, and they will stay the course. And they won’t be foolish enough to think that they can consistently outsmart the market.”

Factor-Based Investing

Factor-based investing is a strategy that targets specific return drivers, like company size and value, to enhance long-term returns potentially. It’s supported by extensive academic research, which has shown that tilting a portfolio towards small-cap and value stocks may lead to better performance over the long term.

Financial advisors apply these academic insights to real-world investment strategies to create portfolios optimized for long-term growth.

Factor-based investing can appeal to dentists looking to build wealth over the long term.

Because these strategies are based on academic research, they tend to be more disciplined and structured than traditional active management approaches.

Alternative Investments

Alternative investments are a category of investments that fall outside the traditional asset classes of stocks, bonds, and cash. They include real estate, commodities, hedge funds, private equity, private credit and infrastructure.

Alternative investments often correlate less to the stock and bond markets, which can provide diversification benefits. They can also be more complex and illiquid, requiring more management expertise.

Dentists may consider alternative investments in an overall investment strategy attractive as alternatives can help provide additional and unique sources of risk and potential return to traditional investments like stocks and bonds.  

Some alternative investments come with a higher level of risk. They are often less regulated than traditional investments and can be illiquid, meaning it can be challenging to sell them if you need to access your money quickly. More recently however asset managers have made alternative investments more accessible either through mutual fund or interval fund forms.  Be sure to understand the trade off of what you’re paying for and potential benefit.  

A qualified investment advisor can evaluate these issues and determine whether exposure to alternative investments is suitable for your portfolio.

Final thoughts

For dentists looking to build wealth, a multifaceted approach rooted in academically backed investment principles can offer a pathway to financial security. By taking a well-informed, evidence-based approach to investing, you can work towards a future as secure as the smiles you help maintain.

Jeff Vistica is the managing principal of Vistica Wealth Advisors based in Carlsbad, CA. He is a CERTIFIED FINANCIAL PLANNER™, a Chartered Special Needs Consultant® a Chartered Financial Consultant® and an Accredited Investment Fiduciary®. He earned an Executive Financial Planner Advanced Certificate from San Diego State University and his bachelor’s degree from Loyola Marymount University. Vistica Wealth Advisors is an SEC registered investment advisory firm. Information was compiled from third-party sources believed to be reliable, however Vistica Wealth Advisors cannot guarantee the accuracy of that information. Hyperlinks to this third-party informational content and websites are provided solely for reader convenience. Information provided is for informational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Prior to implementing any strategy, everyone is advised to consult with the appropriately licensed professionals to assess your individual situations and needs.
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