Why smart dentists invest in index funds, not individual stocks
As a dentist, your expertise is in patient care, not picking stocks. Yet many professionals are lured into the world of active investing, believing they can outperform the market by selecting the right stocks or timing their trades. The reality? Even the world’s top investors struggle to do this consistently.
This is where the Efficient Market Hypothesis (EMH) and the power of low-cost index fund investing come into play. If you’re serious about building long-term wealth, understanding why passive investing beats stock picking is critical.
The problem with market timing: A losing game
Market volatility makes it tempting to jump in and out of investments based on news headlines or economic trends. However, data shows that missing just a handful of the market’s best days can slash your returns in half.
- A study by JP Morgan (2023) found that missing the 10 best days in the S&P 500 over 20 years reduced returns by more than 50%.
- If you had invested $10,000 in the S&P 500 in 2003, you would have $64,844 today. But if you missed the 10 best days, you’d only have $29,708—less than half.
- Historically, the best days in the market often follow the worst days, meaning investors who panicsell during downturns often miss the rebound.
Key takeaway: Staying invested is the only way to guarantee you participate in the market’s strongest growth periods.
Why even the pros can’t beat the market
Many dentists work with financial advisors or portfolio managers who claim they can outperform the market. But here’s the reality:
- The SPIVA Scorecard (2022) found that 91.3% of actively managed funds underperformed their benchmark index over 10 years.
- Warren Buffett famously bet $1 million that a simple S&P 500 index fund would beat a basket of hedge funds over a decade—and he won by a wide margin (Buffett, 2017).
- Nobel laureate Eugene Fama’s research on the Efficient Market Hypothesis (EMH) shows that stock prices already incorporate all publicly available information. This means it’s nearly impossible to “outsmart” the market consistently.
Even the brightest minds in finance—armed with PhDs, AI-driven trading algorithms, and full-time research teams—fail to predict stock movements accurately. If billion-dollar hedge funds struggle to outperform the market, why would an individual investor (or even an actively managed mutual fund) succeed?
The cost of active investing: Fees & taxes
Even if an active fund beats the market in one year, fees and taxes erode its advantage over time.
- Actively managed funds charge higher fees (often 1-2%), while index funds typically cost 0.05%– 0.25%.
- Higher trading activity triggers capital gains taxes, which further eat into your returns.
- Over 30 years, a 1.5% fee difference can reduce your retirement savings by hundreds of thousands of dollars.
By contrast, index funds and ETFs have lower fees, lower tax consequences, and a track record of outperforming active funds in the long run.
The power of diversification: Owning the market
One of the biggest risks of stock-picking is concentration risk—betting on the wrong company and losing big. Instead of trying to find the next Amazon or Tesla, own the entire market.
- A broad-market index fund (such as the S&P 500 or TSX Composite) spreads your investment across hundreds of companies, minimizing individual stock risk.
- Even if a few companies in the index struggle, others thrive—providing a natural balance.
- Index funds let you benefit from economic growth as a whole, rather than relying on individual stock bets.
If your portfolio is down, it means the entire economy is down—history shows this is temporary. The market has always recovered and reached new highs.
Why dentists should stick to passive investing
As a dentist, your time is valuable. Instead of spending hours researching stocks or worrying about market fluctuations, your best strategy is to:
- Invest in low-cost index funds (e.g., S&P 500, TSX Composite, MSCI World).
- Stay invested through market ups and downs.
- Avoid high-fee mutual funds or “hot stock” tips.
- Focus on long-term growth, not short-term speculation.
- Automate your investments and stick to a disciplined strategy.
A simple test: Compare your portfolio
If you’ve been investing for a while, take 10 minutes to review your statements.
- Compare your 5- or 10-year returns to a simple index fund.
- Did your portfolio manager beat the market after fees and taxes?
- If not, consider switching to a diversified, lowcost index fund strategy.
Most dentists will find that—even with a professional managing their investments—they underperformed a basic index fund.
Final thoughts: The path to financial freedom
Dentists work hard to build their careers, and their investments should work just as hard for them. The data is clear: low-cost, diversified index investing is the most reliable way to grow wealth.
However, investing is just one part of your overall financial plan. To truly build long-term wealth, you need a structured plan that balances investing, tax efficiency, real estate, clinic ownership, insurance, and other critical financial decisions. A wellrounded financial strategy ensures that every aspect of your wealth is working together toward your long-term goals.
Disclaimer: This article is for informational and educational purposes only and should not be considered financial, investment, or legal advice. Every individual’s financial situation is unique, and readers should consult with a qualified financial professional before making any investment or financial decisions.
About the author
Gurtej Varn is one of the leading wealth advisors in Canada, specializing in serving early to mid-career dentists. His firm, White Coat Financial Inc., offers a full suite of services – investments, insurance, mortgages, tax planning, and financial advice. He’s quickly becoming the go-to advisor for dentists across Canada.
