Types of Investments for Physicians 

How do you narrow down your investment choices and what types of investment choices do doctors have? 

In your employer-sponsored retirement plans, an investment manager oversees your portfolio and limits the options available to you. If you’re investing outside of an employer-sponsored retirement plan, the investment decisions might be left up to you. 

In order to meet that role, you’ll need to learn to think like an investment portfolio manager. 

You need to understand what a portfolio manager does, and what their job entails. In the most basic definition of their duties, an investment manager allocates your money between various investments. 

How they do this is what you’ll need to learn how to replicate. 

We’ll start by asking simple questions, such as:

What is your investment process?

How do you make your decisions?

Then, we’ll dive into the different options and types of investments that are available to you. 


Following Your Investment Policy Statement

There are individuals who have an investment policy statement– and others who don’t. It’s considered the strategic plan for your investments. 

However, since you are either a physician or married to a physician, it’s better to have it written down. 

We review the Investment Policy Statement in detail here, but for narrowing down your investments we’ll focus on this section: 

Portfolio Selection Guidelines

This dives into your asset allocation guidelines and should give a breakdown of what percentage of your portfolio should be invested in stocks vs. bonds and a further breakdown of the percentage by asset class. 

The main asset classes are: 

  • Equities (stocks)
  • Fixed Income (debt)
  • Cash and Cash Equivalents
  • Real Estate and Commodities

Each asset class is broken down into more sub-groups based on the location, market capitalization, and the growth or value potential of the company. 



Types of investments are broken out by location, normally US and non-US. Non-US companies are grouped by the development stage of the country they are in, either developed or emerging. 

  • US: companies in the US
  • Non-US Developed: companies outside of the US with developed economies
  • Non-US Emerging: companies outside of the US with undeveloped economies

Non-US Emerging is typically a more volatile and riskier class. 


Market Capitalization 

This breaks investments into groups by the size of the company, either micro, small, medium, or large. The dollar values below represent the total value of the company’s tradable stock. To get this number, just multiply the shares outstanding by the price of the share. 


  • Micro-Cap: under $300 million
  • Small-Cap: under $2 billion 
  • Mid-Cap: $2 to $10 billion
  • Large-Cap: over $10 billion 


Growth or Value

Stocks can be identified as either a growth or value stock. 


  • Growth: the price is considered expensive, but there’s a high potential for future growth
  • Value: the price is low compared to the companies earnings, dividends, or book value
  • Blend: a mix of the two!


Equity Style Boxes

When comparing stocks to buy, you might come across this equity style box. Your stock should fall somewhere on this matrix based on its market capitalization and whether it is growth or value. 


If my stock was a mid-cap value stock, the equity style box would look like this:


Value Blend Growth
 X     Mid-Cap


Choosing an Asset Allocation

Your asset allocation is the mix of investments within your portfolio. Some examples include: 

  • 60% Equities, 40% Bonds (60/40)
  • 70% Equities, 30% Bonds (70/30)

This mix is found by first determining the level of risk you can tolerate in your portfolio. If you are able to withstand more risk, you might choose an asset allocation with a higher percentage of equities. 

A 70/30 asset allocation, 70% Equities, 30% Bonds, might breakdown further into: 

70% Equities 

  • 30% US Large-Cap
  • 15% US Mid-Cap
  • 5% US Small-Cap
  • 15% Non-US Equity Developed
  • 5% Non-US Equity Emerging 

30% Bonds:

  • 5% US Corporate Bonds Core
  • 5% US Corporate Bonds Long Duration 
  • 5% US Corporate Bonds High Yield 
  • 7% Non-US Debt Developed
  • 2% Non-US Debt Emerging 
  • 5% US Treasuries
  • 1% Cash or Cash Equivalents

As you age, and your situation changes so should your asset allocation. One common timeline we use is based on how far you are from retirement. 

If you’re getting close to retirement and you mostly have stocks, it could mean trouble and you could be at the mercy of the stock market. As you get closer to retirement, you’ll need to reduce your risk exposure by increasing the percentage of bonds and cash in your portfolio. 

What if you are a new attending physician, who is just starting out?

How would your investment choices look, if there was a 60% decline when you are just starting to invest? 

Look at your assets, the first one is your financial assets, which is what you are considering. However, you can also think about your human capital (lifetime earning stream). 

The scenario looks at your earning potential for the next 30 years, so you have that potential converted into future financial assets!

With that time and money stretching out in front of you, there’s the ability to be a more aggressive investor, and have more in stocks. 

It also depends on how much money is in the portfolio. If it’s very large and it falls by half, you may not feel the impact on your lifestyle. On the other hand, if it’s small, you may feel the impact quickly!

Just as your budget needs to be tailored to your individual situation and goals–so do your investment choices.


Rebalancing is the process of buying or selling investments to realign them with your target asset allocation. 

There are plenty of times in every portfolio’s lifetime when it needs to be rebalanced. Market changes will alter your portfolio, and your financial goals will change.

You’ll need to reassess your assets. You may need to buy or sell assets to protect yourself against risk and meet your personal financial goals.

You can rebalance monthly, quarterly, or annually, or when your asset percentage changes over 5%.

ETFs and Mutual Funds

ETFs and mutual funds are collections of many stocks or bonds. These funds allow investors to diversify their risk of being too heavily concentrated in one company. 


They typically invest in companies based on the purpose of the fund. For example, an ETF for large-cap growth stocks would only invest in large-cap growth stocks. A portfolio manager oversees the fund and ensures it is invested properly. 


ETFs can be bought and sold like a stock, whereas a mutual fund typically sells at the end of the trading day based on the closing price. 


Mutual funds are normally actively managed, and often times have higher fees and expense ratios to compensate the portfolio manager. ETFs are normally passively managed and in turn, can offer lower fees and expense ratios because of their lower overhead costs. 

Fixed Income

Discount or Premium Bonds

When purchasing a bond, the amount of pay for it dictates if you purchased it at a discount or a premium. To determine which, just compare the amount you paid to its face value, the amount you receive back at the end of its term. 


For the examples below, we’ll assume that you hold the bond until maturity. In practice, you could sell the bond before it reaches maturity. 


For example, a $1,000 face value bond sells for $900. This bond was sold at a discount and if it doesn’t pay any interest through a coupon payment, then the rate of return is based on the $100 difference, accounting for the time to maturity. 


If you purchased this bond for $900 and it pays interest every year, then your rate of return will be higher than the coupon rate because you will receive interest every year plus the $100 difference at its maturity. 


However, if that same bond sold for $1,000, the same amount as its face value, then the rate of return is equal to the coupon rate, or annual interest. 


When you purchase a bond for less than its face value, you are buying it at a discount. When you purchase a bond at its face value your rate of return is equal to the coupon rate. Purchasing a bond for more than its face value is considered paying a premium. 

Cash and Cash Equivalents 

Cash and cash equivalents include liquid assets, such as actual cash, cash that is not invested, and liquid investments such as money in a money market account. 


This is normally a very small percentage of a portfolio, 1 to 2% maximum until you reach retirement. Once in retirement, it’s common to see 3 to 5% in cash or cash equivalents to make it easier to access without having to sell to access your new income source. 


Don’t expect to make high returns in cash equivalents. These securities have low risk, but they also have a low return. 


Some examples of cash equivalents include:

  • US Government Treasury Bills
  • Bank Certificates of Deposit (CDs)
  • Bankers’ Acceptances
  • Corporate Commercial Paper
  • Money Market Instruments

TIPS (Treasury Inflation Protected Securities)

TIPS are one of the securities issued by the US government. These were created to provide investors a security that changes with inflation to protect them from a reduction in purchasing power. 


The value of a Treasury Inflation Protected Security changes with inflation, and the interest payments change with the value of the TIPS itself. 


These are often a small percentage of investors’ overall asset allocation and fall under the main allocation of “safer” asset classes with bonds. 


Government Securities and US Treasuries 

Municipal Bonds

US Corporate Bonds Core

This group of corporate bonds is fairly new and offers investors access to a bond fund product with a diversified bond exposure. The way they are designed provides diversification on the maturities and investment grade of many bonds. 


These funds can be active or passive, meaning some US corporate bond core funds could be actively managed by a manager and have frequent trading. 


As this is a new term, there is not a clearly defined meaning of the “core” concept. Before investing in a US corporate bond core fund, be sure to research the fund and its manager if necessary. 

US Corporate Bonds Long Duration

Long duration bonds have a duration of more than 10 years to maturity. These bonds typically have higher interest rates compared to shorter duration bonds. 


As with other bonds, your income and principal are relatively safe. However, long duration bonds are considered riskier because of the risk that inflation will reduce the purchasing power of the bond over such a long time period. 

US Corporate Bonds High Yield

US corporate high yield bonds offer higher yield compared to other bonds, meaning you receive a higher rate of interest. However, these bonds typically also have a higher risk of default and are often called “junk bonds.”


When companies are not able to obtain a higher, investment grade rating for their bonds, they need to pay a higher interest rate to entice investors looking for a higher reward, but who are also willing to accept the level of risk they pose. High yield bonds carry a bond rating of BB or lower. 


Companies who cannot obtain an investment grade rating aren’t necessarily bad companies, much smaller or emerging companies may be unable to obtain this high rating and may resort to issuing a high yield bond. However, if a larger or more established company offers these “junk bonds” that may mean they are highly leveraged or experiencing financial difficulties. 


Non-US Debt Developed

International bonds made up 35% of the world’s investable assets according to a 2012 Vanguard study. International bonds are grouped by the stage of development of a country, either developed or emerging. 


Non-US bonds from developed countries are considered a less-risky investment compared to non-US bonds from emerging countries, they are, however, not without risk. 


An important risk to consider when investing in non-US debt, developed or emerging, is currency risk. Currency risk is also sometimes referred to as exchange-rate risk. Currency risk becomes an issue when the currency of the bond you are buying changes in relation to the US Dollar. 


The risk of currency fluctuations can be hedged against and is by many professional investment managers and institutional investors with the use of the forex market and derivatives like futures and options. 


Currency risk might be fine for the occasional traveler, but for investors, it poses a serious risk of loss. 

Non-US Debt Emerging

Emerging market bonds are a small, but growing segment of the overall market. These securities typically offer higher returns and yields but also come at a higher risk of default compared to non-US bonds from developed countries. 


Interestingly, according to a 2018 Vanguard study, they found the emerging market bonds actually “performed more like equities than like bonds.”


In the same Vanguard study, they found that 68% of the total emerging market bond market was from 10 of the larger emerging countries including:


  • 13.8% in Brazil
  • 10.3% in Mexico
  • 9.7% in China
  • 6.4% in Indonesia
  • 5.7% in Russia
  • 5% in Poland
  • 5% in Turkey
  • 4.2% in South Africa
  • 3.5% in Colombia
  • 2.5% in Thailand


Because of the nature of these bonds, they typically fall into the same group as US corporate high yield bonds due to the non-investment grade rating of the countries that issue them. 



Common Stock vs Preferred Stock

Common stock and preferred stock are two classes of stocks, and are fairly similar. 


The value of common stock and preferred stock both fluctuate with the earnings of the company. Preferred stocks pay a dividend, and have the first “right” to dividends when they are called and have an agreed upon cadence. Common stock may or may not pay dividends, depending on the financials of the company. 


As interest rates rise, preferred stocks can lose their value as the dividend they pay has less purchasing power and competitiveness than before. 


Preferred stocks are great for investors who need a stable stream of income when interest rates are low and do not require voting rights on the company. If held to maturity, normally 30 to 40 years later, you will receive the full value back just like a bond. There isn’t a guarantee that the issuing company won’t call them back before you reach maturity, however. 

US Equity Large Cap

Large-cap stocks are for companies with a market capitalization of more than $10 billion. 


These large firms typically have a history of paying dividends and steady growth. The brand names are fairly recognizable and maybe household names. 


Large-cap equities are considered conservative, compared to investing in small or mid-cap equities. The returns of large-cap equities are typically lower, but their risk is also typically lower as well. 


Some companies that are large-cap include:

  • Apple
  • Alphabet
  • Microsoft
  • Amazon
  • Facebook
  • Johnson & Johnson


Large-cap stocks can be found in the leading benchmark indexes such as the S&P 500, the Dow Jones Industrial Average, and the Nasdaq Composite. 

US Equity Mid Cap

Mid-cap stocks are for companies with a market capitalization between $2 and $10 billion. These fall between large and small-cap equities. 


These mid-size firms typically are growing fairly quickly, and have the potential to become large-cap firms. 


The risk and returns of mid-cap equities typically fall between that of small and large-cap equities. They typically provide a nice mix of growth and stability. 

US Equity Small Cap

Small-cap stocks are for companies with a market capitalization of under $2 billion. Their size places them in between mid and micro-cap equities. 


These small firms typically are newly established and growing quickly. The risk and returns of small-cap equities are typically much higher than that of large-cap equities. 


Because these small-cap equities have smaller market capitalization, there isn’t as much available for investors to purchase. Mutual funds are oftentimes limited on buying small-cap equities because they cannot hold a majority share in a company. 

Non-US Equity Developed

International equities, just like international bonds, are grouped by the stage of development of a country, either developed or emerging. 


Non-US equities from developed countries are considered a less-risky investment compared to non-US equities from emerging countries, they are, however, exposed to currency risk. 


Currency risk is also sometimes referred to as exchange-rate risk. Currency risk becomes an issue when the currency of the equity you are buying changes in relation to the US Dollar. 

Non-US Equity Emerging

Emerging market equities typically offer higher returns, but also come at a higher risk compared to non-US equities from developed countries. 


Not only do non-US equities from emerging countries have currency risk, but they are also at a higher risk of default or extreme volatility. 


When investing in non-US equities from emerging countries, ensure that it is a small percentage of your overall portfolio asset allocation to limit your exposure to the high level of risk these equities pose. 


ETFs and Mutual Funds

What is the future of index investing?

There is an analogy that index investing can be so large that it’s herd investing, and it’s like a bubble. That bubble is expected to eventually pop. 

While everyone is not indexing, it still has benefits. The biggest benefit is that it’s an easy way to invest. 

You may have heard of fundamental indexing, which is weighted by revenue earnings. The benefit of being weighed in that way is with most index funds the bigger the holding, the bigger the weight is going to be.

What if the stocks aren’t priced right?

An example is when investors are forcing the price to increase too much. The stocks will have a sizable weight index fund. You can compare that to something that’s weighted with revenue or earnings. The weights will be smaller with those.

The fundamental indexing approach will underweight the most expensive companies and overweight cheaper companies. 

There is never a time to say, indexing is bad or good. It depends on what’s inside. This goes back to being able to explain how an index works, what it involves, what it contains.

You’ll still need to understand the research and to know where you’re putting your money. There’s never a time to be an ostrich. 

You can’t just follow the crowd and think that if it worked for someone else it will work for you.


Oil and Gas

Oil and gas are considered to be a part of the energy sector. Over time, the energy sector has experienced high volatility and is generally only considered for experienced investors. 


Given the political and environmental risks these stocks are exposed to, even slight changes to environmental policies or the political landscape can cause large fluctuations in price, and quickly. 


Oil majors, oil and gas exploration, and production companies are typically the most covered subgroups of the oil and gas energy sector. Over the years these companies have aggressively restructured their cost bases to adapt to the ever-changing environment. However, this does not remove all risk of high price fluctuations. 


Try as they might, investment managers are typically unable to accurately predict changes to oil prices, making the oil sector extremely unattractive. 


If highly skilled investment managers are unable to forecast changes to the energy sector, don’t fool yourself into thinking you can either. 


Oil and gas can hold a small weighting in your overall portfolio asset allocation, however. By exposing yourself to this risk in a small percentage of your total investments, you may be able to withstand the ever-volatile nature of this sector. 


Gold and Other Precious Metals

Professionals suggest investing in gold and silver because it’s an asset class. Depending on your timing, it can be either a good investment or a bad investment for physicians. It all depends on the “why”!

What is your motivation for investing in gold and silver?

From a psychological standpoint investing in gold and silver can be extremely comforting. It is extremely portable. When you carry gold coins while traveling you have instant liquidity–across markets!

Other than the comfort factor of investing in gold and silver there is really no difference as to when you should buy it. It is just like any other stock.

However, there are other reasons for investing in gold and silver, such as protecting a portion of your portfolio against inflation. There is also one very bad reason for investing in gold and silver — fear.

Have you thought about where the fear is coming from? Are you getting either a subliminal or direct message of impending doom? Where is it coming from?

The answer might be Uncle Sam. Our government has a history of using fear as a tactic for getting people interested in investing in gold and silver. Or, it might be analysts and commentators attempting to scare people into investing in gold and silver by making references to a financial market collapse. It has happened before.

For example, relative to other assets, gold did very well during the financial collapse in 2008. There is no other market that does as well when the spotlight of fear is shining on it.

It turns out that the people who invest in gold tend to fall into several psychological categories. These groups have remained steady since the 1970s when our government disassociated the value of the dollar from gold.

  • The first group believes the world as we know it is ending
  • The second group is a conservative investor
  • The third group are the traders
  • The fourth group are the collectors

The first group is planning to use gold as a safeguard in the event our currency system crashes. The second group holds a small portion as an investment. The third group invests in gold for capital gains. They may consider themselves to be bullish (believing the price of gold will rise) or bearish (believing the price of gold will fall). However, their beliefs about the market are not an indication of what action they might take. The fourth and final group are coin collectors.

Investing in gold and silver can be a good investment. It will depend on the timing and momentum in the market. There are good times to invest and good times to pull back from investing in gold.

It will also depend on the balance of your portfolio.

You need to check your security market investments (stocks, bonds, and gold) every six months to see if they are lining up with your objectives. If they aren’t–you will need to calibrate them.

How did my portfolio get out of balance?

Think about the time when you bought the gold. Now think about what has changed in the market until now. The fluctuations in the market have affected the price of gold. Meaning it raised or lowered to a new percentage the gold represents in your portfolio. This throws your portfolio out of balance.

How on earth do I calibrate my investment portfolio?

That depends on how long it has been since you’ve assessed your portfolio.

You start with your expectations. Look at the difference in your portfolio’s current asset allocation and compare it where it should be.

Is the percentage more than your original allocation– then it’s too high for your portfolio, and you might need to sell some. Is the percentage too low? You might need to buy to restore balance.

You also take this time to reassess your portfolio in relation to your age, earnings, assets, your current situation, and future goals. Consider your risk tolerance. All of these factors play a part.

Why are you interested in investing in gold and silver? Is it because you’ve done your research and you want to diversify your portfolio? Have you learned something from a reputable that convinces you that it’s a good move? Or are you listening to an analyst who has an ulterior motive?

The same analyst or dealer who wants to sell you gold or silver.

I’ve talked on my podcast and written on my blog many times about conflicts of interest. Here are some things to keep in mind:

  • Is someone wanting you to buy something or do something?
  • Is there a conflict of interest? Does the person have something to gain? A motive?
  • Keep in mind that an indirect suggestion is like subliminal advertising
  • Are they selling something?
  • Will they be compensated?

When you are making a decision about investing in gold and silver here are a few things to ask yourself:

  • Does investing in gold and silver make sense for my portfolio?
  • How does the market for investing in gold and silver work?
  • How risky is investing in gold and silver?
  • Do I understand the gold and silver market?


Coin Collectors

I know, you are here to learn about financial independence and building your wealth–not hobbies!

So, unless you are someone who falls in one of the four groups of people who are investing in gold and silver, you’ve probably never given gold or silver much thought. Or been conscious of anything to do with this topic.

Except for coin collectors. They’ve given investing in gold and silver plenty of thought.

Hasn’t almost everyone at least heard of coin collecting?

Is coin collecting for both fun and profit?

Coin collectors investing in gold and silver take up a good portion of the market. They may choose themed coins with a bullying content of one ounce of either silver or gold.

Why do people collect coins?

Where do they find these coins?

I started collecting coins when I was five with my grandpa.  I’ve always been interested in coins. It’s almost like stamp collecting, I don’t think there are very many people left doing it. I would say most of the other coin collectors are a lot older than I am.

A collector may start collecting and investing in gold and silver according to a chosen motif. Examples are Nautical, ancient Rome, animals, or a Star Wars theme. Maybe they have a variety of interesting pieces.

A collector has the choice of searching for old coins or buying newly minted coins. Places to search for old coins may include:

  • Check your pockets!
  • Walk around old abandoned houses with a metal detector (beware of going inside of an unstable building)
  • According to Treasure Pursuits, farmers kept their money in a “posthole bank”
  • Near large trees or under bridges
  • Check out the backs of antique picture frames

Hopefully, this list will jumpstart your imagination!

It’s exciting to finally come across a coin you’ve been intrigued with or searching for a long time. They are fun to look for and collect. But, if you are looking at coin collecting as a way to make a profit they are probably not a good investment.

The gold content or silver coin is going to have the value of the metal content for the relative market. You may spend  $50 on a collectible coin that comes in a nice display box or on a limited edition. However, there is no guarantee you will make a profit when you decide to resell it.

Investing in gold and silver coins is a great hobby, It’s just not usually profitable!

Experts have a golden rule of holding no more than 10% of your assets in gold. After all, gold is a commodity. The price of gold will depend on the supply and demand for it. If the US dollar has strengthened, the commodity market will be weak. And vice versa.

Are we talking about investing in gold and silver as the actual physical bar or part of the market?

Are you building a locker and storing food? You might choose to invest in an actual bar.

When you want to hold the actual bar of gold there are some things to think about and questions to ask:

  • Shipping costs
  • Research the dealer
  • Research the product
  • Where is it being held?
  • Who is backing the product?
  • What type of transaction confirmation is there?

If you choose an actual bar you will pay a premium relative to the gold price. And a disadvantage is the liquidity is diminished.

However, if you are comfortable with the markets instead of buying gold bars you might choose to invest there, instead of buying the physical gold bars!

You will want to get as close as possible to the value of the true market. To that end, you have the option of using an ETF.

Who wants to hold a Gold Eagle?

When investing in gold and silver American’s want to hold the Gold Eagle!

The bad news is it is one of the worst coins you can buy from an American perspective. The pricing is the same as when the eagle coin was first issued in the 1980s. That’s right 33 years ago!

There are no deals for the dealers. They pay the same price for each coin regardless of how many coins they buy and they don’t get anything under melt value.

Let’s say I’m a dealer. I will pay 3% ($38 per coin). If another dealer comes to me, I’ll sell to him at a slight increase ($45). If a customer comes to me directly I will sell it for between $50 and $60.

This is harking back to high school economics, but think about the law of supply and demand, nobody is paying attention to the premium. Why? Because there is so much demand for the Gold Eagle and Silver Eagle.

The US mint has the mindset: If it’s not broke, don’t try to fix it.

The Gold Eagle coin is fine in the United States. However, other countries prefer a 24-carat gold coin–and the Eagle is not that.

So, if the Gold Eagle isn’t equal to the coins in other countries–which coin is?

The US has the Buffalo which is a four nines gold coin which compares equally with the Royal Canadian Mint Gold Maple Leaf, the British Britannica, and the Australian kangaroo. They are all four nines gold coins.

The US Buffalo sells at the same rate as the US Gold Eagle–sometimes even higher. The dealers get their mark-up. It is the retail investor that pays an additional $30 or more.

An even better deal is to buy a gold bar. They can be traded for $15-$20.

Since the US mint is at 3%, it’s opened a window for the other sovereign mints to offer their coins on the US market. That discounts the Golden Eagle.

As a lifelong collector, I’m continually disappointed that the US Mint chooses not to be more competitive when it could.


Derivatives are securities whose value is driven by the underlying asset or group of assets. The term derivative refers to contracts between investors, whose price is directly tied to some asset. 


For example, a farmer might purchase a derivative contract on corn to protect themselves from changes in the price of corn before they are able to sell it on the market. 


Corn is one type of asset a derivative contract can be used on, a commodity. 


The most common assets used for derivatives include:

  • Stocks
  • Bonds
  • Commodities
  • Currencies
  • Interest Rates
  • Market Indexes


Investors use derivative contracts to hedge themselves against changes in the price or value of the underlying asset. 


In our farmer example, let’s say corn is selling for $10 a unit when the farmer goes to plant their fields. They run all of their projections based on a selling price of $10, however, they are fairly concerned that the price of corn might decline to $7 by the time their harvest is ready to sell. 


Another investor believes based on the information they have that the price of corn will actually go up by the time this farmer’s crop is ready to sell. 


This farmer could purchase a derivative contract, called a futures contract, from this investor locking in a rate of $10 per unit. 


If the price of corn goes down like the farmer is predicting, the farmer has the right to sell his corn to this investor for $10. The investor then can sell the corn for the going rate, probably losing money. 


If the price of corn goes up like the investor is predicting, the farmer could sell the corn for $10 to the investor, and the investor can turn around and resell the corn for a profit on the market. The farmer might be upset from not being able to make a higher profit, but they also might be thankful they didn’t have to worry about their initial analysis turning out much worse.  


While this is a fairly simple example, it does follow the general structure of most derivative contracts. 


The various types of derivative contracts include:

  • Future Contracts: contracts traded on an exchange
  • Forward Contracts: off-exchange contracts
  • Swaps: interest rate swaps
  • Options: puts and calls


Futures Contracts

Our farmer example above is an example of a futures contract if it was done through an exchange. The contracts on these exchanges are standardized, reducing the risk of an obscure requirement from either party involved. 


By trading on an exchange, future contracts reduce the credit risk involved in the transaction as each party is obligated to fulfill their commitment. 


Not all futures contracts end with one party actually receiving the asset, such as the corn in the example above. These contracts are typically sold, or cash-settled before actual delivery of the asset occurs. 


So, in our farmer example, the investor wouldn’t actually receive the corn. 

Forward Contracts

Forward contracts happen off of an exchange. Because these investments occur between two parties directly, they are exposed to a high level of credit risk. If one of the parties is unable to fulfill their commitment, the other party might be out of luck or need to sue. 


These contracts are highly customizable. The terms, size, and settlement process can be adjusted based on the needs of parties involved. 


Swaps are used to exchange one form of cash flow for another, such as interest rates. 


Let’s say I issued a loan to another company at a 5% variable rate. I think interest rates will increase soon, and decide I now want to charge 6%. I could swap this investment to another party and they will pay me the 1% difference. 


However, if interest rates fall to 4%, I will have to pay the other company the 1% difference. 


These contracts can be used to exchange currency rates, mortgage rates, and other cash flows for businesses. 


An option is a contract between investors that allows one party the right to buy or sell an investment and obligates the other party to buy or sell. 


A stock option typically is written for 100 shares, but they don’t have to. 


To purchase an option, you’ll pay a premium to enter into a contract. The seller of the option keeps this premium even if you do not decide to buy or sell the underlying asset. 


In The Money (ITM), Out of The Money (OTM), and At The Money (ATM)

The value of an option decreases as it gets closer to its expiration date because there is less time for the stock price to become more favorable for the buyer of the option to buy or sell. The intrinsic value of a stock is the difference between its strike price and the current stock price. 


In The Money (ITM):

  • Call: the option buyer has the opportunity to buy the security below its current market price.
  • Put: the option buyer can sell the security above its current market price.


An option being in the money doesn’t mean the buyer stands to make a profit, but it does make it more likely that they will after considering the premium, taxes, fees, and possible commissions.


Out of The Money (OTM):

  • Call: strike price that is higher than the market price of the underlying asset.
  • Put: strike price that is lower than the market price of the underlying asset.


An option can also be at the money (ATM), which means the market price is equal to the strike price of the option. 



The buyer of a put has the right to sell their investment to the other party in the contract, and if they decide to sell, the seller of the put must buy it to meet the requirements of the contract. 


The buyer of a put must own the underlying asset in order to sell it per the terms of the contract. They typically have until a certain date to sell, and they must sell it at a specific price based on the details of the contract. 



The buyer of a call has the right to buy the underlying asset at the specified price by the expiration date. The seller of a call must sell their asset if the buyer decides they would like to buy. 



Annuities are contracts that aim to provide income. They are long-term income, not investment, strategies, and are not meant for short-term goals. The main benefits of annuities include retirement income, diversification, and principal preservation. 


Annuities are essentially contracts issued by an insurance company. The type of annuity and the details of the contract determine your future annuity payments. 


The main purpose of annuities is to transfer your longevity risk, the risk of outliving your savings, to the insurance company. 


Types of Annuities

Immediate Annuities

Immediate annuities are funded with a lump-sum payment. As the name suggests, the payments begin immediately and are not deferred to a time in the future. This limits the time for tax-deferred growth from investing your premiums. 

Deferred Annuities

Deferred annuities can be funded with a lump-sum or periodic payment of a premium. These annuities grow tax-deferred until the payout phase begins. 

Fixed Annuities

Fixed annuities guarantee a rate of return for a set period of time, and may renew at a different rate after the initial period ends. 

Variable Annuities

Variable annuities earn interest through investments that you select. These annuities do not guarantee a rate of return. 

Indexed Annuities

The rate of return is tied to a market index, such as the S&P 500, for indexed annuities. They offer a guaranteed minimum rate of return. 


Key Features of Annuities 

Free-Look Period

This is the time, as defined by your state, that is required to allow you an opportunity to cancel the contract without paying a surrender charge. 


Riders are addendums that allow customization to annuity contracts. While riders allow you to add additional benefits to your annuity contract, they typically come at an additional cost. 

Death-Benefit Rider or Guaranteed Minimum Death Benefit Rider

This rider allows you to add beneficiaries to your contract who will receive a portion of the contract value at your death.

Disability Income Rider

This rider ensures higher income will be paid for a limited time if you become disabled. 

Impaired Risk Rider

If you have documented health risks that may lead to a shorter life, this rider can accelerate your annuity payments to account for a shorter payout time. 

Long-Term Care Rider

This rider increases your income if you require long-term care. It is typically based on a multiplier of your normal monthly annuity payment and is limited to a couple of years. 

Cost of Living

This rider increases your monthly annuity payment with inflation or a specified percentage dictated by the annuity contract. 

Return of Premium

This rider gives the unpaid portion of your premium to any beneficiaries upon your death. The unpaid portion is equal to your contributions minus the payments made to date. 

Fees and Commissions

When an annuity is sold, the financial professional selling it typically makes a commission. On top of the commission, additional fees can be charged for added riders, management fees, and more. Ensure you are provided a clear breakdown of the fees and commissions you are expected to pay before purchasing an annuity. 


If you find yourself needed to withdrawal more than the contracted annuity payment, expect to pay fees to do so. 


If you purchased an annuity with after-tax money then the portion of your annuity payments that came from earnings is taxable. This is similar to a brokerage account taxation, however, with an annuity the taxation is deferred until you withdraw the funds. The amount you pay taxes on is calculated by using an exclusion ratio. 


If you purchased an annuity with pre-tax dollars then the entire annuity payment is taxable with withdrawn. 

Alternative Investments

Real Estate 

Traditionally, real estate investing has been considering an addition to a well-diversified investment strategy. Many investors get into real estate to expand their portfolio. 


For more information on real estate investing, visit our mega-post on real estate investing here. 


REITs, real estate investment trusts, are companies that own or finance income-producing real estate. These securities provide many of the financial benefits of real estate investing, without the hassle of actually managing properties. 


REITs can be publicly traded on an exchange, or be non-traded. Non-traded REITs are fairly illiquid investments that cannot be quickly sold on the open market. 


REITs must payout at least 90% of their taxable income to shareholders through dividends, some pay 100% out through dividends. They must also invest at least 75% of their assets in real estate, have a minimum of 100 shareholders, be managed by a board of directors or trustees, and have now more than 50% of its shares held by 5 or fewer individuals. 


mREITs, or mortgage REITs, don’t own income-producing real estate – instead, their income comes from the interest on the real estate financing they provide. 

Asset-Backed Securities 

Asset-Backed Securities are bonds or notes that are backed by a pool of assets. These assets can include loans, leases, credit card debt, royalties, or other receivables. Asset-Backed Securities help lenders raise money to issue more debt, and reward their investors through cash flow. 


There are typically three main tranches of Asset-Backed Securities; A, B, and C


Tranch A is the highest quality, investment-grade debt with the lowest default rate. This is the most attractive to investors. 


Tranch B has a lower credit rating and is considered riskier than tranch A. However, due to its higher risk this tranch also includes debt with higher rates and better cash flow opportunities for investors. 


Tranch C is the riskiest and is sometimes too risky of debt to actually sell through an Asset-Backed Security. 


Cryptocurrencies are a digital or virtual currency that is secured using cryptography. While a fairly new player in the investment world, cryptocurrencies were introduced in 2008 by Satoshi Nakamoto (a pseudonymous person or persons) who came up with the idea of blockchain. It is a way to pay someone without the use of a middleman (like a bank).


First of all, you’ll need a “wallet”. You can get the app for your computer or phone. The wallet will have an address–sort of like an IP address. It can be used to pay someone or receive payments. The wallets hold your “private keys”.


There are many different types of wallets.

  • Downloaded or cloud-based wallets
  • Software wallet-directly on your computer
  • Online wallets (you will need passwords)
  • Mobile Wallets-apps for your smartphone
  • Hardware wallets (electronic device)



Keys are only for you and have the same importance as your social security number. They are proof that the transactions come from the owner of the wallet.


We can use bitcoin keys as an example for understanding the keys:

  • You have a private key that allows access to your bitcoin address.
  • Your bitcoin address is actually your public key.


Keeping yourself safe is simple: Don’t share or write down your key information anywhere including your phone apps, such as Evernote. If your phone was hacked they could potentially steal your cryptocurrency.


The crypto-influencers have had it happen to them. In fact, there is a lawsuit against AT&T because of hacking.


If you are not planning on trading your cryptocurrency soon and you want to keep it safe, you can consider putting it into “cold” storage which is not “centralized” and is offline (think USB drives).

Where to Buy Cryptocurrency 

There are a number of ways to buy cryptocurrencies, one of them is at coinbase.com.  You will need to sign-up and verify your ID, perhaps by the user submitting a picture of yourself holding a driver’s license next to your face. There are Bitcoin ATMs in the United States, and you can buy fractions of it, for example, .0001 bitcoin.

Types of Cryptocurrency 

Stable coins, which were started last year, are backed by a national currency. Their price remains fairly stable.


Tokens can be used as an investment contract, for example with real estate. They reflect legal ownership of the property. Proof of the ownership must be verified in the blockchain.


An example of an altcoin that has its own blockchain and protocol is Ethereum.


Ethereum is an open software program that is founded on blockchain technology. It is centered on running the programming code of any decentralized application.


Ether is another type of crypto and is used to fuel the network. It can also be used as payment within Ethereum’s network!


The blockchain is basically a virtual ledger with a secure history of data exchanges. The data exchanges are the record of where the cryptocurrency transfers. So, before there was Bitcoin–there was blockchain.


Data exchanges or money transfers are recorded through the use of a peer-to-peer network to time stamp each cryptocurrency exchange. Once the information is added to the blockchain it is a permanent record. The permanent record or validation can involve contracts, records, or cryptocurrency.


How do you mine for cryptocurrency?


Mining happens with computers. That means that computers are at work all over the world trying to solve an algorithm.  There are actually several ways to mine for cryptocurrency. The simplest way is through an app that you download on your computer, that mines in the cloud.


For the serious miner who wants to make an investment, application-specific integrated circuits (ASIC) hardware is needed. This hardware or microchip was created for the specific use of mining. Just like an oil-rig they constantly run 24/365! When they finally solve the algorithm, they hit the jackpot and are awarded bitcoin.

Initial Crowd Offerings (ICO)

Initial Crowd Offerings (ICO) is fundraising by crowdfunding in the cryptocurrency world. They are typically used by startups to avoid all the regulatory control in place when raising capital. This capital is used to develop other types of software, cryptocurrency, or other projects.

Desensitized Autonomous Organization (DAO)

May 2016 brought about the creation of the Desensitized Autonomous Organization (DAO). It was a virtual organization using blockchain technology to offer the sale of its coins. The sale of DAO tokens was being used to raise capital for crypto and decentralized space. This platform allowed anyone with a project the ability to present it to the community. If the project was popular it received funding from the DAO. It was sort of like a free-for-all. Then, the DAO was hacked and millions were stolen. In 2017, the SEC stated that the Desensitized Autonomous Organization (DAO) was violating its policies because they were raising capital. 

Security Token Offering

Introduced in 2019, Security Token Offerings (STOs) were an answer to the unregulated process of Desensitized Autonomous Organization (DAO) and Initial Crowd Offerings (ICOs). Initial Crowd Offerings (ICOs) avoid regulations because they are to be used for fundraising. Security Token Offering (STOs) are registered with the government and considered more trustworthy.

Is Cryptocurrency Legal?

We may be so absorbed in the growing business of cryptocurrency and cryptocurrency trading strategies that we don’t consider that just because it’s growing here in the United States, that it is embraced everywhere.


As surprising as it may seem, there are countries where it is actually banned by banks, not allowed to be used for payment or not allowed to be used in business.


Here are a few of the countries where it is illegal or banned:

  • Algeria
  • Bangladesh
  • Bolivia
  • Ecuador
  • Macedonia
  • Nepal
  • Vietnam


Why are some governments anti-crypto currency? There may be concerns about that nation’s own currency stability, fear of inflation, or they may want to protect investors. There are a variety of reasons they may want to ban cryptocurrency and cryptocurrency trading strategies.


Blockchain, cryptocurrency, and cryptocurrency trading strategies are the new frontier. That can scare people!


The average consumer may believe that blockchain, cryptocurrency, and cryptocurrency trading strategies are too ephemeral.


There are trust concerns with things that aren’t understood. There are people who don’t believe that as a method of currency it isn’t based on anything solid.


Another strike is that Bitcoin and cryptos are not classified as securities by the SEC.


Cryptocurrency has had a hard past, but that doesn’t mean it can’t have a future. However, there are many who believe it will ultimately succeed in taking a place of at least part of our national currency.


The question is what will it take to build that future?


Ryan Inman