19 October 2021

GPs are not recession-proof

COVID-19 Finance KnowCents Practice Management

Working as a private GP practitioner may provide substantial financial benefits along with greater control and flexibility over your career.

However, it also provides an added layer of risk in the event you and/or your practice are unable to operate.

The covid pandemic has been a recent example of this, where some private practices have been unable to operate as normal or additional costs in the form of PPE have been required, impacting on cashflow.

It is important to understand that GPs are not recession-proof and that steps can be taken to provide assistance in times of need.

Rather than placing all available funds in your private practice, it may be prudent to consider some alternative asset options, which can be used to supplement your cash flow during trying circumstances.

Investing options for GPs

Direct shares

Direct shares, or stocks, provide investors with direct ownership of a percentage of publicly listed companies. Investors can purchase shares using an online broking platform. However, this requires some knowledge of what to buy and at what price. An alternative is to align yourself with a stockbroker who will provide specific stock recommendations at a cost.

A shareholder in a company will be entitled to receive income in the form of dividends, which are typically paid half-yearly. In addition, direct shares provide opportunity for capital growth. 

Investors can choose to reinvest the dividends, thereby using compounding to increase the potential for capital growth in future. In the event that income related to your own business has reduced, electing to receive share dividends in the form of cash may assist with cash flow. In addition, shares can be sold in parcels, so it would be possible to make small redemptions when cash flow is reduced, rather than having to redeem the entire share portfolio. 

Managed funds

An alternative to direct share investment is managed funds, where fund managers will pool investors’ capital together and invest on behalf of everyone. Managed funds can provide high levels of diversification; however, this often means there is less transparency in terms of knowing exactly what companies your money is invested in beyond the main holdings.

Fund managers may try to replicate the market through a “passive” (index) approach or outperform the market through an “active” approach. When building a portfolio of managed funds, it is important to consider the management expense fees, what the fund managers’ objectives are and to ensure the overall asset allocation of your portfolio remains consistent with your risk tolerance, goals and objectives.

Similar to direct shares, managed funds can also provide income and potential for capital growth. The income from a managed fund is generally paid via distributions on a quarterly basis. Access to managed funds can be purchased directly from the fund manager, or they can be accessed through an administration platform. 

The time it takes to redeem managed funds will vary depending on the underlying assets, how liquid they are and the process of selling these down.  

Exchange-traded funds

An ETF is a type of fund that holds multiple assets. They share a lot of similarities with managed funds and can be used to provide portfolio diversification. 

Like managed funds, an ETF may pay income in the form of distributions and, ideally, will provide capital growth over time. 

The main difference between an ETF and a managed fund is that an ETF is bought and sold on a stock exchange, which makes the price fluctuate throughout the day. A managed fund, by comparison, is traded after the stock market is closed.

Real estate investment trusts

A real estate investment trust (REIT) is a company that owns, and in many cases operates, income-producing real estate. REITs own many types of commercial real estate, ranging from office and apartment buildings to warehouses, hospitals, shopping centres, hotels and commercial forests.

REITs are attractive to investors because they offer the opportunity to earn dividend-based income from these properties, while not having the management and upkeep burdens typically associated with direct property ownership. In other words, you can get access to the rental yield and property growth without directly owning the properties.

Similar to ETFs, the distributions can be reinvested or taken as cash and the underlying investments can be redeemed when required. 

Fixed income

Fixed income is a defensive investment that provides periodic payments such as interest or distributions with an eventual return of principal at maturity. They are considered debt instruments often issued by governments or corporations looking to raise capital.

Types of fixed-income investments include bonds, treasury bills, guaranteed investment certificates, mortgages, preferred shares or other products that provide a fixed income that represents a loan by the investor to the issuer. 

This type of investment typically does not provide capital growth, although in some instances the underlying capital value can fluctuate, thereby increasing risk on those particular assets. It is used mainly to store capital while targeting a higher income yield than holding cash in the bank. 

The importance of diversification and seeking advice

As a GP, whether you are investing in direct shares, managed funds, REITs or fixed interest, it is important to maintain appropriate diversification and a suitable asset allocation for your goals and risk tolerance. There are many factors that determine what the appropriate investments and asset allocation should be, based on individual risk tolerance levels, investment timeframe, and your personal goals and objectives.

If you are unsure how to build a portfolio of investments that suit your personal and professional needs, a medical financial specialist team of financial advisers at DPM Financial Services can help. Call 1300 376 376 or book in for a complimentary no-obligation initial consultation.

Disclaimer: The information contained in this site is general and is not intended to serve as advice as your personal circumstances have not been considered. DPM Financial Services Group recommends you obtain personal advice concerning specific matters before making a decision.

Christian Seeley is a financial adviser with more than 10 years’ financial industry experience, specialising in helping medical professionals plan appropriately for their future lifestyle and financial objectives

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