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How to Think About Illiquid Investments

VML winery

Today’s post was written by the chartered financial analyst, Dave Denniston.

The industrious husband and father is also a blogger and financial advisor.

Today, he is writing about illiquid investments, a common type of investment among physicians. The screen is yours, Dave.

How to Think About Illiquid Investments


By Dave Denniston, CFA

In a recent presentation to the Osteopathic Society of Minnesota, I had the honor of discussing the ‘7 Deadly Sins of Physicians Finances’.

Today, we are focusing on one of them.

In this guest post on PhysicianOnFire, we’re going to be tackling deadly sin number six- investing in weird, illiquid investments.

What are illiquid investments? They are those things that you can’t sell easily. You may have to hold onto them forever and ever and ever. They aren’t stocks, bonds, mutual funds, or ETFs that you can sell and get all your money in trade plus 3 business days.

Common examples include:

  • Surgery Centers
  • Imaging Centers
  • Wineries
  • Online Businesses
  • Franchises
  • Oil & Gas
  • Equipment Leasing
  • Residential Real Estate
  • Commercial Real Estate
  • Raw Land
  • And so on and so forth


VML winery
looks pretty liquid from here


In my opinion, this is where many physicians get screwed over. Literally losing hundreds of thousands, and in some cases, millions of dollars. You can also learn about my rocky experiences with illiquid investments and Why I Can’t Retire by 45. (Hint: It involves a seven figure investment and some very painful lessons)

On the other hand, illiquid investments are where many physicians make out like bandits and multiply their wealth many times over- like PhysicianOnFire and what I admire about him.

Which of these investments are good and which ones are bad?


What’s the difference between the illiquid investment that generate wealth and those that lose fortunes? How can you tell the difference?

The Experiment


I want you to imagine that I brought with me a science experiment here today. Imagine that I have in front of me a beautiful bouquet of red roses. Those lush red roses look gorgeous and are in full bloom. Don’t they smell lovely?

There are many things you can do with them. You can carry them with you. You can trim them. Gentlemen, you could put them in a boutonniere. Ladies, you could put one in your hair.

Alternatively, you could find a beautiful vase and put it in some water and food to keep them lush and beautiful. Perhaps you could choose to plant more roses — a whole garden. You have many choices, right?

Let’s do an experiment, shall we? Imagine that on my right hand side- I have a tank of liquid nitrogen. A nice, big fat metallic tank.

Take a deep smell of that rose. Take it all in. Smells great, right?

Now, with the right protection and long pair of tongs, I’d like you to dip it into the tank of liquid nitrogen.

Feel that cold… brrrr! Now, pull it out now.

Dead, solid frozen.

Let me ask you a question… do you think this rose is going to be able to grow anymore? No, absolutely not.

What happens if you drop it? It shatters into a million pieces.

This is what happens my friends to many physicians with money. They go and they have this beautiful rose of their savings and then they go and invest in something that freezes it up in a weird illiquid investment.

Rich Dad, Poor Dad or Poor Dad, Poor Dad?


Let’s talk about Robert Kiyosaki for a little bit. I’m sure that you know that he is the author of Rich Dad, Poor Dad. If you haven’t read it yet, I highly recommend you check it out and let me know what you think.

There’s a lot that you can learn from Mr. Kiyosaki and I admire several things about his philosophies (but more than anything the business he’s built around it).

However, there’s some ways that this sage advice can be taken and twisted and turned. I like to call it the light side and dark side of Rich Dad, Poor Dad.

The Light Side of the Rich Dad Force (What I Agree With)


One of the best pieces that I absolutely agree with is creating multiple streams of income. Don’t just rely on your portfolio to create wealth! You certainly can, but you have a better chance of experiencing FIRE and having more flexibility if you have more than one or two income sources.

Where I see physicians doing well is when they’re involved in the business of an illiquid investment. They are making business decisions and have their hand in the profitability of the business.

By far, the most common example that I see working out well is a physician is working in a private practice. As part of the practice, they own the building where they practice as well as a piece of the surgery center that they do surgeries in.

They know the building well. They do surgeries there. They know most of the physicians who use the surgery center. They make decisions on upkeep and equipment. They help make decisions on distributions and cash flow. Just as importantly, they know the profit and loss like the back of their hand.

I have seen these investments give double digits returns, sometimes very high double digit returns just with cash flow.

One day when the physician retires- they often sell the building or their portion of the building for six figures, sometimes seven figures.

In terms of digital assets, there are many, many ways you can make money there as well. Check out my blog for more details on my latest experiment with digital assets.

I can think of no better example of physicians crushing this space than PhysicianOnFire and The White Coat Investor. They have both done this through creating blogs and generating money off of ads and affiliate offers on top of their practicing income.

They spend a tremendous amount of time creating posts. They know the site in and out. They partner with others. They know how much they get in ad revenue and what their expenses are. They know the business in-and-out.

Here’s another example…


Let’s take physicians that invest in real estate. They’re overseeing the real estate. They may hire a manager, but they know the tenants. They know the rent. They know the expenses. They know what is a good buy and what is a bad deal.

Many of these folks have started with one or two properties and were doing EVERYTHING themselves. Once they mastered it, they bought another property and another property and another property. They know their process inside and out and weren’t afraid to ask for help of a manager who could do things their way once they started running out of time. However, even though they hire a manager, they know exactly what it takes and could manage it themselves if they need to.

The Dark Side of The Poor Dad Force (What I Don’t Agree With)


Where I see doctors messing up is where they hand the keys over to someone else and they don’t know anything about the investment opportunity — they may not even understand the concept that they invest in and how it could make money or even worse, lose loads of money.

Let’s take an example of an equipment leasing company. They lease servers or ‘big yellow’ tractors or building equipment or they lease gigantic copiers to corporations. They might be structured as a private placement or a limited partnership. A financial advisor comes around with an idea of investing in an ‘alternative’ asset class that isn’t a stock or a bond. The fund is paying a whopping 10% distribution. Amazing! You start crunching the numbers- this could get me back a 50% rate of return.

You think it sounds like a pretty sweet deal. You don’t really get it, but you agree with the principle that diversification is a good thing and you don’t want to screwed over by another stock market crash.

What the financial advisor doesn’t tell you is that he is going to get paid a 7% commission, his broker-dealer is getting paid a 3% commission, and the fund company takes a slice of another 5%. After everything is said and done, there is only 85 cents on the dollar remaining to invest. Then on top of that, the fund company charges management fees and fees for this and that and this and that each and every quarter.

They may keep up the 10% distributions for 3 years or 4 years or 5 years or 6 years if you are lucky. By this time, you haven’t even scratched the principal that you initially invested. Then, the financial reality comes crashing down. They are running out of cash. The distribution gets cut. Then it gets cut again. At the end of the day, you get left holding the measly scraps of your investment, just hoping to get close to getting your money back.

Unfortunately, in many cases, it is long gone. The broker spent those commissions years and years ago.

More Tales from the Dark Side

Other common examples that I’ve found include:

  • Oil and gas partnerships
  • Private real estate investment trusts
  • Tax shelters
  • Wineries in the Cayman Islands (no joke! Seriously!)
  • Coffee plantations in Panama
  • And so many more examples I’ve seen over the years


In every one of these examples, the unsuspecting doctor has given up control of their money. They’ve given up the idea of managing wholly to someone else without knowing about the business themselves. They aren’t involved in it whatsoever and they typically have no idea what the heck it is.

The unsuspecting doc does not look at the financial statements. They don’t understand the balance sheet nor even take 5 minutes to glance at it. They don’t know the amount of debt being used. They don’t know the commissions or management fees that are being paid. They just simply… invest.

It’s like Anakin turning into Darth Vader. This person who presented the opportunity appeared to have been good. In reality, they turned out to work for the dark side of the force. What happened? Darth Vader (a.k.a. the Equipment Leasing Consortium) tried to take a huge slice of the unsuspecting physician’s hard-earned money. In the process, Darth Vader whittled down their money with fees, fees, and more fees (and commissions too).

Nooooooo…. You are not my father!!!!

Anyhow, I digress.

Know Your Illiquid Investments


I just want to encourage you when you look at the Rich Dad, Poor Dad strategy the idea of investing into different things and having multiple streams of income… be involved in the process!

Know the business in-and-out. Understand what it would take to be profitable. Demand a rate of return from the investment in the form of cash flow. Know the customer. Be on the board of directors or be an ACTIVE partner or just simply own the whole thing. Help make decisions on costs like marketing and staffing and research and development.

Simply… Don’t invest in stuff you can’t have a say in.

Final Thoughts

With that my friends, let’s close this out with several rules that I would like you to apply when considering an illiquid investment:

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Rule# 1: Do you have control of this investment?


Meaning… could you have the power to manage it yourself if you choose to? Subbing it out is fine, but what if you want to take over the illiquid investment and manage it yourself. Can you be on the board of directors? Can you be the ‘CEO’?

Rule# 2: Can you sell it in the open market and get close to the market price?


Could you actually find a market for it and sell it, maybe not immediately, but within a reasonable timeframe?

For example, rental real estate or raw land or even online websites generating revenue like PhysicianOnFire can be sold in an open market (check out empireflippers.com). In stark contrast, take an example of timeshares. Timeshares cannot be sold on the open market except for pennies on the dollar.

Timeshares are not investments my friends. Fun, yes. Investment, no.

Rule# 3: For any financially related product with a financial advisor, I highly recommend that you go to www.finra.org and use broker check to do a background check on any financial advisor.


Most of us advisors are located there, myself included. You can go and see whether or not the financial advisor has a history of complaints. You can see whether they have had a criminal record or declared bankruptcy or whether they’ve skipped from firm to firm.

For RIAs (registered investment advisors), you can also go to SEC’s website and look for similar instances.

Rule# 4: Finally, run an illiquid opportunity by your personal board of directors.


Your board can be a financial advisor, a CPA, a good doctor friend that is business knowledgeable, or even family. Just make sure that these people have EXPERIENCE in investing in illiquid investments and even more importantly in RUNNING illiquid investments.

Let me leave you with this thought…

A curbside on surgery with an undergraduate pre-med student probably isn’t a good idea, right? They might be super bright and they might have some good ideas. Unfortunately, they’ve never been in a surgery room before & their closest experience was probably Grey’s Anatomy.

Be with someone who has been in the trenches and gotten bloodied. That’s where the wisdom is.

I would love to know from you. Have you ever invested in an illiquid investment? Would you consider one? What are the lessons that you’ve learned along the way?

You can reach me at dave@daviddenniston.com or on my website at www.daviddenniston.com

About the Author

Dave Denniston, Chartered Financial Analyst (CFA), is an author and authority for physicians providing a voice and an advocate for all of the financial issues that doctors deal with. He also has 1 wife, 2 kids, and a bunny named Black Snow (which is a lot better of a name than Yellow Snow).

If you’ve enjoyed this guest post, you can learn more about his adventures in illiquid investments & much more nonsense by finding his latest blog post and videos by clicking here.

Advisory services through Capital Advisory Group Advisory Services LLC and securities through United Planners Financial Services of America, a Limited Partnership. Member FINRA and SIPC. The Capital Advisory Group Advisory Services, LLC (CAG) and United Planners Financial Services are not affiliated.

The views expressed are those of the author and may not reflect the views of United Planners Financial Services. Material discussed is meant to provide general information and it is not to be construed as specific investment, tax, or legal advice. Individual needs vary & require consideration of your unique objectives & financial situation


[PoF: In addition to property (we close on 7 acres of waterfront tomorrow!), I’ve also invested in a couple of breweries. I have a 4% equity share in one. I am not involved in managing the business, but I have stopped in each of the last three days to sample their wares (my liquid dividends in an otherwise illiquid investment).

I also loaned money to another brewery, as covered in this post about an intentional bad investment, and that taproom opened last month. The two breweries represent about 1% of our net worth, and I think it’s a good idea to keep these risky but fun investments to a small percentage of your portfolio. That might be a good rule #5: limit these investments to “play money” of no more than 5% or 10% of your investments.

Have you made any of these alternative investments? Any grand successes or utter failures you’d like to share with us?]

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17 thoughts on “How to Think About Illiquid Investments”

  1. I’m not convinced that rule # 1 is critical. I invest in a lot of things I don’t have the money to manage myself. Apple or Amazon, for example, are well beyond my abilities. I’m not sure that their liquidity overcomes the inability to manage.

    I think if you were going to limit yourself to four rules, I think the fourth one should have been what PoF mentioned at the end- limit your illiquid investments. The main reason to have liquidity is in case something comes up in your life. I’m perfectly willing to allow a certain percentage of my portfolio to not be liquid as long as I’m being paid for that illiquidity. I don’t think control of the investment is required.

    But who knows, maybe I’ll agree with you at some point down the road. That’s one big downside of illiquid investments- you often won’t know whether it was worth the illiquidity and the risk for years, and by then it’s too late to go back and either avoid the investment or invest more in it or buy another like it.

    Diversifying your illiquid investments is also pretty critical. So you make a bad decision about a syndicated apartment building. That’s a big deal if you invested $300K of your $700K nest egg in it. It’s not a big deal if you invested $50K of your $3M nest egg and have a dozen more of them that did well.

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  3. This is good advice for anyone who is easily tempted by illiquid investments. Usually the thought process that gets them started is that they will make an easy buck. However, things can go south very quickly and there is no way to get your money back. I like PoF’s recommendation to limit these type of investments to 5-10% of your portfolio. What is your recommendation for the remaining 90-95%?

  4. Some hard lessons learned in this realm. Invested in a 30% stake in a franchise, with the opportunity cost of lost investments, I would say I am at least 60k poorer or payed a 60k education in the process. Some lessons learned, get a lawyer to review any business partnership agreement you make, mine way too favored my business partner. Another, someone who is a good business manager does NOT meant they will be a good owner. 5 plus years later, my prior business partner cannot read a profit and loss statement. Hard lessons learned, I exited this year with a 25k paper loss on the investment.

  5. I agree with your proposed rule #5, to keep illiquid investments a small part of your portfolio. I think people can be too swayed by the apocryphal tales of the doc who cashed out millions of dollars from his investment in a medical imaging center. No one brags about getting completely cleaned out by failed investments. In general it is either very hard or very risky to generate 10%+ net IRRs consistently on investments. Docs and other highly paid professionals have day jobs that make it difficult to do the due diligence necessary to evaluate these opportunities. Taking a few swings is fine, but risking a sizable piece of your net worth in illiquids isn’t in my view.

  6. I have found most of my losers fall into two categories; not having control or investing outside my expertise. When you are not the controlling partner, the controlling partner can make expenses that benefit them and not you. My friend had a great example.

    He invested in an oil drilling partnership. He had no control and was to split the “profits” 50-50 with his controlling partner. The controlling partner needed a “business” car and went on several “business” trips. He seemed to do well in conjunction with the business. There were never any “profits” left over for my friend to split. My friend still invests in the oil business, but now he takes his percentage from what comes out of the ground and gets sold to the refinery. He takes a lessor portion that comes out before expenses. No room for shenanigans there. He learned a lesson. I learned it from him as well.

    • I sometimes fall into the trap of assuming other people woudn’t do things I would never think of doing. Like spending other people’s money on a car and vacations for myself. It’s best to assume the worst in people, unfortunately, at least in situations like this one.


  7. This is a good article. I agree illiquid investments on your dark side list are where we can all get into trouble.

    To me, the core principle at play here is Warren Buffet’s “Buy simple investments you know and understand.” It sounds like surgery center centers and other medically related commercial real estate is a theme with docs. It meets the simple and understandable tests because docs can reasonably study that market.

    I primarily invest in residential income properties. I have found d them to be as understandable as any possible investment. We have all rented or bought houses or apartments. So, we intuitively get the qualities that make residential rentals attractive to tenants.

    The other important point you make is control. When you can never make decisions that impact your investment for good or bad – you might as well just buy broad index funds. This is one thing that concerns me about crowd funding real estate sites, even though I like the asset class.

    • Good point about the crowdfunded RE deals. I feel like I understand them reasonably well, but you have no control over them, other than whether to invest or not.

      Individual rentals are pretty easy to understand. Get a favorable cap rate, good tenants, and collect checks!


  8. I find that “being involved” with your investments is the hardest thing for physicians to do. Call it being busy or lack of interest, many of my colleagues are more than willing to outsource their financial plan to a financial advisor rather than spending a little bit of time learning about the issues themselves.

    I myself have been looking more into illiquid investments, namely rental real estate. However, I am of the same mindset that I should understand something before I invest into it, so I am doing my best to educate myself on the topic before diving in.

    As always, thanks for helping this community think more about taking control of their finances!

    • Fortunately, rental real estate is one of the easier investments to understand. There is a ton of information out there (see Coach Carson, Bigger Pockets, etc…). You just have to decide if you want to invest the time and deal with the potential issues (or hire someone to do it for you).


  9. It seems like the docs who invest in surgery centers, etc. do pretty well. It is like Mr Denniston says, when we start investing in things completely out of our realm with no prior knowledge that we get into trouble.

    I have yet to invest in anything illiquid (except for my own home…if you can call that an investment) or strange. I recently wrote about investing in non-traded REITS which would fall into the category of the “Dark Side”. I would not recommend it.

    • The more obscure and complex the investment, the more likely you may be to lose big time.

      I have made sure to understand the brewery business. I actually used my investment to start homebrewing so I could talk smart with the brewmaster.


  10. Nice review of a subject that is important to physicians. I think it comes down to the individual physician’s financial situation, tolerance of risk, hurdle rate demanded, and knowledge of the investment and the people involved. If there is a solid management team in place, a built in referral network, and solid financials it can be a great opportunity.
    I have invested in imaging centers, commercial real estate (medical office building or surgery center), physical therapy business, senior housing development, and equipment leasing. They have all done phenomenally well. My average IRR has run around 33% over a 20 year period. Some of this is luck. Some of this is due diligence and financial understanding. I turn down more investment opportunities than I accept. I still have two investments in small private company start ups that may ultimately fail. Or they may do well, but only time will tell.

    • Those are fantastic returns! It’s no wonder you’re the Wealthy Doc.

      I haven’t had many opportunities present themselves to me, but I may not have been looking hard enough.


      • Thanks. You are too kind. Despite the extraordinary returns, I haven’t achieved extraordinary riches, for several reasons.
        1. I was always a saver, but I thought the typical 10%, 15%, or 20% was a lot to save. It was what I saw recommended and more than most I knew. Saving 1K a month seemed like a lot. It never occurred to me to set aside 50% – 70% as some FIRE folks do now (or as Sir Templeton did back in the day).
        2. Most of these investments have an upper cap on the amount invested. The great investments aren’t too available. When a few shares become available from one of the more successful surgery centers become available, people pounce on them. They don’t want one investor to hold too much of it too. So the percentage returns are high but the total amounts are not always so large.
        3. The extra investment income allowed me to be a bit sloppy in my spending and record keeping. I’m not that compulsive about recording and spending. I’m sure I waste a ton of money, but I have done well to allow that so far.

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  12. I have invested in one surgery center, two hospitals, and one home health company. All did ok but I did not like having no idea what the position was worth. It also means a K-1. Most of these investment types will not let you keep the investment if you do not practice their any more so no retirement income stream from these. My angel investment went very bad as I written about on WCI. I agree that it is better not to invest in things that you know nothing about and are not involved in.

    • Yes, I didn’t see deranged gunman among the list of potential dangers, but I recall that was the issue with your angel investment!

      I do get a K-1 from my first brewery investment, but the same CPA that does my taxes also does the brewery’s taxes and K-1’s, so it’s no hassle.



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