Today, we answer a wide variety of your questions including what HSA contribution rules are, the importance of spending money instead of just saving it, if it is a good idea to change your financial plan to take advantage of a down market, and many others. We once again talk about the importance of ditching your bad financial advisor and what to do with actively managed mutual funds when you do decide to break ties with said bad advisor.
Scaling Back Tax Withholdings
“I'm not a doctor but a personal finance enthusiast in Silicon Valley, and I greatly enjoy your podcast. I am a tech worker and, through my employer, have access to a 401(k) plan, which allows me to perform a Mega Backdoor Roth. Unfortunately, the after-tax contributions are payroll deductions, and my base pay compensation is such that it takes many, many pay cycles to contribute my target amount while I live off RSU vestings. It is likely in 2023 I will leave this employer by choice or layoff and my next employer may not offer a 401(k) with the same features. Is there any downside to scaling back my tax withholding with my employer to leave more after-tax funds for contribution toward my Mega Backdoor Roth? This would allow me to reach my target sooner, and I can make estimated tax payments to ensure I reach the tax withholding safe harbor.
It's not all gloom as I could land with another employer with a great 401(k) where I could utilize the $66,000 limit twice in a single tax year while observing the $22,500 voluntary contribution limit. Hopefully this question isn't too specific. I greatly enjoy your podcast. I really need to give my doctor a copy of your book because she has a whole life insurance plan.”
I think your plan's fine overall. I've seen docs do something similar to actually pay off their student loans in the first six months out of residency. Many years ago, we had a guest post of a doc who basically took advantage of the fact that when you're self-employed, you get a pass the first year on your quarterly estimate. She basically didn't pay taxes for the first six months out of residency, and she sent all that money to her student loan lender and paid off her student loans. Then come the next year, January, February, March, April of the next year, she saved up her money to pay her tax bill for the prior year. It worked out really well, and she was debt free and still met her tax obligations for that year.
Keep in mind, there are two things going on here when we're talking about taxes. You have to pay your taxes, all right? I'm not advocating that you do not pay your taxes. You should pay your taxes, every dime you owe. Don't leave them a tip, but pay them every dime you owe. What you do with your tax return each year is you are settling up with the Treasury, with the IRS, with the government. If you paid them too much, they give you some back. That's a tax refund. If you haven't paid enough, you have to send in a tax bill.
Sometimes you've broken some of the rules, right? The federal system is a pay-as-you-go system. Some states are not. Utah is not a pay-as-you-go system. You're allowed to pay your entire tax bill on April 15 of the next year. That's perfectly fine with Utah. It is not fine with the federal government. They want you to pay as you go. The way most people do that—because most people are employees—is their employers are required to pull some money out and send it to the IRS with each paycheck. That's called tax withholding. Other than that, the general rule is that employers have to pull a certain amount out based on what you put on your W-4; it's a little bit loosey-goosey there. Because how you fill out the W-4 affects how much they have withheld. If you fill out your W-4 in such a way that they don't withhold very much, you may end up having to write a big check come April. There may be some penalty associated with that, but there's really nothing that keeps you from changing it throughout the year.
I think they want you to be as honest as you can when you answer the questions on the W-4, but I've never actually heard of anybody getting in trouble for not doing so. You'd still have to pay the taxes in the end, but I think there's more flexibility there than the IRS really likes to tell you there is. Especially if you're paying as you go anyway with quarterly estimated payments. I really don't think they care and it would help your cash flow to be able to do it this way. I think that's fine. I don't think anybody's going to give you a hard time about that and it'll allow you to max out your retirement account. The IRS does have an estimator that you can use. It's at irs.gov/individuals/tax-withholding-estimator, which lets you do all kinds of changes on how much you have withheld. I don't see any reason why you couldn't do what you're planning to do here. Especially since you are paying as you go just as much as I am by doing your quarterly estimated tax payments.
More information here:
What Happens If You Miss a Quarterly Estimated Tax Payment?
Selecting Insurance Plans and HSAs
“Hi, thank you for all you do. I'm a resident who has an HSA who is currently switching insurance plans within the hospital, and I'm wondering how can I switch the HSA to a self-directed HSA or personal HSA due to the fees and poor investment options in the current HSA.”
I have this image of you recording this question with a hoodie over your head sitting in the corner on one of the wards at the hospital trying to be quiet as you recorded on the Speak Pipe. I don't know if that's how you actually recorded it, but that's kind of what it sounds like. It sounds like you're trying to be quiet as you recorded it. But it's a great question. Here's the deal with HSAs. You mentioned you're switching insurance plans. That really doesn't have anything to do with any of it. If the old plan was a high deductible health plan and you're allowed to use an HSA for it, that's fine. If the new plan is a high deductible health plan, you're allowed to use an HSA for it, that's fine, too. But the HSA itself is kind of separate from those.
There is a benefit to using whatever HSA your employer allows you to use or your employer has chosen for you. The benefit is they put money in there without you having paid payroll taxes on it—which, for a resident, is a big deal because you're still paying Social Security tax. That's 12.4% when you count the employer's portion and your portion (6.2% is your portion of that plus Medicare; 1.45% is the employee portion of Medicare). You don't have to pay those taxes on the money that goes into the HSA if your employer is pulling it out of payroll and putting it in the HSA. That's a good reason to use your employer's HSA. The downside is a lot of employer HSAs suck. They're terrible. They have terrible investment options. They might have a bunch of fees. They might be a pain to work with. There are better HSAs out there—places like Fidelity, places like Lively.
We contribute directly to a good HSA because we don't have it withheld. It's not a benefit that we offer at White Coat Investor because we know people can just go open it up themselves if they want. But if you are stuck at your crummy employer one, you're not stuck there for long because once a year you can roll it over into a good HSA. That's what I would do if I were you. I would just have the employer pull the money out of payroll and put it in their crappy HSA with the high expense ratio of funds or whatever. Then, once a year, do a rollover to where you really want to be, a Lively or a Fidelity or someplace like that with low cost, good investing options, and go for that. We actually have an affiliate relationship with Lively. If you want to help support the site while you open that, you can go to whitecoatinvestor.com/lively. I think we get $10 if you open an account there. It's not exactly a big profit-maker for us, but it does help support the site and we do appreciate that.
More information here:
7 Reasons an HSA Should Be Your Favorite Investing Account
HSA Contribution Rules
“Hi, Dr. Dahle. I have a question about HSA contribution rules. I am a W-2 employee, and I have a high deductible health plan and HSA through my employer, which I have been contributing to. My employer's benefits handbook specifically states that we are not allowed to decline their health insurance coverage. For 2023, I also enrolled in my husband's health insurance plan through his employer. It is a PPO plan and is not a high deductible health plan because there is a specific practice that I want to see that I cannot go to with my own employer's health insurance. Since I will technically be enrolled in both plans, am I still allowed to make contributions to the HSA for 2023? I use my HSA account as an extra retirement account, as you have advised. So, I do not plan to use or withdraw any of the contributions for healthcare expenses.”
Great question. The answer is no. You cannot contribute to an HSA unless your only health plan is a high deductible health plan. The fact that you're also covered by this PPO keeps you from contributing to your HSA for 2023. That doesn't mean you have to pull the money out of your HSA that you have in your HSA now. You don't have to spend it. You can leave it there, you can leave it invested, but you cannot contribute for 2023 because you are covered by a non-high deductible health plan. Boy, that's a really unfortunate situation. You've got a plan provided to you, you want to use an HSA and presumably you're paying extra to be covered under your spouse's plan. That's a bummer and you don't even get any money back from your employer for it. I guess if you really want that doc and you really need that coverage, you have to do it. But that's unfortunate. I'm sorry to hear about your situation.
Leaving a Bad Financial Advisor
“Hi, Dr. Dahle. Thanks for all you do. My question is about what to do with actively managed mutual funds when you decide to make the switch from a bad financial advisor to managing your own portfolio. I'm the partner of a current medical student who recently introduced me to WCI. I'm 24, and I have been maxing out my Roth IRA for a little over a year. My advisor recommended that I buy front load shares of the American Funds one fund portfolio, which I now understand is an actively managed mutual fund invested in other actively managed mutual funds. So, it's doubly actively managed.
I have not yet broken even with the front load fees. My shares are theoretically still worth less than the money I've paid for them if I do choose to sell them. Should I cash them out when I make the switch to investing on my own, or should I transfer them in kind to the new account and just buy low-cost index funds moving forward? I'd kind of just like to be rid of them, but I'm not sure if it's wise since I've already committed to the front load. And so, in theory, they should just be able to sit there and grow without me having to pay that much more on them. I'd appreciate your thoughts. It's been bothering me and I'm going back and forth about it so I just want somebody else's opinion who I trust.”
All right, great question. So much going on here. Let's talk about a few of these things. First, congratulations. Twenty-four years old. Do you know what I was doing at 24? I was broke. I was donating plasma for grocery money. I was enrolling in medical school. I was getting married. I didn't have any money, and I wasn't going to have any money for a long time. You've already been maxing out a Roth IRA for a year. You're going to be so wealthy. Congratulations on getting started early. It makes a huge difference. Lots of docs out there, as you've obviously learned recently, don't get started at 24. But that extra decade of compounding can really work for you in a good way. Congratulations on caring about investing, on saving money, on investing it.
There are far worse things you could have done. I know you feel like you made a mistake hiring a bad advisor and putting money into maybe not the best mutual fund. When I got started investing at 28-ish, it was the same kind of thing. I ended up in a loaded actively managed mutual fund that wasn't the best choice, but I was getting started. That was the beginning of my Roth IRA and my wife's Roth IRA. And you know what? It's had more time to compound than anything else we've ever invested because we started early.
Let's talk for a minute now about financial advisors. If you need advice, if you need service, it is OK to get it. Go hire a financial advisor. We keep a list of vetted financial advisors that give good advice at a fair price under our recommended tab at whitecoatinvestor.com. If you need somebody, go hire somebody. It will help you. If you are not going to do this well on your own, you are far better off paying a fair fee and getting someone to help you. Some of those firms specialize in helping you to become a do-it-yourself investor. Others prefer to both manage your assets and give you financial advice for the long run. You have to match yourself to what you're actually looking for there. But if you need an advisor, go get an advisor.
There are basically four ways to pay financial advisors. The first one, the way you've been paying your “advisor” is with loads or commissions. This means when you invest money in a mutual fund, the advisor takes some of the money you are going to invest and puts it in his or her pocket to load. It's commission. That's how they're getting compensated for what they're doing for you. I do not like this model. I think it's a terrible model because it incentivizes all the wrong kinds of behavior. It incentivizes them to sell; it incentivizes them to cause turnover in your portfolio, which is almost always a bad thing. It incentivizes them to encourage you to invest in the highest load and highest commission investments. I just think there are too many conflicts there that even a good person can't overcome them. The other problem with the model is it tends to attract people at the beginning of their career when they don't know very much and you end up with not a very good advisor. You're not getting good advice, and you're not getting good investments. It's just not a great way to pay.
The other three ways are fee-only methods of paying a financial advisor. The most common one is an asset under management fee where you basically pay a percentage of your assets to the advisor each year. That can be a really good deal when you don't have any assets. If you have a $100,000 portfolio and you're paying 1% a year, that's only $1,000. That's a screaming deal for a full service financial advice and asset management. It's really a good deal if you're only paying $1,000 a year. The problem is when you have $5 million and you're still paying 1% a year. Now you're paying $50,000 a year, which is not a screaming deal. It's a rip-off. It doesn't cost that much to manage a portfolio and to give good financial advice and to help you follow your financial plan. It doesn't cost $50,000 a year, not even close. If you're paying that, you're getting ripped off.
The problem with an AUM fee is you've got to do the math each year. Many people don't want to deal with this. They have inertia, they don't want to change advisors as their assets grow, and they end up paying too much. Even if they're getting good advice, they end up paying too much. It's not my favorite method.
The next method is a flat annual fee. This works pretty well. It's like having an advisor on retainer to give you financial advice, or sometimes you just pay for your asset management this way. You might give them $5,000 or $10,000 a year to manage your assets. I think that's a reasonably good way to pay for financial advice. There aren't a lot of people that work under that method, though. The difficulty becomes finding somebody willing to work under that method. We have a lot of them on our list at whitecoatinvestor.com, so you can check that out if you want to pay people that way.
The last way is an hourly rate. They're often higher than what you're billing at. You might be paying $200, $250, $300, $400, $500, $600 an hour to get financial advice on an hourly basis. That sounds like a ton of money. It keeps you from coming in and getting the advice you probably need. But the truth is you might be paying a lot less on an hourly basis than you would under an AUM fee. You have to do the math just like you would with an AUM fee and make sure you're paying a fair price, which is typically a four-figure amount per year.
All right. Back to your situation. You're in this fund from American Funds. American Funds aren't the worst active management fund company out there. They're a favorite of these commission-based financial advisors. They call themselves fee-based, by the way. There's a difference between fee-based and fee-only. Fee-only is just fees—those last three methods. Fee-based or commission-based, however you want to call it, they're charging you not only fees, but commissions. Anyway, American Funds is a favorite here among these folks. It's not the worst place to have your money. They have a not bad long-term record on some of their funds. You could have done a lot worse. Don't feel too bad about that. But they are actively managed. They do have relatively high expense ratios. I've pulled one of their funds of funds up here. This is the American Funds Global Growth Portfolio. The expense ratio is 0.79%, which is 10-20 times what you'll pay for a Vanguard Total Stock Market Index fund. You can get a Fidelity Total Stock Market Index Fund for nothing. An expense ratio of zero. So, it's a relatively high fee. When you stack a load on top of that, you're paying an 8% load and I don't know what load you're paying to this person, that's like nine times as high of a fee if you only hold it for one year.
It's really expensive and obviously, those fees come out of your return. It just takes time for the investment to do well enough to make up for all those fees. If that's the way it's got to be, that's the way it's got to be. But that is not the way it has got to be, because you can invest in no-load mutual funds. What do you do with actively managed mutual funds? You've already paid the load. That's water under the bridge. You let it go. If you don't want to be in that investment, you get out. Staying in there for years does not help. You're still paying this expense ratio of 0.8% or whatever it is for the given fund that you're in. You just get out.
Now, in a taxable account, you want to think twice before you get out because you might have some capital gains and you'd have to pay taxes on it. Maybe you choose to hold on to a less-than-ideal investment and build your portfolio around it. But you're investing in a Roth IRA, there are no tax consequences to selling.
The load you've paid is water under the bridge. If you don't want to own that fund anymore, sell it, invest in what you want to actually own, and move forward. Consider it tuition in the school of hard knocks. Consider it your stupid tax. We've all paid it. I paid it. I paid it in a whole life insurance policy. I paid it in loaded mutual funds. All these mistakes that doctors make mistaking a commissioned salesman for an investment advisor. I've made these mistakes. Don't feel bad when you've made them, but don't stay there sitting in those mistakes for the rest of your career. Make a change, take control, and have a real investment plan moving forward. Keep your costs low, diversify broadly, fund adequately. Stay the course and you'll reach your financial goals. Great job, Shay. Thanks for being part of the White Coat Investor community.
More information here:
How to Find a Good Financial Advisor at a Fair Price
Where to Save Money for the Short Term
“Hey, Dr. Dahle. My name is Nick, and I am a second-year family medicine resident here in the state of Idaho. I recently signed a contract, an employment contract with a future position as an attending physician in a very small hospital in northern rural Idaho. This is coming with a $40,000 signing bonus as well as a $1,500 monthly stipend throughout the duration of the rest of my residency and until I start my work at my new position as an attending. With this signing bonus, my plan currently was to use a portion of it, about $15,000, in order to pay off the interest that is outstanding on some of my loans. That interest was frozen and was not placed into the total principal upon my graduation from medical school. And so, I would like to pay that off, and I find that to be a good financial option. However, I don't know what to do with the rest of the amount of money. For me, it is a lot of money and I'm not sure what vehicle I should use in the meantime. Because I am going to a very small area, there's really no rental options and I will need to buy a house when I do move up there after residency. And I was hoping to use this as a portion of a down payment for a future house. What vehicle would you recommend that I use? I know the options are available, such as a money market fund or a CD, but I was just wondering what thoughts you might have.”
Let's take that first one to start with. Congratulations on getting through residency. You must be doing a good job. People want to hire you, so congratulations on that. It's exciting to start getting some money. Getting a little bit in advance is a good thing, if you're sure that's where you want to go anyway. Thank you so much, by the way, for being willing to serve and work in a rural community. A lot of people talk about the doctor shortage, and the truth is we don't have that much of a doctor shortage. What we really have is a doctor maldistribution. Everybody wants to work in Salt Lake; everybody wants to work in New York City. Everybody wants to work in Denver, whatever. But nobody wants to work in rural Idaho. Thank you for going to rural Idaho. There are a lot of great things about rural Idaho. I have a wonderful time in Idaho every year. This year, we spent time floating the River of No Return, the Salmon River, floating from the eastern side of Idaho to the western side of Idaho. It is beautiful country. There are a lot of great things in Idaho. I hope you enjoy all of that fun outdoor stuff that you can do in Idaho.
As far as what to do with your money, it sounds like you have a plan. You want to use it for a down payment. Put some toward your loan interest, that's a good use of money. Some for down payment, that's a good use of money. You know where to put it. It almost seems like your confidence is lagging behind your knowledge base. That's pretty typical for white coat investors. A lot of people will tell you this is the case when they came out of residency. They're like, “Ah, I don’t know what I should do.” But if you actually ask them the questions, they do know what they should do. You know what you should do. You know you should keep this money aside in a money market fund and use it for your down payment. That's a perfectly fine use of money.
Now, at the beginning of your career as a doctor—and you guys have heard me say this before—you have a limited amount of money and all kinds of really good uses for it. You have student loans to pay down. You probably have some credit card debt. You maybe have a car loan. You want to have a home down payment. You want to get a real emergency fund. You have retirement accounts and HSAs to max out. You want to start investing for retirement. Maybe you want to get started in real estate investing. You have all these great uses of money and not very much money. In your case, you got an extra $1,500 a month. That's great. That's huge for a resident. You have a $40,000 signing bonus. But you're not going to be able to do all that with that much money. You're not going to be able to pay off all your student loans, for instance. You're only covering some of the interest that's built up.
You have to choose, and there's no really wrong answer among these choices. It's just your personal preference. If your priority is paying off loans, maybe you want to put it all toward loans. If your priority is to have a down payment and not use a doctor mortgage for buying that house, that's an option, as well. No real wrong answer there. Do what you want with the money, but don't go spend it. You have too many good uses for it to be spending it yet. Now is the time period where you live like a resident for 2-5 years, kind of jumpstart your wealth accumulation process. You'll be glad that you did that.
Fidelity Advisor Freedom Blend 2065 Fund
“Hey Jim, this is Nick from the Midwest again. I just wanted to send a follow up with more information. Currently I've chosen the Fidelity Advisor Freedom Blend 2065 Fund Class C shares due to my plan of not being at this employer for the long term. Seeing as though I'm young, I chose the 2065 fund. Let me know your thoughts.”
Oh, I'll let you know my thoughts. I don't like that fund. Is that fund in your 401(k)? Because if so, your employer hates your guts and you ought to sue them for it. Maybe not sue them. But the point is employers have a fiduciary duty to you to give you good mutual funds in your 401(k). If they don't do that, they have liability. They have a duty to give you good investments. A Fidelity advisor fund in your 401(k) is like a high-expense ratio mutual fund. Fidelity has two kinds of funds. They have some very low-cost index funds, and then they have advisor funds that are used to compensate their advisors for selling you these funds—to compensate them for this great advice they're giving you to go into these high-expense ratio mutual funds. It's not a service, though. I would try to avoid that fund if you can.
Looking around that 401(k), see if there's something better. I get the draw for a target retirement or lifecycle-style fund. It's a great choice. These lifecycle funds are a great choice, particularly for a resident. All your investments are in a 401(k) or they're in a Roth IRA or whatever. It's fine to use these lifecycle funds. It's a one-stop shop. Get back to learning medicine. It's great. I don't like high expense ratio ones. If that's all that's available to you in your 401(k), maybe you've got to suffer with it for a year or two, fine. If it's your IRA, look around, you're probably in the wrong fund. You can get something that's dirt-cheap index funds.
Fidelity has two sets of these lifecycle funds. One that the advisors sell with high costs and one that the advisors don't sell with high cost. When you deal with Fidelity, you have to be aware of that. We had a podcast a few weeks ago where we talked about the problems with Vanguard. Well, this is one of the problems with Fidelity. Fidelity is a privately owned company. They want to make a profit. The Johnson family, I think, still owns it. What they try to do is have you come over with these loss leaders, these super low-cost zero-ER index funds, and then hopefully you buy some other services there like their expensive actively managed funds. That's the problem with Fidelity. You have to be aware of that dichotomy and negotiate it and navigate it properly so you're not getting ripped off. In your case leaving residency, if this isn't a 401(k), you'll probably want to just convert this all to a Roth IRA. That's one of your priorities as you leave residency, and there'll be a little bit of a tax cost to doing that most likely. But it's probably worth paying, and maybe you want to use some of your $40,000 signing bonus for that.
Do You Really Need to Diversify Beyond Total US Stock Market Fund?
“Hey Dr. Dahle. Thank you for all that you do. I'm a beginner investor and a first-time question asker. I've jumped into the Bogleheads philosophy, and I think I've made the mistake of consuming too much information in a short period of time. I'm suffering from analysis paralysis, and I'm hoping you can help. I'm confused as to why asset allocation should be diversified past investing in a total US stock market fund if you have a long-risk horizon. Why discuss adding value premiums and weighing and having different tilts, internationals, REITs, emerging markets, etc? It seems that looking at compound annual growth rates over the past 40 years, it's been most optimal to just edit your risk profile by changing the ratio in your portfolio between pure equity and a total market fund and fixed income rather than adding asset classes or weighing different premiums. Obviously, previous returns have no say in the future, but I think I'm just having a difficult time getting started. So, I was hoping you could speak on that.”
It's difficult for me to talk about this question because it sounds like I'm talking down about a total stock market fund, which is my favorite investment. It's my favorite mutual fund. Twenty-five percent of our retirement portfolio is in Vanguard or iShares depending on if we have tax-loss harvested recently. Total stock market fund, it's in US stocks as allocated by capitalization. Very low-cost investment, very broadly diversified, essentially guarantees you the return of the US stock market. I like this investment. It's a good investment. I've chosen not to put all of my money in it because I think there are other things that are worth owning.
One of the best explanations of this is to imagine that you were a Japanese investor in the mid-1980s, and you said “If I look at past returns, the Japanese total stock market fund for the last however many years has done so well. Why would I bother investing internationally? Why would I bother investing at small and value tilts and REITs and bonds and all this other kind of stuff? If I have a long-time horizon, why wouldn't I just put it all into this Japanese total stock market fund?” The answer for those of us who understand financial history is very clear. By the late 1980s, the Japanese stock market had collapsed, and it basically has not yet come back. It's come back some, it's paid some dividends along the way.
But if you look at the Japanese stock market and you go back to, let's see, the furthest Google's going back for me is 1991. In 1991, it was at $26,000. Well, today it's at $27,000. It's been 30 years; 30 years the index has not gone up. Could that happen in the US? Absolutely it could. The US is a bigger economy than Japan, although at that time, Japan was a huge portion of the world's stock market capitalization. The US, in a lot of ways, has some advantages Japan does not. But this is the reason why you invest internationally, because you don't know when this is going to happen to your country. I think it's worthwhile owning international stocks. It's so easy to do. Just like there's a total stock market index, there is a total international stock market index where you can buy all the stocks in the world in 30 seconds essentially for free. Not that hard. You can own all these European stocks, all these Japanese and Pacific Rim stocks, Australian stocks, emerging market stocks in China and India, etc., in case you're not sitting on the winner.
No. 2, you're looking at the past record. What you may not be considering is that over the last 10 years or so, US stocks have done dramatically better than international stocks. Part of that reason is just the US happened to do well, and part of it is the dollar has strengthened dramatically over the last 10 years. It looks like it's done even better than it has. But going forward, US stocks are more richly valued than international stocks are right now. That gap is bigger than it's been in a long time. That pendulum swings back and forth, and you haven't been investing long enough to watch very many of these swings. The last time international stocks did really well was in the 2000s, and they called the 2000s the lost decade because the S&P 500 basically didn't go up.
If you count dividends, it did, but it basically didn't go up from the market high in 2000 until 2010. It's the lost decade. Maybe the 2020s are going to be a lost decade for US stocks and everyone by the end of it will be going, “Why’d anyone invest in US stocks when the record for international stocks is so much better?” But that pendulum swings back and forth. I think it's worth owning both. How much should you put in each is really up to you, but I think it's worth owning both. Jack Bogle didn't, though. He's like, “US stocks do business outside the US. You're OK just owning US stocks.” I disagree with him on that point. Lots of people do. If you don't, knock yourself out, just buy US stocks. I think it's a mistake. I think you need to own some international stocks, whether it's 10% of your stocks or 50% of your stocks, whatever. I think you have to own some international stocks.
As far as small and value tilting, in some ways it's the same story. The question is, “Is diversification just owning the maximum number of stocks or is it about diversifying risks?” Because the academics would tell you that there's market risk, there's small risk, there's value risk, there are all these other factors as well. But those are the big ones. If you tilt your portfolio to small stocks and you tilt your portfolio to value stocks, you are actually diversifying your risks even though you are not now market-weighting your stock portfolio. Of course, over the last 10 years, what has done the best? Large stocks, growth stocks, US stocks, tech stocks, so that means small value stocks and international stocks are more value than growth.
International stocks, as well, have not done as well. Everyone goes, “Well, why don't I just invest in the FAANG stocks since they do so well, they have the best historical record.” Well, because the pendulum swings, that's why. I think you need to pick something you can stick with for the long run. For me, that's a little bit of a tilt to small stocks. It's a little bit of a tilt to value stocks. It's a little bit of a tilt to international stocks. It's a little bit of a tilt to real estate. I know there are times when those tilts are not going to pay off. There are other times when I'll be very glad to have those tilts, like 2022. US large growth stocks did not do awesome and small value stocks did much better. This has been a good year for a small value investor. But if you look back historically, there are good years and bad years. Over the long run, small and values seem to have outperformed, but it's probably a risk story. They're probably riskier stocks. I'm taking on more risk by tilting my portfolio to small and value stocks.
If you don't want to tilt, if you just want to use a classic three-fund portfolio, total stock market, total international, total bond market, I think that's fine. Different strokes for different folks. There are many roads to Dublin, but I would encourage you to pick a mix of investments you can stick with in the long term and then stick with it. Don't swing back and forth because what will happen is you'll have a decade like the last one, you'll go, “I should put it all in US stocks.” Then you'll have a decade like the 2000s and you should go, “I shouldn't put any money in US stocks,” and you'll be buying high and selling low. Don't do that. Just have a static asset allocation, rebalance once a year. Take what the market gives you and you'll be successful in the long run.
More information here:
How to Build an Investment Portfolio for Long-Term Success
Adjusting Your Financial Plan in a Down Market
“Hey, Jim, longtime WCI follower, first time Speak Piper. What are your thoughts on adding a wrinkle to my financial plan? We followed our financial plan consistently for about a decade now, including maxing out our 401(k), defined benefit plan, HSAs, SEP-IRA and yearly Backdoor Roth for myself and my wife. After experiencing a couple of bear markets, I had not a slightest incline to sell during them. I have consistently found myself wanting to take advantage of the market downturn. We currently have 75% stock, 25% bond portfolio, and I’m 43 years old.
We're considering changing our plan to specific triggers to increase the equity portion. For example, my financial plan might read, if a 25% drop in the market occurs as measured by the price of VTSAX, we will change our investment holding to 95% stock, 5% bonds. If we implement this, we would also plan to have a lesser trigger at 10% market downturn, 85-15, and plan for corresponding changes in times of market gains. It seems that this might help me to buy low and sell high over time. I don't mind doing a bit more work. In fact, I enjoy nerding out on this stuff. I'd love your blunt opinion on whether this is an unwise addition to our financial plan.”
I think it's OK to do something like this. It needs to be written down in your plan. Our plan requires us to wait three months before making a change. I hope yours does, as well. Think about it. Decide if this is really something you want to do long term, but I think that sort of thing is OK. But you are only mentioning half of it. You haven't thought about the criteria of when you go back to the lower stock allocation. Because going to 85% or 95% stocks, at some point presumably, you're going to want to go back down and you've got to pick the right time to do that. That's the difficulty in timing the market. You have to set criteria to do that. Is this OK to do? This is OK if it's what your plan says, I think you ought to follow it. But you ought to think about this in advance. What am I going to do? Make sure it's something you can tolerate.
Consider the downsides of when this could burn you. Because there are times when this could burn you. Look at the Great Depression, that sort of a thing when this sort of thing might not have worked out as well as you think. The other thing I would caution you about is not really to make changes at 10% and 20% down. I've looked at the data on this particular point and the data is pretty good when the market drops 40% plus, pouring money into stocks really works out well. The data is not very good when stocks go down 10%. Pouring money into stocks is a good idea. I would encourage you, if you want to do this tactical asset allocation, which even Jack Bogle mentioned was OK to do a little bit. I think the amount you're doing probably still falls within a little bit, is to have a little bit bigger movement before you actually make any changes or you're likely to get whipped.
The other thing to keep in mind is, there are tax consequences to doing this in a taxable account. If a lot of your investments are in a taxable account, there's a cost to buying and selling and changing your asset allocation dramatically that may outweigh the benefits of doing so. But the idea here is simple. Stocks are cheaper when the price goes down. Let's say it had gone down 15%, well you're buying the same company 15% cheaper, and that's the way the overall market is, as well. It makes sense to try to do that. It's just incredibly difficult to do in the long term. I think the best way to do it is with some sort of systematized plan. Maybe you go from 75% to 85% stocks after the market drops 25% and then you keep it there until the market recovers to its former high and then you go back to 75% stocks. But you need to write that plan down, be comfortable with it, look at it historically, how it would've been in a few different situations. Make sure it's going to pass the stomach acid test with you, then implement it and follow it and stick with it. Don’t be changing that sort of a plan every year, or you'll end up regretting it.
When I've made changes to my investment plan, I've often regretted them. Keep that in mind. I remember when I added REITs to my plan in 2007. It did not work out well. That initial investment I lost 78% on. Now we've stayed the course with it over the years and our long-term return is just fine on that asset class. But that initial investment, the timing on it might not have been all that awesome.
Struggling to Justify Cutting Back Hours
“Hi, Dr. Dahle. Thanks for everything you do at The White Coat Investor. I'm a physician in the Midwest. My spouse and I are in our mid-30s and in terms of savings, we are about 70% of the way to our financial independence savings goal. I've been contemplating cutting back my hours to 0.6 FTE so I can have more time for travel and hobbies and just less stress in my life. If I cut back, we would still be able to put about half of our annual household income into savings.
Logically, I know we're in a great place financially to allow me to scale back. However, when I run the numbers after taxes, I currently make about $700 a day. So, for each day that I choose not to work, it would feel like I'm paying $700 for the day off. As a frugal person, it's hard to imagine spending $700 a day just to read books and take my dog on walks. Am I thinking about this correctly as far as feeling like cutting back my hours is paying a lot of money for more days off? Do you have any advice for me in this situation?”
There are a lot of people out there listening to this podcast who can relate to your question. I know because they send me messages and I see their posts on Twitter and Facebook, and I talk to them at the WCI conference. You are a natural saver. This advice I'm giving to this doc does not apply to everybody listening to this podcast, OK? It only applies to this doc and people whose mindset is like this doc. You have won the game. You haven't quite won it yet, but you are on track to, you'll win it very soon. You're at 70% of the way to your FI number in your 30s. That's awesome. You're very frugal. You're talking about cutting back and still having a 50% savings rate. You have won this game that a lot of people struggle with, of earning enough money and saving enough money and investing it wisely. A lot of people struggle with this. You do not. You won.
But there are five money activities, and you are not winning at all of them, I suspect. The first one is earning. It sounds like you're doing fine there. You're making $700 a day after tax. The next one is saving. You're clearly doing well here when you can cut back on work and still have a 50% savings rate. You didn't mention your investments, but I'll bet you're doing fine there. The next one is spending. I don't think you're very good at spending, and I can relate. I'm not very good at spending either. I think you need to spend some more time and effort on spending and, frankly, some money on spending, and figure out some things that you can spend money on that will make you happier.
Now, one of those is probably cutting back at work. Does this cost you money? Yes. It costs you $700 a day. And guess what? There will come a time in your life in the not-very-distant future when that seems like a fantastic deal. Because here's the deal, you can always make more money. You can't make more time. You're in your 30s, you're young, you're in the hard-charging era of your career. But there will come a time when you will realize that you only get so much time on this sphere going around the sun, and you can't get any more of that. Seven hundred dollars for a whole day of it? That's a great deal. I'm like, “$700? Wow. Hey, I'll pay $700 for a day off. That sounds like a great deal to me.”
Don't think about it that way. Think about it as you have enough money or soon will. Start thinking about, “Well, how can I buy some of my time back?” You can buy time back by paying someone else to clean your house and mow your lawn and shovel your driveway and do your grocery shopping for you and work on your car for you. There are lots of ways you can buy time back, but one of which is just by working less. I have done this. I have bought my nights back by paying my partners to work them. I do not work after 10pm, ever. I used to work after 10 a lot. We're going on a trip here soon where we got kind of a red eye flight and I'm like, “Ah, I don't like staying up all night anymore. I've already spent enough of my life in those early morning hours awake. I don't want to do it anymore.”
I have also cut back on my shifts at work. I've essentially bought my time. What does an emergency medicine shift pay? They probably pay on average about $2,000. After taxes, it's going to be less than that. I don't know, $1,200, something like that. Every time I drop a shift, it's $1,200 a month and I get a day off for it. I get this time that I can use to do something else. That's a very good price to pay. It's not all about money. You only need enough. It sounds to me you've figured out how much is enough. When you have enough, more does not make you any happier. As you are well on track to having enough, you may want to cut back a little bit early and start buying some of your time back and doing those things you enjoy, even if they're very inexpensive things.
Walking a dog or reading books don't cost much money. But you've got to decide what your life looks like. You should not feel guilty that you should be at your practice all the time practicing. You should not feel guilty about spending some time off, about not earning as much money as you can possibly earn. Find balance in all things. But for you, you are like me, a natural saver, not a natural spender. You have to spend some time working on the spending skills that I suspect have eluded you to this point. Realize that you have got a saving problem, an earning/saving/investing problem. You're very good at those to the detriment of the rest of your life. I would bet that there are some things that you would like to spend a little bit more money on when you sit down and think about it and come up with a deliberate plan to do so.
So, congratulations. You are in a minority of people, a minority of physicians. It's difficult for most of us to save as much money as you're saving. You've won, from that respect. Now it's time to start thinking about what next? What are you going to do with the remaining 10, 20, 40, 50 years left on this planet? How much of it do you want to spend practicing medicine? How much of it do you want to spend reading books and walking your dog? It's now your choice. Congratulations, you win.
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Sponsor
The sponsor of this episode, 37th Parallel, is a private multifamily acquisitions and asset management firm based in Richmond, Virginia. Since 2008, they have completed close to $1 billion in multifamily transactions with a 100% profitable track record for our clients. They provide a vertically integrated investment platform (fund and single asset investments) for high net worth, family office, and institutional investors seeking tax-advantaged income and equity growth. They specialize in Class A/B apartment communities in demographically strong markets in Texas, Georgia, Florida, and the Carolinas. Learn more about 37th Parallel and the special investment discounts available only to White Coat investors at www.whitecoatinvestor.com/37parallel.
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Expert Witness Startup School
Have you ever wanted to be an expert witness? If so, we have a great course for you! This course will teach you everything you need to know to get started. Taught by Dr. Gretchen Green, founder of Expert Witness Startup School, the 2023 session takes place over four weeks with weekly recorded modules and one weekly live Q&A via Zoom. The course cart opens Friday, January 20, 2023, at 7am ET and closes Monday, January 30, 2023, at midnight PT. As an added bonus, we will give the 2021 Continuing Financial Education Course for free to anyone who signs up for Expert Witness Startup School. For more information, go to whitecoatinvestor.com/expertwitness.
Quote of the Day
Carmen Reinhart said,
“If there is one common theme to the vast range of the world's financial crises, it is that excessive debt accumulation, whether by the government, banks, corporations, or consumers, often poses greater systemic risks than it seems during a boom.”
Milestone to Millionaire
#101 — General Dentist Buys Private Practice
Today on the podcast, we chat with a general dentist about his journey from the military to private practice. Not only has he purchased a practice but he also hit millionaire status just over two years after buying his practice. He said being a business owner requires knowing your risk tolerance as well as having a commitment to paying off debt as quickly as possible.
Sponsor: InCrowd
Full Transcript
Intro:
This is the White Coat Investor podcast, where we help those who wear the white coat get a fair shake on Wall Street. We've been helping doctors and other high-income professionals stop doing dumb things with their money since 2011.
Dr. Jim Dahle:
The sponsor of this episode, 37th Parallel is a private multi-family acquisitions and asset management firm based in Richmond, Virginia. Since 2008, they've completed close to 1 billion in multi-family transactions with a 100% profitable track record for our clients.
Dr. Jim Dahle:
They provide a vertically integrated investment platform fund and single asset investments for high-net-worth family office and institutional investors seeking tax advantaged income and equity growth.
Dr. Jim Dahle:
They specialize in class A, B apartment communities in demographically strong markets in Texas, Georgia, Florida, and the Carolinas. Learn more about 37th Parallel and the special investment discounts available only to White Coat Investors at whitecoatinvestor.com/37parallel.
Dr. Jim Dahle:
Welcome back to the White Coat Investor podcast. I am your host flying solo today. I am Jim Dahle, I'm an emergency physician. I practice in Utah. I'm the founder of the White Coat Investor.
Dr. Jim Dahle:
12 years ago, I decided that docs should get a fair shake on Wall Street and they were not getting it, and I thought, “Well, how can I reach as many of them as I can?” And there was this newfangled internet thing and blogs out there, and I decided to start one. It blew up and has subsequently grown into a lot of different things, including this podcast, which actually now has more reach than the blog.
Dr. Jim Dahle:
So, thank you for listening to the podcast. Our mission here is to help you get a fair shake. We want to connect you with the good guys in the industry, run the bad guys out of business, and mostly help you to become financially literate, financially disciplined, and financially free.
Dr. Jim Dahle:
I hope it has been beneficial to you. If there are things you would like to see us do better, please tell us. The easiest way to do it is to take our survey. It's open for a few more days. whitecoatinvestor.com/survey.
Dr. Jim Dahle:
We'll bribe you to take it. There's going to be a random drawing for people who take the survey. Some are going to win T-shirts. I think we're giving out 20 T-shirts. And somebody's going to win a free online course worth thousands or hundreds of dollars. I guess it could be thousands of dollars depending on which course you choose. It's your choice which of our courses you want to take. But please take that survey, help us help you.
Dr. Jim Dahle:
Something else I want you to know about is a startup school. This is an expert witness startup school. If you have thought that you would like to be an expert witness, now you can just do it for the defense if you want. You don't have to work for the prosecution, but most people do both and just try to give their honest opinion of what the standard of care would be in a case.
Dr. Jim Dahle:
But if that is something you're interested in doing and you want to learn how to do it, you want someone to take you soup to nuts and show you how to become an expert witness and use all this knowledge you spent a decade accumulating, to do a little bit of a side gig, which most people say also helps them in their own practice to be a better doc.
Dr. Jim Dahle:
We have a course that will help you to do that. That course cart opens on January 20th. It closes on January 30th. I'm recording this before Christmas. So, if the world changed in the last few weeks like it did around the pandemic, and I sound really out of touch, if Russia invaded Alaska or something, and I didn't even mention it on this podcast, that's why.
Dr. Jim Dahle:
But basically, you're listening to this on the 26th, 27th, 28th of January. You only have till the 30th at midnight Pacific Time if you want to sign up for this startup school. You'll have lifetime access to the material. You get access to all the modules as soon as you enroll. And it takes place over four weeks with weekly recorded modules and one weekly live Q&A via Zoom.
Dr. Jim Dahle:
There are eight recorded video modules. There's homework each week that may take one to two hours. Obviously, we want you to be serious about this if you're taking it. Depending on your level of experience, it might take you longer. If you've never done anything like this before, it might take full two hours. If you've done some before and you're just brushing up, maybe a little shorter.
Dr. Jim Dahle:
But this session runs from the end of January through February 24th, and basically it will teach you how to launch and build an expert witness practice, to diversify your income and increase your financial security.
Dr. Jim Dahle:
This is done by Dr. Gretchen Green. We've had a lot of White Coat Investors take this course. They like it, they enjoy it, and they get to use skills they already have as physicians to generate some extra money, often at a higher hourly rate than they're making practicing. Anyway, you can sign up, whitecoatinvestor.com/expertwitness.
Be sure to check that out.
Dr. Jim Dahle:
All right, today we have whole hodgepodge questions off the Speak Pipe. You guys drive the content on this podcast. I say guys generically, of course, many of our listeners, of course are not guys, but you know what I mean.
Dr. Jim Dahle:
If you would like to have your question answered on the podcast, you can leave it on the Speak Pipe, whitecoatinvestor.com/speakpipe. If it's too long or you don't want someone to recognize your voice, you can send an email. A lot of those end up on the podcast as well. You can email editor@whitecoatinvestor.com, but it's a lot more fun if you leave it on the Speak Pipe because then we have more voices on the podcast.
Dr. Jim Dahle:
Our first one today, however, is an email question. It says, “I'm not a doctor but a personal finance enthusiast in Silicon Valley and greatly enjoy your podcast.” We appreciate that. There's actually a lot of tech workers who read and listen to the White Coat Investor.
Dr. Jim Dahle:
“I am a tech worker and through my employer have access to a 401(k) plan, which allows me to perform a mega backdoor Roth. Unfortunately, the after-tax contributions are payroll deductions and my base pay compensation is such that it takes many, many pay cycles to contribute my target amount while I live off RSU vestings.
Dr. Jim Dahle:
It is likely in 2023 I will leave this employer by choice or layoff and my next employer may not offer a 401(k) with the same features.” That does sound like life of a tech worker constantly changing jobs.
Dr. Jim Dahle:
“Is there any downside to scaling back my tax withholding with my employer to leave more after tax funds for contribution toward my mega backdoor Roth? This would allow me to reach my target sooner and I can make estimated tax payments to ensure I reach the tax withholding safe harbor.
Dr. Jim Dahle:
If it's not all gloom as I could land with another employer with a great 401(k) where I could utilize the $66,000 limit twice in a single tax year while observing the $22,500 voluntary contribution limit. Hopefully this question isn't too specific.” We like specific questions here at the White Coat investor. Let's get out into the weeds and talk about this stuff.
Dr. Jim Dahle:
Then he finishes “I greatly enjoy your podcast. I really need to give my doctor a copy of your book because she has a whole life insurance plan.” Yes, you do. Please do give your doctor a copy of the book. That would be very kind of you.
Dr. Jim Dahle:
I think your plan's fine overall. I've seen docs do something similar to pay off their student loans actually in the first six months out of residency. Many years ago, we had a guest post of a doc who basically took advantage of the fact that when you're self-employed, you get a pass the first year on your quarterly estimate.
Dr. Jim Dahle:
And so, she basically didn't pay taxes for the first six months out of residency and she sent all that money to her student loan lender and paid out her student loans. Then come the next year, January, February, March, April of the next year, she saved up her money to pay her tax bill for the prior year. And it worked out really well and she was debt free and still met her tax obligations for that year.
Dr. Jim Dahle:
So, keep in mind, there are two things going on here when we're talking about taxes. You have to pay your taxes, all right? I'm not advocating that you do not pay your taxes. You should pay your taxes every dime you owe. Don't leave them a tip, but pay them every dime you owe.
Dr. Jim Dahle:
What you do with your tax return each year is you are settling up with the treasury, with the IRS, with the government. You're settling up with them. If you paid them too much, they give you some back. That's a tax refund. If you haven't paid enough, you got to send in a tax bill.
Dr. Jim Dahle:
Sometimes you've broken some of the rules, right? It is a pay as you go system. The federal system is, some states are not. Utah is not a pay as you go system. You're allowed to pay your entire tax bill on April 15th of the next year. And that's perfectly fine with Utah. It is not fine with the federal government. They want you to pay as you go.
Dr. Jim Dahle:
And so, the way most people do that, because most people are employees, is their employers are required to pull some money out and send it to the IRS with each paycheck. That's called tax withholding. And other than that the general rule is that employers have to pull a certain amount out based on what you put on your W-4, it's a little bit loosey-goosey there.
Dr. Jim Dahle:
Because how you fill out the W-4 affects how much they have withheld. And so, if you fill out your W-4 in such a way that they don't withhold very much, well, you may end up having to write a big check come April, number one, and there may be some penalty associated with that, but there's really nothing that keeps you from changing it throughout the year.
Dr. Jim Dahle:
I think they want you to be as honest as you can when you answer the questions on the W-4, but I've never actually heard of anybody getting in trouble for not doing so. You'd still have to pay the taxes in the end but I think there's more flexibility there than the IRS really likes to tell you there is. Especially if you're paying as you go anyway with quarterly estimated payments. I really don't think they care and it would help your cash flow to be able to do it this way.
Dr. Jim Dahle:
So, I think that's fine. I don't think anybody's going to give you a hard time about that and it'll allow you to max out your retirement account. The IRS does have an estimator that you can use. It's at irs.gov/individuals/tax-withholding-estimator, which lets you do all kinds of changes on how much you have withheld. So, I don't see any reason why you couldn't do what you're planning to do here. I think it's fine to do, especially since you are paying as you go just as much as I am by doing your quarterly estimated tax payments.
Dr. Jim Dahle:
All right, our next question comes from Alex. He's asking, he or she, I'm not sure which is asking about selective insurance plans within the hospital and HSAs.
Alex:
Hi, thank you for all you do. I'm a resident who has an HSA who currently switch insurance plans within the hospital, and I'm wondering how can I switch the HSA to a self-directed HSA or personal HSA due to the fees and poor investment options in the current HSA. I appreciate it. Bye.
Dr. Jim Dahle:
Alex, that's a great question. I have this image of you recording this question with a hoodie over your head sitting in the corner on one of the wards at the hospital trying to be quiet as you recorded on the Speak Pipe. I don't know if that's how you actually recorded it, but that's kind of what it sounds like. It sounds like you're trying to be quiet as you recorded it. But it's a great question.
Dr. Jim Dahle:
Here's the deal with HSAs. You mentioned your switching insurance plans. That really doesn't have anything to do with any of it. If the old plan was a high deductible health plan and you're allowed to use an HSA for it, that's fine. If the new plan is a high deductible health plan, you're allowed to use an HSA for it, that's fine too. But the HSA itself is kind of separate from those.
Dr. Jim Dahle:
Now, there is a benefit to using whatever HSA your employer allows you to use or your employer has chosen for you. And the benefit is they put money in there without you having paid payroll taxes on it, which for a resident is a big deal because you're still paying social security tax, 12.4% when you count the employer's portion and your portion. 6.2% is your portion of that plus Medicare. Your 1.45% is the employee portion of Medicare.
Dr. Jim Dahle:
So, you don't have to pay those taxes on the money that goes into the HSA if your employer is pulling it out of payroll and putting it in the HSA. That's a good reason to use your employer's HSA. The downside is a lot of employer HSA suck. They're terrible, they have terrible investment options. They might have a bunch of fees. They might be a pain to work with. There are better HSAs out there. Places like Fidelity, places like Lively.
Dr. Jim Dahle:
What most people do, if they are not contributing directly to a good HSA like we do, we contribute directly to a good HSA because we don't have it withheld. It's not a benefit that we offer at White Coat Investor because we know people can just go open it up themselves if they want. So, we don't do that. We just go directly and ours is at Fidelity, it's fine.
Dr. Jim Dahle:
But if you are stuck at your crummy employer one, you're not stuck there for long because once a year you can roll it over into a good HSA. And so, that's what I would do if I were you. I would just have the employer pull the money out of payroll, put it in their crappy HSA with the high expense ratio of funds or whatever, and then once a year do a rollover to where you really want to be, a Lively or a Fidelity or someplace like that with low cost, good investing options and go for that.
Dr. Jim Dahle:
We actually have an affiliate relationship with Lively. If you want to help support the site while you open that, you can go to whitecoatinvestor.com/lively. I think we get $10 if you open an account there. So, it's not exactly a big profit maker for us, but it does help support the site and we do appreciate that.
Dr. Jim Dahle:
Our quote of the day today comes from Carmen Reinhart who said “If there is one common theme to the vast range of the world's financial crises, it is that excessive debt accumulation, whether by the government, banks, corporations, or consumers, often poses greater systemic risks than it seems during a boom.”
Dr. Jim Dahle:
A lot of truth to that, it's usually debt that gets us in trouble. Personally, business wise, nation wise, be careful how much debt you take on. And be careful investing in entities that have a lot of debt because bad things happen.
Dr. Jim Dahle:
As I record this in December, the FTX debacle is still going on. I think it was just last week that Sam Bankman-Fried was arrested. I don't know how that will have played out by the time you hear this podcast, but borrowing money gets people in trouble. Be careful what you borrow. Don't borrow more than you need. Pay it off faster than you have to. You'll thank yourself later for it.
Dr. Jim Dahle:
Okay, next question is on HSA contribution rules.
Speaker:
Hi, Dr. Dahle. I have a question about HSA contribution rules. I am a W2 employee and I have a high deductible health plan and HSA through my employer, which I have been contributing to.
Speaker:
My employer's benefits handbook specifically states that we are not allowed to decline their health insurance coverage. For 2023 I also enrolled in my husband's health insurance plan through his employer, which is a PPO plan and is not a high deductible health plan because there is a specific practice that I want to see that I cannot go to with my own employer's health insurance.
Speaker:
Since I will technically be enrolled in both plans, am I still allowed to make contributions to the HSA for 2023? I use my HSA account as an extra retirement account, as you have advised. So, I do not plan to use or withdraw any of the contributions for healthcare expenses. Thanks so much for your help.
Dr. Jim Dahle:
Great question. The answer is no. You cannot contribute to an HSA unless your only health plan is a high deductible health plan. The fact that you're also covered by this PPO keeps you from contributing to your HSA for 2023. That doesn't mean you got to pull the money out of your HSA that you have in your HSA now. You don't have to spend it. You can leave it there, you can leave it invested, but you cannot contribute for 2023 because you are covered by a non-high deductible health plan.
Dr. Jim Dahle:
Boy, that's a really unfortunate situation. You've got a plan provided to you, you'll want to use an HSA and presumably you're paying extra to be covered under your spouse's plan. That's a bummer and you don't even get any money back from your employer for it. I guess if you really want that doc and you really need that coverage, you got to do it.
But that's unfortunate. I'm sorry to hear about your situation.
Dr. Jim Dahle:
We have a program here called the Champions Program, and what I want to do via this program is give away million dollars, but I'm giving it away in a very specific way in the form of White Coat Investor Guide for Student books.
Dr. Jim Dahle:
We are trying to give one of these away to every first year medical and dental student in the country. We want to be as successful as we can at this because we know what makes a difference. We're seeing surveys among medical students that now the younger medical students are feeling more prepared financially than they used to. And then the older ones are the ones who have not yet been given a copy of this book. We've given it over the last couple of years to 70% plus first year medical and dental students.
Dr. Jim Dahle:
So, we know what makes a difference. And as the years go on, that difference will compound and compound and compound and compound. There are a million doctors right now, and I figure this could make a difference of $1 million or $2 million to each of these doctors if they would read and apply the lessons in this book over the course of their careers.
Dr. Jim Dahle:
A million times a million dollars, that's a lot of money. That's a trillion dollars that this investment in giving these books away to first year medical and dental students could create. And it may be the most important thing we ever do here at the White Coat Investor. We need a little bit of help. We cannot afford the staff nor the postage to send these books individually to everybody. We have to send them in bulk. We have to send them in boxes.
Dr. Jim Dahle:
And what we need is a first-year student, somebody in the class to just volunteer to be the champion. All you have to do is pass the books out. That's it. Haul a couple of boxes into school one day, pass the books out to your classmates and we'll send you a T-shirt. We'll send you a WCI Tumblr if you send us a picture of you passing it out to your classmates, but mostly you get to be the champion. You get to be the one who saved your classmates millions of dollars. It's pretty awesome.
Dr. Jim Dahle:
So please sign up, whitecoatinvestor.com/champion. Help us give away a million dollars’ worth of White Coat Investor Guide for Student books this year so we can help doctors to become financially literate, financially disciplined and be able to concentrate on their families and their own wellness and their practices and to do those things that you went to medical school for in the first place.
Dr. Jim Dahle:
We appreciate those who have volunteered to be champions in the past. Those who already volunteered this year, those who volunteered even though there was already somebody from your school. Thank you anyway, we appreciate it. We only need one from each school. But there are still schools out there that have not yet had a champion emerge.
Dr. Jim Dahle:
In fact, Megan, why don't we get a list of the schools that we don't have a champion from and we will put that into a podcast coming up. And if you're at or near or from one of those schools, maybe you can put some pressure on somebody and find us a volunteer to help pass these books out.
Dr. Jim Dahle:
All right, our next question is the one for which this episode “Leaving a Bad Advisor” was named. I think there's a lot of interesting points from this question. It comes from Shay. Thank you so much for calling in with this question.
Shay:
Hi, Dr. Dahle. Thanks for all you do. My question is about what to do with actively managed mutual funds when you decide to make the switch from a bad financial advisor to managing your own portfolio.
Shay:
I'm the partner of a current medical student who recently introduced me to WCI. I'm 24 and I have been maxing out my Roth IRA for a little over a year. My advisor recommended that I buy front load shares of the American Funds one fund portfolio, which I now understand is an actively managed mutual fund invested in other actively managed mutual funds. So, it's doubly actively managed.
Shay:
I have not yet broken even with the front load fees. My shares are theoretically still worth less than the money I've paid for them if I do choose to sell them. Should I cash them out when I make the switch to investing on my own or should I transfer them in kind to the new account and just buy low-cost index funds moving forward?
Shay:
I'd kind of just like to be rid of them, but I'm not sure if it's wise since I've already committed to the front load. And so, in theory, they should just be able to sit there and grow without me having to pay that much more on them.
Shay:
I'd appreciate your thoughts. It's been bothering me and I'm going back and forth about it so I just want somebody else's opinion who I trust. Thanks so much.
Dr. Jim Dahle:
All right, great question. So much going on here. Let's talk about a few of these things. First, congratulations. 24 years old. Do you know what I was doing at 24? I was broke. I was donating plasma for grocery money. I was enrolling in medical school. I was getting married. I didn't have any money and I wasn't going to have any money for a long time. You've already been maxing out a Roth IRA for a year. You're going to be so wealthy. Congratulations so much on getting started early. It makes a huge difference.
Dr. Jim Dahle:
Now, lots of docs out there as you've obviously learned recently, don't get started at 24. But that extra decade of compounding can really work for you in a good way. So, congratulations on caring about investing, on saving money, on investing it.
Dr. Jim Dahle:
There are far worse things you could have done. I know you feel like you made a mistake hiring a bad advisor and putting money into maybe not the best mutual fund, but congratulations on what you're doing.
Dr. Jim Dahle:
When I got started investing at 28-ish, almost 29 it was the same kind of thing. I ended up in a loaded actively managed mutual fund that wasn't the best choice, but I was getting started. And that was the beginning of my Roth IRA and my wife's Roth IRA. And you know what? It's had more time to compound than anything else we've ever invested because we started early. So, good job to you. Good job for learning about this stuff. Good job for caring about this stuff.
Dr. Jim Dahle:
All right, let's talk for a minute now about financial advisors. If you need advice, if you need service, it is okay to get it. Go hire a financial advisor. We keep a list of vetted financial advisors that give good advice at a fair price under our recommended tab at whitecoatinvestor.com. If you need somebody, go hire somebody, it will help you.
Dr. Jim Dahle:
If you are not going to do this well on your own, you are far better off paying a fair fee and getting someone to help you. Now, some of those firms specialize in helping you to become a do-it-yourself investor. Others prefer to both manage your assets and give you financial advice for the long run. So, you got to match yourself to what you're actually looking for there. But if you need an advisor, go get an advisor.
Dr. Jim Dahle:
There are basically four ways to pay financial advisors. The first one, the way you've been paying your “advisor” is with loads or commissions. This means when you invest money in a mutual fund, the advisor takes some of the money you are going to invest and puts it in his or her pocket to load, it's commission. That's how they're getting compensated for what they're doing for you.
Dr. Jim Dahle:
I do not like this model. I think it's a terrible model because it incentivizes all the wrong kinds of behavior. It incentivizes them to sell, it incentivizes them to cause turnover in your portfolio, which is almost always a bad thing. It incentivizes them to encourage you to invest in the highest load and highest commission investments. I just think there's too many conflicts there that even a good person can't overcome them.
Dr. Jim Dahle:
The other problem with the model is it tends to attract people at the beginning of their career when they don't know very much and you end up with not a very good advisor.
So, you're not getting good advice, you're not getting good investments and it's just not a great way to pay.
Dr. Jim Dahle:
The other three ways are fee only methods of paying a financial advisor. The most common one is an asset under management fee where you basically pay a percentage of your assets to the advisor each year. And that can be a really good deal when you don't have any assets. If you have a $100,000 portfolio and you're paying 1% a year, that's only $1,000. That's a screaming deal for full service financial advice and asset management. It's really a good deal if you're only paying $1,000 a year.
Dr. Jim Dahle:
The problem is when you have $5 million and you're still paying 1% a year. Now you're paying $50,000 a year, which is not a screaming deal, it's a rip-off. It doesn't cost that much to manage a portfolio and to give good financial advice and to help you follow your financial plan. It doesn't cost $50,000 a year, not even close. If you're paying that, you're getting ripped off.
Dr. Jim Dahle:
So, the problem with an AUM fee is you got to do the math each year. And so many people don't want to deal with this. They have inertia, they don't want to change advisors as their assets grow and they end up paying too much. Even if they're getting good advice, they end up paying too much. So, it's not my favorite method.
Dr. Jim Dahle:
The next method is a flat annual fee. And this works pretty well. It's like having an advisor on retainer to give you financial advice or sometimes you just pay for your asset management this way. You might give them $5,000 or $10,000 a year to manage your assets. And I think that's a reasonably good way to pay for financial advice.
Dr. Jim Dahle:
There aren't a lot of people that work under that method though. And so, the difficulty becomes finding somebody willing to work under that method. We have a lot of them on our list at whitecoatinvestor.com, so you can check that out if you want to pay people that way.
Dr. Jim Dahle:
The last way is an hourly rate. And these are often high. They're often higher than what you're billing at. You might be paying $200, $250, $300, $400, $500, $600 an hour to get financial advice on an hourly basis. And that sounds like a ton of money. It keeps you from coming in and getting the advice you probably need. But the truth is you might be paying a lot less on an hourly basis than you would under an AUM fee. And so, you got to do the math just like you would with an AUM fee and make sure you're paying a fair price, which is typically a four-figure amount per year.
Dr. Jim Dahle:
All right. Back to your situation, Shay, you're in this fund of funds from American Funds. American Funds aren't the worst actively management fund company out there. They're a favorite of these commission-based financial advisors. They call themselves fee-based by the way.
Dr. Jim Dahle:
There's a difference between fee-based and fee only. Fee only is just fees. Those last three methods. Fee-based or commission-based, however you want to call it, they're charging you not only fees, but commissions.
Dr. Jim Dahle:
Anyway, American Funds is a favorite here among these folks. It's not the worst place to have your money. They've got not a bad long-term record on some of their funds. You could have done a lot worse. So don't feel too bad about that. But they are actively managed. They do have relatively high expense ratios.
Dr. Jim Dahle:
I've pulled one of their funds of funds up here. This is the American Funds Global Growth Portfolio. The expense ratio is 0.79%, which is 10 to 20 times what you'll pay for a Vanguard Total Stock Market Index fund. You can get a Fidelity total stock market index fund for nothing. An expense ratio of zero. So, it's a relatively high fee.
Dr. Jim Dahle:
And when you stack a load on top of that, you're paying an 8% load and I don't know what load you're paying to this person, that's like nine times as high of a fee if you only hold it for one year.
Dr. Jim Dahle:
It's really expensive and obviously those fees come out of your return. It just takes time for the investment to do well enough to make up for all those fees, which if that's the way it's got to be, that's the way it's got to be. But that is not the way it has got to be because you can invest in no load mutual funds.
Dr. Jim Dahle:
This is the big revelation I had in residency. When I went on this road trip, I think we went up to climb Devils Tower. We were driving from Tucson to Devil's Tower to go climbing and then we went to the Wind Rivers, did some climbing there, we're heading back to Tucson. We stopped in Salt Lake. The car wasn't running well. We had to get a fix. So, we went to my old mechanic here in Salt Lake when I was in med school.
Dr. Jim Dahle:
And while we were there, we went to a bookstore. I don't know what it was, Barnes & Noble or something. And I bought a book called “Mutual Funds for Dummies” by Eric Tyson. And I learned the difference between no load funds and A, B and C loaded funds. And I thought, “Oh, I think I've got no load funds because I'm paying my advisor a flat fee each year.” And it turned out that I was also being put into loaded mutual funds and that made me mad. And so, I started learning about investing and eventually created the White Coat Investor.
Dr. Jim Dahle:
So, sometimes good things come from paying loads. Luckily, probably like you, I didn't lose all that much money, but I learned an important lesson in what to do about mutual fund commissions.
Dr. Jim Dahle:
So, what do you do with actively managed mutual funds? You've already paid the load. That's water under the bridge. You let it go. If you don't want to be in that investment, you get out. Staying in there for years does not help. You're still paying this expense ratio of 0.8% or whatever it is for the given fund that you're in. And so, you just get out.
Dr. Jim Dahle:
Now in a taxable account, you want to think twice before you get out because you might have some capital gains and you'd have to pay taxes on it. Maybe you choose to hold on to a less than ideal investment, and build your portfolio around it. But you're investing in a Roth IRA. There are no tax consequences to selling.
Dr. Jim Dahle:
The load you've paid is water under the bridge. So, if you don't want to own that fund anymore, sell it, invest in what you want to actually own and move forward. Consider it tuition in the school of hard knocks. Consider it your stupid tax. We've all paid it. I paid it. I paid it in a whole life insurance policy. I paid it in loaded mutual funds. All these mistakes that doctors make mistaking a commissioned salesman for an investment advisor.
Dr. Jim Dahle:
I've made these mistakes. And so, don't feel bad when you've made them, but don't stay there sitting in those mistakes for the rest of your career. Make a change, take control and have a real investment plan moving forward. Keep your costs low, diversify broadly, funded adequately. Stay the course and you'll reach your financial goals. Great job, Shay. Good question. Thanks for being part of the White Coat Investor community.
Dr. Jim Dahle:
All right, our next question or questions comes from Nick. This must be a long question. I've got two Speak Pipes from Nick. So, let's take a listen to him.
Nick:
Hey, Dr. Dahle. My name is Nick and I am a second-year family medicine resident here in the state of Idaho. I recently signed a contract, an employment contract with a future position as an attending physician in a very small hospital in northern rural Idaho.
Nick:
This is coming with a $40,000 signing bonus as well as a $1,500 monthly stipend throughout the duration of the rest of my residency and until I start my work at my new position as an attending.
Nick:
With this signing bonus, my plan currently was to use a portion of it, about $15,000 in order to pay off the interest that is outstanding on some of my loans, that interest was frozen and was not placed into the total principal upon my graduation from medical school. And so, I would like to pay that off and I find that to be a good financial option. However, I don't know what to do with the rest of the amount of money. For me it is a lot of money and I'm not sure what vehicle I should use in the meantime.
Nick:
Because I am going to a very small area, there's really no rental options and I will need to buy a house when I do move up there after residency. And I was hoping to use this as a portion of a down payment for a future house.
Nick:
What vehicle would you recommend that I use? I know the options are available such as a money market fund or a CD, but I was just wondering what thoughts you might have. Thanks.
Dr. Jim Dahle:
All right, let's take that first one to start with. A lot of good questions there. Congratulations on getting through residency. You must be doing a good job. People want to hire you, so congratulations on that. It's exciting to start getting some money. Getting a little bit in advance is a good thing, if you're sure that's where you want to go anyway.
Dr. Jim Dahle:
And thank you so much by the way for being willing to serve and work in a rural community. A lot of people talk about the doctor shortage and the truth is, we don't have that much of a doctor shortage. What we really have is a doctor maldistribution. Everybody wants to work in Salt Lake, everybody wants to work in New York City. Everybody wants to work in Denver, whatever. But nobody wants to work in rural Idaho.
Dr. Jim Dahle:
So, thank you for going to rural Idaho. There's a lot of great things about rural Idaho. I have a wonderful time in Idaho every year. This year we spent time floating the River of No Return, the Salmon River, floating from the eastern side of Idaho to the western side of Idaho. It is a beautiful country. There are a lot of great things in Idaho. So, thanks for going up there and I hope you enjoy all of that fun outdoor stuff that you can do in Idaho.
Dr. Jim Dahle:
As far as what to do with your money, it sounds like you have a plan. You want to use it for down payment. Put some toward your loan interest, that's a good use of money. Some for down payment, that's a good use of money. And you know where to put it.
Dr. Jim Dahle:
It almost seems like your confidence is lagging your knowledge base. And that's pretty typical for White Coat Investors. A lot of people will tell you this is the case when they came out of residency. They're like, “Ah, I don’t know what I should do.” But if you actually ask them the questions, they do know what they should do. You know what you should do. You know you should keep this money aside in the money market fund and use it for your down payment. And that's a perfectly fine use of money.
Dr. Jim Dahle:
Now, at the beginning of your career as a doctor, and you guys have heard me say this before, you have a limited amount of money and all kinds of really good uses for it. You got student loans to pay down. You probably have some credit card debt. You maybe have a car loan. You want to have a home down payment. You want to get a real emergency fund. You got retirement accounts and HSAs to max out. You want to start investing for retirement. Maybe you want to get started in real estate investing.
Dr. Jim Dahle:
You have all these great uses of money and not very much money. In your case, you got an extra $1,500 a month, that's great. That's huge for a resident. I think you said it was a $40,000 signing bonus or something like that. That's great as well. But you're not going to be able to do all that with that much money. You're not going to be able to pay off all your student loans, for instance. You're only covering some of the interests that's built up.
Dr. Jim Dahle:
So, you got to choose and there's no really wrong answer among these choices. It's just your personal preference. In our case it was important to us to put down a down payment. So that was a pretty big high priority for us coming out of residency. I don't know if it was right in the end. In the end, we probably should have rented for those four years I was in the military. Ended up losing money when we sold the house nine years later. But that was more a reflection of the fact that I came out of residency in 2006.
Dr. Jim Dahle:
But some other priorities we had was maxing out our retirement accounts that year we left residency. That was a big priority and we were able to do that as well.
Dr. Jim Dahle:
So, it just depends on what your priorities are. If your priority is paying off loans, maybe you want to put it all toward loans. If your priority is to have a down payment and not use a doctor mortgage for buying that house, that's an option as well.
Dr. Jim Dahle:
No real wrong answer there. So, do what you want with the money, don't go spend it. You have too many good uses for it to be spending yet. Now is the time period where you live like a resident for two to five years, kind of jumpstart your wealth accumulation process. You'll be glad that you did do that.
Dr. Jim Dahle:
All right, let's listen to your other question on the Speak Pipe.
Nick:
Hey Jim, this is Nick from the Midwest again. I just wanted to send a follow up with more information. Currently I've chosen the Fidelity Advisor Freedom Blend 2065 Fund Class C shares due to my plan of not being at this employer for the long term and seeing as though I'm young, I chose the 2065 fund. Let me know your thoughts. Thank you. Bye.
Dr. Jim Dahle:
Oh, I'll let you know my thoughts. I don't like that fund. Is that fund in your 401(k)? Because if so, your employer hates your guts and you ought to sue them for it. Maybe not sue them.
Dr. Jim Dahle:
But the point is employers have a fiduciary duty to you to give you good mutual funds in your 401(k). And if they don't do that, they have liability. They have a duty to give you good investments. A Fidelity advisor fund in your 401(k) is like a high expense ratio mutual fund.
Dr. Jim Dahle:
Fidelity has two kinds of funds. They have some very low-cost index funds, and then they have advisor funds that are used to compensate their advisors for selling you these funds. To compensate them for this great advice they're giving you to go into these high expense ratio mutual funds. It's not a service though. I would try to avoid that fund if you can.
Dr. Jim Dahle:
Looking around that 401(k), see if there's something better. I get the draw for a target retirement or lifecycle style fund. It's a great choice. These lifecycle funds are a great choice, particularly for a resident. All your investments are in a 401(k) or they're in a Roth IRA or whatever. It's fine to use these lifecycle funds. It's a one-stop shop. Get back to learning medicine. It's great.
Dr. Jim Dahle:
I don't like high expense ratio ones. If that's all that's available to you in your 401(k), maybe you got to suffer with it for a year or two, fine. If it's your IRA, look around, you're probably in the wrong fund. You can get something that's dirt-cheap index funds.
Dr. Jim Dahle:
Fidelity has two sets of these lifecycle funds. One that the advisors sell with high costs and one that the advisors don't sell with low cost. And when you deal with Fidelity, you got to be aware of that. We had a podcast a few weeks ago where we talked about the problems with Vanguard. Well, this is one of the problems with Fidelity.
Dr. Jim Dahle:
Fidelity is a privately owned company. They want to make a profit. The Johnson family, I think, still owns it. And what they try to do is have you come over with these lost leaders, these super low cost zero ER index funds, and then hopefully you buy some other services there like their expensive actively managed funds.
Dr. Jim Dahle:
And so, that's the problem with Fidelity is you got to be aware of that dichotomy and negotiate it and navigate it properly so you're not getting ripped off at Fidelity. In your case leaving residency, if this isn't a 401(k), you'll probably want to just convert this all to a Roth IRA. That's one of your priorities as you leave residency and there'll be a little bit of a tax cost to doing that most likely. But it's probably worth paying and maybe you want to use some of your $40,000 signing bonus for that.
Dr. Jim Dahle:
All right, our next question comes from Noho.
Noho:
Hey Dr. Dahle. Thank you for all that you do. I'm a beginner investor and a first-time question asker. I've jumped into the Bogleheads philosophy and I think I've made the mistake of consuming too much information in a short period of time, and I'm suffering from analysis paralysis, and I'm hoping you can help.
Noho:
I'm confused as to why asset allocation should be diversified past investing in a total US stock market fund if you have a long risk horizon. Why discuss adding value premiums and weighing and having different tilts, internationals, REITs, emerging markets, etc?
Noho:
It seems that looking at compound annual growth rates over the past 40 years, it's been most optimal to just edit your risk profile by changing the ratio in your portfolio by changing the ratio between pure equity and a total market fund and fixed income rather than adding asset classes or weighing different premiums. Obviously previous returns have no say in future, but I think I'm just having a difficult time getting started. So, I was hoping you could speak on that. Again, thank you for all that you do.
Dr. Jim Dahle:
Well, good question and thank you for what you do. That goes for all of you out there listening. It's not easy to be a high income professional. You have a difficult job. That's why they pay you to do it. And so, whether you're listening to this on your way to work your way home, working out, walking, whatever, forcing your spouse to listen to it with you, whatever you're doing, thanks for what you do. It's not easy.
Dr. Jim Dahle:
And for those of you who are the money person in the couple, whether you're the high income professional or not, thank you also for taking care of the finances. Those of us who do that primarily, Katie and I split it pretty well, but I still do more than she does. Know that it is work. There's actually some work and some chores and some jobs that have to be done there as you manage the money. So, thanks for doing that.
Dr. Jim Dahle:
All right. It's difficult for me to talk about this question because it sounds like I'm talking down about a total stock market fund, which is my favorite investment. It's my favorite mutual fund. 25% of our retirement portfolio is in Vanguard or iShares depending on if we had tax loss harvested recently.
Dr. Jim Dahle:
Total stock market fund, it's in US stocks as allocated by capitalization. Very low-cost investment, very broadly diversified, essentially guarantees you the return of the US stock market. I like this investment. It's a good investment. I've chosen not to put all of my money in it because I think there are other things that are worth owning.
Dr. Jim Dahle:
And one of the best explanations of this is imagine that you were a Japanese investor in the mid-1980s, and you said “If I look at past returns, the Japanese total stock market fund for the last however many years has done so well. Why would I bother investing internationally? Why would I bother investing at small and value tilts and REITs and bonds and all this other kind of stuff? If I have a long-time horizon, why wouldn't I just put it all into this Japanese total stock market fund?”
Dr. Jim Dahle:
Well, the answer for those of us who understand financial history is very clear. By the late 1980s, the Japanese stock market had collapsed and it basically has not yet come back. It's come back some, it's paid some dividends along the way.
Dr. Jim Dahle:
But if you look at the Japanese stock market, I don't know what is, NIKKEI 225 or something? I can't remember what the index is called. Yeah, NIKKEI 225. If you look at that, and you go back to, let's see, the furthest Google's going back for me is 1991. In 1991, it was at $26,000. Well, today it's at $27,000. It's been 30 years. 30 years the index has not gone up. Could that happen in the US? Absolutely it could.
Dr. Jim Dahle:
Now, the US is a bigger economy than Japan. Although at that time, Japan was a huge portion of the world's stock market capitalization. The US in a lot of ways has some advantages, Japan does not. But this is the reason why you invest internationally, because you don't know when this is going to happen to your country.
Dr. Jim Dahle:
And so, I think it's worthwhile owning international stocks. And it's so easy to do. Just like there's a total stock market index, there is a total international stock market index where you can buy all the stocks in the world in 30 seconds essentially for free. Not that hard. And you can own all these European stocks, all these Japanese and Pacific Rim stocks, Australian stocks, emerging market stocks in China and India, etc in case you're not sitting on the winner.
Dr. Jim Dahle:
Number two, you're looking at the past record. And what you may not be considering is that over the last 10 years or so, US stocks have done dramatically better than international stocks. Part of that reason is just the US happen to do well, and part of it is the dollar has strengthened dramatically over the last 10 years. And so, it looks like it's done even better than it has.
Dr. Jim Dahle:
But going forward, US stocks are more richly valued than international stocks are right now. And that gap is bigger than it's been in a long time. That pendulum swings back and forth and you haven't been investing long enough to watch very many of these swings. The last time international stocks did really well was in the 2000s and they called the 2000s the lost decade because the S&P 500 basically didn't go up.
Dr. Jim Dahle:
If you count dividends, it did, but it basically didn't go up from the market high in 2000 until 2010. It's the lost decade. And maybe the 2020s are going to be a lost decade for US stocks and everyone by the end of it will be going “Why’d anyone invest in US stocks when the record for international stocks is so much better?” But that pendulum swings back and forth. So, I think it's worth owning both. How much should you put in each is really up to you, but I think it's worth owning both.
Dr. Jim Dahle:
Jack Bogle didn't though. He's like “US stocks do business outside the US. You're okay just owning US stocks.” I disagree with him on that point. Lots of people do. If you don't, knock yourself out, just buy US stocks. But I think it's a mistake. I think you need to own some international stocks, whether it's 10% of your stocks or 50% of your stocks, whatever. I think you got to own some international stocks.
Dr. Jim Dahle:
As far as small and value tilting, in some ways it's the same story. The question is “Is diversification just owning the maximum number of stocks or is it about diversifying risks?” Because the academics would tell you that there's market risk, there's small risk, there's value risk, there's all these other factors as well. But those are the big ones.
Dr. Jim Dahle:
And if you tilt your portfolio to small stocks and you tilt your portfolio to value stocks, you are actually diversifying your risks even though you are not now market weighting your stock portfolio. And of course, over the last 10 years, what has done the best, large stocks, growth stocks, US stocks, tech stocks, so that means small value stocks and international stocks are more value than growth.
Dr. Jim Dahle:
And so, international stocks as well have not done as well. And everyone goes, “Well, why don't I just invest in the FANG stocks since they do so well, they have the best historical record.” Well, because the pendulum swings, that's why.
Dr. Jim Dahle:
I think you need to pick something you can stick with for the long run. For me, that's a little bit of a tilt to small stocks. It's a little bit of a tilt to value stocks. It's a little bit of a tilt to international stocks. It's a little bit of a tilt to real estate. And I know there are times when those tilts are not going to pay off. And there are other times when I'll be very glad to have those tilts like 2022. US large growth stocks did not do awesome and small value stocks did much better.
Dr. Jim Dahle:
And so, this has been a good year for a small value investor. But if you look back historically, there are good years and bad years. Over the long run, small and values seems to have outperformed, but it's probably a risk story. They're probably riskier stocks. And so, I'm taking on more risk by tilting my portfolio to small and value stocks.
Dr. Jim Dahle:
If you don't want to tilt, if you just want to use a classic three fund portfolio, total stock market, total international, total bond market, I think that's fine. Different strokes for different folks. There are many roads to Dublin, but I would encourage you to pick a mix of investments you can stick with in the long term and then stick with it.
Dr. Jim Dahle:
Don't swing back and forth because what will happen is you'll have a decade like the last one, you'll go, “I should put it all in US stocks.” Then you'll have a decade like the 2000s and you should go, “I shouldn't put any money in US stocks” and you'll be buying high and selling low. Don't do that. Just have a static asset allocation, rebalance once a year. Take what the market gives you and you'll be successful in the long run. Hopefully that's helpful.
Dr. Jim Dahle:
All right, next question comes from Ross who's thinking about changing his plan. Ugh, probably not a good idea, Ross. I know it's tempting. Probably not a good idea. Let's listen to your justification.
Ross:
Hey, Jim, longtime WCI follower, first time Speak Piper. What are your thoughts on adding a wrinkle to my financial plan? We followed our financial plan consistently for about a decade now, including maxing out our 401(k), defined benefit plan, HSAs, SEP IRA and yearly backdoor Roth for myself and my wife.
Ross:
After experiencing a couple of bear markets, I had not a slightest incline to sell during them. I have consistently found myself wanting to take advantage of the market downturn. We currently have 75% stock, 25% bond portfolio and I’m 43 years old.
Ross:
We're considering changing our plan to specific triggers to increase the equity portion. For example, my financial plan might read, if a 25% drop in the market occurs as measured by the price of VTSAX, we will change our investment holding to 95% stock 5% bonds.
Ross:
If we implement this, we would also plan to have a lesser trigger at 10% market downturn, 85-15, and plan for corresponding changes in times of market gains. It seems that this might help me to buy low and sell high over time. I don't mind doing a bit more work. In fact, I enjoy nerding out on this stuff. I'd love your blunt opinion on whether this is an unwise addition to our financial plan. Thank you.
Dr. Jim Dahle:
Oh, Ross, that's very convincing. I think it's okay to do something like this. It needs to be written down in your plan. And our plan requires us to wait three months before making a change. So, I hope yours does as well. Think about it. Decide if this is really something you want to do long term, but I think that sort of thing is okay.
Dr. Jim Dahle:
But you are only mentioning half of it. You haven't thought about the criteria of when you go back to the lower stock allocation. Because going to 85% or 95% stocks at some point presumably you're going to want to go back down and you got to pick the right time to do that. That's the difficulty in timing the market. So, you got to set criteria to do that.
Dr. Jim Dahle:
Is this okay to do? This is okay if it's what your plan says, I think you ought to follow it. But you ought to think about this in advance. What am I going to do? Make sure it's something you can tolerate.
Dr. Jim Dahle:
Consider the downsides of when this could burn you. Because there are times when this could burn you. Look at the great Depression, that sort of a thing when this sort of thing might not have worked out as well as you think.
Dr. Jim Dahle:
And the other thing I would caution you is not really to make changes at 10% and 20% down. I've looked at the data on this particular point and the data is pretty good when the market drops 40% plus, that pouring money into stocks really works out well. The data is not very good when stocks go down 10%.
Dr. Jim Dahle:
That pouring money in the stocks is a good idea. And so, I would encourage you, if you want to do this tactical asset allocation, which even Jack Bogle mentioned was okay to do a little bit. And I think the amount you're doing probably still falls within a little bit, is to have a little bit bigger movement before you actually make any changes or you're likely to get whipped.
Dr. Jim Dahle:
The other thing keep in mind is, there are tax consequences to doing this in a taxable account. So, if a lot of your investments are in taxable account, there's a cost to buying and selling and changing your asset allocation dramatically that may outweigh the benefits of doing so.
Dr. Jim Dahle:
But the idea here is simple. Stocks are cheaper when the price goes down. Same company, right? Walmart is the same company it was a year ago, and now you can buy it for, I don't know how much less. Let's look it up. Walmart stock over the last year. Well, it’s not down all that much. Walmart's actually about even over the last year. But anyway, if it was a stock that had gone down, let's say had gone down 15%, well you're buying the same company 15% cheaper, and that's the way the overall market is as well.
Dr. Jim Dahle:
So, it makes sense to try to do that. It's just incredibly difficult to do in the long term. I think the best way to do it is with some sort of systematized plan. Maybe you go from 75% to 85% stocks after the market drops 25% and then you keep it there until the market recovers to its former high and then you go back to 75% stocks.
Dr. Jim Dahle:
But you need to write that plan down, be comfortable with it, look at it historically, how it would've been in a few different situations. Make sure it's going to pass the stomach acid test with you, then implement it and follow it and stick with it. Don’t be changing that sort of a plan every year, or you'll end up regretting it.
Dr. Jim Dahle:
Okay, good question. Wasn't as crazy as I thought it was going to be. When I've made changes to my investment plan, I've often regretted them. So, keep that in mind. I remember when I added REITs to my plan in 2007. It did not work out well. That initial investment I lost 78% on. Now we've stayed the course with it over the years and our long-term return is just fine on that asset class. But that initial investment, the timing on it might not have been all that awesome.
Speaker 2:
Hi, Dr. Dahle. Thanks for everything you do at the White Coat Investor. I'm a physician in the Midwest. My spouse and I are in our mid-thirties and in terms of savings, we are about 70% of the way to our financial independence savings goal.
Speaker 2:
I've been contemplating cutting back my hours to 0.6 FTE so I can have more time for travel and hobbies and just less stress in my life. If I cut back, we would still be able to put about half of our annual household income into savings.
Speaker 2:
Logically, I know we're in a great place financially to allow me to scale back. However, when I run the numbers after taxes, I currently make about $700 a day. So, for each day that I choose not to work, it would feel like I'm paying $700 for the day off. As a frugal person, it's hard to imagine spending $700 a day just to read books and take my dog on walks.
Speaker 2:
Am I thinking about this correctly as far as feeling like cutting back my hours is paying a lot of money for more days off? Do you have any advice for me in this situation? Thanks for your thoughts.
Dr. Jim Dahle:
All right. great question. There are a lot of people out there listening to this podcast who can relate to your question. I know because they send me messages and I see their posts on Twitter and Facebook and I talk to them at the WCI conference.
Dr. Jim Dahle:
You are a natural saver. This advice I'm giving to this doc does not apply to everybody listening this podcast, okay? It only applies to this doc and people whose mindset is like this doc. You have won the game. You haven't quite won it yet, but you are on track to, you'll win it very soon. You're at 70% of the way to your FI number in your thirties. That's awesome. This is like the Physician on FIRE. He was FI at 39 or 40. That's where you're going.
Dr. Jim Dahle:
You're very frugal. You're talking about cutting back and still having a 50% savings rate. You have won this game that a lot of people struggle with, of earning enough money and saving enough money and investing it wisely. A lot of people struggle with this. You do not. You won.
Dr. Jim Dahle:
But there are five money activities and you are not winning at all of them, I suspect. The first one is earning. It sounds like you're doing fine there. You're making $700 a day after tax. The next one is saving. You're clearly doing well here when you can cut back on work and still have a 50% savings rate. You didn't mention your investments, but I'll bet you're doing fine there.
Dr. Jim Dahle:
The next one is spending. I don't think you're very good at spending, and I can relate. I'm not very good at spending either. And I think you need to spend some more time and effort on spending and frankly, some money on spending and figure out some things that you can spend money on that will make you happier.
Dr. Jim Dahle:
Now, one of those is probably cutting back at work. Does this cost you money? Yes. It costs you $700 a day. And guess what? There will come a time in your life in the not very distant future when that seems like a fantastic deal. Because here's the deal, you can always make more money. You can't make more time.
Dr. Jim Dahle:
Now you're in your thirties, you're young, you're in the hard charging era of your career. But there will come a time when you will realize that you only get so much time on this sphere going around the sun, and you can't get any more of that. And $700 for a whole day of it? That's a great deal. I'm like “$700? Wow. Hey, I'll pay $700 for a day off. That sounds like a great deal to me.”
Dr. Jim Dahle:
And so, don't think about it that way. Think about it as you have enough money or soon will, you could be on coast to FIRE very easily and be there in just a few years, even if you don't save anything more. And start thinking about, “Well, how can I buy some of my time back?” And you can buy time back by paying someone else to clean your house and mow your lawn and shovel your driveway and do your grocery shopping for you and work on your car for you. There's lots of ways you can buy time back, but one of which is just by working less.
Dr. Jim Dahle:
I have done this. I have bought my nights back by paying my partners to work them. I do not work after 10 o'clock at night, ever. I used to work after 10 o'clock a lot. We're going on a trip here soon where we got kind of a red eye flight and I'm like, “Ah, I don't like staying up all night anymore. I've already spent enough of my life in those early morning hours awake. I don't want to do it anymore.”
Dr. Jim Dahle:
I have also cut back on my shifts at work. I've essentially bought my time. Now, what does an emergency medicine shift pays? They probably pay on average about $2,000 after taxes. It's going to be less than that. I don't know, $1,200, something like that. And so, every time I drop a shift, it's $1,200 a month and I get a day off for it. I get this time that I can use to do something else.
Dr. Jim Dahle:
And so, that's a very good price to pay. It's not all about money. You only need enough. And it sounds to me you've figured out how much is enough. And when you have enough, more does not make you any happier.
Dr. Jim Dahle:
So, as you are well on track to having enough, you may want to cut back a little bit early and start buying some of your time back and doing those things you enjoy, even if they're very inexpensive things.
Dr. Jim Dahle:
Walking a dog or reading books don't cost much money. But you've got to decide what your life looks like. You should not feel guilty that you should be at your practice all the time practicing. You should not feel guilty about spending some time off, about not earning as much money as you can possibly earn.
Dr. Jim Dahle:
Find balance in all things. But for you, you are like me, a natural saver, not a natural spender. You got to spend some time working on the spending skills that I suspect have alluded you to this point. And realize that you have got a saving problem, an earning saving, investing problem. You're very good at those to the detriment of the rest of your life. And I would bet that there are some things that you would like to spend a little bit more money on when you sit down and think about it and come up with a deliberate plan to do so.
Dr. Jim Dahle:
So, congratulations. You are in a minority of people, a minority of physicians. It's difficult for most of us to save as much money as you're saving. And so, you've won from that respect. Now it's time to start thinking about what next? What are you going to do with the remaining 10, 20, 40, 50 years left on this planet? How much of it do you want to spend practicing medicine? How much of it do you want to spend reading books and walking your dog? It's now your choice. Congratulations, you win.
Dr. Jim Dahle:
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Dr. Jim Dahle:
Don't forget about our survey. We appreciate you taking that, whitecoatinvestor.com/survey. It's only open for a few more days. It helps us to guide what we do for the next year. It really does matter what you put on that survey. We make changes every year based on the responses to it.
Dr. Jim Dahle:
Thanks for those who have volunteered to be White Coat Investor Champions. If you are a first year medical or dental student and somebody has not yet handed you a White Coat Investor book this year, be the champion for your class. Be the person who hands them out to your classmates, whitecoatinvestor.com/champion.
Dr. Jim Dahle:
If you'd like to take the expert witness class that we mentioned earlier, this online course by Gretchen Green, you can sign up for that at whitecoatinvestor.com/expertwitness.
Dr. Jim Dahle:
Thanks for those of you leaving us reviews. These five-star reviews do help us to spread the word about physician financial literacy. One came in this year from Tactical Magic who said, “Best Financial podcast, period. I have been listening to the podcast for years, and can easily say this is the best financial podcast out there. Objective, carefully researched, and accurate. Whether you’re an MD, an MBA (like me), on the path to FI or just trying to figure out whether the Whole Life Insurance policy your brother-in-law’s friend is trying to sell you is a good idea, the White Coat Investor is the best place to start. Thank you to Dr. Dahle and your team for everything you do.” Five stars. Thank you so much for that great review.
Dr. Jim Dahle:
Keep your head up, shoulders back. You've got this and we can help. We'll see you next time. Thanks so much. Have a great week.
Disclaimer:
The hosts of the White Coat Investor podcast are not licensed accountants, attorneys, or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.
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