By Dr. Jim Dahle, WCI Founder2023 was generally a good year to be an investor. However, the delay in relative performance between public and private real estate definitely showed up as expected. While our private real estate investments smashed publicly traded REITs in 2022, I was not surprised to see the opposite in 2023 as the effects of the rapid rise in interest rates caught up to private real estate.
Note that any links to investments that you see in this article go to companies that sponsor The White Coat Investor. While we're proud to introduce you to these companies, you have to remember that hearing about them here is just an introduction, not a recommendation to invest. There is no guarantee that a company that advertises at WCI will always provide a good return or even return all of your capital. I'll tell you what I invest in, but if your only criteria to invest is to invest in the same stuff I do, that might mean you'll be losing money right alongside me.
Our Portfolio
As a reminder, our portfolio (asset allocation) is 60% stocks, 20% bonds, and 20% real estate, broken down as follows:
60% Stocks:
- 25% Total US Stock Market
- 15% Small Value Stocks
- 15% Total International Stock Market
- 5% International Small/Small Value Stocks (more on this in a moment)
20% Bonds:
- 10% Nominal bonds
- 10% Inflation-protected bonds
20% Real Estate
- 5% Publicly traded REITs
- 10% Private equity real estate
- 5% Private debt real estate
Note that this is just our retirement portfolio and does not include UTMAs, 529s, our kids' Roth IRAs, HSA, cash reserves, small businesses, etc. The asset allocation (but not overall retirement account performance) also ignores a small cash balance plan (which returned 16.35% in 2023 and will shortly be closed and rolled into my 401(k)).
2023 Portfolio Changes
As discussed in multiple posts that ran in 2023, we've changed our approach with both small value stocks and international small/small value stocks. Unfortunately, both of these asset classes are mostly in a taxable account in our portfolio, so changing in the most tax-efficient way will be a gradual process requiring several years.
On the US side, we're changing from:
- Vanguard Small Value Index Fund/ETF (VBR) and its tax-loss harvesting partner
- Vanguard S&P 600 Small Value Index Fund/ETF (VIOV)
to
- Avantis US Small Cap Value ETF (AVUV) and its tax-loss harvesting partner
- DFA Dimensional US Small Cap Value ETF (DFSV)
At the end of 2023, due to tax-loss harvesting changes and appreciated shares that have not yet been used for our charitable giving, this asset class sits as follows:
- VBR: 0%
- VIOV: 42%
- AVUV: 28%
- DFSV: 30%
On the international side, we feel like good options for international small value are finally available to us. While we're not thrilled to lose emerging market stocks from this asset class, we think it's worth that loss and the slightly higher fees to invest in international small value stocks instead of just international small stocks as we have been doing for many years. We're changing from:
- Vanguard FTSE All-World Ex-US Small-Cap Index ETF (VSS) and its tax-loss harvesting partner
- Schwab International Small Cap Equity ETF (SCHC)
to
- Avantis International Small Cap Value ETF (AVDV) and its tax-loss harvesting partner
- DFA Dimensional International Small Cap Value ETF (DISV)
This transition is ongoing, and the asset class sits as follows in our portfolio as of the end of 2023:
- VSS: 91%
- SCHC: 0%
- AVDV: 9%
- DISV: 0%
More information here:
5 Questions to Consider Before Changing Your Investment Portfolio
150 Portfolios Better Than Yours
2023 Portfolio Performance
As mentioned above, 2023 was a great year to be a stock investor and not a bad year as a bond investor either. Our actual returns (as verified by XIRR) in each of these asset classes for 2023 were as follows:
Stocks
- US stocks (VTI and its TLHing partner ITOT): 26.01%
- Older small value funds (VBR and VIOV): 4.77%
- New small value funds (AVUV and DFSV): 23.82%
- International stocks (VXUS and IXUS): 15.92%
- Older international small funds (VSS and SCHC): 15.31%
- New international small value funds (AVDV and DISV): 6.49%
Note that the numbers above may appear skewed to the casual observer, but this is because we were moving money from the older funds to the newer ones during the year. The above are my actual dollar-weighted returns. The time-weighted returns for these funds in 2023 were as follows:
- VBR: 16.01%
- AVUV: 22.83%
- VSS: 15.56%
- AVDV: 16.78%
Nominal Bonds
- TSP G Fund: 4.22%
- Intermediate Tax-Exempt Bonds (VWITX and VTEAX): 7.03%
Inflation-Indexed Bonds
- Schwab TIPS ETF (SCHP): 7.39%
- Individual TIPS: 3.71%
- I Bonds: 6.04%
Real Estate
- Publicly traded real estate (VNQ): 10.74%
- Private debt real estate overall: 9.10%
- Private equity real estate overall: 8.00%
Overall Retirement Portfolio Return: 14.82%
Debt Real Estate Individual Performance Report
We have three holdings in this space with a six-figure amount in each of them.
DLP Lending Fund
I own this one in my self-directed 401(k)—which is good, because, like all debt funds, it is terribly tax-inefficient. It had another great year with a return of 11.31%. Not quite the 11.74% it made last year but certainly nothing to complain about. It offers an 8% preferred return and targets a 9%-10% return. The most recent loan tape I saw shows over $1 billion of loans in the fund.
Learn more about the DLP Lending Fund!
Arixa Enhanced Income Fund
We switched in the first quarter from Arixa's non-leveraged fund to their leveraged one, increased our investment, and moved it into Katie's self-directed 401(k). Prior to selling, we made 2.64% in the first fund, and after buying, we made 6.49% in the new fund (7.24% if you look at it all together). Arixa's returns have never been the highest. It was a lot easier to get excited about making 6% or 8% when cash was only paying 1% than now when it is paying 5%+.
Unnamed Debt Fund
I'm going skiing with these guys in January, and I plan to check in again with them to see if they'd like to advertise with us. Last time I asked, they didn't even want me to tell you who they were. But they had another good year with returns of 9.18%. I like their monthly reports because they always give an extensive discussion of the non-performing loans (currently two out of the 73) and include a chart of monthly returns since inception that looks like this:
Unfortunately, this one is owned in a taxable account so the tax man takes a pretty good bite of that return.
Overall, I'm pleased with the returns of this particular asset class, just like I've always been. When equity deals go bad, the debt investors often make out just fine. Projected returns are, of course, lower, but if you're like me, you can reach all of your financial goals just fine with a return of 9.36%, which is what my long-term return in this asset class has been. My worst year was 6.7%, and my best year was 15.8%. Yes, it's riskier than investing in Treasuries, but I think the extra 4%-5% of return is more than adequate compensation for that risk.
More information here:
Comparing Private Real Estate Lending Funds
Equity Real Estate Individual Performance Report
Want more excitement in your investing life? The 2023 private equity real estate market was one place to get it. Interest rates have never risen as quickly as they did in 2022-2023, and it caught a lot of syndication operators and fund managers with their pants down. Warren Buffett likes to say that you don't know who's skinny-dipping until the tide goes out. Well, it turns out there were quite a few in this space, and I'm sure some more will be revealed in 2024.
While some of our investments did great and many did fine, there were a few that struggled and at least one disaster. In 2022, publicly traded REITs lost 26%. They got almost 11% of it back in 2023. Since private equity real estate is not marked to market nearly as often, there is often a delay in their performance compared to public real estate. Thus, our private real estate investments in 2022 spanked our public real estate investments +9% to -23%. In 2023, public real estate won, 11% to 8%. Still, it's hard to complain about 8% in a market like today.
A big focus we have had the last couple of years is to attempt to both simplify and diversify our equity real estate investments. We're simplifying by trying to reduce the number of K-1s we receive and the number of states in which we file. I really don't want to file in more than the 12 states we had to in 2022. So, we're trying to invest more in each investment rather than acquiring new investments, and I'm deliberating getting rid of the smaller investments whenever possible. We're trying to diversify by avoiding individual properties and by buying funds. Naturally, the round trip on many of these investments is 5-10 years, so it takes time to make these changes.
Let's go through our individual investments.
Practice Office Building
I was managing this syndication until this year. We have a five-figure amount invested, and it had a great year. I also got paid an additional share for being the manager for the last three or four years, so my total return on it was 30% in 2023 with a long-term return of 10.84%. As part of our portfolio simplification and diversification, we're in the process of being bought out of this one, but we're financing the buyout ourselves due to cash flow. I just don't need five-figure real estate investments in my portfolio, much less ones where I have to go to meetings.
Origin Fund III
We've been in this one for a long time, and it's been educational. The managers expect to wrap it up in 2024. It still owns a couple of properties, but it has sold the rest (well, aside from one where they mailed in the keys to the lender). In 2023, Origin internally marked down the value of the remaining two properties, accounting for a lousy 2023 return of -39.31%. However, the long-term XIRR so far is 11.21%. Not awesome and certainly below pro forma but hardly a disaster.
Learn more about Origin Investments!
Houston Apartment Building
You want a disaster? Here you go. This has been a disaster in my portfolio for many years. Fraud was involved, and although the platform that featured this investment formed a new partnership to try to recapitalize it, the company finally felt comfortable in 2023 projecting that the most probable outcome for the original equity investors like me is a total loss of capital. I had already written this one down to $0 in value on my spreadsheet, so my return for 2023 was 0%. After six years, this value-add project has finally finished the renovations, and it got the occupancy rates up to 90% or so. But it just took so long that it ended up eating all of the equity investors' capital in operating costs to do so. It'll likely get sold and finalized in 2024. I count my blessings that I only invested $20,000 here.
Fort Worth Apartment Building from 37th Parallel
Another one of my few remaining individual syndications, I invested six figures in this one. It continues to plod along below the original pro forma. Nothing bad has really happened; it just hasn't been awesome. Occupancy is not quite as good as we'd hoped, and it's not quite as easy to raise rents as we'd hoped. Expenses are a little higher than we'd hoped. It ran into some cash-flow problems in 2023 but continued to make distributions. I think the original pro forma called for something like 6% in distributions each year. On average, they've been less than 3%, and the latest are only 1.46%. Still, I think we're only about halfway through the 10-year hold period, so I think there's still plenty of time for this one to generate a solid return. It probably won't be what was projected, though. They don't mark it to market so I really don't know what our return is so far. I still use the original purchase price as its value, and I am only counting the income as the return.
Learn more about 37th Parallel!
Origin Income Plus Fund
A six-figure investment for us, this evergreen fund owns equity (and now a lot of preferred equity) and even a little debt. We've owned it for almost four years now. We made 4.4% on it in 2023, and our XIRR over the last four years is 8.4%. It's much less risky than the Origin Fund III and is much more focused on income. The income it pays is substantial (about 6%) and very regular. Plus, you get some appreciation on the equity investments (obviously not this year). I like that Origin actually tries to figure out what its properties are worth so you have a pretty good idea where you stand. I think we'll probably end up investing a little more into this fund in 2024.
Learn more about the Origin Income Plus Fund!
37th Parallel Fund I
On average, 37th Parallel does a lot better on their properties than the one I own in Fort Worth. This fund is a collection of a bunch of them. Still, like with most equity real estate, 2023 doesn't seem to have been a great year. It's not in trouble or anything but the income is definitely lower than the year before as expenses are up more than revenue. We've been in this one with a six-figure investment for four years (I think it runs 8-10), and the average income has only been 2.75% a year—definitely less than the original pro forma. In 2023, it was only 1.21%. Still, compared to the disasters in my portfolio, I'm perfectly happy with this one, and I'll reserve judgment on overall performance until it's gone round trip. I didn't buy it because I needed the income; I just wanted solid long-term performance. This fund is not evergreen, but 37th Parallel is currently raising money for Fund II. The company has never lost investor capital over the course of a deal so I don't see why it'd start now.
Learn more about the 37th Parallel Fund II!
Alpha Investing Fund I
This is another non-evergreen fund from a company that used to advertise here. It's been good about communication so you know what's going on, but it's clear that there have been some challenges in 2023 with several of its properties and it's reduced some return of capital and income payments to ensure it has the cash flow to get through. This is a six-figure investment for us, and it still has at least a couple more years to run. My XIRR calculation shows a return of 6.14% (4.72% in 2023), but the investments aren't marked to market regularly.
MLG Fund IV
We're now about three years into this six-figure investment with blog sponsor MLG. While I don't want to say MLG is immune to what's been going on in the markets, I certainly can't complain about the returns. In 2023, it returned 42.59% and 18.89% per year since we started investing. This is one of the larger investments in our portfolio and is certainly a bright star so far. One of the things investors love about MLG is its long, long track record and broad diversification.
This fund owns about 10,000 doors across about 40 investments, mostly multi-family. It's got some floating rate debt in the portfolio, but most of it has been protected so far by previously purchased rate caps. Despite having the same challenges as other multi-family fund managers and syndicators, MLG seems to be weathering the storm a lot better so far. I certainly don't expect 2024 to look like 2023, though. MLG also has a nice feature in that it offers two versions of its funds—one with a K-1 passing through depreciation that will eventually require multi-state returns and the other with a 1099 for those who wish to avoid that hassle or are investing within retirement accounts. The funds aren't evergreen, though, so they're currently raising money for Fund VI.
Learn more about MLG Fund VI!
Unnamed Fund
This equity fund, a six-figure investment for us and managed by the same folks as the unnamed debt fund above, never did end up calling all of its capital. It just didn't find deals good enough to include in the fund. After an investor-approved extension, it still has a few months to call some of it, but I don't think it will. In fact, it's already returned a fair amount of capital.
But it's been marking down the value of the properties it owns as it goes, and 2023 wasn't exactly a banner year for multi-family investments. Our return was -4.52% in 2023 with a multi-year XIRR return of -2.26% per year over the last three years. My only real problem here is that I never got as much invested as I had hoped, but I'd rather see that than have a fund manager buying lousy properties just because they have (my) money in their pocket. The thing I like best about this fund is that I have had a chance to see how the managers would handle the catastrophic event of its debt fund becoming an equity fund in a major real estate downturn, and I like what I see. This fund still has many years to run.
DLP Housing Fund
Another major investment in our real estate portfolio, it's hard not to like DLP. This year's return was “only” 12.57%. It definitely prefers staying positive, but you wouldn't even know there were headwinds this year in the multi-family space if all you were looking at was the DLP funds. Our XIRR over the 2.5 years we've been in this fund is 13.83%. Not bad given its target of 10%-12% returns.
Learn more about the DLP Housing Fund!
Single-Family Home REIT
This is the disaster of the year when it comes to my real estate portfolio and that of many other white coat investors. Overleveraged, floating rate debt, a call option offered (and used) by a preferred equity provider, and cash flow challenges from trying to grow too fast all added up to badness. The fund stopped taking new investments at the beginning of the year, and by the end of the first quarter, everyone knew trouble was brewing. It was hard to project how bad it was going to be, but by the end of the year, it became clear that equity investors like me were probably going to lose 75%-100% of their investment.
While we appreciate the transparency, we all wish the managers had just not taken as much risk as they did. I like the idea of a diversified investment in single-family homes, but it turns out this wasn't the one to choose. Thankfully, I only invested the minimum $25,000 in this one. Investments like this one really teach the importance of diversification—not only between properties but between managers.
Wellings Income Fund
This investment is a little bit unique. A lot of white coat investors really don't feel comfortable doing due diligence on properties and managers. That's where Wellings comes in. While it costs you an extra layer of fees (Wellings is technically a Registered Investment Advisor; it doesn't operate any of the properties in the fund), the due diligence done seems to be about as good as it gets. After watching this investment for a year and a half, Katie and I recently quadrupled the amount we have invested here. We figure if we are going to get a multi-state K-1, we might as well make more off the investment than the tax returns are costing us. Due diligence and diversification are the principles at play with this income-focused fund. Check out this diversification:
That's 1,200 properties in eight asset classes from 10 different operators in 24 states. Wellings is definitely trying to be a one-stop shop for real estate. I'd still diversify between managers, but you're getting a lot of diversification here for an entry price of just $50,000. Although it's still raising money for this fund, the income payout increased in December. For most of 2023, it was 4%, and it was just increased to 5%. The properties are not marked to market in this 10-year hold fund, so the income is the only return I can report.
Learn more about the Wellings Income Fund!
Reliant Fund IV
This was our only new equity real estate investment of 2023. It is a major holding for us, and, along with the additional investment in the Wellings fund, it will help us diversify our mostly multi-family portfolio. This one invests solely in self-storage units: nine properties in four states so far. It started making distributions toward the end of 2023, but the distributions only added up to 1.33% of the investment. That should grow over time. We may be bringing them on as a sponsor eventually, so you'll likely get to hear more about them.
It's always so hard to report an overall return for private equity real estate investments because so many of them are not regularly marked to market. That has the effect of hiding the volatility and risk that is actually there, although much of that volatility is dampened by the multi-year nature of these investments. It also has the effect of hiding the returns you are actually getting. While my calculated return for 2023 was 7.89% and my long-term XIRR return is only 8.33%, I expect the actual returns achieved over the long run to be double digits, perhaps 10%-15%.
2023 was a good year for most investors, including us. Our retirement portfolio is 32% larger than it was a year ago. Some of that is new contributions since we're still earning, investing, and accumulating. But a lot of it was also our money doing its share of the heavy lifting. “Just Keep Buying” is good advice indeed.
If you are interested in private real estate investing opportunities, start your due diligence with those who support The White Coat Investor site:
Featured Real Estate Partners
What do you think? How did your investments do in 2023? What were the highlights and disappointments? Most importantly, what did you learn?
Thank you for sharing the detailed breakdown of your 2023 portfolio performance. It’s always insightful to see how different asset classes contribute to overall portfolio growth, especially in the context of a diversified investment strategy like yours.
I’m curious to know if the portfolio you’ve described is what you consider your ‘liquid’ portfolio, which primarily includes stocks, bonds, and real estate investments. Specifically, does this calculation exclude private business assets, such as your interest in The White Coat Investor? Understanding this would provide a clearer picture of how you segment your investments between liquid market securities and private business holdings.
From just under the portfolio percentages:
“Note that this is just our retirement portfolio and does not include UTMAs, 529s, our kids’ Roth IRAs, HSA, cash reserves, small businesses, etc.”
It also excludes our house and our business (WCI). It’s less than half our net worth but it would be silly to to talk about asset allocation and include those things.
Makes sense. Thank you for this essay. It gives me a great starting point anchor that I can adjust for my own circumstances.
And no, I don’t know of any companies that just do investment in tax-free states. You can select syndications that are only in tax-free states though, but then you give up a certain amount of interproperty diversification since you’re invested into fewer properties.
How does increasing your investment in the Welling fund jibe with your goal to reduce the number of states you file taxes in? If they are invested in 24 states, do they send you that many K-1s (minus the 4 or 5 without state income tax)?
Are there any companies out there doing real estate investments in only income-tax free states?
I’m already filing in those states. Whether I have $50K in there or $200K in there, the filing burden is exactly the same. So investing more money into the same investments rather than new investments helps me to minimize the burden.
I don’t yet have a Wellings K-1 for 2023 and I wasn’t invested in them in 2022 so I can’t tell you exactly how many state K-1s they will send me. But it’ll definitely be more than 1. More info on multi-state K-1s for similar partnerships here:
https://www.whitecoatinvestor.com/real-estate-k1-depreciation/
If a fund invests in 24 states, some of those states you already file in. Some are tax free states. Some do composite returns. Some you don’t have to file in every year if your income is covered by depreciation. It’s really quite variable. It would surprise me if the Wellings Fund made me file in more than 2 additional states than the 12 I filed in last year. Hopefully I can get that number under 10 eventually.
But if you’re only filing in one state and buy into a partnership like that, you could easily go from 1 to 12. If that is something that really bothers you, don’t invest in those sorts of investments. It’s yet another reason why these are not very good investments until one reaches a certain level of wealth. Sure, you might have enough wealth to diversify the portfolio, but not enough to make the additional tax burden worth it. I can’t imagine a situation where one is investing less than $500K total into private real estate and it’s actually worth it. That’s 25% of a $2M portfolio. That would be 3-5 $100-200K investments.
Nope, I was wrong. I did get a 2022 K-1. It’s 30 pages and includes Alabama, Arizona, Illinois, New Jersey, New York, Pennsylvania, and Virginia K-1s. That doesn’t mean that this K-1 creates an obligation for me to file in each of those states though. You have to look at the amount of taxable income and the state filing requirements to determine that. For example, the Alabama K-1 shows an ordinary income of -3,172. I haven’t read the Alabama tax laws, but I’ll bet my accountant finds out that I don’t have a filing obligation for that.
As of the 2023 Q3 update, it is invested in 25is states, but that includes WA, WY, NV, TX, NH, FL (all tax free states) as well as many states I’m already filing in like CO, MI, VA etc.
It’s really complicated and actually the main reason why we have an accountant doing our taxes now. I expect to spend a high four figures on tax returns this year between the business ($2K), the trust ($2K), and the personal ($6K) return.
No private reits for me (besides not being rich enough). Filing 25 state tax returns — crazy complexity. I’ll stick with VNQ.
Yup, it’s definitely a downside and one that should be understood before starting down that path. I’ve never had to file in 25 states though. In fact, due to the way the laws are, I kind of doubt anyone really ever has to do more than about 15.
Thanks for sharing. I don’t track my investments as well as you do, but your investments (& returns) look similar to mine.
I’m glad I dodged the SFH REIT, though. That’s a good reminder of the real risks.
I’ve invested with Reliant for years, including multiple funds. They seem to do a good job navigating the self-storage space.
Glad to hear you’ve had a good experience with them.
It is surprising to me you do not have any single month of negative return since 2011. Jim, what majoc sauce did you add to your portofolio?
I’m not sure where you’re getting that idea. Sounds like you skimmed the article and mistook the returns of one of my debt funds for my portfolio’s returns. I’ve certainly had plenty of months of negative returns in the last 12 years.
I see. My apology
Aside from your childrens’ 529 plans — which I understand you invest aggressively in 100% stocks — how do your other savings vehicles differ, if at all, from your portfolio outlined above (UTMAs, kids’ Roth IRAs, HSA)?
BTW, thank you for everything. Because of you I paid off 320K student loan debt as well as a 300K business loan within the first four years of graduating residency and am now turning my income into retirement savings — overcoming that paralysis by analysis of how to build a portfolio. You have really empowered me to manage my own finances and it is such a blessing in my life. I’ve recommended your website and book to all the medical students who cross my path.
UTMAs are 100% stock (50% TSM, 50% TISM), HSA is 100% stock (100% TSM), Roth IRAs are 90% stock (100% TR 2060)
Congrats on your success! I might have told you how to do it, but you had to actually do it and that’s harder.
Thank you for the update.
Do you have the “DLP Housing” in a taxable or IRA? I hear it is not quite tax efficient.
Also do you recommend going more towards evergreen funds (DLP, Origin) or non evergreens? are you aware of other evergreen funds besides Origin and DLP? Thanks again.
Taxable. Very tax efficient for me so far.
I prefer evergreen given the choice, but it’s not a showstopper. Lots of our funds aren’t.
My debt funds are all evergreen. That’s all I have on the equity side.
Any advice on how to handle switch from vanguard fund in tax shelter account? Do it all in one day?
Not sure what you’re asking exactly, but if I had an investment change I wanted to make and there were no tax consequences to doing so, I’d do it all ASAP.
https://www.whitecoatinvestor.com/dollar-cost-averaging-is-for-wimps/
I have invested in many of the same sponsors as you (MLG, DLP Capital, and Origin Investments).
Do you think it’s safe to say the DLP Housing Fund returned 12.57% this year as they have not had their properties appraised yet? Origin adjusted their NAV down in their income plus fund and I wonder if DLP will need to do something similar after their outside audit later this year?
You mentioned you’re thinking to invest more in the Origin Income Plus fund. It seems that fund is doing worse than the MLG Fund or DLP Housing Fund. What makes you particularly fond of the Origin fund compared to the others?
I simply look at what the account says I have on 12/31/23 and put it into my spreadsheet, just like I did the prior year. I understand they report differently, but I’m not going to wait until April to run this post so my method aligns with DLPs. If the NAV gets marked down in a couple of months, that’ll be reflected in my 2024 returns. Same thing with every other investment I have.
Just curious on your reasoning behind changing your small value VBR/VIOV to AVUV/DFSV. Sorry if I missed it before, or if this was discussed somewhere else. Thank you for what you do!
More info here:
https://www.whitecoatinvestor.com/avantis-vs-vanguard/
https://www.whitecoatinvestor.com/small-cap-value-etf/
Hi Dr. Dahle,
I am reposting my comment/question because somehow a paragraph got lost while I was typing it.
This is the full text:
Hi Dr. Dahle,
I have invested in some of the private real estate that you have: Origin, Wellings and DLP. I have questions about DLP:
Last year DLP raised the management fee for all their funds to 2% (from 1.25%) for “small investors” (with < $1M per fund).
This year they have just added more negative changes: while they promote their funds as offering redemptions at any time (after a certain waiting period), starting next month they will add a penalty for redemptions in the form of forfeiting any preferred return and excess distributable cash that has been earned but has not been paid out yet. That can easily turn out to be a 3-8% "back load".
On the other hand they have decided to form Advisory Committees made up of investors hand picked by Dan, who will be eligible for rebates of the performance fee. They also plan to provide similar perks to certain employees.
I spoke with one of their "Investment Success Managers" (sales people) and he told me that DLP had to focus on large investors because by law the funds are limited to no more than 1999 individual investors. In order to raise more capital they have to change their investor mix. To me it looks like they plan to do this by making small investors (by "small" they mean <$1M) pay much higher fees than the mega ones, their aligned influencers, employees and friends.
Does it look like to you that, after their substantial growth, DLP have shifted their strategy to:
1. Retain mega investors.
2. Find “small” ($0.1M-$0.99M) investors willing to pay extra
3. Find influencers and incentivize them by not making them pay what the “small” investors do
4. Fleece the “small” guy/gal
5. Make it expensive to get out
Do you know anything about this “1999 investor rule” that the sales person told me?
Thank you for all your help!
The only 2000 investor rule I know of is in the 1940 Investment Company Act ( 3(c)(7) I think), same place as the 99 investor rule ( 3(c)(1) ). Also I think that’s per fund and I thought it only applied to qualified purchasers in the case of 3C7, but if you wanted to do more research on that, I would start there.
I’m not sure that forfeiting preferred return and cash is really a potential 3-8% loss on the back end, is it? I mean, they update the NAV in the Housing Fund each year just before the once a year redemption period so what preferred return wouldn’t be paid out at that time?
There’s certainly plenty of good reason to prefer fewer, richer investors, but there are only so many folks out there willing to place $1M+ with DLP. I mean, I’ve got a substantial portfolio and a substantial commitment to DLP and I don’t have $1M total with them, much less that much in a given fund. I also have not (at least not yet) been invited to be on any sort of an advisory committee and as far as I know, there is no influencer who has sent more business to DLP than I have. But imagine if DLP took investors with $10K investments and had to service them all. How many additional people would they have to hire to do that? Even Vanguard treats their wealthier clients better if they’ll put more money with them, that’s hardly a DLP thing.
They do offer more liquidity than most private real estate investments. If you don’t like the deal, you’re never stuck for more than one year. Less with the Lending Fund I think.
I’m impressed (both favorably and unfavorably) by your extremely quick response. Favorably – because it’s great service! Unfavorably – because you have to have better things to do on a Sunday morning other than responding to a DLP-sceptic. We (the WCI fans) need you happy and healthy!
The 3-8% penalty guestimate came from the stated rules for “annual redemption” for the Housing Fund and “90 day redemption” for the Lending Fund. The letter states that the investor will forfeit any preferred return and excess distributable cash that has been earned but has not been paid out yet. That forfeiture begins the moment a redemption is requested and lasts until the redemption is paid out, potentially up to a year later. With a targeted return of 11-12%, potentially a whole year’s return seems to be at risk. That’s how I read it. I hope I’m wrong.
I also have a substantial investment in the Housing Fund and a substantial commitment to both the Housing and the Lending funds. For the Lending Fund I also just jumped through hoops to set up a solo 401k and fund it by rolling over my 403b. I do not believe that my investments in these funds will ever exceed the $1M threshold (per fund per investor). I strongly suspect that most of your WCI fans will be in the same category (2% fee for <$1M per fund).
DLP clearly has a legitimate interest to have fewer and bigger investors. This is a free country and they have the right to set their own rules. Except that it does not seem right to keep making negative changes to the fee structure for funds that that by their very nature are long-term. The 2% management fee is on the high side. The annual negative changes with only a short notice are very concerning. What are they going to come up with next year?
They clearly plan to recruit influencers. The probably have just not told you yet. What is the real value of an "Advisory Board" for DLP? Most doctors who have been on the advisory boards of pharma and device companies know what are those about.
Thank you for all you do! I have been following WCI for just a little over 18 months, but it has led to big changes in how a manage my personal finance!
I was sitting in a nearly empty emergency department waiting on the lab and radiology. Don’t worry too much about me working too much. My clinical time only averages out to about 12 hours a week.
Seems worth asking Don to clarify the next time I talk to him or shooting someone an email if you’re curious before then.
Thank you!
I understand that you don’t include UTMAs, HSA and 529s in your asset allocation, but do you include them in your Net Worth Statement?
I do include them, but now that I think about it, I probably shouldn’t include UTMAs and 529s. I mean, the 529s are technically still our money, but the UTMAs aren’t. I guess the trust money isn’t either, but we still count that.
Thanks for the response. I have a follow-up question.
When it comes to contributing to your portfolio do you count the HSA contribution as part of your whole annual portfolio contribution?
For example: you talk about saving/investing 20% of your gross income. Is contributing to the HSA part of that 20% gross contribution?
I think you mean to ask if I include it in my retirement portfolio asset allocation or not. I don’t. I probably should though. It doesn’t really change anything for us because it’s a tiny part of our net worth.
I think it’s okay to count it toward your 20%, at least the amount you don’t spend on health care this year.
Jim, I know this is a dumb question, but is there a summary somewhere of how to move the money in these debt funds into a 401K (I actually still have a SEP)? I’ve been avoiding it due to overwhelm, but I know I need to get it figured out. I’m invested in Fundrise’s debt fund but it’s all in taxable. Thanks again for all that you do!
You sell it in taxable and buy it in the retirement account. Step 1 for you is opening a 401(k) that will allow that sort of an investment in it. These folks can help, but not every fund will work with retirement accounts at all much less your chosen provider:
https://www.whitecoatinvestor.com/retirementaccounts/
Hi Jim, thanks for this fantastic breakdown.
So far my real estate investments in my 401k have all been invested in REITs and I’m looking to diversify this into the private syndication space. When utilizing a 401k for these investments, my questions are as follows:
1) Can you invest in funds that pass through depreciation through a K1 or can you only invest in funds that utilize a 1099?
2) If investing in funds that pass through depreciation through a K1 is allowed, would this benefit only be realized down the line when you are actually withdrawing the money from the 401k in retirement? And would that be the point where you would have to file multiple state tax returns?
3) Besides the standard differences between debt and equity real estate investing, are there any major differences to think about between the two when those investments are within a 401k?
Thanks!
1. You can, but you won’t get the depreciation. In fact, you’ll probably pay UBIT. I’m really not a fan of equity private real estate in retirement accounts. I’d much rather use that space for another asset class like bonds, debt real estate, even stocks. At a minimum, use something like MLGs Dividend/1099 version of their investments.
2. It wouldn’t be realized at all. I don’t think you’d have to do multiple state returns at any point. Although I could be wrong on that point. I suppose you might have to do multiple state tax returns in order to pay UBIT. Not sure on that.
https://www.thetaxadviser.com/issues/2013/jun/clinic-story-03.html
3. Debt = lower risk, less tax efficiency, probably lower returns, more liquidity, no UBIT. Equity = higher risk, more tax efficiency, probably higher returns, less liquidity, UBIT.
I’m working on our asset allocation, my spouse has different funds available to her than myself. How important is it that funds in a certain allocation type track the same index? For example, for our international allocation we have the TSP I fund in my TSP, all funds available in our Roths, and only DFIEX (DFA’s core equity international fund, ER 0.24). These all come with different ERs – cheapest is the I fund, then those we can get in our Roths, then the DFA one. Maybe I shouldn’t worry that they all track a different index, but thought I’d get your opinion. Thank you.
Not that important, but you certainly want to track the better indices whenever possible.
You’re not trying to recreate your AA in every account are you? Don’t do that. You just need the overall asset allocation to be right and you can take advantage of the best options available in each account. For example, someone might have their entire 401(k) in a 500 index fund with all their international stuff in their Roth IRAs and their bonds in their spouse’s 401(k) and their real estate mostly in taxable.
Thank you, Dr. Dahle.
Im not trying to have our AA be the same in each account. I’m doing our AA across all our accounts as you described (e.g. my TSP may be US heavy while my spouse’s 401k may be only international).
It seems as the through the three indices I have available are reasonable. I had some pause on the I fund bc the index is new. But it sounds like the new index is “better” diversified. It now has some emerging markets and many more stocks. Would you be concerned with that? I don’t have enough space in other accounts to buy VTIAX so I either have to put more in the I fund or the more costly DFIEX.
I agree the new I fund is better than the old I fund. Much closer to the Vanguard TISM fund than before (still excludes China for political reasons) when it was really just a developed markets fund. Although the last few years developed definitely outperformed EM. Not sure I’d bet that way long term though.
DFIEX isn’t an expensive fund though. It’s 23 basis points. Not quite low enough that I’d call it zero but certainly not something I’d feel like I had to avoid.
All are good, reasonable options to use so I’d just pick the one in the account where you want to put this asset class.
First off- I genuinely appreciate all that you do for the white coat community. I have learned a ton from you, your books, and the website over the last several years.
Over the last year I have used a regional wealth management fiduciary (1% AUM) to manage my portfolio. Now, with what I have learned- I feel as though I am comfortable with managing mostly everything on my own.
They have targeted my portfolio to 50% US/Intl Stocks 20% Bonds/Cash 30% non-traditional.
My main concern is the non-traditional funds – (Private equity, Managed Risk, Growth funds, Emerging Markets, global infrastructure, global real estate). Ex. Pomona Investment Fund, BIVIX, IRONX, JHEQX.
All of which seem to have higher expense ratios and are located in our Roth and Taxable accounts. They have described this class as being less risky, less volatile, and adds diversification.
In doing some research my eventual desire is to have a portfolio similar to what you have described above.
Do you have any thoughts on this asset class as far as its representation in the portfolio?
Any tips on how to navigate the transition of a professionally managed portfolio to being personally managed (selling stock, re-balancing) with the least amount of financial/tax implication?
I want to thank you so much for all of your wisdom and information that is shared. I am a newbie 30 year old investor as I have just finished up my residency and am trying to now take on the world of investing. I am trying to accumulate the most knowledge that I can, but I find the more knowledge I consume, the more confused I am getting. I am looking to have a more set it and forget it portfolio and evaluate it every so often. As I accumulate greater wealth, I will likely seek the advice of a fee based only advisor annually, but I wanted to get everything started on my own. I have been contributing to a work related 401k, have performed the backdoor Roth IRA and have a brokerage account. Initially, I was investing around 70% into VTI, 20% in FSPGX, and 10% into VXUS. As I have been reading more and looking further into the sector diversification, I notice that VTI and FSPGX haven a fair amount of overlap and are heavily dominated by tech stocks. Although this is great in the current market, it makes me fear if the tech stocks plummet, that my portfolio will follow with it. Now if this were the case, I would trust the process and give it time in the diversified portfolios, but I wanted to get you advice if you would recommend distributing my portfolio further. Would you gear more toward the small value cap like AVUV that you mentioned instead of FSPGX (large cap growth fund)? At 30 would you recommend investing in different real estate funds? Invest a portion into dividend funds such as SCHD? Thank you again for all of your help and all that you do for everyone.
Remember fee-based does not equal fee-only. Fee-based means they charge commissions and fees.
The large growth tilt (20% FSPGX) feels like performance chasing and recency bias to me.
There is no perfect portfolio, or at least it can only be known in retrospect. I tilt my portfolio toward both real estate and small value stocks for reasons discussed in the following posts:
https://www.whitecoatinvestor.com/real-estate-investing-101/
https://www.whitecoatinvestor.com/small-cap-value-strategy/
But they’re optional for sure as asset classes and compared to US large growth tech stocks have underperformed the last 15 years. But trees don’t grow to the sky.
The most important thing isn’t to do what I do but to pick something reasonable and stick with it. Here are lots of examples of reasonable:
https://www.whitecoatinvestor.com/150-portfolios-better-than-yours/
AVUV is my current preferred SV fund as discussed here: https://www.whitecoatinvestor.com/small-cap-value-etf/
I don’t see dividend funds as the best way to get a value tilt. Aside from the expected benefits of a value tilt, I don’t see any additional benefit (and plenty of downside) from a focus on dividends.
Are you doing this post for 2024? I found it very helpful and interesting last year.
Yea, just wrote it the other day. It’ll run soon.