By Dr. Jim Dahle, WCI FounderMost of what we do here at The White Coat Investor is to teach you the nuts and bolts of how personal finance and investing work. We teach you the rules of the game, and you can do with them whatever you want. However, sometimes we actually tell you what to do. Generally, people appreciate that advice, but not always—particularly if what they're told to do isn't exactly what they want to do.
Today, we're going to go over some of the more controversial pieces of advice we give, the things that people disagree with us about the most. I'll be amazed if there isn't at least one thing on this list that annoys you.
#1 Avoid Speculative Investments
I generally teach people to avoid speculative instruments, i.e., those investments that don't have earnings, interest, dividends, or rents. These include cryptoassets like Bitcoin, precious metals like gold, empty land, and collectibles like Beanie Babies. If the only way you can make money from it is by somebody paying you more for it than what you paid—especially if it has ongoing expenses to insure and maintain it—I don't invest in it, and I think you should limit any investment in it to a single digit percentage of your portfolio. Zero percent is my favorite single digit.
Based on the reaction I get to this advice from some people, you'd think I had just stolen their newborn baby from them. They shake their heads and claim I “just don't understand, just can't see the truth” or have some sort of bias that keeps me from recommending their favorite speculative instrument.
More information here:
6 Reasons to Invest in Bitcoin (and 5 Not To)
A Moderate-Income Physician’s Approach to Alternative Investments
#2 Don't Buy Cars on Credit
When it comes to cars, people just want to hear that whatever they did is OK, even if it means a resident just borrowed $80,000 on a Jaguar. More likely it's a Tesla these days. Well, that's not true. A car is a tool and a necessary one for many people. But few people have a NEED for a car that costs more than $5,000, and nobody has a NEED for one that costs more than $10,000. Most people, and certainly most doctors, can easily save up $5,000-$10,000 for a car. So, there's really no need to use a car loan. Ever. Even if it's 0%. Get used to saving up for things you want to buy.
Now, there might be some unusual circumstances where you need a car right now and don't have $5,000-$10,000 right now. Fine. Get a car loan for less than $10,000 and pay it off rapidly. But this nonsense about having $30,000 or $80,000 in auto loans? It's silliness. But I can't even keep WCI employees from doing it! Part of the issue, of course, is that a physician income covers a multitude of sins. You can make a lot of mistakes and still be OK when you have a mid-six-figure income. But that doesn't mean it isn't a mistake.
The arguments against this idea are varied. Sometimes, it's a safety argument (“Why would I put my family in anything but the safest car on the planet?”), sometimes it's a consumption smoothing argument (“I'm only going to be 32 once, I want to drive what I want to drive, YOLO!”), and sometimes it's an interest rate arbitrage argument (“Why would I use my money to avoid a 0% car loan when I can make 5% in cash and 10% in the market?”). The counter arguments are easily made, of course, but people just aren't convinced when it keeps them from getting what they want.
#3 Leave California
I love California, and I understand why people want to live there. The weather is nice, and there is a ton of fun outdoor stuff to do. There is lots of diversity, plenty of cultural opportunities, and gazillions of people—some of whom may be your relatives. But practicing medicine in California is bad for your finances. Housing prices are through the roof, the state income tax bill is outrageous, the cost of living is generally elevated, and physician pay is lower than in many other areas. It's a recipe for financial disaster. Well, maybe not disaster, but you're definitely hiking uphill through deep snow to get to your goals.
It can sometimes be hard to see that if you would just put some skis on and turn downhill, this would all be dramatically easier. The equivalent of that in the financial world is moving out of California—maybe to Arizona, Nevada, Idaho, or Texas. Pay goes up (especially after tax), and expenses go down. And voila! You're rich. There are plenty of other “Californias” too: Washington D.C., New York, New Jersey, and Hawaii.
I'm actually glad some of you are willing to practice in those areas. Otherwise, I don't know what all the people there would do for healthcare. But I can't say I understand why a “typical doc,” much less a doc struggling financially, would do so.
#4 Don't Buy a House During Residency
I gave up on this one a long time ago. Even though most people who buy a house for a three-year residency come out behind financially, doctors just keep doing it. Part of the problem is that sometimes they don't come out behind financially, like when housing prices go up 40% from 2019-2023. That more than covered the typical transaction costs of 15% of the value. The good news is that even when it doesn't work out, the graduating resident usually has a new attending income that can be used to overcome the error.
#5 Live Like a Resident
This one is more of a mindset than an exact prescription, but it probably gets more pushback than anything else on this list. The idea is that if you can front-load your lifetime financial tasks before you get used to your high income, you can then go on financial cruise control for the rest of your life. Instead of having to decide whether to max out your retirement accounts, save up for a down payment, or pay off your student loans, you can do all three at once.
The greatest wealth-building tool for most physicians is their income, and by combining an attending income with a resident lifestyle, they can free up a huge chunk of that income to build wealth. Heck, you can still give yourself a 50% raise when you get out of residency, and it's probably still going to work out great. But after having deferred gratification already to age 30, 35, or even 40, some docs are just done with it and start spending their whole income. They then might find themselves living paycheck to paycheck when their student loan payments adjust upward.
Another big error people make is assuming this is some sort of long-term idea. It's not. The “live like a resident” period often only needs to be a year or two and never more than five. If you're doing things right, you're getting wealthier every single month, and you can soon choose a more moderate path.
More information here:
A Financial Love Letter to My Wife (and the Realities of Living Like a Resident)
#6 Don't Buy Whole Life Insurance
Although I occasionally get pushback from docs on this one, it more often comes from the financial services industry, particularly those who sell these policies for large commissions. They love to point out all of the interesting things that can be done with a whole life policy (or one of its cousins), ignoring the fact that the way policies are generally sold (bad policies to people who have a far better use for their money) is basically financial malpractice. Expensive insurance combined with a poorly performing investment, what's not to like?
#7 Pay Off Your Mortgage Before You Retire
Over the years, I have met a ton of people who advocate for carrying around debt. The arguments are usually mathematical: “Why not carry debt at 2% when I can earn 8% on my portfolio?” Risk is usually ignored, as are the cash flow considerations. A bigger issue is the behavioral counterargument: people simply do not invest the difference; they spend it. The truth of the matter is that people who build wealth both pay off debt and save money to invest. It's not an either/or for them. The same impulse that leads them to save a big chunk of their income leads them to pay off their debts. So, their mortgage is usually gone in 15 years. Or 12. Or even 7. They're not thinking about taking it into retirement with them because they got rid of it 15 years before they retired. They're like, “A mortgage? How quaint.”
If you have mismanaged your financial life so badly that the only way you can still reach your financial goals is to continue to carry leverage risk into your 70s, we've failed in our mission at The White Coat Investor.
#8 School, College, and Weddings Cost What You're Willing to Pay
Some people think they need to spend a certain amount on big-ticket items, particularly for their children. The classic example is a wedding. In Utah, the minimum cost for a wedding is $100, $50 for the license and $50 for the ceremony. Yet it's possible to spend $500,000 . . . on flowers alone. There may be no other item with such a massive range of pricing. K-12 school is close. It ranges from free to $50,000 per year. Including preschool and kindergarten, that's a total cost of $700,000 per kid.
College is similar. Two of the schools I was accepted to were the University of Chicago (with a current cost of attendance of over $84,000 per year) and Brigham Young University (with a current cost of attendance of less than $14,000 per year). That's a sixfold difference in pricing. It's even more egregious if you just look at tuition. When you consider how many available scholarships and tuition reductions there are out there, college truly costs what you are willing to pay. There are plenty of other items in life that are this way: vacations, cars, children's activities, hobbies. If you can't build wealth because you're spending too much on this stuff, it might be because you can't tell the difference between a need and a want, or you may just have a hard time saying, “No, we can't afford that,” to yourself and other family members.
More information here:
Justifying and Cash-Flowing a ‘Selective Extravagance’
From Fourth Year to the Real World: An $80,000 Wedding Causes a Downward Spiral
#9 Don't Time the Market, Pick Stocks, or Pick Managers
The pushback on this one is what I find most surprising. The data is exceptionally clear . . . crystal clear . . . that the best way to invest in publicly traded stocks is to buy and hold a static asset allocation of low-cost, broadly diversified index funds (including ETFs). Market timing in particular has a nasty tendency to rear its ugly head in strange places, like the lump sum vs. DCA arguments people make or when discussing methods of reducing sequence of returns risk. If it looks like market timing, smells like market timing, or feels like market timing, it probably is. If you could reliably time the market, why in the world would you just be doing it with your money instead of everybody's money?
#10 Nobody Should Have a 100% Stock Portfolio Until They've Been Through a Bear Market
The historical data suggests that if the future resembles the past, those who can handle a more aggressive asset allocation will be rewarded for doing so. Some people take that to mean that all people, certainly all young people, should have a 100% stock allocation. That's a huge error for some people.
First, the future may not resemble the past. It is entirely possible for bonds or cash to outperform stocks for long periods of time, even over your entire investing career, especially when adjusted for risk. Second, there's a big assumption that you won't sell low in a nasty bear market. That's much easier to avoid when you can console yourself that 10%, 20%, even 50% of your money isn't in the market. You really don't know what your risk tolerance is until you've been through a nasty bear market.
There is also a weird underlying premise that somehow your risk tolerance falls as you get older. While I agree your financial ability to take risk likely goes down, your emotional ability to handle it probably goes up as you become more experienced and begin to realize with each bear market that you've “seen this movie before and know how it ends.” Investors will be far better off with an 80/20 portfolio than a 100% stock portfolio that they sell low just once in their 60-year investing career.
#11 You Can Invest in Both Stocks and Real Estate
Don't fall for bizarre arguments that suggest that investing in publicly traded securities is just “buying paper assets.” You also shouldn't assume that there are no advantages to investing in private investments, like your own little real estate empire. Both methods of investing have their advantages, and you can mix and match to get your own perfect recipe.
Interested in exploring private real estate investing? Make sure to sign up for the free White Coat Investor Real Estate Newsletter that will give you important tips for investing in this profitable asset class while also alerting you to new opportunities. Make sure to start your due diligence with those who support The White Coat Investor site:
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All right. Let's have it. I expect at least one comment in the comments section telling me I'm wrong about every one of these. Comment below and tell us what you think!
Yeah but, self driving Tesla’s are just so cool! Plus you bought an expensive SUV (with cash though) so now we can do it too ☺️
You mean the one I put 280,000 miles on? Or the one we still have with 170,000 miles on it? Or the new truck?
Spot on as usual. Especially #3. I’m one of the Californias who actually left. Did so right after completing training. My net worth would be no where near what it currently is if we had not done that.
I will take counter arguments for # 1 and # 2.
1. Over the years, I have had collectible hobbies, including coins, baseball cards, autographs, gold, and watches. At times, especially for coins, I have plunked down sums of money that would make the White Coat Investor blush. In my head, they were all.”hobvestments”, and the psychic dividend of the thrill of the hunt, pride of ownership, and camaraderie with fellow hobbyists was the reward. However, given the amount of money spent, it is hard to justify without expecting some return of or on my outlay at some time in the future. With respect to coins, there was definitely profit, but probably not competitive with stocks, real estate, etc., You decide whether this violates your rule.
2. In 2018, we decided to purchase a Nissan Leaf. The price was established, and I went to the dealer to pick up the car with my checkbook in hand. The dealer looked at it and said that they had 0% financing. He encouraged me to take it. They may have had incentives for it, as well. Knowing that I had the cash in my money market fund, and it wasn’t going anywhere else, I thought it was reasonable to take them up on it. About 18 months in, I found it annoying to keep tracking the monthly automatic payment towards the loan and just paid the loan off.(Shortly thereafter, interest rates started to rise.) Again, you decide whether this was a violation of number two.
2- I also got a Lowes 0% x 24 months credit card for wood floors and played that game. Just easier not to marshall the cash upfront from various money markets, btu also they make their money by folks forgetting when the free interest is over and then starting the 10-25% rate, and I’ve been late and paid late fees a time or two from poor mail management in my earlier life so I paid it off early. Doing it now with an overpayment MIL’s nursing home discovered a year down the line – don’t judge us, it took them so long to refund money due we weren’t going to give them back the check finally received because it might be too much! (They were so embarassed they offered us 0% interest over 12 monthly payments. Makes up some for the interest we lost waiting for them to get it together to mail the first check.)
1- My spouse is a collector. Of everything- edged weapons (wall art to the UK customs and keep the country safe folks when we hauled it all there), watches, vehicles, futbol jerseys… As is my step-mom of fabric etc. (quilter). Dad and I agree if we are widowed someone will kindly come along and turn our spouse’s $100-300K of stuff into, hopefully, >$10K after charging us for the removal. I keep urging spouse to sell some of it with his expertise and connections rather than leave that to us kids, but as my kids remind “Dad LIKES his stuff.” Makes me think I should buy a horse farm for parity- also useless (to me) and expensive but I’d really like it. At least spouse doesn’t madden me by claiming they’re investments, and the kids are already jockeying for which ones will get which antique or Conan copy sword.
Everyone will take a counter argument against at least one of these. But it’s kind of funny that they all argue about a different one.
I’ve done well even in California following the WCI guidelines, so it can be done. And California does some things right: Prop. 13 (favorable property taxes), no State death tax, no State income tax on SS, among others. And the malpractice laws have been mostly doctor friendly too.
Never agreed with buying a beater / used car. Old cars have problems and they happen at the worst possible time. And when was the last time you went to the auto shop and the estimate was less than a few thousand? No thanks. Buy a new (or slightly used if you must), modest/reliable car with good gas mileage. Then sell it when you’re in a good place financially and it will be someone else’s problem.
We buy new since can now afford it (cash) and have been caught out settlign for what works until it doesn’t, just when we need it- if I were a mechanic I’d be a farmer instead of a doctor- but at LEAST when you can’t pay cash avoid the drive it new off the lot fee and get a 1-4 yo car!
I prefer brand new nice cars. And once I had the money to buy them, that’s what I started buying. But there’s no doubt that driving cheap cars saved me and still saves lots of people a lot of money. And when more money is useful to you, I’d suggest paying cash for inexpensive cars or at most having a 4 figure car loan. There are worse financial mistakes docs make though.
I violated #2 in a big way as a resident; I bought a brand-new car on credit. But I did so because my beater had just failed inspection, and I knew I had three years of residency still ahead of me but no guarantee of a job after that as the job market in pathology then was very soft, so I figured a brand-new car which would still be very low mileage (and therefore unlikely to have any serious problems) would be a smart move in case I went through a period of unemployment after residency. So I bought a Subaru Outback Sport using a three-year loan that I could pay off completely before the end of my residency – and then I drove that car until the wheels fell off. But I think that falls into the exception to the usual rule category!
I violated #6 because the NW Mutual salesman got to me before WCI was founded, alas. But now I’ve held the policy long enough that it’s worth something, so I am keeping it with plans to turn it from a lemon into lemonade, either by converting it into an annuity or by naming a worthy individual or charity as the beneficiary after the current beneficiary (my father) dies.
I view collectibles as hobbies, and gold as a hedge rather than an investment. I could potentially see myself keeping a bit of it around in case the fecal material hits the rotating blades, but I’d never hold a lot of it. I can also see it (in the form of an ETF like GLD) being of some use in a risk-adverse portfolio like the Golden Butterfly, but in that case you have to accept that you’re sacrificing some portfolio growth during boom times in order to (hopefully) protect yourself in down times.
#1 for me is ignoring brokerage accounts until all avaliable tax advantaged contributions are maxed. I hear quesrionable advice about “the middle class trap” and how you need a large bridge account because 72Ts, Roth conversion ladder, etc are too difficult. I 100% agree with WCI on this one, even though the large majority of finance pundits don’t.
I think you’re talking about this one:
https://www.whitecoatinvestor.com/early-retirees-max-out-retirement-accounts/
Yea, retirement money should generally go into retirement accounts until they’re maxed out, then taxable.
Could you explain how you reconcile item 9 with item 11? You don’t pick stocks and go with a broad index portfolio, but you’re paying a high management fee for private real estate where you are intentionally betting on a manager and their ability to identify, acquire, and operate an asset.
I have been doing private real estate and also invest in the general S&P500, but I’ve been questioning my logic and would appreciate hearing your logic.
I think this is the post you’re looking for:
https://www.whitecoatinvestor.com/private-real-estate/
Here’s another good one on the topic:
https://www.whitecoatinvestor.com/the-18-downsides-of-private-real-estate-investing/
But basically, if there were an index fund for private real estate I’d buy it. It doesn’t exist. So if you want to invest in any type of real estate besides the big publicly traded REITs, you have to do it on the private side. Which is where most investment real estate is.
What decent, safe, reliable EV can be had for $10K?
Beats me, but people with only $10K to spend on a car shouldn’t be looking for “decent”, “as safe as possible”, nor “electric” IMHO. Let’s see how old a Volt has to be to be worth $10K.
Looks like a 2011 Volt with 120,000 miles on it in very good condition sells (private party) for $5.107 according to Kelley Blue Book. So buy two of them I guess, or get something a little newer if you’ve got $10K. 120,000 miles in very good condition is both safe, reliable, and electric. There you go. Let me know if you need me to find you a Nissan Leaf too.
Thanks. Electric new cars will be mandatory soon enough, though used electric and internal combustion cars will continue to satisfy the low-budget market for years to come. I took from your statement that nobody has a need for a car costing more than $10K to mean that you think no one should buy a car more expensive than that. This would exclude the vast majority of EVs, which are arguably the environmentally responsible choice. That said, I chose a standard hybrid because the dealer honestly suggested that a plug-in hybrid or full EV would not be worth spending the extra money on and provided the numbers to prove it. I paid with saved-up cash. At the time last year, I was in an income bracket that does not qualify for a tax break, but that deters me from spending $10K+ extra just to feel good about my choice from an environmental perspective. Now that I have retired, I intend for the hybrid (Kia Niro) to last the rest of my driving life and am quite pleased with the 56 mpg I am getting from it.
I’m sorry you jumped to that conclusion. I don’t think anyone needs a five figure car loan. Buy whatever you like and pay for it however you like. It’s your money. I’m not here to tell you how to spend it. But if you want to be wealthy, I can teach you how to do that. For most people, spending less helps them build wealth and for some reason there’s this idea out there that sub $10K cars are unreliable and ridiculously dangerous. That just isn’t true.
Glad you like your car. I’m not convinced that electric cars are definitively more environmentally conscious than building and disposing of huge batteries and generating electricity to charge them by burning coal and oil or using solar panels that required substantial environmental destruction to build and dispose of but it’s entirely possible. I haven’t spent a lot of time looking at it. But it seems like a lot of EV buyers are just looking for a dual status symbol to me. That’s the fun thing about a Tesla. Not only do you get to signal that you’re richer than your neighbor, but you can signal that you care more about the planet than they do too.
I do know that no one has yet made an electric truck that will do what I want my truck to do.
I clearly jumped to the wrong conclusion, for which I apologize. I agree with overall recommendation about spending on cars. I’ve always kept mine for many years. My hybrid, which I expect to be my final car, replaced a 25 y/o Honda Accord with over 200K miles on it that was getting too expensive to continue justifying repairs. To me, a hybrid was a good balance of the various personal considerations. From the broader societal perspective, it will be interesting to see how the situation continues to evolve regarding balancing carbon emissions against other environmental effects. Thanks for all of the sensible points you made in this article.
As an aside, I have recently retired in Wisconsin and am moving to West Jordan, UT this week to be close to my grandchildren. I’m hoping the Great Salt Lake doesn’t dry up any time soon. Also, I agree about California. I grew up in Los Altos (Silicon Valley). It was a great place to grow up in the ’60s and ’70s, but the house my parents bought for about $25,000 in 1965 is now valued at $4.5 million. Modernized but not enlarged. Sad.
If you kept a car for 25 years, there’s no need for me to preach to you. You clearly understand this issue.
I hope you don’t need to come see me in West Jordan (that’s where I practice).
EVs are *way* more environmentally friendly than ICE vehicles, and even if powered by dirty energy they still come out ahead.
Part of the issue is that the oil and gas footprint on the environment after a 100+ years is completely normalized as to be almost invisible, but the impacts are catastrophic, from land use and habitat loss, pollution at production sites, loss during transport, groundwater contamination at nearly every gas station you see, increased rates of chronic disease in the workforce and population (cancer, asthma, etc.), not to mention carbon pollution.
here are some links to info…
EPA (read this before the current administration takes it down. LOL!)
https://www.epa.gov/greenvehicles/electric-vehicle-myths
MIT
https://climate.mit.edu/ask-mit/are-electric-vehicles-definitely-better-climate-gas-powered-cars
SciAm
https://www.scientificamerican.com/article/electric-vehicles-beat-gas-cars-on-climate-emissions-over-time/
I might have to get that Tesla after all. But I’m still waiting on a truck with decent towing range.
We traded in our 2018 Leaf (see above) with about 35,000 miles and a range of 150 miles a couple months ago. I expect it would retail for under $10,000, and I would have taken $8000 for it.
As the electric vehicle market is relatively new, the used market is taking shape. Right now there are a starting to be a lot of used electric vehicles, including Teslas, that can be had for at much lower cost.
Another advantage of electric vehicles is that you never go to the gas station and electricity is comparatively inexpensive!
I violated the car rule by buying a new Kia Sportage PHEV on credit, but with the intention of paying it off in a few months, which I did. It has a 34 mile all electric range which works for my short commute with enough left over for a few errands. I just leave it plugged in all the time at home. I hit the gas station once a month to top off the quarter tank I used when I drive on the highway on occasion.
Re #10: What’s your view on the “mental accounting” argument for a new attending whose investment assets (eg tax advantaged accounts) are 100% stocks but whose total assets are still 50% cash due to building emergency/sinking funds, etc? Does this violate your rule?
It’s not a rule by any means. But that’s a pretty common situation for early investors when their emergency fund or sinking funds are a still a big chunk of their net worth. But no, I don’t count money that isn’t in the portfolio as part of the portfolio. Emergency funds and sinking funds are cash flow aids, not investments. I don’t include them in a portfolio.
Re: #3. California (San Francisco, no less) is not for everyone, but it has worked out well for me: arrived here young, in debt and devoted to a career in public service (academics with a focus on cancer research). I used to call academics akin to taking a vow of poverty, but here I am in my early 60s planning to retire soon with a >$2.5M IRA (403b/457b) and looking at a pension of $200k at age 65 that is adjusted for cost-of-living. Raising 2 kids in good public schools with 529s that will top out at 250k for each. Planning to soon sell my third house (which has $2M in equity); this third sale will translate into a total of $1M in tax-free gains. The taxes are sky-high, but you get a lot in this beautiful city, full of fun outdoor activities and world-class museums, theater, concerts, all of which we enjoy. Everyone finds a reason to visit SF (conferences, vacations), so we get to see all of our friends and family frequently without having to travel. I am truly in awe everyday when I see the mountains and skyline—even the fog. WCI has helped me enormously get to where I am, and for that I am eternally grateful.
Nice work. Congratulations on your success!
I am curious how you’re getting $1M in tax-free gains from the sale of a house though. The usual exclusion amount for a married couple is $500K.
It’s cumulative gains on three house sales over the last 24 years in SF: $250,000 (house #1), $250,000 (house #2), $500,000 (house #3, anticipated within the year). That’s why I wrote: “…this third sale will translate into a total of $1M in tax-free gains”.
Thanks for all of your advice over these many years that helped make this possible. You are amazing.
I agree. $250K + $250K + $500K adds up to $1 million. You get an exclusion on each of those as long as you lived in them each for a few years.
Circling back, the main point I wanted to make with my personal story is that with good financial planning, a WCI can make California (and any HCOL area) work out well financially.
I agree with that.