Alternative Investments with Larry Swedroe

Transcription – WCI – 456

INTRODUCTION

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:
This is White Coat Investor podcast number 456 – Alternative Investments with Larry Swedroe.

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Welcome back to the podcast. I hope you're having a great day today. Thanks for those of you out there working in healthcare and other difficult professions. These tend to be the White Coat Investors. People who are in these high-income professions because they're doing hard work that either has a lot of risk or required a lot of education or training, and sometimes it's nice to hear a thank you. So if you haven't heard one today from any of your clients or patients, let me be the first. Thank you for what you do.

 

QUOTE OF THE DAY

Dr. Jim Dahle:
Our quote of the day today comes from Justice Carol Edwards, who said, “If you have no goal, no plan, no objective, you will be wandering in the wilderness.” And this is one of the big things we push here at White Coat Investor. Get yourself a financial plan. No matter what it takes to get it, whether you have to hire a full-service financial advisor to get it, whether you have to take our Fire Your Financial Advisor course, whether you want to go read books and blog posts and ask questions on forums and formulate it yourself, it is worth the effort. It is worth the time. It is worth the money. Get a financial plan in place.

Another reminder is those of you who are taking new jobs now, and there are quite a few of you this time of year, get your contracts reviewed. This only costs a few hundred dollars, and it'll help you avoid mistakes that could cost you tens of thousands, or even over the course of a career, hundreds of thousands of dollars.

Go to whitecoatinvestor.com/contractreview. You'll see our vetted firms there. They're not only vetted by us initially when we put them up there, but they're continually vetted by you and the feedback you send us working with these folks. We think you're getting great advice there. The cost is not high. The benefit can be very high.

Don't sign contracts, whether it's a partnership contract, whether it's an employment contract, until you know what is in there. Things like making sure you know who's going to pay for the tail if you're buying a claims-made policy. That can be worth $50,000. It doesn't take much to pay $400 or $500 or $600 in fees to have those contracts reviewed.

All right, we have a great interview today. We're going to go way out into the weeds today. I've got Larry Swedroe back on the podcast, and he loves researching about investments, all kinds of different investments. We're going to be talking about all kinds of different stuff, and you get to come along for the ride. It's always fun to chat with Larry. He's written a lot of great books, but what I really like talking with him about is getting way out here into the weeds, particularly on alternative investments, which is what we're going to be talking about today.

 

INTERVIEW WITH LARRY SWEDROE

Dr. Jim Dahle:
Our guest today on the White Coat Investor Podcast is Larry Swedroe. Larry, hopefully, is well known to most people listening to this podcast. We've had him on before. He was one of the authors that made a dramatic impact on my investing philosophy back in the beginning. When I started finding the good investment books out there, several of them were Larry's books, and I think the first one that he really became famous for was The Only Guide to a Winning Investment Strategy You'll Ever Need, which was really a book that explained the science of investing in layman's terms and one of the first I picked up. I think he's the author now of, are we up to 19, Larry? How many books do you have now?

Larry Swedroe:
Depends on how you want to count. The original manuscripts are 18 with three second editions, so that's 21.

Dr. Jim Dahle:
Okay, the most recent one, Enrich Your Future, we'll get a chance to discuss a little bit today, and we'll be talking about one of my favorites as well as it goes along with some of the subjects I wanted to cover today, which is all about alternative investments, which you've become quite an expert in over the years, along with the various things you've done in your career, being a chief research officer and being a vice president at a mortgage firm. You've done all kinds of fun things in financial services since you came out of business school years ago. What do you like to do besides working in finance and investing and educating investors about this other stuff?

Larry Swedroe:
I have a pickleball court built on my driveway, so I'm out there most days. Not today because it's ice and snow all over the ground, but I did play yesterday indoors until unfortunately I tore my right rotator cuff, so that's not letting me play tennis anymore, but still do a lot of, even though I retired from Buckingham or Focus as a parent company, I'm still engaged doing writing, which I love to do.

Research probably every day, spend probably three or four hours reading the latest academic papers, writing them up, in a way that the average reader can understand in simple terms what the research looked at, what it examined, what were their findings, and then most importantly, what are the key takeaways, the implications for investors.

I publish now on four websites for Financial Advisor Magazine, Wealth Management, Alpha Architect, which is really where the geeks hang out on more technical papers, and Morningstar as well. And then last March I started my own column because I'm producing more stuff than the others are willing to take on in their budgets, so I now write at Substack as well, and people can follow me either directly on Substack or on Twitter or LinkedIn. I publish links to all the pieces that I write, so that takes up a good part of the day, and my grandkids and my wife are the more important, bigger rocks, and they take up the other half of my time.

Dr. Jim Dahle:
Yeah, it still sounds like you're pretty fully engaged to me.

Larry Swedroe:
Yeah, I got very lucky in my career because of my position at Buckingham and then Focus. We were one of the largest RIAs in the country. When I retired, it was over $70 billion, and so all the investment firms wanted us to work with them, so that got me access to the leading minds in finance, so whenever I had a question or wanted to research a paper, I would contact Cliff Asness or Ken French or many others in the field. And I wanted to keep up those contacts, so I'm still pen pals with all of them. And if I've accomplished anything, I think it's because I was able to stand on the shoulders of giants.

Dr. Jim Dahle:
Absolutely, absolutely. I just got done interviewing Christine Benz about an hour ago. Podcast listeners listened to her interview about two weeks ago. She mentioned that you'd been writing for Morningstar as well, so she was thrilled to have you there.

Larry Swedroe:
Yes, I started writing for them last year, and usually two, sometimes three columns a month.

 

ARE WE IN AN INVESTING BUBBLE?

Dr. Jim Dahle:
Yeah. Okay, well, let's turn to some investing topics. I know it's a subject that's near and dear to your heart. When we look back over the last few years, 2023, 2024, U.S. stocks have gone up 25%, another 15% or 16% year-to-date as we're recording this. Three years that really haven't been equaled since the late 90s as far as U.S. returns go year after year after year. Everyone's starting to call it the AI bubble the Mag-7 bubble. Is it a bubble? If it is, what should we do about it?

Larry Swedroe:
Yeah. Well, I think it's very hard to call it a bubble because we're not at levels that I think define a bubble. Eugene Farmer, who's a lot smarter than I am, once said he could not tell a bubble until after the fact. This is one case where I disagree with him. I think factually you can define a bubble when the broad market valuations are higher than the real return on TIPS, which are the riskless instrument because you have no credit risk and you have no duration or inflation risk, just hold it to maturity, guaranteed to get that real return that you paid for it.

In the late 90s, we were at 40, call it, on the CAPE 10, the Shiller Index. You invert that, you get an earnings yield. That's the best predictor we have. It's not a great predictor and it's worthless in the very short term, out to one, two, three years, but it's the best predictor we have of longer term returns like 10 years or longer. That meant your real yield was two and a half or the inverse yield, two and a half. That meant your real expected return to stocks, if PE stayed the same, would only be 2.5%.

TIPS yields were 4%. I was pounding on the table, begging people to buy as longer term TIPS as they could. All of my retirement account money at that point was in long term TIPS, because I knew, at least in my mind, there was a bubble. It had to burst either by TIPS yield falling, which could happen and eventually did, or stock prices correcting from those valuations.

We're not at those levels at all today. The equity market is about 23, I think something like that, on the current PE. If you look at the CAPE 10, though, it is up in the 30s, but TIPS yields are about two and a quarter or something like that. We're not at that.

I would certainly say that equity valuations, when we're looking at broad market indices, are very high. Therefore, investor expectations for real returns should be very low, but it doesn't mean it's a bubble. I wouldn't do anything per se, and certainly in terms of trying to time it, because you can't do that successfully.

If anything, what Cliff asked, let's use the term sin a little. You're thinking your 60-40 is your portfolio, you think equity valuations are high, maybe you go to 55% equities and trim it a little bit, but you have to be prepared. You could be wrong for years, as I was, Jim. In late 1997, Greenspan declared a rational exuberant market. I'm sure you remember that.

I thought he was right. The CAPE 10 was already in the high 20s. I thought that meant that equity valuations were pretty risky at elevated levels, but I noticed that value stocks, their valuations had been unchanged.

If you think about, let's say historically, to keep it simple, growth stocks are 20 PEs, value stocks 12, market 16, roughly. PEs for the growth stocks went into 30s and 40s, but value stocks were trading at 12. I went 100% value at that point from a much more diversified portfolio, and it turned out that I was dead wrong for two years, and then I was dead right on because it was then the largest value premium in history for the next eight years.

A lot of people wouldn't be able to hang on because they don't have a strong enough belief system, but it shows you how difficult it is to try to time things. Valuations are only good predictors at the very long term, not the short term.

Today, the same thing has happened. We have valuations stretched for the growth stocks, particularly technology. The difference is the companies are more profitable, but the valuations are very high.

One other thing I do want to touch on, value stocks, they're trading lower than they were in the 90s. The PEs of them are typically in the 10, 11 range. They're really trading cheap. It's hard to say the market's in a bubble. Certainly, the large growth stocks that have dominated the market are highly valued.

The last thing I'll comment on is this. There's some really good research, which I've written up, will get published in the near future, showing something that's very important that people may not be paying enough attention to. These high growth stocks used to be a lot of intellectual capital, a lot of off-balance sheet assets, if you will.

They were intangible assets, not physical assets, high margins. If Google made a fortune by creating good software, add another client, their profit margin is infinite when they add that next client almost. I had great scale.

Now, they've become, because we're reading about all these big investments required in data centers, et cetera, that they're becoming capital intensive companies, having to spend huge amounts of cash. Their free cash flow that was driving the stock prices is not going to be there.

That raises the question, will they be able to generate the profits to justify those high valuations? Nobody knows the answer, but we do know this. The evidence is that high asset heavy companies tend to have lower than market returns. These companies have shifted their paradigm to where they're big spenders on CapEx. My crystal ball is always cloudy, but I think that's where the risk of a bubble exists. Nobody knows if the payoff on those investments will arrive. We'll have to see.

 

LIMITING INVESTMENTS TO S&P 500

Dr. Jim Dahle:
It's interesting, though, over the last few years, I've seen individual investors justify and use all kinds of good arguments to do it, but justify limiting their investments to maybe the S&P 500, sometimes just a growth stock index, sometimes just a tech stock index. Nobody seems to like small value stocks. Nobody seems to like international stocks. Nobody even seems to like bonds anymore.

The difference in valuations between large growth stocks and small value stocks are now at historical highs. What do you think? What do you say to these people that are saying you only need the S&P 500, you should let simplicity be your guide, and keep your costs low and just keep it there? What do you think? Do people still need to have small value and international and bonds in their portfolios?

Larry Swedroe:
Well, as I said, my crystal ball is cloudy, but it's very important to avoid behavioral biases which destroy returns. The investor's worst enemy is usually staring them in the mirror, and they're overconfident of their knowledge, and they're subject to recency bias, so they overweight recent returns and forget long-term evidence. There's tons of studies demonstrating that those things lead to bad behaviors and bad outcomes.

One thing I've tried to impress on people is to always look at what led to the recent great returns of causing people to only want to invest in S&P or these other stocks that you mentioned, the high-tech companies, the Max 7, whatever you call it.

Let's say it this way, growth stocks have far outperformed value stocks really since about 2016. We got a decade. What people forget is from 2007, no one would have wanted to own growth stocks. We had the biggest value premium in history. That's not that long ago. And why did that happen? Because valuations spreads had gone to record historic levels. For example, I used that example earlier of a 20 PE for growth, 12 for value, and then we ended up with growth stocks 40, 50. QQQ was trading, I think, at 100 PE ratios.

And that spread in valuations turns out to be the best predictor we have of the value premium. But again, you can't time it. It just doesn't work. So you have to be patient for the long term. What's happened now? Growth stocks have far outperformed. The question is, did that happen because of earnings growing much faster? Well, the reason growth stocks traded at higher PEs with a PE, say, of 20 and 12, because the market expects, say, growth companies to grow earnings, say, 2% or 3% a year faster. And they do. And that's what's happened.

So, how do we get outperformance much greater than that? It was because of PE expansion, not because earnings were much higher than expected. It was because of PE expansion. Trees don't grow to the sky. It's exactly what happened in the 90s. I think there's certainly the risk it could be repeated.

And then you have this other risk that I pointed out as well, that these companies now are morphing into an entirely different type of vehicle. And we don't know if they'll be able to sustain those kind of profits. And I would just remind people that the same thing was true of international stocks. They dramatically underperformed in the late 90s. The next decade, far outperformed US stocks, especially emerging markets, which nobody wants to own today because of recency bias. And investors missed out on those great returns if they didn't stay the course, simply rebalanced their portfolio, kind of a market global cap, which is what I recommend as a good starting point.

We see the same things today. But guess what? This year, we got a reversal. And by the way, Jim, this is something most people don't know because they only focus on US stocks. And they say the value premium is dead. It's 10 years. Well, you know what? The value premium has been there internationally since the last decade. And international small value stocks, the fund I own, is up over 40% this year. And emerging market value stocks, the funds I own, are up over 25% this year.

Will that continue? I don't know. But we do know that the outperformance in the US, again, while the US earnings were faster than international stocks, most of something like 85% of the outperformance was due to multiple expansion, not earnings growth. And also, we had a tailwind for US stocks of a strong dollar. Well, the dollar is now significantly overvalued on a purchasing power parity basis. And that's provided a tailwind for international stocks this year, helping them. Dollars down, if my memory serves, about 10%.

But the latest data from the IMF I just saw yesterday still shows the dollar's overvalued by about 15%. So we could see a paradigm shift here with the dollar falling. We also see a possible paradigm shift with Europe waking up to the fact that their excessive regulatory environments are killing their economy and allowing the US to grow faster. So you're starting to see noises about changes there. And that could lead to faster growth in Europe. Time will tell. I don't know.

But you're buying US stocks at valuations of like 23 times, and international maybe 15 or something, and emerging markets at like 11 or 12, something like that. So, you have a massive gap that's too large to be justified by any reasonable expectations of faster US growth, which is only about 1% or 2% a year, not a big gap that would justify the valuations that wide.

The best thing I can tell you is remember your history. And I'll close this part of it with this reminder. If you think 10 years is a long time, try these periods. From 1929 to 1943, the S&P, which everyone wants to invest in now, underperformed T-bills. That's 15 years. 1966 to 1982 is 17 years the S&P underperformed T-bills. And recently, from 2000 to 2012, it also underperformed. That's 13 years. That's 45 of the last 96 years, I think. That's almost half the time, which means if you abandon it after waiting 13, 15, or 17 years, you miss out on the spectacular returns that happen.

The best thing I tell people is have patience, stay disciplined. A good starting place, I think, is a global market cap. And when valuations get unusually stretched, okay to send a little. Two years ago, I decided instead of owning 12.5% or 1.8% emerging markets, I went to like 15%. I send a little. And this year, it's paid off. Same thing internationally. I send a little, and I lowered my U.S. to add a little international. But I won't make big bets like get out of U.S. stocks because it's impossible to time these things.

 

REAL ESTATE AS AN ALTERNATIVE INVESTMENT

Dr. Jim Dahle:
Good advice. One of my favorite books of yours is The Only Guide to Alternative Investments You'll Ever Need. You took a whole long list of alternative investments, divided them into the good, the flawed, the bad, and the ugly.

But I wanted to talk a little bit today about some of the various alternative investments. People are thinking about these because they worry about a bubble in U.S. stocks in particular, but also they just become sexy sometimes and people become interested in looking at what else is out there.

Probably the first alternative asset class that any investor considers is real estate. And there's a whole spectrum I've taught about real estate that goes all the way from just investing in publicly traded REITs to directly investing in rental properties, buying the properties down the street and renting them out. And obviously there's some things in between, between turnkey properties and syndications, private real estate funds, those sorts of things.

Given real estate has not been super popular since everything tanked when interest rates went up 4% in 2022, but given stock performance the last three years, what are your thoughts on real estate these days?

Larry Swedroe:
Well, first let me just comment on that book which I wrote. I really had a stretch, as you might remember, to even find some good ones. In order to have some good alternatives, I included things like emerging market stocks, which today I think most people would not think of as an alternative investment. But the world has changed dramatically. So, let me just touch on that and then I'll turn to your real estate question.

The reason alternatives like hedge funds or private real estate, private equity, private credit, reinsurance, all of these things that people look to because they either have low or no correlation with the economic cycle risk of stocks and or the economic cycle risk and the inflation risk of bonds.

The problem with them is not the concept itself. These asset classes do bring diversification benefits for obvious reasons, which we could go into if we have time. The problem was that the sponsors were taking all of the benefits in their fee structure. By charging typically 2% and 20% or more. So, 2% annual fees, 20% profit sharing, if you will.

And on worse, many of these were what I'll call capital call investments. You might commit a million dollars and they would call it, maybe every three months you get a call for $100,000. Another three months later, you get another capital call for another $100,000 as they found investments. The problem was they were charging the two percent on the million and you only got right away the first $100,000 was invested. So, they were chewing up all the returns.

A simple math example can demonstrate that. So let's say U.S. stocks got 10% and you could invest in a hedge fund, private equity, whatever you want, investing in equities that could beat the market by 5%. That's huge. You're a legend if you could do that. So you get 15, but you got 2% fees and 20% of 15% is 3%. You're paying total costs of 5%. And then some of them added other expenses. On top of that, you ended up with a return of less than 10 and you had total illiquidity. I recommended avoiding all of these at that time.

Then around 2013, several years after my book came out, AQR was the first real hedge fund to try to democratize some of the assets. They said “Some of the strategies we do in hedge funds are really in niche markets. We can't manage more than a billion or two because then we would arbitrage all the profits away. The cost of trading would be too high. So, we're going to keep them private and we can charge their two and twenty. However, there are other assets where the marketplace is huge and we could bring it to the public.”

And they did, bringing long, short factor strategies, which go long where the evidence shows value, momentum, carry and quality or what they call defensive. And they came out with a fund that they thought would deliver 4% to 5% premium over T-bills with about a volatility of about 10%. And here you had a totally uncorrelated asset to anything and no exposure to inflation.

So if you knew you could get that 5%, which of course was not a guarantee, you would kill for that investment and every model portfolio would load up on it. Turns out 12 years later, the fund is delivered virtually on that and they only “charge” 1.3% and I'll put quotation marks around that. And then a firm called Stone Ridge came out with a reinsurance vehicle.

Now, we know hurricanes don't cause bear markets or earthquakes don't either and vice versa. We know naturally insurance companies are in the business to make money. They charge for profits. Why didn't I recommend it then? Because again, their sponsors were taking the big fees. Stone Ridge came out with a product with no carry, something a little bit more than a 2% fee. Guess it would return about 5% premium. It's over the last 10, 12 years, whatever since it's been out, pretty much has done that.

But both of those strategies I'll point out experienced really bad runs for three years. Both of them had drawdowns of about 35 to 40%, which is typical of equity types of risks. We see that quite often with equities, even much worse.

But as an example, APR's fund the last four years, I think is average over something like 25% a year. And Stone Ridge's fund the last three years, reinsurance funds up like 135%, if you stayed the course.

The world has changed and I now have literally 57% of my assets in alternatives because there is a big illiquidity premium there, which is natural. If you can afford to give up liquidity, that premium generally averages, depending upon the asset and how illiquid, somewhere between 1.5% to 3% a year and sometimes more.

I could give a good example. For people who are looking for higher yields, you could buy a private credit vehicle. It's public, it's called Broadly Syndicated Loans, offered as BKLN or SRLN. It's delivered pretty decent returns. The private version of virtually the same assets is outperformed by 4% or 5% a year.

Why would you give that up? In fact, when the credit profile is actually even slightly better on the private vehicle. But people say, “Oh, I don't want to pay 1.3% or 1.5%. The other vehicle is 50 or 60 basis points.” They're not looking at the problem properly. You care about value added.

Let's come down to real estate. Real estate is certainly a diversifier. However, it does have a fairly high correlation to the economic cycle risk of stocks. Not perfectly high. It also can have correlation with bonds. You get bond yields rising and real estate can get hit like it did in 2022. Which is by the way, also true of equities. Which is why people look to other alternatives because they want to avoid a 2022 when both stocks and safe treasuries lost double digits, large double digits.

And that was not the first time that it happened. I think there are five evidences, at least three and maybe five where that's happened before which is why I want to add other alternatives because I believe there are big risks because of our budget deficit problems and the high valuations. We have a risk of inflation because of those deficits.

And so, real estate is okay. I would only do it if I was investing in a broad, sort of on the market type of public portfolio like a Vanguard REIT or Dimensional Fund Advisory REITs. The problem is that's a very tax inefficient way to do it. You can do it very cheaply. If you do it in private vehicles, you can own the same types of assets. And now the return becomes much more tax efficient because it's treated as return to capital, not an ordinary dividend.

Something like Blackstone's product. Blackstone was the first to come out with a product that wasn't 2 and 20. I think their fee is 1.3% and 12.5%, not cheap. But the fund has outperformed public markets by, I can't remember, 2% or 3% a year since inception. That's because of the illiquidity premium is there.

And now there you're getting some active management, but I think that Blackstone has demonstrated throughout time that they can deliver, if you will. We don't have time to go into it, but I think there are some advantages that Blackstone has in their databases. They're actually the largest employer in the United States. And they cross multiple businesses in their PE and credit and other businesses, real estate. They have great databases to see what's happening, wages, profits, other things, where people are moving, where rents are going. And so, I invested with them as well.

I would include real estate in a portfolio, but I only own private. It turned out to be a big advantage. And I recently added an infrastructure fund run by a firm called Hamilton Lane. Again, here, even lower fees now, 1.4%, no carry at all.

Infrastructure is a better diversifier, much lower economic cycle risks than real estate in general, because they tend to be very long-term contracts tied to inflation, like triple net leases and price escalators, et cetera. I have now, I would say, between real estate and infrastructure, something like 15% of my portfolio in that broad category.

Dr. Jim Dahle:
But you're only interested in these big diversified portfolios. You don't have much interest in building your own little empire of short-term rentals or something.

Larry Swedroe:
No, I don't want to be in that business of being a landlord and the headaches. I also actually prefer, I'll mention this while we're on it. Let me talk about it this way. In private credit, you can invest with some good firms like Aries or Blackstone. These are what I would call closed architecture. They have their own proprietary loans they make, and you can invest in their funds.

I chose to invest with a firm called Cliffwater, who has a private credit vehicle that they have partnered with based upon their track record as a consultant to some of the largest pension plans, endowments in the world for like 30 years. They know who the best performers are.

And unlike in public markets, Jim, where there's no evidence of persistence or performance of active management, in private markets, there is clear evidence of some persistence or performance. And there are papers to explain why, if you're interested, we could talk a bit about that.

Cliffwater knows which firms have the best track record, they have the relationships, and they're now a $40 billion player that all the big boys want to partner with. So if you invest with Cliffwater, you get loans from Aries and Blue Owl and Blackstone and all these other names you and I would not know.

So, you have a much more diversified portfolio by manager, you have a much more diversified portfolio by lender type, by sector, industry, geography, et cetera. I want that, I'm trying to capture, if you will, as much as possible, the beta of that asset class, like a total stock market fund will do. But at the same time, I think you can capture a little bit of alpha by sticking with the best managers there. And private markets obviously are not as transparent as public ones, so there is some advantage there as well.

I would not have invested in Blackstone today if Cliffwater had a real estate fund. There are no ones that I see today of comparable with lower costs in real estate that is open architecture.

 

CRYPTO AND OTHER ALTERNATIVE INVESTMENTS

Dr. Jim Dahle:
When I talk to people about alternative investments today, the one they bring up that wasn't necessarily in your book years ago, but probably the most commonly one mentioned is some sort of crypto, whether it's a cryptocurrency or some other type of crypto asset, a few years ago it was NFTs, although they're not very popular at all right now after recent performance. Do you see a place for these in a portfolio? And if so, what is that place?

Larry Swedroe:
No.

Dr. Jim Dahle:
No, none of them, nothing. No Bitcoin, no Ether, no nothing?

Larry Swedroe:
No, no, no. Here's the logic. I've written some pieces. You can just type in Bitcoin plus Swedroe in Google search for those interested. Let me first say that I'm perfectly willing to admit I could be wrong and have been wrong if you want to look at the valuation, but I don't judge a strategy by the outcome. That's a fool's errand. You should judge a strategy by the quality of decision-making, not the outcome. In other words, Jim, if you took all of your IRA money and bought a lottery ticket and you happened to win, I still think you were pretty dumb doing it. It was not a good strategy.

So, you can make lots of good strategies, decisions, and bad outcomes happen and you lose money. Doesn't mean the decisions are wrong. You can also make bad decisions and get good outcomes. Doesn't mean they were good decisions. In the long run, a series of good decisions is much more likely to get you good outcomes.

So, here's what I think on Bitcoin. What you hear all these arguments that are about the technology of blockchain and everything. That has nothing to do with Bitcoin or any of these things. It's the technology. And the argument that there's a limited supply of Bitcoin is specious. There's an unlimited supply of things that could do exactly the same thing. And if you have an unlimited supply of something, what should the price be? Asymptotically close to zero.

My personal opinion, which I feel good because two of the smartest people I think I know or have the most respect for, John Cochran was president of the American Financial Association. And he, I think, is our leading financial economist. Eugene Fama, I'm sure everyone knows his name, both think this is sort of the biggest scam perpetrated, if you will, ever.

But we could be wrong. Something is worth what somebody is willing to pay for. There's lots of artwork that trades for, sells for tens of millions of dollars. To me, it looks like my grandkids' finger paintings. I think they're worthless, but there is no logic at all, in my opinion, none. And any argument that I've read for anyone to invest in Bitcoin or any other cryptocurrencies, none. And if Cochran and Fama see the same thing, I feel good about my rational thinking.

Dr. Jim Dahle:
Yeah. When I Google Swedroe and Bitcoin, a recent article from Morningstar pops up where you argued that Bitcoin versus gold is a safe haven asset, that Bitcoin really doesn't stand up to gold, even in a terrible economic time when people are fleeing to safe assets.

Larry Swedroe:
Yeah, exactly. And gold can be a safe haven at times, but it doesn't always work. So, gold, I tell people, I don't own it. I wouldn't own it. Gold tends to go through very short periods of explosive returns, and then long periods of sleepy returns. And the one thing I know, most investors can't stay 20 years of underperformance and rebalance and stay the course.

Anyone who thinks gold is an inflation hedge has to explain this. In 1980, gold was at $850. 2002, it was $270, and inflation averaged over 4% a year. So, you lost 86% of your money in real terms. It is literally impossible, intelligently, to say gold is an inflation hedge over any normal investment rise. Over 100 years, yes, it's worked. When Jesus walked the earth, an ounce of gold bought a Centurion's uniform. Today, it'll buy a nice suit for a Goldman Sachs executive. So, you got no real return for 2,000 years.

To me, there are better alternatives out there. However, gold has tended to do really well when governments got fiscally and monetary loose policies combining the two of them, which we certainly did under the Biden administration. We're not doing any better under this administration. And the same thing happened around the globe. And so, that's what spurred gold, I think. And there's a risk that that could get worse. Gold continues to do well.

I think there are better investments like reinsurance, like private credit, both have double-digit returns. And reinsurance, next year, in a normal year, should return something in the order of 20% after being up 136% the last three years. By the way, I'll just touch on that.

Reinsurance is such a logical investment. We have 150 years or more of reinsurance company data. They make money. You can invest in it in either a cap bond, a catastrophe bond, which is daily liquid. So I don't do that because I want the illiquidity premium. And that's had a nice return over T-bills, something on the area of 5% a year. Totally uncorrelated to anything. And I think it's only had, here's the interesting thing, one year of loss in the last 15 or 20 years, and yet nobody wants to own it.

And the fees, part of the reason why, there's something like 1.5% a year, something like that. There are a lot of advisors, if it's not a Vanguard-like fee, they ignore it. But they're costing their clients great opportunities to add a good diversifier. 2022 reinsurance, of all kinds, did fine. Certainly didn't lose double digits.

But if you own what is called quota shares, which are one-year type of contracts on a more diversified, today, well, let me go back. 2018 through 2020, three really bad years in a row, lost something like 35%. But there's a self-healing mechanism in all risk assets. What do I mean by that? Jim, I'll ask you, where do you live?

Dr. Jim Dahle:
I'm in Utah.

Larry Swedroe:
Utah. So, let's imagine you lived in California or Florida. What happened to homeowners insurance premiums after the fires in California?

Dr. Jim Dahle:
They went crazy. People are having a hard time getting it.

Larry Swedroe:
Yeah, like 60%. And what happened to the other underwriting standards? Well, they went through the roof, meaning if you wanted insurance and you lived in an area prone to fires, you can't have a tree within 30 feet of your house and no two trees within 30 feet. And all the brush has to be cleared.

And in Florida, if you want hurricane insurance, your roof and window have to be able to withstand 140 mile an hour winds, it's got to be concrete or whatever. So, the risk went down because it's tied to underwriting. The deductibles went way up. Maybe a $5 billion hurricane that caused that losses would have hit these reinsurance programs. Now it might not until losses got to $10 billion. And the premiums went up 30, 40, 50, 60% in some cases.

What happened in 2023, the fund I invested in Stone Ridge's reinsurance fund made 44.5%, but 80% of the money was gone. Naive retail investors panicked and sold. I bought more. Like Warren Buffett, I run to where the fire is because the premiums are higher, the risk is less and I'm getting a much higher expected return for taking less risk.

Next year was up like 33% and this year it's going to be up like 23%. And next year it's a little early because the contracts aren't in, but the talk in the industry, I would expect in a normal year to make about 20%. And by the way, this year the fund's up over 20% despite the big losses from the Altadena fire, which cost $10 billion in losses. If that hadn't happened and that was easily preventable, the fund would have returned over 30% this year, but that risk showed up. I think every investor should own reinsurance. It should be 10% or so, 5% at a minimum. I own about 15% of my portfolios in reinsurance.

Dr. Jim Dahle:
Can it be done cheaper or does it just cost that much to do it that they got to charge 1.5% or more?

Larry Swedroe:
Well, yeah, it could be done cheaper as a cap bond. I'm surprised that no one's come up yet. I know there's one firm that came up with a little lower fees, like 150. The other funds, the one Stone Ridge I think is like 170. Pioneer runs one, I think that's a very good fund, 160.

But I wouldn't want to own an index here and that would be the cheap way to do it. And the reason is the issuer of the bond has asymmetric knowledge of the buyer. So they may say, “Hey, this is not the best deal. Let's get rid of it and dump it on the public and it'll be there. And if you're an index fund, you'll own it.” I want more equal, I know that. I want an active manager there who's got lots of experience in doing that.

However, the quota shares, they're really running a reinsurance company for you, literally, but without the regulatory environment, infrastructure, you don't have all these salespeople and whole stuff, you can run it with a small team to do that.

And so, when you're paying about 2% or so to manage that, that does seem expensive and I wish it was cheaper. But the return on investment for the insurance contracts you're buying are very similar to the return the insurance companies get, because they have all those other expenses of dealing with all the regulators and capital rules, et cetera.

Like I said, it's hard for me to see why today someone wouldn't want to invest in a reinsurance vehicle that's expected return is about 20% and has no correlation to any other asset. Why would, if you could give up the liquidity.

Now I'll add one other important thing. My experience in my 30 years in this business advising thousands and thousands of clients is one thing investors vastly overvalue is liquidity. Having worked at a firm with $70 billion assets, we had over 10,000 clients. I never met one and I asked our, we had hundreds of advisors. I asked how many of your clients take more than their RMD who are withdrawing? And I never got one who said they were.

Now at age 90, your RMD is not even 10%. These illiquid assets today on what are called interval funds, most of them offer 5% every quarter. 20% a year at a minimum. If you're not taking 10%, why couldn't you have some portion of your portfolio in an illiquid asset? Not all of it of course, but all of my assets in my IRA or tax advantaged accounts are in illiquid assets. For that reason, I can capture a large illiquidity premium and most of these are tax inefficient investments as well. So, I do want to hold up in tax advantage accounts.

Dr. Jim Dahle:
Now, the typical mantra with investing is high returns come with high risk. If you're expecting 20 or 30% returns out of this sort of an asset class long-term, what is the risk?

Larry Swedroe:
Yeah, first of all, I'm not expecting 20% long-term. I'm telling you what's happened now because capital flew out. When I first started investing, the no loss return, the premiums collected was about 15%. The expected losses average, a median of a bell curve, was about 8%. The fund after expenses would have expected to return 7%. T-bills were 2%. So, a nice 5% premium. If I could guarantee that, I'd take it all day, I'd get out of equities altogether.

But of course, that's not true. That median means you could have in a one in say 25 years, lose 30, 40%. One in 50 years, lose 50 or 60%. And one in 100 years, you get wiped out totally. Same kind of thing with the stock market, which is why you don't put 100% of your money in reinsurance. And why I have, call it 15% of my money there, not 30 or 50 or 100% of my money there. You always have that tail risk there.

What happened is I told you the first few years the fund generated about that 5% return, real. Then it had three horrible years. The fund was at $5 billion at the end of 2017. Three years later, it was down to $1 billion. Now about a third of that drop was due to the losses. The other two thirds was due to investors fleeing.

Now it was down to $1 billion. And what happened? As we talked about, the premiums went way up and the no loss return was in the 30s. If you applied a normal, say 8% or 10% loss, you would have expected 23%. Some good circumstances happened. The fund did even better than anyone would have expected.

Today, I expect the no loss to return to be about 30%. No one expects no losses, although that's possible. But it's highly unlikely. The median return would be about, let's call it 8% or a 10% loss. And then you got the tail risk where you could get hurt back. The risks are there and you're illiquid. In the insurance market, that's worth 1.5% to 2%, depending upon circumstances. Those are regime shifting. It could be more sometimes, could be less. That's a free lunch for me because I don't need the liquidity.

 

INVESTING IN PRIVATE CREDIT

Dr. Jim Dahle:
Now, the other asset class you've talked a lot about lately is credit, credit in the private market. And I've invested there in several different ways. Years ago, I was invested in some peer-to-peer loans and you get such high yields on them that even with pretty high default rates, you still come out with a pretty good return.

And more recently, I've invested on the credit side of real estate, essentially in funds that sit there and loan money to developers, but are in first lien position on the properties where they can foreclose. When you're talking about investing in these sorts of private credit vehicles, what are you talking about actually investing in?

Larry Swedroe:
Yeah, I invest in two funds, both run by a firm called Cliff Order. One is a private credit, which is middle market to smaller companies, typically companies with EBITDAs between say $50 and $150, $200 million. The average LTV is only about 40%. The average default, these are all loans by the way, that are senior, secured by real assets and sponsored by private equity.

Bad things happen, doesn't guarantee that the private equity firm will jump in and throw more capital to save their investment. But it means the odds are pretty good, it could happen because if there is a default, the lender seizes all the assets and the private equity firm can get wiped out.

These types of loans, Cliff Order publishes every quarter an index called the Cliff Order Direct Lending Index and they publish both a broad one and the senior loans. Their credit default history on the direct loans is 1% losses, on the senior secured sponsored, it's only 25 basis points. Today, the yield is 10% on that fund. No duration risk.

Now you tell me why you think you should own say a 5 or 10 year treasury yielding 4. You have duration risk when we have big budget deficits, inflation risk. I can get 10, I don't have liquidity, at least a minimum of 20% a year, but maybe I can get it all out, depends on how many people get it.

And the default history through cycles, call it 1% a year. Doesn't mean it can't have losses. But that's a huge premium of 6% and I have a much less risky portfolio from one perspective, which is inflation risk. I am taking credit risk, that's true, that's the economic cycle risk, but the structures of the deals are good enough that the history is even in a really bad environment, like in 2008, I would expect the fund to only lose high single digits. That's the nature of that investment.

I invest in another fund that's a little too technical, run by Flat Rock that invests in what are called BB pieces, a little too complex here, but that fund, that BB's have had virtually, not zero, but virtually no credit losses. And that fund is probably yielding over 11%. I've owned that for several years as well.

They're generating big returns. They all 2022 did fine, provided strong returns. They do have risks, but the downside risks are tiny compared to the downside risk of equities. And all of them have equity-like expected returns right now.

Dr. Jim Dahle:
So you're essentially loaning money to private companies.

Larry Swedroe:
Yes.

Dr. Jim Dahle:
Procured by the company's assets.

Larry Swedroe:
Yeah, and something like 90% of companies are private. Just because you're in the public markets doesn't mean you're as diverse. And all these are highly profitable companies, at least in the structure that I'm recommending. Again, open architecture, broad diversification, of course, industry sectors, geographies, managers.

In Clifford's case, unlike if you're with a big BDC, business development company, they might have eight or 10% in their biggest loan. Clifford is under 1%, I think it's 0.6% is the largest loan. Even if there is a default, not going to really hurt the portfolio very much.

Dr. Jim Dahle:
So, hundreds of loans in the fund?

Larry Swedroe:
Thousands, thousands of loans.

Dr. Jim Dahle:
Very interesting. And why do you think that people are passing on these? Is it a liquidity risk that you think they fear? Is it a combination of that plus the higher expense ratios on these funds? What's keeping people out of it? Just that it's not traditional, hasn't been popular? Typically when things have great returns like these have, people chase them. And I hear very few people besides you talking about these.

Larry Swedroe:
Yeah, I'd want to keep it that way along trying to educate people and take advantage. I don't want money flooding in because that's how you ruin an asset. Money flows in, gets crowded, and spreads come down. That certainly can happen.

First of all, these spaces, the companies who I would invest with, most of them, these are complex products with big illiquidity issues, they want to make sure that there's an advisor, someone like yourself or myself, who's sitting down with the client, explaining the risks, walking them through in great detail, showing them the tail risks with hurricane losses, all this stuff. Not just saying, “Buy this, it's in my model portfolio.”

That also allows them to keep their expenses down because they don't have to have hundreds of people and manning call centers, etc. They won't take money directly from investors. AQR, Cliffwater, Stone Ridge, none of them takes money directly. That's one issue.

Second is there are lots of advisors who I think are short-sighted. They tend to look at only the expense and not the value added and the benefits. It's like, say, well, I'm going to take my wife out on her anniversary to McDonald's instead of a nice restaurant because it's cheaper.

You only go for something cheap if it's a commodity. An S&P 500 fund should choose the cheapest one because they're all virtually identical. In this space, that's not true. There are way significant value adds here and you're getting illiquidity premiums and you want access to the best management because there is clear evidence of persistence of performance as well there.

You have the price issues or the cost issues, you have the illiquidity, and then you have advisors telling clients don't invest. And the last thing is the average investor who's do-it-yourself, which many are, that's their choice, of course, they don't have the time, the skill, the access to do a proper due diligence.

When I was at Buckingham, we took three years to get to know the people at Stone Ridge before we would invest, and I had access to them. We had a dozen meetings or more over the years, getting to know the character of the people, etc. Almost no individual investors are going to have access to do proper due diligence. So, you really should be working, I think, with an advisor if you're going to invest in these things.

That's where the limits are. You have a lot of people who just say, “I want to be a DYI, don't want to pay an advisor”, so they're not going to get access. That's their choice, but they're missing out on some significant opportunities that they can't access on their own.

Dr. Jim Dahle:
Now, this was a little bit of the DFA model for years, up until the folks left DFA and started Avantis and started offering this sort of fund management techniques that they used at DFA in an ETF model. DFA then, of course, had to follow suit and start offering ETFs directly to individual investors. Do you see that sort of thing happening with these asset classes?

Larry Swedroe:
I don't think that's the case, because, again, this is the illiquid nature. And if you can't make them liquid, there are firms that are trying to do it, like putting private credit into a daily liquid asset. I'd avoid them like the plague. To me, shows a complete lack of risk management skills. You don't put an illiquid asset into a daily liquid investment.

And what you're doing, if you do that, now you're going to hold a certain amount of illiquid assets in a daily liquid ETF. That means you better have a lot of liquid assets there. So, now you're not capturing the illiquidity premium anyway with those other assets. I don’t want to own the fund anyway.

That's the real problem. You're mixing things that don't belong and you can end up with blowups. In a bear market, everyone starts to panic. And now they're even forced to sell that illiquid asset at the worst time. And the buyers will say, “Sure, I'll buy 30 cents on the dollar, 50 cents on the dollar, whatever.” I'd avoid anything that looks like that's trying to mix those two assets, except in very minor ways. Maybe we'd own 10 or 15% or something like that.

Dr. Jim Dahle:
Now, the criticism of this style of investing, these multi-asset classes, some liquid, some illiquid, is you end up with a pretty complex portfolio. And among individual investors in the personal finance and investing space, there's this constant debate between optimizing and satisficing.

Now, I've always had the impression that you lean toward the more complex side, the optimizing kind of side. At what point do you think it's not worth managing a portfolio with all these sorts of a little bit more complicated, a little more illiquid assets, just because you don't need to? And simplicity has its value.

Larry Swedroe:
Yeah. Well, I think the biggest mistake here made is overstating the simplicity issue. For example, we know you certainly can invest whether you want to tilt, like I do, to small value stocks or not. You can own just two or three funds and you're globally diversified, sector diversified, et cetera. You can own a Vanguard total U.S. and a Vanguard total international fund, or you could own three DFA funds or Avantis funds and you got all your equities.

Then you could own three or four alternatives, say 10% each. You could own a reinsurance fund, a private credit, real estate that maybe incorporates infrastructure as well, and maybe AQR and you got four funds. You mean to tell me the average person that seven funds is way too complex and hard to deal with? To me, ridiculous is the right word. There's nothing complex except you have to understand some of the products.

I would tell people if you don't understand the product or don't have an advisor you trust 100%, don't invest in the AQR long, short factor strategy, which goes long copper and short zinc and all these other currency hedges and all this stuff.

Now you have three funds, but everyone can understand private credit. It's very simple. Reinsurance is very simple and real estate. So, you own 10% of each. You got three funds, three domestic funds, and you own a TIPS or a treasury for your liquid daily to help rebalance and stuff. I find it hard to believe somebody really makes the case that that's too complex. So, that's my view. I don't have 50 funds. I've got a small number of funds.

 

ENRICH YOUR FUTURE

Dr. Jim Dahle:
Now our time's getting short, but I wanted to spend just a moment on your latest book, Enrich Your Future. Who should buy it and what are they going to learn?

Larry Swedroe:
That book is a collection of stories that I've developed over the years to help people understand difficult concepts. When I wrote my first book, I was lucky enough to have as an agent an English professor named Sam Fleischman at Columbia University. He said, “Larry, you got a good book here, but we need to inject a way to make it much more readable for the average reader because you're trying to convey difficult concepts.”

He taught me to use analogies to cooking and gardening and sports and movies and history that make difficult concepts easy to understand. The most important chapter in the book is analogy to sports betting.

We all know, say, if you're a college basketball fan, Duke is playing Army, which they do every year because Mike Krzyzewski was the famous coach of Duke, was an Army West Point grad and coached at Army, play them every year. They've never even come close to winning a game and likely never will. But you can't make money betting on Duke just because they're a better team because everyone knows it.

The point spread works to equalize the odds of people winning, which is why we don't know people who get rich betting on sports, or it's highly unlikely we do. The people who get rich betting on sports are the bookies. And so, I use that analogy that the point spread is the PE ratio. It's easy to tell if you take, say, Google and General Motors, which one is Duke and which one is Army, Jim.

Dr. Jim Dahle:
Yeah, that one's not hard. I think pretty much everyone would say that Google would be Duke.

Larry Swedroe:
Right, exactly. So, why do you think you can pick Google as a better investment than General Motors when everyone knows that it's in the price already? And so, I use stories like that throughout the book to make difficult concepts easy to understand.

My wife is a great baker. And what she taught me was if you want to make cookies sweeter, you add a little bit of salt, not sugar. Well, same thing applies in investing. You can add a risky asset to a portfolio like reinsurance. And by adding it, you actually reduce the risk of the portfolio because it's uncorrelated, the way it mixes with other assets.

The book is really filled with 40 terrific stories. It's got great reviews. Anyone can look up on it. I have lots of people who've given it to their children and grandkids for them to learn how to read. And so, you don't have to be a math professor or quant or even a DYI investor. If you want to learn how markets really work and what the winning strategy is, I think you'll find it a very valuable book.

I'll just add this one last thing. One of the things I've always done is made myself available. Anyone who reads my book and has any questions about it can always reach out to me on LinkedIn or X or my Substack account. I'm happy to answer any questions. I never go to bed at night without checking emails and answering questions. So, you get that as a bonus in reading the book.

Dr. Jim Dahle:
All right. We've been chatting with Larry Swedroe, author, columnist, advisor, investor. We appreciate your time and all the work you put in on behalf of individual investors and their advisors.

Larry Swedroe:
My pleasure. Hopefully they found this helpful and you can subscribe to my columns at Substack.

Dr. Jim Dahle:
I hope you enjoyed that. As promised, we got into the weeds, as we usually do anytime I talk to Larry, and give you some things to think about when it comes to investing. If you incorporate alternatives into your portfolio, consider ways to keep the portfolio still reasonably simple, that it can be dealt with not only by you if you have diminished capacity, but by your heirs, your spouse possibly, perhaps children that you're leaving money and assets to.

Keep these things in mind as you build your portfolio. If it requires an investing advisor to invest in it, you're also putting that heir in with that investment advisor. So, make sure you're going the right way when you do that.

Don't forget about our contract review partners. You can go to whitecoatinvestor.com/contractreview, and please have your contracts reviewed.

This is one of those few no brainers. If you're paying off your student loans, it's a no brainer to refinance them. If you're going to sign a contract, it's a no brainer to have it reviewed by somebody that reviews these all the time. The likelihood that you will not save more than that fee is practically zero. Almost every contract can be improved. If nothing else, you'll be told exactly what you're worth using the most current data available out there.

 

SPONSOR

Dr. Jim Dahle:
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Thanks for those of you telling your friends about the podcast. Thanks for those of you leaving five-star reviews. A recent one came in. “Life-changing. I'm an attorney, not a doctor. This podcast has been a life changer for me and my family. I've learned so much good, effective, and powerful advice. I have my kids listening to this as well.” Five stars.

Those poor kids. Hopefully, we'll get something entertaining for the kids out there. I'm not that entertaining of a person to start with, so asking me to entertain your children as well is asking a bit much. For those of you kids out there that your parents are making you listen to this, I hope you're learning something useful. If not, I apologize, but the podcast is now over. Hopefully, you can now listen to something you want to listen to.

For the rest of you, keep your head up and shoulders back. We're here to help you. Stick around with the White Coat Investor community, and we'll all achieve our goals together.

 

DISCLAIMER

The hosts of the White Coat Investor 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.

Transcription – MtoM – 259

INTRODUCTION

This is the White Coat Investor podcast Milestones to Millionaire – Celebrating stories of success along the journey to financial freedom.

Dr. Jim Dahle:
This is Milestones to Millionaire podcast number 259 – PA pays off student loans in 16 months.

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Thanks so much for listening to the podcast. This podcast is all about you. We want to feature you on it. So you can sign up whitecoatinvestor.com/milestones. We'll bring you on, we'll celebrate whatever financial milestone you've accomplished and hopefully use it to inspire somebody else to hit the milestone that they're working on.

We're offering five scholarships to medical students or residents to attend the Physician Wellness and Financial Literacy Conference virtually for free. You can apply for this WCICON Scholarship through February 4th. The conference is designed to give you clear practical education on topics like investing, insurance, avoiding burnout, leadership, and building a strong financial foundation as a physician.

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The scholarship is our way of investing in you early when the payoff of good information is the highest. If you're in medical school or residency and want to be intentional about your financial future, we encourage you to apply. Please share this with those you know who would be eligible. Go to whitecoatinvestor.com/wciconscholarship to submit your application by February 4th, 2026.

All right, stick around after our interview today. We're going to talk about bonds for a minute. What is a bond and what you need to know about them. Our interview today, I think you're going to love. It's a PA who's done a fantastic job with her student loans and let's find out how she did it.

 

INTERVIEW

Dr. Jim Dahle:
Our guest today on the Milestones to Millionaire podcast is Arden, welcome to the podcast.

Arden:
Thank you, thank you so much for having me.

Dr. Jim Dahle:
Tell us what you do for a living and where you're at in your career.

Arden:
I'm a physician assistant, I work in psychiatry. I graduated in 2022, so I'm about three years out.

Dr. Jim Dahle:
Three years out now. All right, tell us what milestone we're celebrating today.

Arden:
We are celebrating a debt payoff. I paid off all of my student loans over $150,000 in 16 months.

Dr. Jim Dahle:
16 months as a PA. And I've got written down $155,000, I think I have in my notes.

Arden:
Yes, that's correct.

Dr. Jim Dahle:
Last I looked at PA salaries, that's about what a PA makes, am I wrong?

Arden:
Yes, a little less actually.

Dr. Jim Dahle:
Okay, what'd you live on for those 16 months?

Arden:
Well, I cut my expenses drastically, but more important than that, I was working like three or four jobs for that amount of time.

Dr. Jim Dahle:
You truly, for lack of a better term, lived like a resident.

Arden:
Yes.

Dr. Jim Dahle:
Not only in the way you spent, but in the way you worked.

Arden:
Exactly, it's funny you mentioned that because that's literally what I told myself. I said, if all the med students do it, I'm going to have residency too. And I looked at it like a self-imposed residency for a very short amount of time. Luckily, not three, five, seven years, but that's how I looked at it. And I figured if all the medical students can do it and all the doctors can do it, then I can definitely do this for a short amount of time.

Dr. Jim Dahle:
There wasn't some inheritance? Did you move into your parents' basement? Are you married and somebody else supported you?

Arden:
No, this was all me. I'm married now, I was not married at the time. This was all my income. I didn't sell anything. This was purely cutting expenses and earning money as a new grad PA. A new grad salary and everything.

Dr. Jim Dahle:
How much did you make? Once you started working, how much did you make in that first year?

Arden:
I think my income at its peak, peak, overtime differential bonuses, everything like that was probably around like $260,000, I would say.

Dr. Jim Dahle:
$260,000. And by the time you pay taxes, you're down to at least $200,000, maybe a little less than $200,000.

Arden:
Right.

Dr. Jim Dahle:
And you put something like $125,000 of that toward your student loans.

Arden:
Right.

Dr. Jim Dahle:
Pretty awesome. But you know what? That still means you were able to live like the average American household.

Arden:
I set aside 3% of my take-home pay. I said, this is going to be my fun money. And since I was working so much, luckily that was like a larger amount than if I had been working one job. And I went out to dinner with my boyfriend or went out with my friends when I wasn't working, but those days were pretty rare. And then the rest of it, everything went to my debt.

The thing is that you don't have a lot of opportunities to spend a ton of money because I was literally at work from 06:00 A.M. until 11:00 P.M., nine out of 10 days. And so, they compound on each other where it's easier not to spend money when you're working all the time. And the thing is when you know that if you cut a certain expense, you're there 15 days closer. And if you do that 10 times, when you're working so much, you're like willing to do anything to cut that time down.

And at that point, when you're not going on vacation and you're not really going out to eat and you're working every weekend, who cares if you're not getting your hair cut or you're not having coffee out? At that point, it just doesn't even make a difference on the quality of your life that you're just willing to cut and cut and cut. And then you're done sooner. And so, it's win-win in that way.

Dr. Jim Dahle:
Did you feel like it helped you get good at your job quickly to work that much?

Arden:
Yes, it did. I'm actually really grateful for that because I worked three different physician assistant jobs. I'm in psych, so I worked an outpatient job. I worked at a ketamine clinic and then I also worked in the emergency room and then I picked up some additional shifts inpatient.

And so, I got such an amazing experience. And in psych, it's nice, they all feed off of each other. One thing helps the other role helps the other role that I know how inpatient works really well. I can talk to my outpatient patients about that. And so, it was very difficult. I felt very insecure for the first three months at every single job, I had no idea what I was doing. Unlike residency, well, I guess it is similar to residency. It's not really formal training. You don't really know what you're doing and you just start, it's like baptism by fire.

But looking back, I'm just so glad I went through that because a lot of my classmates are like, “Oh my gosh, everybody tells me, don't change specialties for two years. You've got to find your footing, you need the experience.” And in my case, that just wasn't true. I really was able to do it and I was able to be good in all of the roles that I was in. If anything, it was beneficial one for the other that I was getting on this experience.

Dr. Jim Dahle:
Did you feel like you got adequately supervised?

Arden:
At some jobs, yes. And then at some jobs, not as much as I would like. It really did depend. I worked some virtual jobs. I had a virtual job where I felt like I had amazing supervision and then another virtual job where I felt like the supervision wasn't that great looking back.

But for the most part, I felt like it was really good. And you're able to work with a team and there's time in between patients to bounce ideas off each other, or ask questions or look things up or talk to the doctor about what their opinion is, that kind of thing. I felt like for the most part, it was good. And now I'm at a place where I don't really feel like I need that much supervision. I don't really ask that many questions anymore in my jobs.

Dr. Jim Dahle:
Let's get to the finances now. Clearly this was important to you when you came out. You were focused on your finances. When did you become financially literate? When did your finances become important to you?

Arden:
Well, I've always been a bit individualistic. And so, I've always been interested in going against the grain or these anti-establishment movements, I guess. I was a vegetarian for 10 years and I tried to home birth with my first baby. And so, I've always kind of been drawn to “What is against the norm? And is there any benefit in what the average person isn't doing?”
When I graduated, I had been working minimum wage jobs up until that point, getting experience for PA school. I was going to have a significant income for the first time ever, I wanted to do right by it. And so, I read a handful of the best personal finance books out there. And all of them told me, your interest rate is not high enough to justify paying off the debt. And I really ran the numbers and I charted my net worth over the next 10 years. And I was going to have a negative net worth for five years.

And that just felt ridiculous to me that I was going to be like getting my company match and contributing to my 401(k) and going on vacation and telling myself that I'm making six figures and I'm a successful PA and I was going to be completely broke for five years.

That just didn't make sense to me at all. Not to mention my payment was like the size of a small mortgage. $150,000 is insane. And I realized that I could very quickly pay it off if I worked like 80 hours a week for two years, I could be done. And I was like, “Why would I do that when everything in life would be 15% better once I was out of debt?” I was like, I just need to give myself that gift and suck it up for a couple years, have this like self-imposed residency on myself. And then after that, everything in life gets better. My vacations are better. My house can be even better. I can get in a house sooner. You have so much more flexibility.

And so for me, once I really got that vision of being debt-free and what that would look like and how it would impact every area of my life in a positive way, there was just no talking me out of it. I was like addicted to this idea that I could pay it off. And when I ran the numbers and saw how much quicker I could pay it off than I thought, I would have thought I would have to be working crazy hours for like four, six years or something like that. Because the number seems so big compared to my salary too. And I realized that it was just so much more doable than I thought. And at that point I was like, “I can definitely do this.”

Dr. Jim Dahle:
You were motivated enough and interested enough that you actually developed an app to help you keep track of all this. Tell us about the app and where people can get it.

Arden:
Yeah, if you're interested in doing what I just talked about, seeing your net worth, tracking that, seeing where you are with your debt, most people don't even know how much debt they have. If that's you, you're not alone. You can download the toolkit basically that I use to help pay off my debt so quickly at shesfinanciallyfree.com/starterkit. Go online and get that. It's completely free. I shared it with a few friends and I realized that there was just a small demand for this app that I designed and my budget sheet and things like that that I used. And so, definitely go online and get that.

Dr. Jim Dahle:
Okay, what was the hardest part? At some point in this 16 months, it felt really hard. Do you remember that moment? Tell us what that was like and how you pushed through it.

Arden:
Absolutely, and I think that if you're listening, it might surprise you that it really wasn't a sense of burnout or the exhaustion or not seeing the sun some days because I would wake up and go to the office and then leave the hospital and you're like in the walls for 15 hours and you don't even know what the weather is outside.

It wasn't that. It was actually being so set on this goal and then all the setbacks to get to that goal. I was a new grad PA, I was a very unattractive candidate for a lot of these job applications because we require a lot of upfront training that they basically, the employer has to take on while paying us a full-time salary.

And so, it's kind of as a PA, an unspoken agreement when you get hired that there's going to be some onboarding period just at the beginning for the employer. And so, when I'm competing with other PAs with experience who don't need that kind of attention or training, it was very difficult to get jobs. And that's especially true for part-time work. They don't want to invest that time in you for a part-time position. And that's really what I needed to fit around the schedule.

And so, I got so obsessed with this idea, “I'm going to get out of debt, it's going to be so great.” And then it was like months and months of applying to jobs and I would get an interview and the online job posting said it was virtual and it was in-person and that wouldn't work for me because I didn't have access to a car or I couldn't make that commute in that amount of time. Or they didn't hire new grads and it didn't say that online.

That was really the hard part was when I knew that if I could be working those hours, I would be out of debt that much sooner and I wasn't able to work. I was babysitting and spending my weekends babysitting for like $60 instead of working as a PA where I could make like $70 an hour or something like that.

And then the credentialing gets delayed and then your start date gets delayed and then they're cutting the amount of overtime that you're getting and there were just so many setbacks like that. It was unbelievable for how short a time it was. It literally felt like every single month, a job that I thought was lining up wasn't and each time that free day gets pushed back and all that time you're not going out to eat, you're not doing anything really fun.

And so, that was really what took, I would say the most grit is just being committed to this vision and when it felt like everything was stacked against me and that maybe this wasn't what I was meant to do, really just holding tight to that, having a compelling vision for the future that you want, what it's going to look like, feel like, taste like when you're officially done with this debt and that really gets you through all of those roadblocks.

Dr. Jim Dahle:
It's interesting, we talked so much about burnout being an issue and you were wanting to work more. You looked at it as an opportunity rather than something that you had to do. So, how has your work life changed since you paid off the debt?

Arden:
Since I paid off my debt, I dropped my hours down, we were able to build up our emergency fund really quickly, luckily, and go on a really nice honeymoon once I got married, which was awesome, we went to Alaska. And then I had my first baby a year ago and so I actually was able to stay home with her for the whole first year of her life. Luckily as a PA, there's a lot of flexibility with the job which is something that drew me to the position in the first place, but I wouldn't have been able to do that if I still had my debt.

And I'm glad that you mentioned burnout because I really look at my debt payoff and this aggressive debt payoff as burnout prevention because when you're working those kinds of hours of your own volition, you really don't get burnt out. You're excited to be there. You're appreciating every paycheck. It's not like “Oh, I have to work this weekend.”

Burnout I think comes from when you are working and you don't have agency over that. You're working late and you don't want to be working late. You're working that weekend and you would prefer not to be there. And so, now that I've paid off my debt it really is burnout prevention because I never have to pick up an extra shift again if I don't want to. There's so much flexibility in my life. I have so many more options.

I think that for your listeners I really would think about that not having payments and working for a finite amount of time to get rid of those loans for life, decades and decades and decades. It really I think as a form of burnout prevention especially in healthcare.

Dr. Jim Dahle:
Now at about the time you were wiping out this debt you were also moving into a marriage. How did that impending date affect your attitude toward the debt and what did your spouse, your fiancé’s spouse think about the fact that you had all this debt and your plan for the debt and how did that impact the marriage decision?

Arden:
Yeah, I think that to be honest it didn't really influence my decisions that much. We got engaged a month before I paid off my debt. And so, I knew that I was going to be out of debt by the time we got married. I was very motivated to pay off the debt before we got married. I'm a believer in that you fully combine finances once you're married and I didn't want any of his help paying off my debt. I really wanted this to be an accomplishment that I could hang my hat on alone.

And I felt like since it was my debt, I had gone into it and I knew I could do it. I really wanted that all for myself. I wanted to start the marriage with a clean slate. It was great to not have those student loans and it really would have impacted I think a lot of decisions going forward especially what postpartum looked like for me with our first baby. I don't think it would have even been an option for me to take that much time off when you have this huge payment that now this other person has to shoulder alone if you decide not to work.

And I would have felt guilty, even if we were able financially to make that decision I think I would have felt a little guilt and a little like I was shirking my financial responsibility a bit to not take that on now when I had the option to now and I knew that I would be choosing deliberately not to pay it off when I ran the numbers and knew it was possible for me.

Dr. Jim Dahle:
So, what's the next financial goal you guys are working on?

Arden:
I think we want to buy a house. I think that that's the next decision. We're like nomads right now. We're not really sure where we're going to be living but once we figure that out I really would love to get in a house and decorate and paint and all that stuff.

Dr. Jim Dahle:
Awesome. Well, you've done a fantastic job. You should be very proud of yourself and I'm sure you'll be inspiring others whether they're coming out of PA school or farm school or coming out of residency or whatever to get after it. And you don't have to drag these things around for decades. So, thank you so much for being willing to come on the Milestones to Millionaire podcast, share your story with others and hopefully inspire them to do the same.

Arden:
Yeah. Well, thank you so much for having me.

Dr. Jim Dahle:
All right, I hope you enjoyed that. I love the focus. Clearly Arden is a hustler. She's not afraid to hustle. She's not afraid to work hard. She's not afraid to set a goal and go crazy achieving it.

But look at what you can do. If you're a doc and you're making doc kind of money and you have doctor type student loans this is not crazy to pay off your student loans in 16 months or 20 months or 24 months. Yeah, you got to work a little harder than you might the rest of your career. Yeah, you got to live on less than you will the rest of your career.

But wow, you can be free of your medical school, your dental school, your law school loans very early in your career. You can just take them in the corner, drop an anvil on them and be done with them. And that's a pretty awesome feeling. In a lot of ways, you're not really done with medical school until you paid for it.

Well, Arden has paid for her school and she is done with that. And now she can do what she wants the rest of her life. For instance, she just took a year off to have a baby, raise a kid. It's awesome to have financial freedom because look at the cool things you can do with it. They built up an emergency fund. Now they're working on getting into a house. You can do all kinds of things when you're not burdened by these payments that for some people last decades. They don't have to last decades for you.

 

FINANCIAL BOOT CAMP: WHAT IS A BOND?

Dr. Jim Dahle:
All right, let's talk for a minute about bonds. A bond is a relatively safe type of investment when compared to other investments like stocks or real estate or speculative investments like cryptocurrency or precious metals.

At its essence, a bond is just a loan. Whether you're loaning money to a government, whether you're loaning money to a corporation or whether you're loaning money to people who have taken out a mortgage. And the way you make money from a bond is those people who borrowed the money pay you interest.

A typical bond will have interest payments that are made periodically, perhaps once a quarter for the term of the bond. If it's a one-year bond or a five-year bond, we'll make payments every quarter for that period of time. And then you get the principal back at the end.

There are generally three main risks of bonds. The first one is interest rate risk. This is the risk that you buy a bond and interest rates go up. And in that sort of a situation, if there's someone else that wants to own a bond, they're going to buy the new bond because it pays a higher interest rate.

And so, the value of your bond must be lower until the yield, the interest rate paid on those bonds is equivalent. And so, that's a risk for bonds. If interest rates go up, then your bond becomes worth less. If interest rates go down, the opposite happens, of course, but that is a risk of bonds and that risk gets more significant the longer the term on the bond. It's much more significant for a 30-year bond than a two-year bond.

The second risk of a bond is that default or credit risk. This is the risk that whoever you loan money to doesn't pay you the interest or doesn't pay it on time, or maybe doesn't even give your principal back when they're supposed to. And this risk varies. Most people consider a loan to the US government to be pretty darn safe, given the US government's military dominance in the world and their ability to tax their citizens.

Alternatively, loaning money to a corporation is not nearly as safe. Corporations go bankrupt all the time. And the more likely they are to go bankrupt, the more junky their bonds are. An investment-grade bond is pretty low risk as far as default, but a junk bond, that's not insignificant at all. And depending on the status of the company, their bonds may be classified as junk bonds. There are entities out there that quantify this risk for each different type of bond. And you can look up bonds on those lists and see what their ratings are.

The third risk with bonds is the risk of inflation, because almost all bonds are denominated in just nominal terms. They're not indexed to inflation. And so, if inflation goes sky high for a few years, 9%, 10%, 15%, whatever, that's going to decimate the real, or after inflation, value of your bond.

The things that make the value of your bonds go up and down are changes in interest rates, changes in that default risk, changes in inflation. Those are all things that change the value of your bonds.

Now, each bond traditionally came with a coupon, and back in the day, you would cut the coupons off your bonds each quarter, and you'd go redeem them and get that interest payment paid to you.

Now, these days, they just refer to that as a coupon payment. Everything's done electronically, but the coupon is what that bond pays. So, if it's a 5% bond when you buy it, it always pays a coupon of 5% of that initial value of the bond. That's a coupon payment.

Par is the value which you paid for the bond. And when you first bought it, when it was first issued, that's par value. And if you hold it until the term is up, as long as they don't default on it, you get par back. If you bought the bond for $1,000 and you get interest payments over the next five years, and the value of it goes up and down as interest rates change, but after five years, you get your principal back at par value. And that is one reason why some people prefer to buy individual bonds.

This can be risky, though, if you don't have very many of them and they're not particularly high-grade bonds. Putting all your bond money into a couple of bonds to two different companies may not be very wise. You're generally smarter if you diversify that default risk, at least as far as you're loaning money to somebody besides the United States Treasury. And the way a lot of people do that is with a bond fund.

Just like any other mutual fund, you get professional management with this, you get economy of scale when it comes to costs, you get daily liquidity, and of course you get the instant diversification.

And so, a lot of people choose to invest in bonds via bond mutual funds. And you can use an index bond mutual fund as well, with very low costs and very broad diversification.

However, if you want to be 100% assured that you're going to get the value of that bond back at the end of the term, you want to use an individual bond, usually an individual treasury bond, because bond funds can actually lose value because that bond fund manager may have to sell them while the value is down as people exit the fund or sell them when the value is down because the bond fund is trying to keep an average term on those bonds of five years. Maybe it sells bonds when they get down to two years. And so, there is a possibility of actually losing principle when you use a bond fund that doesn't exist with individual bonds, at least as long as those bonds don't default.

Maturity is the term that is used to tell you how long until the bond matures, until you get your principal back. But a more useful measure of your interest rate risk is called duration. This is a complicated mathematical formula, but basically what it means is if the duration is five years and interest rates go up 1%, you're going to lose 5% of the value of your bond. So, it's a measure of interest rate risk and a good way to compare one bond fund to another.

Now, I mentioned earlier that there are all kinds of entities that you can loan money to. You can loan money to the US government. Those are called treasury bonds and they're generally considered to be pretty safe. You can also loan money to states and municipalities. Those are called municipal bonds and they're pretty safe as well. They do have an interesting feature though in that their interest is tax-free as far as federal income state taxes go.

And so, the yields on those are generally lower, but if you're in a high income tax bracket, the yields are often higher after tax. It often makes sense if you're investing in bonds in a taxable account to use municipal bonds or muni bonds in order to get that higher after tax yield. If you're buying municipal bonds that are in your state, they also might be state and even city tax-free.

There are corporate bonds that loan money to corporations. These are considered a little bit more risky than treasuries and municipal bonds, but you can often get higher yields because the risk is a little bit higher.

At its riskiest end in companies where people are really worried about them not being able to pay you back, those are called junk bonds. And the default risk is not insignificant when it comes to junk bonds, so the yields tend to be significantly higher.

There are also mortgage-backed bonds that are in essence loaning money to people who have taken out mortgages on their homes. And they have their own unique set of risks.

Inflation-indexed bonds, such as treasury inflation-protected securities and I-type savings bonds can help eliminate one of the risks of bonds, that risk that inflation spikes while you own the bond. However, during normal times, they're generally priced so the return is going to be equivalent or maybe slightly lower than what you would get from a similar nominal bond.

There's a lot to learn with bonds, but at their essence, they're not that complicated. They're just a loan and you get interest. That's how you make money off it. And they generally don't fluctuate as much in value as your other investments like stocks and real estate and speculative investments.

If you're a high-income physician, you already know how hard you work for every dollar. The question is, how much of it are you actually keeping after taxes? Gelt is a tax firm focused on proactive tax strategy, guided by expert CPAs and optimized via in-house AI tools.

They work with physicians and practice owners to use the tax code more intelligently so your entity structure, deductions and income timing all work together to help you keep more of what you earn.

 

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Dr. Jim Dahle:
As a White Coat Investor listener, visit whitecoatinvestor.com/gelt to book a free strategy intro and receive 10% off your first year with GELT. It's time to start using your tax plan as a lever for growth.

Thanks for being with us today on the podcast. It's a joy to create these for you. It's awesome to see your success and to see you crushing it out there on whatever you're working on.

So, please stay focused on your next milestone. You can do this. You’ll be surprised how quickly you knocked them off and maybe you too will chose to get on the podcast and share your story with the rest of the White Coat Investor community.

Until then keep your head up, shoulders back. You’ve got this. We are all here standing behind you to help. We’ll see you next time on the podcast.

 

DISCLAIMER

The White Coat Investor podcast is for your entertainment and information only. It should not be considered financial, legal, tax, or investment advice. Investing involves risk, including the possible loss of principal. You should consult the appropriate professional for specific advice relating to your situation.

How Dental Insurance Works – WCI Financial Boot Camp

Dr. Jim Dahle
Dental insurance is one of those topics that feels simple on the surface but often ends up confusing and frustrating once you actually try to use it. Many people assume dental insurance works the same way medical insurance does, but that assumption is what leads to most of the disappointment.

At its core, dental insurance is really more of a discount plan than true insurance. Traditional insurance is designed to protect you from rare, catastrophic events. Dental insurance, on the other hand, is designed to help offset routine care costs and encourage preventive treatment like cleanings and exams.

Most dental plans are structured around three categories of care. Preventive care usually includes cleanings, exams, and X-rays. These services are often covered at 100 percent, though that does not always mean they are completely free. Coverage is usually limited to a certain number of visits per year, and there may be restrictions on how often X-rays are covered.

Basic procedures typically include fillings, simple extractions, and some periodontal care. These services are commonly covered at around 70 to 80 percent, meaning you are responsible for the remaining portion of the bill. Many plans also require a waiting period before basic services are covered, especially for new enrollees.

Major procedures are where dental insurance feels the least generous. Crowns, root canals, bridges, dentures, and sometimes oral surgery fall into this category. Coverage for major procedures is often around 50 percent, and waiting periods of six to twelve months are common.

One of the most important features of dental insurance is the annual maximum. Unlike medical insurance, which typically has an out-of-pocket maximum, dental insurance usually has a maximum amount the plan will pay each year. This number is often surprisingly low, commonly between $1,000 and $2,000. Once you reach that limit, you are responsible for 100 percent of additional costs for the rest of the year.

Another common source of confusion is the concept of usual, customary, and reasonable charges, often abbreviated as UCR. Insurance companies determine what they believe a procedure should cost in a given geographic area. If your dentist charges more than that amount, you may be responsible for paying the difference even if the procedure is technically covered.

Dental networks also matter. In-network dentists have agreed to negotiated rates with the insurance company. Out-of-network dentists can charge whatever they want, and your insurance reimbursement may be significantly lower. This is why seeing an in-network dentist can make a big difference in your out-of-pocket costs.

For many high-income professionals, especially physicians and dentists themselves, dental insurance may not make financial sense. When you add up premiums, limited coverage, and low annual maximums, some people are better off paying cash and negotiating directly with their dentist. Many dental offices offer discounts for cash payments or in-house membership plans that can be more cost-effective.

The key takeaway is that dental insurance is best viewed as a budgeting tool rather than true insurance. It can help smooth out routine expenses and provide modest assistance with larger procedures, but it is not designed to fully protect you from high dental costs. Understanding these limitations ahead of time can help you set realistic expectations and make better decisions about whether dental insurance is worth it for you.