Risk, Reward, and Smarter Investing with Ben Carlson

Transcription – WCI – 473

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.

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All right, we've got a great episode today. This podcast, I think, drops in June. We're recording it the end of April. So if something crazy happens in the last month and we don't mention it, that's why.

We've had lots of great stuff happening in our family this week. I'm literally in between a wedding and a funeral today. I'm getting on a plane in a couple of hours to go to a funeral. But it has been an exciting time in our family and lots of interesting time spent thinking about philosophy and what's really important in life. So I hope your life is going well out there.

We're certainly grateful for what you do. It's not easy work. We know the audience for this podcast is mostly high-income professionals like doctors. You've got hard jobs and you spend a long time in school and in training, learning how to do them. You feel called to your work and we're grateful that you do because what you do is important. So if nobody said thanks today let us be the first.

 

QUOTE OF THE DAY

Dr. Jim Dahle:
All right, we've got a great interview today. We've got Ben Carlson here with us and we're going to talk about a potpourri of investing topics as well as his new book that's out. But before we get into that, I want to share a quote of the day, which is from Warren Buffett. He said, “If you aren't thinking about owning a stock for 10 years, don't even think about owning it for 10 minutes”, which is great advice pointing out the importance of being a long-term investor.

Are you buying a house soon? Do you have a better use for your money than a down payment? You probably want to look into a physician or a doctor mortgage then. These allow you to not have to pay private mortgage insurance despite putting down less than 20%. If you would like to know who you can get these from in your state, go to whitecoatinvestor.com/mortgages today.

 

UNDERSTANDING RISK, MARKET HISTORY, AND INVESTING BEHAVIOR

Dr. Jim Dahle:
Okay, let's get into this interview with Ben. Today on the White Coat Investor podcast, I've got Ben Carlson. He's the director of institutional asset management at Ritholtz Wealth Management. They do all kinds of portfolio management there for institutions and individuals to help them achieve their goals.

He's written four, now five books. We're going to be talking about that fifth one today. He's been named to the Investment News, 40 under 40 of top financial advisors, but you probably know him best from his Animal Spirits podcast. He's been doing that almost as long as the White Coat Investor has been doing a podcast. Thank you, Ben, for all of the work you've done for individual investors over the years.

Ben Carlson:
Good to be with a fellow content provider here.

Dr. Jim Dahle:
Okay, let's start with the book. Risk and Reward is the new book. It talks about market history. It talks about behavioral finance. Tell us why that was important for you to write.

Ben Carlson:
I feel like this book is everything I've been doing for the past 10 or 11 years in content creation and writing. I've started out writing with the mindset of trying to explain complex topics in simple, plain English. I've been trying to explain how the stock market works and how investing works. This idea has always come back to me that risk and reward are attached to the hip.

I think all of investing is some form of trade-off. Almost every financial decision you make is some sort of trade-off. Today for tomorrow, tomorrow for today, all that sort of thing. Investing is like this idea of regret minimization. It's kind of like a yin and yang. I wanted to go through the history of the last 100 years or so just to show the good and the bad side of investing in the markets and provide some context around that so people understand both sides of the equation.

Dr. Jim Dahle:
I think the first time I heard someone argue that an individual investor really needs to understand market history was probably Bill Bernstein. He wrote a book called The Four Pillars of Investing two plus decades ago. One of those pillars was market history. Why do you think that investors need to understand market history?

Ben Carlson:
Yeah, I'm a big Bernstein acolyte as well. When I first started out, I got involved in the markets. I realized I don't know enough about what's going on here. I'm still inexperienced. My way of learning was standing on the shoulders of giants and then reading history and understanding like, “Oh, the pendulum really does swing really far in either direction.” And the more you read about history, you realize the reason that so much crazy stuff happens in terms of the booms and the busts is because of human emotions. And that leads you down to the psychology part of things.

And that's one of the reasons that I find markets so fascinating is because it's like this giant laboratory for understanding human emotions and how making money and losing money can impact the way that we feel. And a lot of times it's these things that you can't really control. Jason Zweig says that emotions aren't good or bad. They just are. It's part of what makes us human.

And so I think understanding that stuff, especially through the lens of history, is helpful for two reasons. And there's two people I had in mind when I wrote this book. One is the newbie investor who's witnessed a great bull market and thinks, “This is kind of easy. Yeah, sure, the market falls every once in a while, but it always comes back really quickly.” And I wanted to show people that no, there are still really bad things that can happen.

And then the other side is like the people coming out of the 2008 financial crisis were saying, “Oh my gosh, I'm done, I'm tapping out. It's too hard. The risk is too great. I can't be involved in this.” And so I wanted to provide a sort of a guide to both of those. And obviously, people in the middle as well. But that's the thing is looking at both things. The risks, yeah, they're painful at times, but they are worth it in the end. That's kind of where I come out on this.

Dr. Jim Dahle:
Risk and Reward, you can pick it up at Amazon. By the time you hear this podcast, it will be available to buy. As we're recording it, you can pre-buy it. Thank you so much for writing that.

We talk about people who got overwhelmed after the global financial crisis. There are a fair number of people who exited the markets after they lost money and have not gotten back in. How would you advise somebody like that who's had their money sitting in, I don't know, a money market fund or CDs or their high yield savings account, and that's it for five years, 10 years, 15 years. If they came to you saying, “What should I do?” how would you help them to still reach their financial goals?

Ben Carlson:
We certainly had a lot of that coming out of the 2008 financial crisis. In the mid-2010s, 2015, 2016, 2017, we'd have people who say, listen, in 2008 or 2009, I tapped out and said I went all cash. And I think they were perfect examples of why market timing is so hard, because you don't have to just make one decision. You have to make two decisions. It's easy to say, all right, get me out. I'm done for a while. I want to just wait till the dust settles. It was the same story every time. It was, “I decided I was going to wait until the market crashed again, and I'll buy when markets are on 20%.” And that doesn't happen. Now what? The market takes off without me. And then if the market did fall 20%, it was, “Well, I'm going to wait for it to fall 30% now.”

I say that market timing is like a gateway drug for a cash addiction. You can't force yourself to get out of that position because it feels so comforting. And you go, “When I do put money to work, then it's going to fall.” And I think for most of the people, you have to take more of a psychological, less math-based thing. Because the math would tell you, just put the money back into the market.

The majority of the time, the stock market's up. 3 out of every 4 years on average, if you played the probabilities, if you were a gambling person and went to the casino or you're gambling on FanDuel, and you had a 75% chance of winning, you would take that bet all day long. But people have the psychology behind it, and they go, “No, but I have this lump I've been sitting on. And if I put it in and then it falls, the market falls 15% or 20%, I'm going to regret that.”

So for most people, it's just coming up with a plan. And every month, you're going to put a little bit of money to work or every 3 months or every week or whatever it is. And then just sticking with that plan, come hell or high water. I think that's the thing, is writing it out. And for certain people, you can give them an out. We've done this with clients who have come to us and said, “I did this, I shouldn't.” We had a client who did this in March of 2020. The market was down 20% or something that month. And they said, “I got out of half my portfolio, I couldn't do it.” And 4 years later, they're still sitting in cash. And they said, “Well, what if the market does fall? I'm dollar cost averaging back in.” And we said, “Alright, fine. We'll put some rules in place. If the market falls 20%, you can turn up the dial a little bit and put a little more in. You don't have to be so rigid.” I think some sort of psychological plan like that is probably the easiest thing for that crowd.

Dr. Jim Dahle:
Yeah, probably not the time to try to talk them into lump summing, because the data suggests that's going to come out ahead in the long run. They're the people who actually need a DCA kind of plan.

Ben Carlson:
Yes. Yeah, right. Even though the spreadsheet would tell you that's not the right answer.

 

SIMPLICITY, COMPLEXITY, AND PORTFOLIO CONSTRUCTION

Dr. Jim Dahle:
Yeah. Now, you're best known probably for trumpeting simplicity. Keep it simple. Keep it simple. And obviously, all else being equal, simpler is better. All else isn't always equal, though. What are some instances in which some additional complexity in your financial life, in your portfolio, is actually worth it?

Ben Carlson:
Yeah, that's a great question. I do really believe that I think the whole idea and I came to that because I was dealing with institutional investors, and they made things really complicated because they thought it made it more sophisticated. And I realized that it was harder to lean into the pain when you have a complicated strategy. If something's not working it's easier to just hit the eject button and let it go as opposed to like, no, I should reinvest more because it's going to work out in the end.

And there are now tools that I've seen in the wealth management arena. And you have to explain this to clients, like, “Listen, this is more complicated.” And you give them the choice. Sometimes more complicated is not better, but there are options. And one of them, and I think the biggest change in the 2020s that I've seen is just this phenomenon of tax alpha. And people understanding, listen, I know that I can't beat the market. It's been drilled in my head for 10, 15, 20 years.

Everyone has been saying this, that indexing just wins. And that argument has only gotten stronger over time. But I can control the efficiency of taxes in my portfolio. That's where I want to get the edges. Because fees went to zero on commissions in the early 2020s, late 2010s, you have the ability to customize your portfolio more through technology, through direct indexing or custom indexing.

And that allows you to harvest losses because you're not buying an S&P 500 index fund, you're buying each of the 500 stocks there. And in any given year, the average number is something like, even in an up year, 30% of all stocks in the index will still be down. And you can utilize those individual names to tax loss harvest.

Now, the thing that matters is, do you have gains to offset somewhere? You can't just turn these complicated tools on just for the sake of doing it. You have to have the sale of a business or the sale of appreciated stock or stock options that are coming due. You have to have something in your life that makes sense to use these more complicated tools. So that's how we position it with clients. But I am seeing once you explain how this stuff works to clients, they go, “Oh, why wouldn't we all just do this? If the cost is pretty similar and you have these edges around that you can add value for taxes, it makes a lot of sense.” But it just depends what the client actually needs it or not.

Dr. Jim Dahle:
Yeah, it's really an Investment Act of 1940 problem, Investment Company Act of 1940, where basically the funds couldn't pass the losses to you. And so you have to run your own fund if you want to maximize the losses. But I agree with you. The main thing people don't think about when looking at direct indexing is, “Do you have a use for those losses?” Because you can get a lot of just tax loss harvesting at the fund level. And do you really have a use for more before you start running the risk of not tracking the market as well if you're direct indexing, and the hassle if you want to stop doing it?

And there's always an additional fee. I've seen it as low as nine basis points, but most people doing it are trying to charge quite a bit more than that. And I'm not sure that for the vast majority of people, the tax alpha is more than what's being charged for the direct indexing.

Okay, that's one example of where complexity might be worth it. What other examples have you seen where we're mixing it up a little bit more might be worth it?

Ben Carlson:
Yeah, I think a lot of it is how diversified you want to be within your portfolio. Because we've seen just a simple three fund Vanguard portfolio can do just fine for most investors. A lot of people, when they just start out, they just put their money in a target date fund and go, “Why would I need anything more than a single fund?” And obviously, I think the more capital you get in your portfolio, then it makes more sense to think about how much more wide diversification do I need? And I get this question all the time. And there's, of course, not a right answer.

How many funds do I need? How many strategies do I need? And the answer is always depends, which is seems like a fallback answer for financial advisors. But it's true. And obviously, one of the reasons that you add more strategies is for rebalancing, it could be for tax loss harvesting, it could be because when you need to spend the money you want to take from certain areas, and you know that parts of your portfolio could be down while others could be up and you want to take from the ones that are up and not sell the ones that are down, these types of things.

I think it really is how much more diversification you need. And it's actually one of the biggest challenges for investors these days too, because for individual investors, they've never had it better in terms of options.

The strategies you have access to today in an ETF wrapper, with really low fees, a tax-efficient fund structure, there are strategies available today that you could not have possibly thought of getting 10-15 years ago that were only available to maybe hedge funds or insurance companies if you wanted them. And now you can buy them off the shelf throughout the trading day. And I think the hard part is dealing with the temptation of, “Yeah, this exists, but do I really need it?” That's the hard part for investors these days.

Dr. Jim Dahle:
There are no called strikes. And you cannot invest in very many. You would have a bizarro portfolio if you tried to incorporate even 10% of the strategies that are available out there with all these ETFs.

Ben Carlson:
Let me ask you, “Where do you think adding complexity can add value to a financial plan?”

Dr. Jim Dahle:
Diversification, obviously, adding more asset classes, I think there's some value there. And people come up with this question all the time, “Well, how many is enough?” And I've said, well, I think there's a lot of benefits in getting the three asset classes. I think you get significant benefits going to seven, and maybe there's some additional benefits getting to 10. But beyond there, you're clearly just playing with your money. There's no doubt once you're beyond 10 asset classes. So I think that's one place.

But I see it even not just on the investment side, I see it on the consumption side, and the cash flow planning side, and people doing all kinds of different things trying to arbitrage interest rates as far as their debt versus investing kind of decisions and the unbelievable amount of complexity that goes into people's decisions with Roth conversions, especially considering all the variables that go into the equation are all unknown, and some are unknowable. And you can really get things very, very complex.

Ben Carlson:
Well, yeah, the other big one, I guess, is borrowing against your portfolio. People saying, “Listen, I want to let that compound as long as I can, I'm going to borrow against my portfolio.” It adds another few decision trees and risks to the equation, even though it could work out great for you, or if you're using it as a bridge loan or whatever.

And then the other one, I think we've talked to a lot of clients is “I'm going to buy a vacation house.” And how much does that complicate my life? Because now I'm doubling up on property taxes, I'm doubling up on furniture and things to take care of, and places to keep clean and landscaping, all this other stuff. And as you mentioned, like your personal life, that's just another added worry of “Is it worth it or not?” And that's more experiential than investment for a lot of people, I think, but it's a layer of complexity, your life for sure.

Dr. Jim Dahle:
Yeah, you talk about working with institutional money. I'm on the retirement plan committee for this group of physicians. I think it’s 400 or 500 doctors in this group across a couple of states. And we have both a 401(k) profit sharing plan as well as a cash balance plan. And the investment in the cash balance plan is a Vanguard life strategy fund. That's it. That's the whole investment. And so, our meetings tend to be relatively short when we meet as a committee to talk about investments.

It's just a good example of how you can keep it very, very simple. It's a tax protected account and you really don't have to make your life all that complicated, but it's interesting to see what docs do because we have insight not personally for every single one of them, but in mass of where the money is in the plan.

And we see that about a third of the docs are using the equivalent of a target date fund, a target retirement fund. A third of them are picking from the menu of funds that we've selected for them, which are all low cost index funds. And a third of them have chosen the Schwab PCRA option, where basically they can buy anything that's available at Schwab. And it just kind of demonstrates that there's different strokes for different folks and different things that people want. And some people want a little more complexity, them or their advisors that are helping them. But there's a lot of different ways to skin this cat for sure.

Ben Carlson:
I think some people get some entertainment value out of it too. The people who pick stocks, but I talk about in the book a little bit, I think you really need to position size it correctly to understand, not a lot to take over your life. I just think it's more brain damage for lack of a better word that you get, because if you have a brokerage account where you're picking a few stocks, you're checking it constantly.

And the other stuff, I'm sure with your life strategy fund and your doc group, those meetings are probably pretty short. And if you held 20 individual stocks, you'd be talking about a bunch of different things about what's going on with these companies. And there's something to that of the performance reporting behind it and the amount of time that you're spending, thinking about it.

Dr. Jim Dahle:
You talk about people that they're hobbyists. They find it entertaining. You've written before that investing is not supposed to be fun. Why isn't investing supposed to be fun? What happens if you try to make it fun? If you try to make it your hobby, what happens?

Ben Carlson:
It's a difficult game to play because there is this difference between obviously investing and speculating and gambling. And you mentioned, there's different strokes for different folks and different people look at different ways. There's obviously a lot of investors who have just sort of turned off that entertainment value.

And you can see it by the biggest ETF right now. I think it's the biggest ETF in the world is VOO. The S&P 500 Vanguard fund. It's almost a trillion dollars. Vanguard has $12 trillion. BlackRock is approaching $15 trillion. So there's obviously enough people who realize, “Okay, I'm getting out of the game.”

But on the other hand, now you have all these individuals on Reddit and Robinhood that trade all the time. And they're looking for the next thing to pounce on. And they have zero day options. And now we have prediction markets and all this. So, it's an interesting dichotomy that we have these two different groups.

I think the hard part for most people, especially when you're young, almost the worst thing that can happen to you is you get right on one of these trades. You have one that works and you go, “Oh geez, I'm a genius. I'm going to do this again and again.” And people don't realize that persistence about performance is one of the hardest things to do.

Even among the greatest wealth investors of all time, having that stuff that works year in and year out. And I think that's where you set yourself up for psychologically when the greed really kicks in and you get the overconfidence. That's the problem when you have a winner not realizing that you might have been lucky. And we've had plenty of people come to us who said, “Hey, 10 years ago, I put some money in Nvidia and I let it ride for 10 years. And I have this huge pile of money.”

And they don't say, “I'm going to try to do it again.” They say, “Help me diversify this in a tax-efficient manner.” And so it is kind of heartening to hear people say, “I get it. I know I was kind of lucky. I don't want to have to get rich twice.” But that's the temptation is that I'm going to keep compounding this at the same rate. And it's easy. And of course, we know it's not.

Dr. Jim Dahle:
Yeah. I think that person is actually surprisingly rare. I can recall running into somebody on an investing forum, might've been the Bogleheads forum, he was in his 20s and had struck it big with some sort of crypto asset. And he had literally $25 million or $30 million in his 20s. But he had the good sense to recognize, “This is not what I should keep doing with this money.” And he was looking to diversify. But I feel like that person is really rare. I feel like when people hit it big, they're looking for the next big thing until they eventually lose.

Ben Carlson:
Yeah. And especially it can really mess play mind games with you when you do it when you're young, because most people have a stair-step approach to building wealth over time. It's slowly, but surely happens. They make more money as their career progresses. They save more money. The money compounds, you slowly but surely get used to it. If you have, like a lottery ticket winning, you win a bunch of money at a young age, I think it can mess with you. And it's hard to stay grounded in reality. I think that's a challenging part too.

Dr. Jim Dahle:
Now your book talks about behavioral mistakes. And clearly the biggest enemy for an investor is the person who stares them back from the mirror every morning. It's ourselves. We're killing ourselves most of the time when it comes to the big mistakes that get made. If you had to rank the behavioral investing mistakes that people make, what would be in your top 10?

Ben Carlson:
I think the internet and I think AI too will be the biggest confirmation bias machine ever created. I think it's never been easier to just feel like you're right, even if you're wrong. I think that there's a fine line between being really disciplined about an investment strategy and just being totally inflexible and not understanding that the world has changed. And so, I think that part of it is really hard. Again, I think there's two polar opposites. One is the person who doesn't really know a lot and once they learn a little, they think they know everything. And it's being naive.

And the other one that I've encountered through my time working with institutions is just the people who are highly educated. And they are very intelligent, but they think that makes them smarter than the market. I think that's that overconfidence among intelligent people. And it could not just be people in the investing world. I'm sure you've dealt with this with doctors. Highly educated people, very intelligent. And they assume that their success in one arena automatically transfers over to this other arena. I think that can be a mistake, just assuming that you've been outsmarted.

I think it's probably never been harder to outsmart the market just because the sheer amount of computing power. And there's little rocket scientists and PhDs that spend all day long trying to do this. This is the only thing they care about, these code breakers. I think trying to assume that you're smarter than the market is a really tough place to be. So, having a little more humility makes a lot of sense to me.

Dr. Jim Dahle:
I feel like I see the opposite problem as well, where people have not enough confidence. And typically, when I see people becoming DIY investors, I feel like their confidence lags their knowledge, their ability by about a year. I don't know what it is that you want to make people confident enough that they can go out there and select and manage a portfolio of a handful of index funds without making them overconfident, feeling like they can go pick the next NVIDIA.

Ben Carlson:
Yeah, you're right. The whole second guessing thing is really huge. And I always say one of the biggest jobs that a financial advisor can do for people is “Just tell me, am I going to be okay?” That's what most people want to know. Because it's funny, there's a lot of people who already think, “Listen, these LLMs are going to put financial advisors out of business because people can just go ask them questions.” And I actually do think that for a lot of DIY people, AI is going to be great. For people who never would have gone to a financial advisor in the past anyway, they can ask questions, they can poke and prod.

But we still get people who say, “Hey, listen, I put all my information into this, into ChatGPT. I uploaded it. Is it right? What it's telling me, is it right?” That's what people want to know. They want some sort of assurance. And you and I both know that there's certain assurances you're never going to get. Because no one knows how long they're going to live. No one knows what the future returns are going to be. We don't know what inflation is going to be or interest rates or any of those things.

And so people just need some sort of guidance to be like, “Hey, am I on the right path? Just someone let me know, please.” That uncertainty, I think, is something that for a lot of people just never goes away.

Dr. Jim Dahle:
It's interesting. People do want to be reassured. I have a blog post. I think it's called something like the Backdoor Roth IRA Tutorial. It's three or four or five thousand words long. It's got screenshots of how to do it. It's got every bit of information you could possibly ever want about a backdoor Roth IRA. And then it's got three or four thousand comments below it.

And yet every January and February, I get dozens of emails, comments on that post of people who just want to know, “Did I do it right?” Every bit of information they could possibly want, every question they can ask has been asked and answered 50 times in that comment section on the post. But they still want that personal assurance – “Yeah, you're OK. Yeah, you did it right.” And I think that's a lot of what a good financial planner provides.

I've had this conversation about the threat of AI to financial planning as a profession. And the experienced planners are telling me, “You got to be kidding me. It's like AI replacing you as an emergency doc. What percentage of your job could AI do?” Like 5%. And that's basically what they say is basically the same with financial planning. What we're doing is not the stuff you can plug into AI and have it spit something out.

Ben Carlson:
Yeah, I tend to agree. I think it's going to make advisors more efficient and take away a lot of the stuff that they don't want to do anyway. That's the hope at least.

Dr. Jim Dahle:
All right, well, let's dive into a little bit more controversial topics on investing. Let's start with real estate. I've met lots and lots of docs that have been very successful building wealth in real estate, whether they're doing it directly. They're buying properties and renting them out short term rentals, long term rentals, whatever. Sometimes they're doing it passively. And this typically ends up taking the form of some sort of syndication or a private fund and some that just stick with a VNQ kind of Vanguard real estate index fund. Your thoughts on real estate in a portfolio? Who should consider it? Who shouldn't? What are your thoughts on it?

Ben Carlson:
Yeah, it kind of gets back to our simplicity versus complexity talk earlier. I get a lot of people and one of the things I've seen more and more in the 2020s is people who say, “Listen, I've got this 2.75% mortgage. I don't want to get rid of it. But we have to move to another town because of a job or we've outgrown this house. Should I just keep it as a rental?” And I think the place you don't want to be is like an accidental real estate investor.

Dr. Jim Dahle:
Amen to that.

Ben Carlson:
Someone who's just trying to do it on the side. I think that's a really tough place to be.

Dr. Jim Dahle:
One property is the worst number for sure.

Ben Carlson:
Yes, yes. I think you either do it or you don't do it. And I think one of the beauties of real estate is that it forces you to be a long-term investor. And it's a very tax efficient form of investing because mostly you're not buying and selling these properties all the time. And I think that's why there probably are so many wealthy real estate investors because it's not a very liquid market. And the fact that they hold on for the long term, I think that has something to do with it.

I've always said that no one really knows what their own home return is because of all the variables involved, leverage involved and ancillary costs and all these things. Obviously, that stuff is easier to calculate as a rental investor. But I think you have a lot of questions you have to ask yourself. Do you want to be a property manager? Do you want to hire it out? How many properties do you need? What kind of cash flow?

We've got one client who has a portfolio with us, but also a big portfolio of real estate rental investments all over the United States. And he had one target goal in mind. “I want a monthly cash flow of X. Once I get that cash flow from real estate, I'm set.” And that was his whole fallback.

I don't think he really cared what the appreciation was in the houses. It was all about the income. I think you also have to think about, “Well, what is the point of this? Am I going to try to sell these houses in 10 years for more than they're worth? Or am I building equity and I'm trying to just get the income?”

I think you have to really understand what you're getting yourself into if you're going to buy those actual tangible properties. And for some people, having that tangible thing actually is more comforting. I can see this. I can feel it. I know what the house is versus this stuff that's just off on my computer that shows me what it's worth.

And so, again, I think a lot of it probably is more personality driven. Some people are just more set up to be real estate investors than others, but I think you have to really make sure that if you're going to do it, you're going to go all in. And if not, then yeah, you buy the REIT ETF or something.

Dr. Jim Dahle:
Okay, let's talk a little bit about crypto. There's lots of people out there that are very into various kinds of crypto assets. There's literally thousands of them. The NFTs came up for a while and kind of rapidly disappeared. There's still plenty of Bitcoin bros that are true believers that are never going to exit their Bitcoin positions. What are your thoughts on crypto and its place in the portfolio?

Ben Carlson:
I think the fact that Bitcoin just won't die as a brand is probably the biggest and best selling point for it. It's had all these different narratives about what it's going to be over time. At first, it was going to be a form of currency. It's going to replace the dollar. And then it was going to be inflation hedge, it was going to be like the digital gold. And a lot of those narratives have changed and shifted, but they keep morphing. And every time it looks like, “Okay, it's really dead this time and things are really bad this crypto winter, and it kind of comes back.” So I think the fact that it won't die actually is one of the biggest positives for it.

Dr. Jim Dahle:
The fact that there are so many Bitcoin bros, who if it drops to $10,000 a Bitcoin, they'll pile in and buy a whole bunch more of it.

Ben Carlson:
It has many features of a religion or a cult. And I say that in a positive way, the fact that there are a lot of true believers in this, whether what they believe is right or wrong. And I think from a portfolio management perspective, it's an interesting asset. If you go back to Bill Bernstein. What was his first book, The Intelligent Asset Allocator? He talked about that. That was like my first foray into thinking about assets that act differently and rebalancing. And if you thought about Bitcoin, it's just a form of asset allocation. And you said, I'm going to have 5% of my portfolio in it. And it's this highly volatile asset. It's like four times as volatile as the stock market.

If you looked at it that way and said, I'm going to use it to rebalance around a position. And when it has these huge up years and it's up 100%, I'm going to sell some, get back down to target. When then it crashes down 60%, I'm going to buy some more. That actually makes sense to me, like a really volatile asset could probably add value to a portfolio. How many people are actually doing that that own Bitcoin? Probably not many.

So it actually seems like it could make sense in like a target date, kind of fund, if you actually were disciplined about putting those guardrails in place. Now other people I know say, hey, I took a flyer on this thing. And I'm just going to put my money in and let it ride and see what happens. And I think, again, that comes back to position sizing and how much can you stand. Because I've seen since it first came out, and it was 2017 was the first year that it hit the zeitgeist. And there's been so many different iterations of it since then that it's hard to keep up. And I've had trouble understanding it over the years.

But it's still here. And it's a $2 trillion or $3 trillion asset now, which is just pretty impressive. The fact that it came from nowhere after the 2008 financial crisis. But I don't like people just guessing like, “Oh, I'm going to try to pick the winner. It's not Bitcoin. It's some other crypto.” That to me, seems like kind of a fool's errand. And Bitcoin to me, I don't know, seems like the biggest brand still, even though the returns of the past are not going to be the returns of the future.

Dr. Jim Dahle:
Okay, next topic, factor investing, small value tilting. Where does this have a place in a portfolio? If you look at the last 15 years, it's been all about having your money in large U.S. growth tech stocks. And anybody who had a small value tilt in their portfolio has underperformed the overall U.S. market in particular. Maybe not so much last year, and maybe not year to date this year, but for a long period of time. Is there value in going away from a total market approach and tilting a portfolio to some sort of factors?

Ben Carlson:
I look at them and I got to learn about factor investing after the dot-com crisis and all the value stocks and quality stocks did really well and saved people's butts back then. And I think a lot of people went headfirst back then. And then coming out of a great financial crisis, then it was the opposite. We've had plenty of conversations with clients over the years who go, “Why do I need to own anything else besides the S&P 500?” Or they further way to go, “Actually, maybe just the Nasdaq 100. Give me all the tech stocks.”

So you have a lot of those conversations. You have to remind people the benefits of diversification. And I never looked at any of those factor tilts as a way to outperform the market. That, to me, never really made sense. And I think a lot of the history of it was back before you even had the ability to invest in these groups of stocks. The liquidity was so much worse. And so, I always took the historical back test with something of a grain of salt.

But I look at these as compliments to your portfolio, that there are certain environments, whether it's high inflation or low inflation or high rates or low rates, where some of these other types of stocks can do well. And that's how I think you view those type of diversification is as a compliment. And yeah, small value is done a little better. I think if you even look from since the COVID bottom, small cap value is now maybe outperforming the S&P. So, it's had a decent little run here, 3 to 5 years where it's done better than people thought.

But that's the way I look at it. It's a different type of stock that can maybe perform differently in a different environment. And I don't believe that just large cap U.S. growth stocks are going to continue to outperform forever. And even though the last 18 months or so they've underperformed is kind of a good reminder for people of that.

Dr. Jim Dahle:
OK, let's talk a little bit about tactical asset allocation, essentially changing your mix of investments in response to market conditions rather than having a fixed static asset allocation that you just rebalance to every year. Is there value there? Is it just too hard to do? Is it just market timing? What are your thoughts on tactical asset allocation?

Ben Carlson:
Yes, probably a place where I've changed my mind about the most after being in the wealth management industry. And I still love the opinion that timing the market is really hard. Like I said, you have to be right twice. When you get out and when you get back in.

But learning about things like trend following, momentum investing, I think for the right person, it can actually add value. And not as much from outperforming the market side of things, but more from the I needed behavioral release. There's certain people who just have the ability to sit through the losses and rebounds or sit through the pain. And listen, I've been through four bear markets in my career. I'll be fine in the fifth. There's plenty of people who do that. And you go, “More power to you. Great.” There's other people who go, “You know what? Every time this happens, I feel like I'm going to pull my hair out and I'm going to lose it. And it's going to want to change my allocation. It's going to want to tap out and sell. And I need something.”

And if you go that route, I think you need rules in place. I don't think you can try to guess. I think you need some sort of pre-established rules that tell you when you're going to lighten up and when you're going to get back in. And I'm not a fan of all or nothing. We're going to go all in the stock market or all the cash. I think you kind of do it around the edges. Cliff Asness has said, “If you're going to sin, sin a little.”

And so I think that's how you look at it. You're taking your portfolio from 60-40 to 40-60. But again, I think you have to have some sort of rules in place to guide your actions. And trend following was the one that made the most sense to me because it's essentially based on behavior of the market. If the market is in an uptrend, and you define that by moving averages, and we've got a strategy that we run in-house, actually. It's like this.

But you don't try to guess and do so in a discretionary manner. You do it with a rules-based strategy that you follow no matter what. I think that's the only way you can do it. Because sometimes it's uncomfortable and obviously nothing always works. There's going to be times where you pull the parachute and it doesn't work. It doesn't come out. It's the kind of thing you can't just use it when it feels good. You have to use it all the time and understand, again, the trade-offs.

Dr. Jim Dahle:
Okay, gold investing. Does it belong in a portfolio? Does it not? It's had a heck of a run the last few years.

Ben Carlson:
It is interesting. It's one of the most unique assets there is, for sure, because it's not really a currency. It's not really a commodity. It's kind of one of each. One of the things I find fascinating is the fact that gold and stocks are both done well this decade, which basically never happens. It's usually they're opposites. 1970s gold did really well. The stock market did really bad. 1980s and 1990s stock market boom, gold did terribly. 2000s, it was the opposite. Gold did well. Stocks did poorly again. 2010s, it switched. Now the 2020s are both doing well. And it's kind of interesting. It's kind of like Bitcoin where the narrative changes often with gold.

It didn't really hedge you that great in 2022 when inflation was here. But now people say, well, now we're worried about the system, the Fed and the government and all these things. And now gold's doing well.

I think if you look at the history of gold, one of the interesting things to me is people have asked, “Well, I don't want gold to replace the stock market. I know it's not that. The history of returns doesn't tell you that. But what if it replaced some of my bond portfolio? So instead of doing a 60-40, I did a 60-30-10 or a 60-20-20.”

That to me actually makes more sense than trying to change your whole stock, with the understanding that gold is much more volatile than bonds. It has bigger drawdowns. But I think it could actually hedge those periods like 2022 when the bond market did really poorly. And so, I think that's one way to consider it, again, more of a portfolio construct than replacing a bunch of assets.

Dr. Jim Dahle:
So how much is too much? Somebody really likes gold as an asset class. If they have more than 5% or 10% or 20%, is that too much in your portfolio? Where would you draw the line?

Ben Carlson:
I do think it's one of those more complementary assets. It's like a satellite, not a core. I think a 10% or something position, you don't want it too small where it doesn't move the needle at all. If you have a 2% position in gold, what's the point? I think probably it has to be double digits to actually move the needle and make sense in a meaningful way.

I wrote a blog post probably about a year ago, maybe 18 months ago. And this is before gold really, really took off saying, here's why I don't own gold. And I look at the history of the returns and how volatile it is. And I said, I understand why certain people like having a small position in gold. It just doesn't make sense to me because whatever position I have, it's not going to move the needle. And it basically had two lost decades in the 1980s and 1990s. And it was a 70% drawdown. And I just said, it's kind of just not for me because I need more of a fundamental reason to own it. And so, I think you just have to have a good reason one way or the other.

Dr. Jim Dahle:
Yeah. My problem has always been with assets that I call speculative, whether that's gold or Bitcoin or empty land or beanie babies or commodities. They're not producing anything. They're not producing earnings. They're not producing dividends. There's no interest. Currencies are the same way.

We've just decided we're not going to invest in stuff that isn't producing stuff. And it's entirely possible to make money with classic cars or beanie babies or whatever. But we've just decided not to put those in our portfolio because we're not comfortable with them. But lots of people do put an allocation of gold or Bitcoin or whatever in their portfolio. And I think if it's reasonably sized, that's probably okay. Does it bother you to not have productive assets?

Ben Carlson:
Yeah, I'm similar to you. But I think that's one of the things that you need in today's environment is just a no list. My colleague Josh Brown always says a good financial advisor is like the bouncer at a club standing behind the velvet rope and just mostly saying, “Get out of here. No, you're the riffraff. You're not getting into the club. It's the exclusive list.”

I think with all the investment opportunities out there today, you have to have some things that you go that “You know what? That could work. It might work for some other people. It just doesn't make sense for me. And I'm okay with that.”

I think you have to be okay with that with all everything else coming out these days. There's a buffer ETFs and structured products and option income products and all these different new fixed income ways to invest. And I think you just have to have some limitations and filters in place to guide your actions these days. Otherwise, you're going to get overwhelmed.

 

DEBT, WEALTH, RETIREMENT, AND LONG-TERM PLANNING

Dr. Jim Dahle:
Yeah, you can't invest in everything. You'll end up with the world's worst portfolio if you try. Okay, you've got an episode out there called Never Pay Off Your Mortgage. And one of the most common discussions that investors have that people interested in personal finance have that everyone has is paying off debt versus investing, investing on leverage, taking advantage of both leverage risk and market risk. Give us your thoughts on this whole dilemma of paying off debt versus investing and how much leverage to have in your life.

Ben Carlson:
Another thing that I've completely changed my mind about, and it was probably totally market related, refinancing into a 3% mortgage in 2020. I just thought this is probably one of the great financial assets I'll have. And I probably should have borrowed more money back then. And I'm a personal finance person who has always had a number. I've never carried credit card debt. I don't borrow a ton of money.

I just thought if I'm going to be in this house for the long term, having more of my money concentrated there is not a, to your point, a productive asset. The first house my wife and I owned, we paid the mortgage double. Every time we refinance, we kept paying the same as we were paying at a higher rate. And then we went to sell the house. And I kind of thought, “Well, what was the point of that? The money was just sitting in the house, doing nothing.”

Now other people would say, “No, no, no, it's helping me sleep at night. You have a set hurdle rate that you're paying off.” And so, I think my “Don’t Pay Your Mortgage Off” thing was more for people who have a low rate at a certain level. Today's rates are probably pretty close to there, 6% or so, where you're thinking like, “Does it actually make sense?” That hurdle rate, to me, is a lot higher.

But for the people who were able to get a 2%, 3%, 4% mortgage in the pandemic, for me, I don't think it makes a lot of sense to pay it off when inflation essentially eats into your entire payment. The inflation rate right now is 3.3%, and my mortgage is 3%. On a real basis, it's negative, essentially, that I'm borrowing for.

Dr. Jim Dahle:
Are you familiar with Thomas Anderson's work? He wrote a book called The Value of Debt, and it's a series of books. But The Value of Debt was kind of the first main one. You ever read any of his stuff?

Ben Carlson:
No. What did he say?

Dr. Jim Dahle:
Basically, he talks a lot about it. I think it's maybe the best treatise out there on leveraged investing. And there's a few things he points out. He's like, well, if you're going to do this, get the best debt you can. Longest term, non-callable, low interest rate, deductible, get the best debt you can get. And then limit how much of it you take out. Because obviously, this is the way people get into trouble with debt, with leverages. They just take on too much of it.

And so, his recommendation was to keep it between 15% and 35% of assets. If you add up your home, you add up your portfolio and your retirement accounts, et cetera, keep your debt between 15% and 35%. And that's always made a lot of sense to me. Now, I'm a fairly debt-averse person. We paid off all our debt and don't need any debt to reach our goals, so don't bother with it, really.

But that made sense to me. Intellectually, I was like, “Okay, this guy's making a case for using debt and he puts those guidelines around it.” I've recommended that to people who are interested in thinking about it. But I think far too many people just look at it at a very superficial level, where they're just like, “Oh, well, the mortgage is 3%, so of course I should keep it.” Well, never mind the fact that you have $10 million and the mortgage is only $50,000. Does that really even move in the needle? That's just making your life more complex.

I think you have to take a little bit more of an overall holistic view to it. And if really this is what you're going to do because you need this to reach your goals or you want to do something that this will allow you to do, maybe look at everything. And it's not just a mortgage, but what else can you use? Maybe you're using a margin loan. You go to interactive brokers or something. They've usually got the lowest margin rates. And you've got some margin loan, and you've got some mortgage debt, and maybe you've got some debt on an investment property or two as well. And you're just looking at it holistically. I think a lot of people, it just comes down to, oh, well, they offered me 0% of my car, so I'm going to take it. And I don't know. Do you think you have to look at it more in depth than that, or do you think it's as easy as, of course, “I can out-invest that interest rate?”

Ben Carlson:
Yeah. I think the hurdle rate thing is probably somewhere people get tripped up on. And they just assume, “Well, I'll get 10% of the stock market or whatever.” And you're right. It's probably more of a personal finance question than it is an investing question as far as I'm concerned. I don't look at my mortgage like I'm paying off a bond or something. I know people do that. To me, it's more personal finance related. That fixed mortgage payment is a way for budgeting and all these other things. So I look at it way more on a personal finance thing than investing.

Dr. Jim Dahle:
Yeah. I think a lot of people, intellectually, they look at it, and they say, “Well, I can out-invest that.” But behaviorally, they don't actually invest the difference. I think that's the main issue with debt is most people are like, “Well, my RV loan's only 3%. So of course, I'm going to keep it.” But then they're spending what they're not using to pay off that RV. And I'm not sure that really gets them ahead and gets them any closer to their goals.

All right. Another really interesting, I think it was an episode you guys did, said that one million is the worst kind of money. And I want to talk a little bit about that. What mean by that? Why is one million the worst kind of money?

Ben Carlson:
We had someone email us in that, we talked about the fact that people are wealthier now than they've ever been. We've had a booming stock market and a booming housing market. And if you just look at the numbers, the median numbers, whatever, people are now wealthier at all levels than they've been in a long time. And a lot of people emailed us in and said, “Well, that's fine. My 401(k) is up and my housing price is up. And on paper, it says I'm worth a million dollars.”

But this is the worst. So it was actually a teacher. It was two teachers. And they said, “We don't have a very big salary. We have a million dollars in the market. And the market goes up 25% in one year, we make $250,000. That's more money than we make as teachers. And they said that can be disconcerting.” And they told us that this is why a million dollars is just the worst amount of money. And maybe they're being a little tongue in cheek.

But I think a lot of people view like, “Hey, the fact that this money is liquid, it's stuck in a tax deferred account or stuck in my home, and I can't do anything with it that means I'm not really wealthy.” And I think that's just hogwash. It's the reason that you have a million dollars in these tax deferred accounts in your house is because you can't touch it. It's actually a benefit. It's making you defer and allowing it to compound. And if you could spend it, then you're not going to be a millionaire anymore.

I think that's the hangout for people. It's like, “Well, I'm not really rich because I can't touch the money.” But the money's there to have you in the future, not right now. And there's a difference between spending a million dollars and being a millionaire, obviously. It seems obvious. Some people have a hard time thinking of that.

Dr. Jim Dahle:
Polar opposites. Polar opposites.

Ben Carlson:
Yeah.

Dr. Jim Dahle:
I've heard that argument used, though, by people selling a life insurance. “For savings. Yeah, you have to put this in here and it'll build wealth over time.” So I think it can be carried to an extreme, but certainly liquidity has some value, but we don't need everything in our portfolios to be liquid, for sure.

Ben Carlson:
Yes. And I've heard people make the claim, too, that, hey, I'm on a retired in my 50s and I didn't put enough money in a brokerage account, I put it all in tax deferred accounts. I think there is something to be said for the flexibility of having that liquidity. I think it's a push and pull.

Dr. Jim Dahle:
Yeah. Okay. Well, our time's starting to get short, but you've got the year probably, I don't know, something like 25,000 or 30,000 high income professionals. These are docs, dentists, business owners, engineers, whatever. Some of them have a negative net worth. They're still paying off student loans and some are a deck of millionaires. But thinking of that audience in particular, what would you like to say to them that maybe we haven't discussed today?

Ben Carlson:
I think the big thing is you talk about a range of people. I think that risk just means different things to different people depending on where you are in your financial life cycle. I talk about this a little bit in the book. The fact that obviously a bear market is going to be extremely risky to a retiree if they're just going into retirement and don't have any income coming in to save. But for a young person, it's going to be a great opportunity. It's not a risk at all. You should hope for bear markets when you're young.

I think there's also a difference between… You mentioned that decamillionaire. If you have a lot of money, the percentage declines don't matter nearly as much as the dollar declines. You see a certain chunk of your portfolio. We have certain clients who tell us, like, “My financial goal is my money doesn't go below this level. If I have $10 million or I have $11 million, I never want to go below $10 million.” And that's the way that they set their risk parameters.

And so I think when you have more money, it not only makes your life a little more complicated, but it can be more painful when you have losses. And so I think thinking about risk meaning different things at different points in your life cycle is important.

Young people have the biggest asset of all. It's the human capital. Their future savings from their earnings. Me being more of a middle-aged person, it's interesting because I have a foot in one each camp. I think I'm saving more now because my income has never been higher. So a bear market is going to be okay for me. But I have a lot of money in the market too. So it's going to be painful. And so I think trying to balance those trade-offs as you age is something that's interesting.

We have 70 million baby boomers retiring that are either retired or going to be retired. I think the number is 13,000 baby boomers are trying every day between now and the end of the decade. And we've just never had a group this large that's going to live this long that's this wealthy before.

I just think about all the financial challenges that people are going to have in years ahead and how much advice that they're going to need. We might need AI to help a lot of these people. People talk about AI taking financial advisor jobs. I think there's going to be a lot of people who have trouble. For most people, accumulation is relatively easy, straightforward, and automatically saved. But then trying to plan out spending down the money and giving it to heirs and all these things, that's where the tricky part comes in, I think, for a lot of people.

Dr. Jim Dahle:
Yeah, for sure. All right. We've been talking with Ben Carlson. He's half of the hosting team of the popular podcast Animal Spirits. His new book is out, Risk and Reward. You can pick it up on Amazon today. It's all about market history and behavioral finance. Thank you so much, Ben, for being willing to come on the White Coat Investor podcast.

Ben Carlson:
Thanks for having me. I appreciate it.

Dr. Jim Dahle:
Hope you enjoyed that as much as we did. I've wanted to get Ben on here for a long time. His new book is a great excuse to do it. Everybody wants to get out and promote their new book when they get it out there. But he's been podcasting, like I said, almost as long as we have here at the White Coat Investor. Animal Spirits is a great podcast, been highly rated, and it's always a thrill to talk with him. I think I'm going to be seeing him at the Bogleheads conference this fall as well. I think he's going to be one of the speakers there.

 

SPONSOR

Dr. Jim Dahle:
All right. As I mentioned at the podcast, SoFi is helping medical professionals like us bank, borrow, and invest to achieve financial wellness. Whether you're a resident or close to retirement, SoFi offers medical professionals exclusive rates and services to help you get your money right. Visit their dedicated page to see all that SoFi has to offer at whitecoatinvestor.com/sofi.

Loans are originated by SoFi Bank, NMLS 696891. Advisory services by SoFi Wealth LLC. The brokerage product is offered by SoFi Securities LLC. Number FINRA SIPC. Investing comes with risk, including risk of loss. Additional terms and conditions may apply.

Thank you to those of you who have left us five-star reviews. It does help spread the word about this podcast. A recent one came in that said, “The finance guide for high-income earners. Dr. Dahle is able to guide new high earners through their financial journey in a way that is honest, simple, and practical. He shows you that taking control of your own finances is empowering and simple. Such guidance is often overlooked by parents and school. This podcast is informative and invaluable for new higher individuals and families.” Five stars. Thanks so much for that review. It just came in a couple of weeks ago.

Okay. We're at the end of the podcast, but we're not at the end of your financial life. You got to keep going. Part of the hardest part of this is the stay the course aspect. You got to get a plan in place. You got to implement it, and you got to stick with it. You got to be saving. If you're an attending physician or similar professional, you got to be saving something like 20% of your gross income for retirement. You got to stick with that for a couple of decades, invest in some reasonable manner, and stay the course with your investing plan. And you'll be amazed if you do that, it will not take you that long before you will be a financially independent multi-millionaire, and you can do whatever you want without the financial consequences. Without any bad financial consequences, without even having to consider the financial implications of it.

Too many people out there are way too stressed about money. You don't have to be. Get a plan in place, and you'll be amazed how much better your life is when you can concentrate on what really matters in life. And the only way you can do that is by taking care of this financial stuff.

So, let me be the person giving you a kick in the behind to get going on whatever you need to do next. Maybe it's getting disability insurance in place. Maybe it's getting your next student loan if you're a student. Maybe it's refinancing your loans or your mortgage or something like that. Maybe it's finally getting a written plan in place by taking Fire Your Financial Advisor. Maybe it's hiring a financial advisor.

Whatever it is, resolve to do it this week. It doesn't do you any good to just listen to this podcast if you don't actually do any of this stuff we talk about. So, get out there, get it taken care of. You can do this. We're here to help. We'll see you next time on the podcast.

 

DISCLAIMER

The White Coat Investor podcast is for your entertainment and information only and 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.

Transcription – MtoM – 276

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 276.

This podcast is sponsored by Bob Bhayani of Protuity. He is an independent provider of disability insurance and planning solutions to the medical community in every state and a long-time White Coat Investor sponsor. He specializes in working with residents and fellows early in their careers to set up sound financial and insurance strategies.

If you need to review your disability insurance coverage or to get this critical insurance in place, contact Bob at www.whitecoatinvestor.com/protuity today. You can email [email protected] or you can just pick up your phone and call (973) 771-9100.

All right. We've been getting a lot of questions over the last, well, year really, but mostly in the last three months about private medical school loans. The One Big Beautiful Bill Act that was passed last July has changed the landscape for medical student borrowing. Now medical students can only borrow $50,000 per year, $200,000 total in federal student loans. After that, they need private loans.

They know we've been doing student loan refinancing for years. And we went to our partners that have been refinancing student loans for years. And we said, hey, there's an issue here. People are going to need to borrow private medical student loans again. They haven't done this for 20 years, but we want to provide a similar experience to what White Coat Investors have been getting refinancing their loans by giving you cash back from the lenders themselves. And we usually throw in something.

For medical students we're throwing in the Fire Your Financial Advisor course, our flagship course, the student version of that to anybody who gets student loans through our links. So, you're getting a better deal than if you went to the lenders themselves because they're giving you some cash back and the same interest rate you would get. And we're throwing in an online course for you to help you become financially literate from the very beginning of your educational and career journey.

So what should you do? Well, you should go to our list, whitecoatinvestor.com/loan and check out two or three lenders on the list and go with the one offering you the lowest interest rate and the best terms. It's not that complicated.

Now, obviously, these are not going to qualify for public service loan forgiveness. These are not going to go into an income driven repayment program. So spend as little as you can in med school. Take out as little as you can in private loans because you are definitely going to be paying them back, barring something terrible happening to you, of course.

But know that this resource is out there. You are still going to be able to go to medical school. And if you finish school and residency and get a job and work full time for a few years, you are going to be able to pay these loans back. So again, that link is whitecoatinvestor.com/loan. We're excited to be able to offer this to you and hope it helps you to figure out the best way for you to pay for your medical education. But I know a lot of you out there are going to need at least some money in private loans each year.

All right. We've got a great guest on today. We're always getting requests for regular people, regular docs, maybe not these people that make a gazillion dollars on the podcast or are already a deck of millionaires or whatever. Well, we've got a doc here who's been working for the government his entire career. Let's get him on the line and talk about some of the milestones he's accomplished.

 

INTERVIEW

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

Brian:
Hello.

Dr. Jim Dahle:
Tell us a little bit more about you as far as what part of the country you're in, what you do for a living, how far you are out of your training.

Brian:
I'm from Texas. I'm an OBGYN physician and got out of residency in 2008. So almost 20 years.

Dr. Jim Dahle:
2008. Okay. So only a couple of years after me. Tell us what we're celebrating today. What have you accomplished?

Brian:
Well, celebrating a couple of things. I recently went to part-time working for the government, which I didn't think it was actually a possible thing to do. And then also made it as a TSP millionaire.

Dr. Jim Dahle:
Oh, that's pretty awesome. Both of those. I'm a big fan of part-time work. Tell us a little bit about your journey through your career and how you ended up now being able to work part-time.

Brian:
Well, let's see. I go back. I did ROTC undergrad. I had an undergrad paid for and then did not want to add additional time for medical school. I took loans from medical school and went to Tufts Med and then Walter Reed for residency training. And then the Army sent me down to Texas. And then I've stayed here ever since once I got out of the Army in 2012.

Dr. Jim Dahle:
Okay. So you did the minimum time in the Army. It sounds like you paid off your ROTC obligation. Did you continue to work for the government at that point?

Brian:
Yeah. I stayed in the same office doing the same exact job and they decided to pay me more and no more deployments. So I enjoyed it and continue to enjoy it.

Dr. Jim Dahle:
Yeah. If you were coming on active duty about that time, you probably had a significant number of deployments. How many times did you deploy in the three or four years you were active duty?

Brian:
I did one full year deployment in that timeframe.

Dr. Jim Dahle:
Yeah. That's a long time to be away.

Brian:
Yes.

Dr. Jim Dahle:
Okay. So you stayed on as a government contractor. Were you hired as a GS employee or what?

Brian:
GS employee. At the time it was, I got out making about $220,000 a year and just has slowly increased over time up to $360,000 a year now. And I've gotten to the point where I've got enough that I want to take more time to spend with the kids, more time to travel. And it kind of came up at last year.

And when the whole government was trying to cut employees, we all got the emails that, “If you leave the government, we'll pay you for seven months.” And I thought about it. And one of my cogs who was getting ready to retire, I was like, “Oh, it's a no brainer for you. You're just going to take this. Why stick around?” And he was like, “Well, I really want to stay around for a little bit longer and just wanted to do part time.” And I was like, “Hmm, that sounds good.”

And the powers that be, they said, “Well, it actually would make it easier if we had two people that wanted to do part time to make this happen. Then we could hire another full time employee pretty easily.” And it was a government. So I took 6 to 12 months to actually make it happen paperwork wise. But now I'm enjoying it. I can do this all the way to my government minimum retirement age of 57 and then continue on with a pension.

Dr. Jim Dahle:
Now, are you guys officially splitting the job or are you just two part timers and it happened to be about the same amount of work that would have been happening from one doc previously?

Brian:
They call it a job share. And so, you just have a job share agreement. And he really just wanted to essentially work labor and delivery. He didn't want to do clinic anymore. And I said, I want to do full time and full spectrum OBGYN. And they just worked our schedules around it. And he's actually going to be retiring later on this year. And they said, when he retires, we'll actually just leave it on as a halftime position that somebody else can be hired into. I don't think we'll have a difficulty finding somebody wanting to do that.

Dr. Jim Dahle:
Very cool. Okay, since you started doing part time work, how do you feel about work compared to how you felt about it before?

Brian:
I actually feel better going into work. I'm more energized. We do have residents that rotate through. We got ER residents, family medicine residents. We have an FMOB fellowship. And I definitely feel more energized in order to be able to teach and just taking care of patients. It's so much better when you're not on the verge of burnout.

Dr. Jim Dahle:
Did you feel burnt out? Were you feeling crispy when you're just before you went part time?

Brian:
I was, especially in the summer times, as you know, around the military, there's PCS, ETSCs, everyone's moving around. We're short staffed. It's tough during those summers usually. Working 60 hours a week in those summers gets old.

Dr. Jim Dahle:
The first thing I tell burned out docs is you ought to think about cutting back to full time because so many docs are like you were working a job and a half really working 60 hours a week is a job and a half to the rest of Americans. And even if you're going half of that, that's still three quarters of a job.

So, let's keep in mind what we're talking about. A lot of times we're talking about part time work for physicians. Sometimes it just means cutting back to one job. Of course, that's going to, that's going to help your burnout and that sort of a thing. Okay. So, how long you've been doing part time work now?

Brian:
They actually let me start scheduling part time last summer. They just said, “Hey, you can use some of your leave until the official part time happened in January.” A little over six months of a part time.

Dr. Jim Dahle:
So, not all that long. Have you given any thought to clinical competency. And how long you can do part time work at the level you're doing it without worrying that you're not as good a doctor as your patients probably deserve.

Brian:
Essentially I'm working about 50 to 60%. The one point that it might be a difference is kind of doing my GYN surgery. Because even for our practice, we only had about one OR a month in general. So now it's like one OR every other month. Yeah, I could see over time that may diminish some of those surgical skills as far as your surgeries that I don't do very often.

C-sections we do them often enough that it's not a big deal for labor and delivery and those kinds of skills. But a GYN surgery can definitely take a hit. I remember that actually when I was gone for a whole year for deployment and then came back and some of the things that just trying to remember instrument names and things can take a hit.

Dr. Jim Dahle:
Were you ever tempted along the way to leave the government and go out in private practice or join a partnership or be employed by a hospital or tell us about if you ever were and what your decision-making was when you decided to stay in.

Brian:
When I first got out of the military in 2012, I was looking around. Actually, there was a hospital in town that was being built and they were hiring. They already had three OBGYNs. They were looking for a fourth. And I interviewed with them and talked to them. The minuses for me were like, they were talking about when you're not on call, you're still expected to come in for your patients that are delivering if you're still in town. I'm like, okay, you're on call 24/7 it sounds like. I'm used to fairly big group practice. We've got 10 to 15 OBGYNs and I'm on call every 10 nights or so. It's not as daunting.

I think for life outside of work, I thought it was kind of better to stay with a big group. And then more recently when I was looking into, if I took this seven months, they pay me and I could maybe do some locums or join some of the groups around here. And there was some part-time, some of the hospitals around here. And, again, I thought about it. I didn't really look into it seriously since I think knowing that I had those options, at least when I talked to the administrators and said, “Hey, I'm looking at this seriously. Are you able to give us this part-time position?” I think that's one of the keys is having a plan and a backup when you're wanting to do part-time to say, “Oh”, and ready to leave that, “Hey, if this doesn't work out, I'm ready to go.”

Dr. Jim Dahle:
Do you feel like you left a lot of money on the table by not going out into private practice? Or do you feel like you ended up being paid fairly for the work you did when you include all the government benefits and pensions and matches, et cetera?

Brian:
I think it was fairly competitive. Again, talking to some of my colleagues that got out of the military and either joined other groups or moved and did locums, I'm fairly competitively compensated. And I like having that safe pension option. And technically I could still get a pension if I left now, it wouldn't be as much. And it wouldn't start till later.

But I did find out as far as the part-time work, one of the things I didn't realize was even the next 10 years of doing part-time work count towards the years required to get to the minimum for retirement for the government. So, it's 30 years plus reaching the minimum retirement age, but a year of doing half-time work still counts as a full year for that. So, that was a benefit I didn't realize as well.

Dr. Jim Dahle:
Which it probably should, if we're really talking about half-time being 30 hours a week as far as public service loan forgiveness definition of full-time work is 30 plus hours a week. It doesn't feel full-time when you're a typical OBGYN that's been killing it for decades. But it technically is.

Okay. You've become a TSP millionaire. That's pretty awesome that you've acquired that much money in what essentially is the thrift savings plan, the government 401(k). Tell us about how you saved for retirement over the years, what kind of accounts you've used and what kind of investments you've used.

Brian:
When I got to the point that I was making enough to the backdoor Roth IRA for myself and my spouse. So, doing those retirement accounts and then generally saving about 20 to 25% a year. Not super saver, but enough that we could take trips and do the things that we wanted to do and also maxing out the HSA account as well.

We've got those now six figure HSA accounts and actually starting to use that money as well now, since it's just continuing to grow over time. So pretty much the waterfalls that you, that you have in your book and blog just work my way through. And then once I've used up all the retirement accounts, going to the brokerage account and using that up.

Dr. Jim Dahle:
I'm kind of surprised to hear that you were able to use an HSA. Did the government not provide you a traditional lower deductible healthcare plan that wouldn't allow you to make HSA contributions?

Brian:
Yeah, you have a bunch of different choices. You can do Blue Cross Blue Shield, or you can do a high deductible health plan. It was one of the least expensive choices, but they also contribute, I think maybe $1,500 a year, I forget exactly, towards the HSA. Yeah, it's a nice option to have. And I'd max that out. And of course towards the TSP that you get the 5% matching on a doctor's salary is a good amount of money in there every year in order to get up to the TSP million.

Dr. Jim Dahle:
Now that you're also qualifying for a pension, I like that you describe yourself as not a super saver, but you save 20 or 25% a year. In addition to qualifying for a pension and of course, social security down the road as well. So I imagine you're on track for a pretty comfortable retirement.

Brian:
Yeah. Yeah. I think so. At this point, I said, I can probably be coast by, I’m still contributing to the accounts at this point since it hasn't really made a difference with the decrease in salary at this point.

Dr. Jim Dahle:
Okay. Let's talk a little bit about how you invested over the years. The TSP is known for these rock bottom cost index funds the C fund, which is an S&P 500 fund. And the S fund, which is basically an extended market index fund. And the I fund, which is currently a developed markets international index fund. And then the F fund, which is a total bond market fund. And of course the unique G fund, which is kind of a money market fund on steroids. But you had other investments you had to mix it with in the IRAs and your brokerage account. So, what did you invest in over the years?

Brian:
When I started, I again, didn't know very much. And the simplest thing was doing the target retirement funds. That's what I started with. I started with whatever, I think I started with like the 2040 fund and knowing when I might want to retire. So I started with that.

And then over time I've tweaked a little bit and done it on my own, but it's closer to 90 to 95% equities. The C, the S, the I fund and then just a smaller amount on the other two. I've got a spreadsheet with all of my accounts to look at what I've got in the stocks versus the bonds. And I've been able to do a little bit more of an aggressive asset allocation because I know that I've got a pension that will be coming down the road.

Dr. Jim Dahle:
Well, it sounds like you've been a very successful DIY investor. Congratulations to you on your success. If there's somebody out there that's like you, beginning of their career and they want to be on track to have a great retirement, maybe they want to be a 401(k) or a TSP millionaire, what advice do you have for them?

Brian:
I definitely recommend automating things. Just automating the TSP or 401(k) from the get go with each increase in your salary. In the military is great. You knew every two years or every promotion you got an increase. Bump up those amounts until you get to the max. Also as a resident was automate everything you possibly can because you're going to be spending so much time doing other things. Automate bills. That was one of the things. Automate all your bill pays, try to minimize the time you have to spend doing that kind of stuff outside of work because you need time to spend with loved ones outside of work. Those are really the big thing. Just automating, putting savings first is huge.

Dr. Jim Dahle:
David Bach, who we had on the podcast a few months ago, wrote the automatic millionaire and you've given a good case study for why that method certainly works well. Well done. You should be very proud of what you've accomplished. Thank you for being willing to come on the podcast to inspire others to accomplish their goals as you're accomplishing yours.

Brian:
Well, thank you so much for having me and thank you for all that you do to help us along the way to get here.

Dr. Jim Dahle:
I hope you enjoyed that as much as I did. It's always great to talk to people that have made different decisions than I did. When I got out of the military, about the same time this doc did, I decided to go into private practice. He continued to work for the government and it's interesting to see the differences in the pathways we've gone down.

But the fact that either way we could have been successful if we paid attention to our finances, if we continued to save money, he'll have a pension that I won't have. Maybe I had a higher income that he didn't have. And maybe I had to save more of my money to get to the same place. But the truth is both pathways work just fine to reach financial independence.

 

FINANCIAL BOOT CAMP: HIGH-YIELD SAVINGS ACCOUNT

Tyler Scott:
Hello. My name is Tyler Scott with White Coat Planning. And today, Dr. Dahle asked me to come share the principle of high-yield savings accounts with you. A wonderful topic when I'm excited to talk about.

A high yield savings account is exactly what it sounds like. It's a savings account at a bank or a brokerage that offers a higher interest rate on your cash than a savings account at your local average national bank.

When I graduated dental school and knew nothing about personal finance, I had our checking and savings account at Chase Bank because they were everywhere and I got some kind of bonus to sign up with them. I started building my emergency fund in my savings account like Jim told me to. And I noticed one year I got a statement from Chase showing that I made $1.09 in interest during the year. Closer examination of the statement showed that the savings account paid me an interest rate of 0.02% to one hundredths of a%.

This is your classic low yield savings account that the vast majority of Americans are using. The purpose of this lesson is to make sure you don't fall victim to this unfortunate hole in our financial literacy. We want you to be earning a reasonable rate on your cash. To do that, don't let your cash sit in a savings account at the local credit union or some enormous national bank. Make sure you're keeping your cash in a high yield savings account.

To find a good high yield savings account, you can always Google it and a list of banks will come up. The most popular ones I see clients using these days are Ally Bank, SoFi, Wealthfront, Capital One, Discover and others.

Well, what makes for a good high yield savings account? The first and most important quality is a reasonable interest rate. Right now in late 2025, that means about 3 to 4%. Don't worry too much about finding the highest rate. The difference between 3.2 and 3.9% is not what we're worried about. We are worried about the difference between 0.02 and 3.2%.

Just to drive that point home, let me quantify why you don't need to stress about getting the best interest rate. Let's say we're talking about where to keep your $60,000 emergency fund. Getting an extra 1% means an extra $600 a year before considering taxes. Remember that interest paid from a financial institution is subject to ordinary income tax rates. So assuming you have a 40% marginal tax rate, that $600 becomes $360.

I'm not here to scoff at that difference of $300. I just don't think $300 to $400 this year is going to make or break any of your short or long-term financial goals. But the difference between getting functionally 0% and maybe 4.5% on that same amount is $2,700 pre-tax and $1,600 after tax, assuming that same 40% marginal tax rate.

Again, I'm not saying you'll get rich with an extra $1,600 or $2,000 a year, but that buys some nice holiday gifts, a quality weekend away. And that is worth making sure you're earning each year. So, it's definitely worth getting the 3 to 4%, but not worth bouncing your money from bank to bank to get a few extra tenths of a percent of income here or there.

A reasonable interest rate is the first quality we're interested in. The second is organizational opportunities. What I mean by that is some banks allow you to create buckets within your high-yield savings account. I'm not talking about different accounts with different account numbers. I'm talking about sub-accounts within the high-yield savings account that are earmarked for future expenses that we know will happen, but we don't know exactly when they will occur.

For example, we know we will need to replace our cars. Our home will need some updating and repairs. We know we'll go on some bigger vacations, and at some point we'll have some larger out-of-pocket health care costs. To prepare for these episodic expenses, we recommend clients set up what is commonly known as sinking funds, where you sink away a little bit of cash every month into your high-yield savings account via automatic monthly transfers.

I personally use Ally Bank for this purpose, and our high-yield savings account has different buckets within the account that we deposit specific dollar amounts to every month via automatic transfers from our checking account.

You may be wondering how we pick the amounts to set aside each month. Well, for travel, we pick an amount that's some combination of currently true and reasonably aspirational. For us, that's about $20,000 a year. Now, we don't spend $20,000 every year, but we sink away these funds, and they roll over year to year to give us a guiding light for an average annual spending target.

For out-of-pocket health care expenses, we pick the amount of our high-deductible health plan, individual deductible. Again, some years we use less, some years we use more, but this is a decent rubric for our otherwise and reasonably healthy family. For home-related costs, we save 1.5% of the value of our home each year. This is meant to cover big repairs, upgrades, and sizable furnishings.

Obviously, this amount doesn't get used every year, but again, it rolls over year to year, and so when my wife asks me if we can get such and such done on the house, I just open the Ally app on my phone and show her the home bucket balance. That gives us a ceiling on what we can spend and ensures we aren't undermining our other goals with the insidious and corrosive threat that is ongoing home renovations.

Same idea for cars. We take the number of vehicles in our family, the number of years we intend to keep each car, and the expected cost to replace those cars, and that helps us come up with an annual savings target.

For us, we have two cars. We plan to keep them about 15 years and spend about $25,000 to replace them. That math produces a monthly savings target of just under $300 to the car bucket. Then down the road, when it's time to buy a new car, we're prepared to pay for it in cash.

Other sinking funds that I've seen be useful for clients include future backdoor Roth IRA contributions, annual disability or other insurance premiums, because you often get a discount if you pay annually instead of monthly. Maybe there's a wedding coming up or a big cultural celebration, a bar mitzvah, quinceanera, or a down payment on a house.

Another one I see a lot of clients use is what I call surprises and demises, and that's intended for aging parents, pets, or other loved ones whose present uncertainty may result in a large cash demand in your future.

The way sinking funds work mechanically is that we pay for the expense with our credit cards, so you can get your cash back or your miles, and then we reimburse ourself from the corresponding bucket back to our checking account. Then we pay the credit card bill from the checking account.

For example, I just put one of my daughters in braces. It was $5,000, paid the orthodontist with the credit card at the office, came home, took $5,000 out of the health care bucket, put it back in the checking account, and then paid the credit card off right away. Then the bucket begins to fill up again because of the automated monthly contributions.

Now, your emergency fund can sit in its own separate bucket. Sinking funds and emergency funds are distinct and separate ideas. Sinking funds are for inevitable future expenses that we know will happen, we just don't know when or how much. An emergency fund is the safety net that sits underneath the sinking funds in case an expense arises sooner or larger than the bucket can handle.

Having these sinking funds allows us to automate our financial life and to be reasonably assured that any future expense will not disrupt our normal monthly cash flow. They're a great way to make additional use of your high-yield savings again.

Now that you've got a good interest rate and some meaningful organization, if you're using a bank, you also have FDIC insurance. FDIC stands for Federal Deposit Insurance Corporation. This government entity guarantees that you can get your money back if your bank fails, and bank failures happen. This is not just a problem from the 1920s, there's been some large bank failures in the recent past. And so, it is important to know if you have this coverage or not.

The FDIC will return up to $250,000 for an account held by just one person, and up to half a million dollars for a jointly held account. In some cases, these financial institutions partner with other banks to ramp up their FDIC insurance to $1 million or $2 million, depending on the account.

You probably don't have a financial plan that calls for seven figures in cash, so it's not applicable to most people. But for some people, FDIC insurance provides a meaningful amount of peace of mind for large sums of cash.

For other people, like Jim, they don't really care about this FDIC insurance or these sinking funds. They just care about the simplicity and the interest rate. They don't use a bank at all for their high-yield savings account. They use a taxable brokerage account at a place like Vanguard or Fidelity. Jim is especially fond of Vanguard because the settlement fund in a taxable account is the federal money market fund that is currently paying a little higher interest rate than what he could get at a bank.

Now, these money market funds are incredibly safe and liquid, but they do not have formal FDIC insurance. In exchange, they often have a slightly higher rate than what the bank will offer, not always, but often.

Where you set up a high-yield savings account and what the exact rate at the exact time is, is not important. What is important is using any of these options instead of some crappy, low-yield savings account that most people are using at their local bank or big national bank, and they don't even realize there's a better way.

I hope that was helpful. Go out and make sure that you've got your cash held in a high-yield savings account. That'll be a meaningful way to add organization and long-term wealth to your financial plan.

 

SPONSOR

Dr. Jim Dahle:
This podcast was sponsored by Bob Bhayani at Protuity. One listener sent us this review. “Bob has been absolutely terrific to work with. Bob has quickly and clearly communicated with me by both email and or telephone with responses to my inquiries usually coming the same day. I have somewhat of a unique situation and Bob has been able to help explain the implications underwriting process in a clear and professional manner.”

Contact Bob at www.whitecoatinvestor.com/protuity, email [email protected] or call (973) 771-9100, to get your disability insurance in place today.

This is the Milestones to Millionaire podcast. If you'd like to come on and inspire others to accomplish what you've accomplished, you can apply at whitecoatinvestor.com/milestones.

Thanks for being here. Keep your head up, your shoulders back. You can do this. We're here 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.

Dr. Jim Dahle:
This is the White Coat Investor Podcast, Financial Boot Camp, your fast track to financial success. Let’s talk about net worth for a minute. Net worth is perhaps the most important number, certainly one of the few important numbers in personal finance and investing. A lot of people get fixated on their credit score. Your net worth is dramatically more important than your credit score as far as financial numbers go. Don’t worship at the altar of FICO. If you’re going to concentrate on stuff, concentrate on things like how much you have in investable assets, your savings rate, and your net worth rather than your credit score.

Net worth is everything you own minus everything you owe. Technically, it includes everything: your clothes, your computer, your vacuum, everything. But practically speaking, what most people include on the asset side is their investments, bank accounts, and their home, and that’s usually about it. Your investments and your home are kind of the big chunks. If you can calculate that much each year, that’s probably enough. You don’t have to go crazy assigning values to your cars, RVs, boats, clothing, jewelry, or anything like that. If you want to, you can. It technically is part of your net worth, but a lot of people leave that out of any sort of annual net worth calculation they do.

On the other side of the ledger are your liabilities, your debts, credit card debt, auto loans, and your mortgage. So your net worth includes your home equity, but you’ve got the value of the home on one side and the value of the mortgage on the other side of the ledger. You subtract the liabilities from the assets, and that’s your net worth.

If you’re like most doctors, your net worth starts out negative. Seventy-five percent of doctors pay for medical school with loans, so when they come out of residency or fellowship and they’re 31 or 35 or whatever, their net worth is negative because they’ve got two or three or $400,000 in student loans and $10,000 in assets. So they have a negative net worth, and that’s okay. The point is not where you start. It’s the direction you’re moving in and the speed you’re moving at.

Now, I get lots of questions about net worth. People want to get into specifics of what should be included and what shouldn’t be included. For example, they ask about accounts like 529s and UTMAs and their children’s custodial Roth IRAs and donor-advised funds. The truth is, you can include those if you want, but I think the important thing is to be consistent because what you’re really looking for here is the trend that you’re moving in.

Technically, in one respect, the 529 belongs to you even though your kid is the beneficiary. You could pull all the money out, pay any taxes and penalties on doing so, and buy a sailboat with it or put it in your taxable account. It’s technically your money. It’s interesting, though, because for estate tax purposes, it’s already been considered a completed gift to your kids. So there’s a little bit of interesting nuance there with 529s.

A lot of people look at these sorts of things for their children’s accounts and don’t count them in their net worth because they consider them not theirs anymore. It’s their kids’ money. So 529s, UTMAs, custodial accounts, and custodial Roth IRAs, for instance, often don’t count in their net worth because they view it as their kids’ money, and I think that’s very reasonable.

When it comes to a donor-advised fund, or DAF, that’s particularly true. You can’t take that money out, just like you can’t take out your kids’ Roth IRA or your kids’ UTMA account and put it into your own account. It’s gone. It’s definitely a gift you’ve already given away. But if you want to include that in your net worth, I think that’s okay too. Just be consistent year to year.

A more important number than net worth is probably your investable assets. This is a number you can actually use for something important and make decisions with. Net worth is more kind of interesting and neat to know and useful for making sure you’re moving in the right direction. But investable assets is a number you actually use to do financial planning.

For example, as a general rule, you can take out about 4% of your investable assets per year and expect your money to last in retirement for at least 30 years with a very high probability. But that’s not your net worth. That’s your investable assets that you multiply by that number.

Generally, investable assets just include your investments. Most people don’t include their home in that. They typically don’t include their debts in that. They typically don’t include things like 529s, UTMAs, donor-advised funds, or anything that isn’t just your investments. If you have rental properties, you’d include those. If you have retirement accounts, you’d include those. If you have taxable brokerage accounts, you’d include those all in your investable assets.

What I wouldn’t necessarily try to do, though, is somehow put a dollar value on income streams you have. If you have bought a single premium immediate annuity, which is basically a pension you buy from an insurance company, I would not include the value of what you paid for that any longer in your investable assets. Same thing with Social Security. Don’t try to assign a dollar value to it and put it in your investable assets or your net worth. Same thing with a pension. If your pension has already been annuitized and is now an income stream, I wouldn’t include it in your investable assets.

When you go to calculate how much you need out of your portfolio, you subtract all those sources of guaranteed income from the amount of income you need. So if you say, “I need $150,000 to live on,” and you’re getting $20,000 from a pension, and you bought an income annuity that’ll pay you $20,000 a year, and you’re getting $40,000 from Social Security, now you only need your portfolio to provide you $70,000 a year, not $150,000 a year. But I wouldn’t try to assign a value to any of those assets and put them into your investable assets. I would leave them out and just subtract the guaranteed income from the amount you need.

So net worth is worth calculating once a year. You or your financial advisor certainly need to know what your investable assets are so you can do financial calculations and financial planning with that number. But these are numbers worth calculating once a year, whether you’re a do-it-yourselfer or not, just to track how you’re doing and where you’re going.

The question we get a lot is whether we should pay down debt or invest, and the truth is both of those are good things to do. Both of them increase your net worth, and they generally increase your investable assets as you go along as well. So don’t worry so much about where your money’s going in that respect. Worry more about how much of it is going toward these good things that build your net worth. Hope that’s helpful to you.

The White Coat Investor Podcast is for your entertainment and information only and 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.