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\"I know what the math says, but….\"

Home Personal Finance and Budgeting \"I know what the math says, but….\"

  • Zaphod Zaphod 
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    Status: Physician, Small Business Owner
    Posts: 6084
    Joined: 01/12/2016

    WCI, regarding millionaires’ views of debt, I think you are a bit myopic by focusing on doctor millionaires whose net worth is largely the result of accumulated savings rather than returns on investments. People in the business world who are worth millions do not take such a view of debt. Taking the next step between $5-10M and $10-50M+ of net worth typically requires leverage.

    Click to expand…

    I don’t believe he is… I believe it is you making that assumption.

    If you meet enough old guy millionaires you will see that most of them are not borrow-the-world types.  Most of them have taken on debt to fund their business, their real estate purchases, etc., but limit their risk.  That’s not to say they haven’t taken on more than their fair share of risk, from time to time, but their entire empires are not usually completely hinged on other people’s money.

    Click to expand…

    I think this is the crux though, every time anyone mentions they are in no hurry to pay off their mortgage or 0.9% student loan, it is then taken to the other extreme where they are degenerate gamblers where money burns a hole in their pocket and needs to be bet on roulette.

    Thats not usually the case, they usually all still indexers and are investing the same boring slow way but just funneling the discretionary spending to those same indexes instead of mortgage/student loans.

    Yes even that can be taken to the extreme, but its not normally the case. Just like @startrekdoc is using leverage wisely, and in what can be described in no other way as safe given the overall life structure and income, etc…but it was smart and for all intents and purposes low on the risk scale.

    #54829 Reply
    Zaphod Zaphod 
    Participant
    Status: Physician, Small Business Owner
    Posts: 6084
    Joined: 01/12/2016

    That’s the point Craigy –debt isn’t necessarily bad.  Debt can be a good thing if leveraged correctly and responsibly; and that’s the devil in the details — correctly and responsibly.   Debt isn’t gambling where house rules will guarantee win over time.

    I suppose this is how the Jefferson vs Hamilton debates where like on having a strong banking system or property/commerce driven system. ????

    Click to expand…

    I am only interested in where the odds favor the person taking on the debt. Actually its win win but over different time scales. Thats why my view is long long term, thats where the edge is in favor of very specific debt, at safe levels.

    #54830 Reply
    Craigy Craigy 
    Participant
    Status: Spouse
    Posts: 2023
    Joined: 09/16/2016

    WCI, regarding millionaires’ views of debt, I think you are a bit myopic by focusing on doctor millionaires whose net worth is largely the result of accumulated savings rather than returns on investments. People in the business world who are worth millions do not take such a view of debt. Taking the next step between $5-10M and $10-50M+ of net worth typically requires leverage.

    Click to expand…

    I don’t believe he is… I believe it is you making that assumption.

    If you meet enough old guy millionaires you will see that most of them are not borrow-the-world types.  Most of them have taken on debt to fund their business, their real estate purchases, etc., but limit their risk.  That’s not to say they haven’t taken on more than their fair share of risk, from time to time, but their entire empires are not usually completely hinged on other people’s money.

    Click to expand…

    I think this is the crux though, every time anyone mentions they are in no hurry to pay off their mortgage or 0.9% student loan, it is then taken to the other extreme where they are degenerate gamblers where money burns a hole in their pocket and needs to be bet on roulette.

    Thats not usually the case, they usually all still indexers and are investing the same boring slow way but just funneling the discretionary spending to those same indexes instead of mortgage/student loans.

    Yes even that can be taken to the extreme, but its not normally the case. Just like @startrekdoc is using leverage wisely, and in what can be described in no other way as safe given the overall life structure and income, etc…but it was smart and for all intents and purposes low on the risk scale.

    Click to expand…

    I definitely agree that many on here have hit the Dave Ramsey koolaid a little too hard.

    However, that doesn’t mean that we should take a hard-line complete opposite stance and seek to completely obliterate all of the usual themes and strengths of such a belief system.

    Advocating for the middle-ground (which I think this thread has eventually evolved to), seeking to temper the arguments of either end of the spectrum, rather than crushing them blindly, is more tenable and effective.

    Being in debt does not make you a slave, but paying off your debt does not make you stupid either.

    LEVEL 1 WCI FORUM MEMBER.

    #54835 Reply
    Avatar beagler 
    Participant
    Status: Physician
    Posts: 259
    Joined: 07/08/2017

    Based on replies, leverage use seems to vary depending on phase of career and asset levels in relation to financial independence (FI) level. Again a personal decision.

    Seems most early phase career/ asset accumulation folks use some leverage – amount up to you. I did, WCI did, others too. Moderation would be keep your mortgage, and maybe a few low interest student loans for a single digit number of years.

    Once your net assets are near FI you don’t need leverage, what’s the point? Leverage magnifies risk and return, period. Ask the financial types. Same as higher beta portfolio or stocks. No one should time markets nor predict downturns, but reversion to mean and valuations can provide strategic information for one’s portfolio risk one takes.

    If I were early phase / longish working time horizon to FI I’d stay moderately leveraged regardless of valuations. Perhaps Zaphod may feel different about leverage in a few years when FI. Again, personal decision.

    Solo Internist, Midwest

    #54838 Reply
    Donnie Donnie 
    Participant
    Status: Other Professional
    Posts: 770
    Joined: 01/11/2017

    Craigy, my point about doctor millionaires is that people who are mostly relying on saved earnings to generate wealth, like docs, lawyers, etc. are less likely to use personal leverage. Folks who are relying on return on investments to generate wealth do use personal leverage. Most of the truly wealthy people I know ($10M+) use leverage fairly aggressively. Most people in the $1-5M range I know do not. Maybe the utility of having $50M versus $10M isn’t that important to warrant the risk to get there, but as Dave Chappelle once said after he walked away from his TV show, “The only difference between having 10 million dollars and 50 million dollars is an astounding 40 million dollars. ”

    As an aside, if you invest in the S&P 500, you are making use of debt since those companies have leverage equal to 2x+ free cash flow.

    #54853 Reply
    Zaphod Zaphod 
    Participant
    Status: Physician, Small Business Owner
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    Joined: 01/12/2016

    Based on replies, leverage use seems to vary depending on phase of career and asset levels in relation to financial independence (FI) level. Again a personal decision.

    Seems most early phase career/ asset accumulation folks use some leverage – amount up to you. I did, WCI did, others too. Moderation would be keep your mortgage, and maybe a few low interest student loans for a single digit number of years.

    Once your net assets are near FI you don’t need leverage, what’s the point? Leverage magnifies risk and return, period. Ask the financial types. Same as higher beta portfolio or stocks. No one should time markets nor predict downturns, but reversion to mean and valuations can provide strategic information for one’s portfolio risk one takes.

    If I were early phase / longish working time horizon to FI I’d stay moderately leveraged regardless of valuations. Perhaps Zaphod may feel different about leverage in a few years when FI. Again, personal decision.

    Click to expand…

    I dont think I will feel differently about reasonable and safe leverage at all in the right times by the right person. Yes, the whole point of the thread was that not paying your mortgage down in 1/5th of the time isnt necessarily indicative of a wonton leverage abuser.

    While I always will view leverage as a tool, it definitely makes more sense at different times. The risk/benefit of leverage starts to increase the shorter you are from retirement and all those benefits that are mainly due to long time lines disappear, leaving you mostly with risk. So, I do not plan to always be leveraged, in fact, thats part of the point the loans roll off along a schedule, nbd.

    As @hatton1 alluded to, this is an entirely different discussion for someone under say arbitrarily 45 and those over. Thats when the risk/reward must start to be aligned with the end game and progress levels. This is a big part of the issue and I think where a lot of the up front disagreement comes from, people at different stages of the game.

    I mostly took this stance to moderate it back to the middle, as a point of argument. I know the super conservative subset that is our forum may consider my liabilities to assets risky, but they arent objectively, and the longer time goes on the faster it takes care of itself.

     

    #54861 Reply
    Liked by erictait, hatton1
    Avatar beagler 
    Participant
    Status: Physician
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    Joined: 07/08/2017
    Earnest refinancing bonus

    Debt by itself can be a useful tool when used as leverage (borrow to invest). We’re assuming that people here are using debt to leverage their investment.

    But sometimes the available cash and larger statement balances in your investment accounts make you feel richer than your net asset value.

    That can lead to increase consumer spending. Ramsey et al mainly hate debt when used to fund consumption. Still without knowing if one has pared expenses ruthlessly the question of whether one should use leverage is incomplete. If one’s net asset value is zero and one spends too much one should not be leveraged, pay off debt. Or if one feels a bit rich due to higher investment account balances, one might tempted to spend a bit more due-that’s a moral hazard of leverage/debt for everyone.

    Solo Internist, Midwest

    #54949 Reply
    The White Coat Investor The White Coat Investor 
    Keymaster
    Status: Physician
    Posts: 4482
    Joined: 05/13/2011

    I don’t think anyone begrudges WCI for making money on the blog, and I have no idea why anyone would. I think he does a very good job of trying to disclose potential conflicts of interest. That said, even if he is conflicted, who cares. Everyone who is paid for doing something is conflicted. It is the nature of capitalism.

    WCI, regarding millionaires’ views of debt, I think you are a bit myopic by focusing on doctor millionaires whose net worth is largely the result of accumulated savings rather than returns on investments. People in the business world who are worth millions do not take such a view of debt. Taking the next step between $5-10M and $10-50M+ of net worth typically requires leverage.

    Click to expand…

    If your goal is to take the “next step” and your income is only that of a typical working physician, then I agree you’re going to need leverage to get there.

    I disagree that that is my next step nor that of the vast majority who have any concept of “enough.”

    I also disagree that significant leverage is needed to get in to the mid to high 7 figure range, but that’s just my personal experience speaking.

    Site/Forum Owner, Emergency Physician, Blogger, and author of The White Coat Investor: A Doctor's Guide to Personal Finance and Investing
    Helping Those Who Wear The White Coat Get A "Fair Shake" on Wall Street since 2011

    #54954 Reply
    Donnie Donnie 
    Participant
    Status: Other Professional
    Posts: 770
    Joined: 01/11/2017

    I don’t think anyone begrudges WCI for making money on the blog, and I have no idea why anyone would. I think he does a very good job of trying to disclose potential conflicts of interest. That said, even if he is conflicted, who cares. Everyone who is paid for doing something is conflicted. It is the nature of capitalism.

    WCI, regarding millionaires’ views of debt, I think you are a bit myopic by focusing on doctor millionaires whose net worth is largely the result of accumulated savings rather than returns on investments. People in the business world who are worth millions do not take such a view of debt. Taking the next step between $5-10M and $10-50M+ of net worth typically requires leverage.

    Click to expand…

    If your goal is to take the “next step” and your income is only that of a typical working physician, then I agree you’re going to need leverage to get there.

    I disagree that that is my next step nor that of the vast majority who have any concept of “enough.”

    I also disagree that significant leverage is needed to get in to the mid to high 7 figure range, but that’s just my personal experience speaking.

    Click to expand…

     

     

    I agree with most of what you wrote.  As I posted somewhere earlier in this thread, I suspect that you are close to achieving your financial goals so are dialing back risk, which makes sense.  The point I was trying to make was that taking the next step between $1-10M and $10-100M typically requires leverage, so if you hang out with $1-10M types, they will have a different view of leverage than $10-100M types.

    That said, most entrepreneurs who are in the $1-10M range use debt to get there.  Most highly paid professionals did not.  The key difference between the two is that entrepreneurs who start or buy businesses are much less risk averse for obvious reasons than folks who go into stable, highly paid professions like doctors and lawyers.

    To your point, those with a concept of “enough” and those who keep pushing the risk envelope have different goals.  One has a goal of wealth maximization and the other is trying to achieve a “number.”  For the record, I don’t think there is anything wrong with paying off debt. I have done the same in instances in the past rather than invest (to my own detriment, especially with the benefit of hindsight), but I am also more conservative than you.  Sometimes you just have to trust the math.

     

     

     

    #54962 Reply
    Avatar Complete_newbie 
    Participant
    Status: Physician, Small Business Owner
    Posts: 804
    Joined: 01/03/2017

    I don’t think anyone begrudges WCI for making money on the blog, and I have no idea why anyone would. I think he does a very good job of trying to disclose potential conflicts of interest. That said, even if he is conflicted, who cares. Everyone who is paid for doing something is conflicted. It is the nature of capitalism.

    WCI, regarding millionaires’ views of debt, I think you are a bit myopic by focusing on doctor millionaires whose net worth is largely the result of accumulated savings rather than returns on investments. People in the business world who are worth millions do not take such a view of debt. Taking the next step between $5-10M and $10-50M+ of net worth typically requires leverage.

    Click to expand…

    If your goal is to take the “next step” and your income is only that of a typical working physician, then I agree you’re going to need leverage to get there.

    I disagree that that is my next step nor that of the vast majority who have any concept of “enough.”

    I also disagree that significant leverage is needed to get in to the mid to high 7 figure range, but that’s just my personal experience speaking.

    Click to expand…

     

     

    I agree with most of what you wrote.  As I posted somewhere earlier in this thread, I suspect that you are close to achieving your financial goals so are dialing back risk, which makes sense.  The point I was trying to make was that taking the next step between $1-10M and $10-100M typically requires leverage, so if you hang out with $1-10M types, they will have a different view of leverage than $10-100M types.

    That said, most entrepreneurs who are in the $1-10M range use debt to get there.  Most highly paid professionals did not.  The key difference between the two is that entrepreneurs who start or buy businesses are much less risk averse for obvious reasons than folks who go into stable, highly paid professions like doctors and lawyers.

    To your point, those with a concept of “enough” and those who keep pushing the risk envelope have different goals.  One has a goal of wealth maximization and the other is trying to achieve a “number.”  For the record, I don’t think there is anything wrong with paying off debt. I have done the same in instances in the past rather than invest (to my own detriment, especially with the benefit of hindsight), but I am also more conservative than you.  Sometimes you just have to trust the math.

     

     

     

    Click to expand…

    Absolutely correct.

    #54969 Reply
    Avatar Complete_newbie 
    Participant
    Status: Physician, Small Business Owner
    Posts: 804
    Joined: 01/03/2017

    I don’t think anyone begrudges WCI for making money on the blog, and I have no idea why anyone would. I think he does a very good job of trying to disclose potential conflicts of interest. That said, even if he is conflicted, who cares. Everyone who is paid for doing something is conflicted. It is the nature of capitalism.

    WCI, regarding millionaires’ views of debt, I think you are a bit myopic by focusing on doctor millionaires whose net worth is largely the result of accumulated savings rather than returns on investments. People in the business world who are worth millions do not take such a view of debt. Taking the next step between $5-10M and $10-50M+ of net worth typically requires leverage.

    Click to expand…

    If your goal is to take the “next step” and your income is only that of a typical working physician, then I agree you’re going to need leverage to get there.

    I disagree that that is my next step nor that of the vast majority who have any concept of “enough.”

    I also disagree that significant leverage is needed to get in to the mid to high 7 figure range, but that’s just my personal experience speaking.

    Click to expand…

    WCI has helped countless MDs, and please don’t take this the wrong way. I have a hard time believing this – if this were the case, you wouldn’t be doing the conference and it would be free.

    #54970 Reply
    Avatar erictait 
    Participant
    Status: Physician, Other Professional
    Posts: 57
    Joined: 01/20/2016

    complete_newbie – Here here!!!!

    Eric S. Tait M.D., MBA
    President
    Vernonville Asset Management
    http://www.vernonville.com
    1-877-668-3311

    #54971 Reply
    Avatar erictait 
    Participant
    Status: Physician, Other Professional
    Posts: 57
    Joined: 01/20/2016

    StarTrekDoc – There is a potential downside in having paid off mortgages on rental properties – the liability

     

    Debt doesn’t only have to be used to magnify returns, it can be used as an asset protection tool as well.

    Plaintiff’s attorneys look for assets that they can get cash out of, fully paid off properties are just such assets.

     

    I don’t know you, but I will assume that you have each of those rentals not in your own name, but in individual LLC’s or a series LLC, if not I would

    advise doing that ASAP. I’ve got a great firm that can help you with that, just PM me, I’ve been a client of theirs for years.

    The return on a fully paid off property is not great (relatively speaking) if we’re using a pure numbers ROE strategy, it is going to be around the same as the long term stock market average without the benefit of potential liquidity.

    So from a pure monetary optimization standpoint it is not the greatest, but it is great that you have real estate in your portfolio.

    Eric S. Tait M.D., MBA
    President
    Vernonville Asset Management
    http://www.vernonville.com
    1-877-668-3311

    #54996 Reply
    The White Coat Investor The White Coat Investor 
    Keymaster
    Status: Physician
    Posts: 4482
    Joined: 05/13/2011

    I don’t think anyone begrudges WCI for making money on the blog, and I have no idea why anyone would. I think he does a very good job of trying to disclose potential conflicts of interest. That said, even if he is conflicted, who cares. Everyone who is paid for doing something is conflicted. It is the nature of capitalism.

    WCI, regarding millionaires’ views of debt, I think you are a bit myopic by focusing on doctor millionaires whose net worth is largely the result of accumulated savings rather than returns on investments. People in the business world who are worth millions do not take such a view of debt. Taking the next step between $5-10M and $10-50M+ of net worth typically requires leverage.

    Click to expand…

    If your goal is to take the “next step” and your income is only that of a typical working physician, then I agree you’re going to need leverage to get there.

    I disagree that that is my next step nor that of the vast majority who have any concept of “enough.”

    I also disagree that significant leverage is needed to get in to the mid to high 7 figure range, but that’s just my personal experience speaking.

    Click to expand…

    WCI has helped countless MDs, and please don’t take this the wrong way. I have a hard time believing this – if this were the case, you wouldn’t be doing the conference and it would be free.

    Click to expand…

    The conference is actually the biggest financial risk this business has ever taken, but it still doesn’t involve any leverage.

    Site/Forum Owner, Emergency Physician, Blogger, and author of The White Coat Investor: A Doctor's Guide to Personal Finance and Investing
    Helping Those Who Wear The White Coat Get A "Fair Shake" on Wall Street since 2011

    #55016 Reply
    Avatar StarTrekDoc 
    Participant
    Status: Physician
    Posts: 1966
    Joined: 01/15/2017

    StarTrekDoc – There is a potential downside in having paid off mortgages on rental properties – the liability

     

    Debt doesn’t only have to be used to magnify returns, it can be used as an asset protection tool as well.

    Plaintiff’s attorneys look for assets that they can get cash out of, fully paid off properties are just such assets.

     

    I don’t know you, but I will assume that you have each of those rentals not in your own name, but in individual LLC’s or a series LLC, if not I would

    advise doing that ASAP. I’ve got a great firm that can help you with that, just PM me, I’ve been a client of theirs for years.

    The return on a fully paid off property is not great (relatively speaking) if we’re using a pure numbers ROE strategy, it is going to be around the same as the long term stock market average without the benefit of potential liquidity.

    So from a pure monetary optimization standpoint it is not the greatest, but it is great that you have real estate in your portfolio.

    Click to expand…

    LLC all the way 🙂   — the liability is there regardless of payoff or not.  I’m not aware one is able to search mortgage vs paid off properties readily.

    Yes, we’ve used RE as leveraged buys over the years to grow our RE portfolio and fortunate enough to be in stage of life to be happy with cash flow from these properties (plus their continued appreciation).

    We still maintain a healthy primary mortgage of 600K and not in hurry to pay that off and using the monthly to plow into the market.

    Our asset portfolio is balanced at about 50/50  RE/Equities (not including the 600K to balance off the mortgage) — so we’re happy to be in the 7s and no intention to make the 10-50M mark —hence backed away from leveraged buys.

     

    When/If another prime property opportunity comes along, we have the full capability to tap into all these assets.

    #55020 Reply
    Liked by hatton1, Zaphod

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