Good Investing Is Boring Investing

[00:00:00] 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. Here's your host Dr. Jim.

 

[00:00:20] Welcome to episode number 34. Good investing is boring investing. This podcast is sponsored by Education Loan Finance. Education Loan Finance is here to empower you to a brighter future. We do that by helping you through the refinancing process with your own personal loan adviser who will be with you during the entire process. Education Loan Finance also as some of the lowest rates in the industry. You can learn more and get the special white coat investor deal. Three hundred twenty five dollars back to you at Elfi dot com slash White coat investor.

 

[00:00:51] Our quote of the day today comes from J. Reuben Clark who said, interest never sleeps nor sickens nor dies, never goes to the hospital. Works on Sundays and holidays, it never takes a vacation, it never visits nor travels, once in debt interest is your companion, every minute of the day and night and whenever you get in its way, or cross its course, or fail to meet its demands, it crushes you.

 

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[00:01:44] I've got a few questions and complaints recently from someone who said hey why don't you write about this. And I emailed back and told them I did write about that. Ten days ago I sent you a post about it and it turned out they weren't signed up for the newsletter. Well if you want to get all the stuff we're pumping out that's what you need to be signed up for.

 

[00:02:02] Also I hope you're excited about the upcoming course. We're pouring some time and effort into making this online course absolutely awesome. It's going to be great for those who really don't want to be investment hobbyists but don't want to get hosed either. And so it's a great option for you to learn how to be a do it yourself investor. It's going to be at least six hours of video, quizzes. You will be able to review all the answers to the quizzes. There are screen caps and it's going to take you from beginning to end of setting up your own personal financial plan.

 

[00:02:37] In today's podcast we're going to talk a little bit about basic investing and sometimes I realize when I read some threads on forums or I interact by e-mail with people that I ought to spend a little more time on some things that I think are pretty basic which for the most part involves investing behavior today.

 

[00:02:58] So I want to share this post that was put up on the Bogle heads Forum and the thread went for a few days and for several dozen posts. But I think what's interesting is reading through what the original poster put on the post.

 

[00:03:14] He started out this way. Yes I feel like the biggest idiot especially in this bull market. I only started investing 3 years ago and got involved in high risk stocks including oil and biotech. I made some really bad picks and took a massive loss. I try to ignore thinking about how much I've lost because I feel ashamed and embarrassed. I still owe one hundred fifty three thousand dollars in student loans and have a one hundred ten thousand dollar mortgage. I love reading and following the stock market, it is a hobby of mine and brings me lots of joy but it is also stressful and depressing because I seem to always pick the worst stocks to invest. I'm lucky to have a stable 120 thousand dollar a year job. I'm considering which path to take moving forward. Any opinion will be greatly appreciated. Thank you in advance.

 

[00:03:58] So he provides two pathways. Number one get out of the market completely, focus entirely on paying off my student loans, which as a reminder are one hundred and fifty-three thousand dollars at four point eight percent interest and only consider investing after paying off my student loans. This will alleviate a lot of stress in my life but I will feel more depressed because I know I won't be able to win back some of my losses. Investing does bring me joy and excitement. Life will be boring.

 

[00:04:26] Path Number Two. Let's continue to pay off student loans but invest a modest amount of about 600 dollars a month. This will bring me more happiness because I get to stay in the market and not feel like I'm missing out.

 

[00:04:37] I don't want to feel like I'm missing out in 2018 at the tax cut plan passes and stocks continue to rise. This plan will make me feel guilty because this is an additional 600 dollar monthly payment I could put towards my student loans and bring apprehension because I will constantly worry about losing more money especially with my track record of horrible picks.

 

[00:04:57] Then a few posts into the thread he says Thank you. I will admit the thrill is sometimes addictive. I hate myself for losing so much money and trying my best to not repeat the same mistake again. I already have 401K matching for my employer. But I guess the greed in me is always wanting more money which leads to high-risk investments. Path number one is where I'm leaning and I currently have a plan to knock off my student loans by 2020. I just don't understand all the people on Twitter and other social media outlets bragging about making fifty thousand or 200 thousand dollars in stocks. It is so difficult for me to even make a 500 dollar profit. I should just swallow my pride and accept that I'm not a good stock picker. I do plan to invest in a vanguard index fund later when I'm done with my student loans.

 

[00:05:37] Now later post he says I lost it all permanently. I have some major bad luck, invested large chunks in biotech last October before the presidential election. Then Hillary Clinton went on a verbal rampage against pharmaceutical companies and all the biotech stocks plummeted. I had to sell due to margin calls. I also invested in and lists a few other stocks. All were oil companies that filed Chapter 11.

 

[00:06:00] So here's what we see here. We see a few lessons learned and I'm not sure this particular poster has learned all these lessons. But let's go through them.

 

[00:06:11] Number one, buying individual stocks is a bad idea. And the reason why is individual stocks go to zero all the time, they go bankrupt. Not only do they race up and race down and give you more volatility in your portfolio but they bring on what is called uncompensated risk. Uncompensated risk is risk that you don't get paid for taking. And individual stock risk is an uncompensated risk. If you can diversify your risk away nobody is going to pay you to take it. And it's very easy to diversify away individual stock risk. You simply buy a mutual fund particularly an index fund.

 

[00:06:50] Number two investing is supposed to be boring. It's not supposed to be fun. It's not supposed to bring you joy. It's not supposed to be exciting. You're not supposed to be depressed when you don't do it and excited when you do, that is completely the wrong attitude you want to have while you're investing.

 

[00:07:07] Second, in several times in these posts he talks about getting back to even. That's really the sunk cost fallacy, this idea that somehow things will be better if you get back to even, all your losses are water under the bridge and all you need to consider is what you want to do going forward. In fact if you're investing in a taxable account and you have a loss you should sell it in order to claim that loss for your taxes. You can exchange him to something very similar if you like the investment but you want to sell it and get that last to use against your taxes.

 

[00:07:40] Next issue, paying off debt might not be a very high yield investment but it is a guaranteed one and it certainly smarter than gambling which is what this investor has been doing. Four point eight percent is not a terrible guaranteed return particularly if you make too much to be able to deduct student loan interest from your taxes. Particularly when you're highly leveraged. In this case this person not only owes his annual salary and a mortgage but he owes more than that in student loans.

 

[00:08:12] Next issue, it turned out if you dug deeply into the thread that he the reason he lost all of his money was that he was buying these stocks on margin and leveraged investing is risky. Not only can you lose your entire investment, you can lose more than your entire investment by losing the money you borrowed. Another thing to be aware of is the fear of missing out. This has been palpable lately when people are talking about bitcoin. You know when you watch something go up 1700 percent in a year and you start seeing Bitcoin millionaires out there all of a sudden you feel like you need to jump in there and it's hard for a lot of people to resist that. But you've got to realize that the investor is more important than the investment and if you can't resist the greed of jumping in when something's gone up a lot and resist the fear of jumping out when something's gone down a lot you're not going to be successful no matter what you invest in.

 

[00:09:07] I wrote a post earlier this year about my favorite mutual fund which really explains a lot about why index funds are so awesome. My favorite mutual fund is the Vanguard Total Stock Market Index Fund. It's a great fund. Is it boring. Absolutely it's boring. What do you get out of it. You get the market return and that's it. You're never going to beat the market. Now you're not going to underperform it either. But you're not going to beat it. And one of the reasons I like it is that it has pretty awesome long term performance. If you look at it over the last five years has made fourteen point six percent a year. That's pretty good performance.

 

[00:09:42] It also isn't going anywhere. One thing about mutual funds is mutual funds are oftentimes disappearing, they disappear all the time. And that's part of the reason why a lot of the data is flawed it looks at mutual funds because if they don't account for the fact that a bunch of them disappeared then you assume the actively managed mutual funds are better than they actually are and it's just not true. You've got to account for that survivorship bias and the nice thing about a big fund like the Vanguard Total Stock Market Index Fund has is not going anywhere because you know which ones disappear, the bad ones, the ones with the bad performance, they're the ones that disappear. And so the ones that are left behind look better.

 

[00:10:25] Another reason I like the total stock market fund is that it's super tax efficient since it owns all the stocks. It never really has to buy or sell them. And so it's turnover is very low usually less than 5 percent. And so that keeps your costs low and it keeps your taxes low. So you're really not paying much in tax at all. Other than unqualified dividends and it kicks out each year. And when you sell the fund.

 

[00:10:49] It also has no tracking error. Right. You get the market return. There's no worry that it's going to underperform the market. You don't have to worry about manager error and your manager losing his touch. It's also super diversified. The total stock market fund owns thousands of stocks. Last time I looked it up was three thousand six hundred fifty stocks. That's a ton of stock right. You're very diversified when you own something like that. Another reason I like it is the economies of scale. It literally allows me to pool my money with millions of other people and push those costs way way down. I think the expense ratio on this fund is something like four basis points right now, four basis points is basically free. It's FREE. Your professional management comes for free. That diversification you get from owning all those stocks. Free. Liquidity of being able to buy and sell it any day the markets open, free. It's a pretty awesome deal.

 

[00:11:44] It's also widely acknowledged to be a smart way to invest. Warren Buffett said most investors both institutional and individual will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results after fees and expenses delivered by the great majority of investment professionals.

 

[00:12:05] Allan Roth said the S&P 500 fund is a great way for investors to harness the return that capitalism has to give. In fact I think it's better than ninety nine point nine percent of mutual funds out there a total stock market fund, like the one I'm talking about, is just slightly superior.

 

[00:12:21] Jack Bogle said the index fund is sensible serviceable method for obtaining the market's rate of return with absolutely no effort and minimal expense. Index funds eliminate the risks of individual stocks, market sectors, and manager selection, leaving only stock market risk.

 

[00:12:37] Jonathan Clements said Santa Claus the Easter Bunny should take a few pointers from the mutual fund industry. All three are trying to pull off elaborate hoaxes. But while Santa and the bunny suffered the derision of 8 year olds everywhere actively managed stock funds still have an ardent following among otherwise clear thinking adults. This continued loyalty amazes me, reams of statistics prove that most of the fund industry's stock pickers fail to beat the market.

 

[00:13:02] Jeremy Siegel said there is a crucially important difference about playing the game of investing compared to virtually any other activity. Most of us have no chance of being as good as the average in any pursuit where others practice and hone skills for many many hours. But we can be as good as the average investor in the stock market with no practice at all.

 

[00:13:22] And William Bernstein says an index fund dooms you to mediocrity. Absolutely not. It virtually guarantees you superior performance.

 

[00:13:31] I think it's pretty easy to see why a favor index fund investing. If you're going to buy stocks this is the way to do it. This is the way to invest in the stock market. It's not exciting, it's not going to bring you any joy but you know what this is serious money. You're investing money that you're going to need to spend later. And so I don't think you should be looking for excitement and joy. That's not the point. The point is to get your money invested so it grows. So meet your goals so you can get on with what you really care about in life.

 

[00:13:58] All right we've got a little bit of time for some questions. Here's one that came in said I have a hundred thousand dollars in sole proprietor income, it is my only income. Is it better to take business deductions or contribute more to a solo 401k or a Roth Solo 401k? If I am correct business deductions lower the amount I can contribute to the Solo 401k. Should I always max out any business deductions first. Or contribute more to the Solo 401k?

 

[00:14:26] While in this situation the very best tax break you can get is a business deduction. The reason why is you don't have to pay any payroll taxes on business deductions. You don't pay Social Security. You don't pay Medicare and you don't pay any income taxes on business expenses either. It's basically free. Well I'm not entirely free because you spent the money on something. I mean it's a legitimate expense but the amount that you spent on it is what you get to deduct from your income.

 

[00:14:55] And so you definitely want to take that. A Solo 401k is great but you have to pay payroll taxes and all the money that you put into the solo 401 k plus when you take the money out you have to pay some more taxes. Now there is the benefit of having your money compounds tax free for years and years and years. But it takes decades for that to overcome the fact that you don't pay taxes at all on the business expenses. So if you can take a business expense take the business expense even if it lowers how much you can put into your retirement accounts.

 

[00:15:27] All right. Here's another question that came in. I saw this one at a forum actually. Help I took out a small position in bitcoin and a couple other crypto currencies. I've already made my initial capital investment back in short order around two weeks. Now it's just playing with house money and I can't stop. Even though it's just small amounts I can see this being a huge time suck going forward. I've told myself I won't check the crypto values but it's so hard to do when they are skyrocketing. I check it multiple times a day. I want to continue to focus on medicine. My specialty is fun and generates income and real estate which generates passive and generational income and wealth. But this crypto craze has got me absolutely distracted.

 

[00:16:06] Well here's the deal. If you are having to check your investments 20 times a day you're probably doing it wrong. I mean either go be a Wall Street trader or practice medicine. But don't try to be both. It's just you're not going to do either one of them very well.

 

[00:16:23] It's interesting I see a lot of people counsel these folks who don't know how to get out of Bitcoin, as you know, take your take your original investment out and then you're just playing with house money. What a lot of people don't realize is that's a fallacy. House money spends just as well as earned money and it's a real loss when you lose whether you earned the money or whether it came on an investment in a speculative investment. And so if you would not invest that same money today into bitcoin or whatever speculation you have don't leave it in there get the money out because that is exactly the same money. It's all fungible. And when you think about it you realize that's true but too many of us fall for that fallacy and play with house money.

 

[00:17:04] When I spend my money or when I saved my money it's really all serious money. This idea of play money is fine, you just got to realize it's a very expensive hobby to play around with your investments. I mean you can go do some other very expensive things like heli skiing and buying a boat and burning a ton of gas in it for what you will spend playing around with your money. Because most of the time that leads to poor investment returns.

 

[00:17:32] This podcast was sponsored by Education Loan Finance. Education Loan Finance is here to empower you to a brighter future. We do that by helping you through the refinancing process with your own personal loan adviser who will be with you during the entire process. Education Loan Finance also has some of the lowest rates in the industry. You can learn more and get the special white coat investor deal, 325 dollars back to you at ELFI dot com slash white coat investor.

 

[00:17:59] Head up shoulders back. You can do this. We can help. Make sure you're getting all the information you deserve by signing up for the free white coat Investor monthly newsletter at white coat investor dot com.