Podcast #30 Show Notes: How to Invest at All-Time Highs
Our topic on the podcast today is how to invest at all-time highs. This is a question I've been hearing a lot lately both in person, via e-mail, and in comments. But in reality, I view it as an investing teenager question. It is not an investing child question because when you're just getting started as an investor, you don't even worry about stuff like this because you don't know it is a problem. You don't really know where the market is at. It's only as you start learning a little bit about investing that you start worrying about things like this. And then as you become an investing adult you realize that worrying about this doesn't do you any good. And so you stop. But in that transitionary period, it is a big concern for a lot of people. So we're going to talk about it today.
Podcast # 30 SponsorIf you’re looking to Boost Returns, Lower Taxes & Build Wealth, join the WCI monthly Real Estate Opportunities list for tips and strategies to maximize your real estate returns and for introductions to exclusive investment opportunities.Expect educational emails that introduce you to syndicators, fund companies, online courses, and online real estate platforms. Go to www.whitecoatinvestor.com/reopportunities to sign up today. You can do this and The White Coat Investor can help.
Quote of the Day[00:02:21] “Anyone may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the treasury; there is not even a patriotic duty to increase one's taxes.” – Judge Learned Hand
Opening[00:00:43] We had a wonderful time this last month at a couple of conferences. I took the whole White Coat Investor team down to FinCon in Texas where we learned how to be a lot more effective at getting this message of financial literacy out to our target audience. [00:01:16] It was interesting as we were there we noticed a real trend in the financial content market. Whereas I think five years ago it seemed to be mostly about blogs, over the last few years that's gradually transitioned to podcasts and even to videocassettes and so we're trying to incorporate those things into the program here at the White Coat Investor, so we can stay current and relevant and bring information to you in the way that you like to receive it. [00:01:45] It was interesting as I then went from there out to DC because I had a speaking gig at the American College of Emergency Physicians scientific assembly. But that night I met I don't know 80 or 100 or 120 of you and it was interesting that almost everybody I talked to thanked me for the podcast, which we always kind of viewed as this little tiny part of what we're doing here at the White Coat Investor. But it seems to be becoming a bigger and bigger part. And so we appreciate you listening and we appreciate you sharing it with others. We appreciate you giving us a rating so that this great podcast can be found by those looking for this information.
Main Topic[00:02:38] Our topic today is how to invest at all time highs.Wealth of Common Sense recently addressed this topic. [00:07:57] To invest at all time highs you need to:
- Have a written investment plan
- [00:08:55] Avoid complexity.
- [00:09:17] Have enough cash or very safe assets to make it through a rainy year or three.
- [00:09:56] Don't put all your eggs in one basket.
- [00:10:08] Continue to invest.
- [00:11:06] Buy and hold your portfolio.
- [00:11:56] Embrace the momentum.
Q&A from Readers and Listeners
Reader Question #1[00:14:11] “I have an opportunity to get a STEM MBA during my gap year with costs covered. Is it worth it to gain some financial literacy?” [00:14:25] Answer: I like MBAs, but not for that reason. More for business skills than personal finance ones. Good use for a gap year though.
Reader Question #2[00:15:23] “I am married and filing jointly. I do not have any existing IRAs, all have been converted into my solo 401K. My wife quit her job and just started her own business. She should be able to open up her own 401k to rollover funds into because she owns the business. So what follows are these questions:
- Does my wife have to rollover old IRAs (from her previous jobs) to a 401K so that I can do the backdoor Roth per protocol? (because we are filing jointly?)
- Once she does it, I could then fund a backdoor spousal Roth and backdoor Roth for me?
Reader Question #3[00:17:18] “Which brokers do you use and what funds do you use? I went over your 150 portfolios where you go in-depth with ticker symbols. What allocation do you use? Also have you tried Dan Wieners newsletter?” [00:17:37] Answer: I use a lot of brokerages. I've got a Vanguard brokerage account, a Fidelity brokerage account, a T.D. Ameritrade brokerage account, and a Charles Schwab brokerage account. I think they're all fine if you want to use any of those brokerages. [00:18:23] We use Vanguard funds. We tend to use index funds like the Total Stock Market Index Fund, the Total International Stock Market Index Fund, the Small Value Index Fund, and the REIT Index Fund. We buy them at T.D. Ameritrade, Charles Schwab, and Vanguard brokerages. You can buy these anywhere you want to go. [00:19:22] Any of those portfolios are reasonable portfolios. The purpose of that post, 150 Portfolios Better Than Yours is to show you what a reasonable portfolio might look like and I go over the rules for what's reasonable. [00:20:23] Dan Wiener is a guy who has been writing a Vanguard mutual fund newsletter for years and years. He has two things that he does with that newsletter, talks about some of the changes in the funds and recommends portfolios. I think if you want to subscribe to that, it is fine.
Full Transcription:[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. [00:00:19] Welcome to podcast #30: How to Invest at all time highs. If you’re looking to Boost Returns, Lower Taxes & Build Wealth, join the WCI monthly Real Estate Opportunities list for tips and strategies to maximize your real estate returns and for introductions to exclusive investment opportunities. Expect educational emails that introduce you to syndicators, fund companies, online courses, and online real estate platforms. Go to www.whitecoatinvestor.com/reopportunities to sign up today. You can do this and The White Coat Investor can help. [00:00:43] We had a wonderful time this last month at a couple of conferences. I took the whole white coat investor team down to FinCon in Texas where we learned how to be a lot more effective at getting this message of financial literacy out to our target audience. We also learned how better to run our business and be a little bit more efficient and even make more money. And so that was a wonderful time to be able to have a little bit of a retreat and and step back and really learn how to sharpen the saw in the classic words of business texts. [00:01:16] It was interesting as we were there we noticed a real trend in the financial content market. Whereas I think five years ago it seemed to be mostly about blogs over the last few years that's gradually transitioned to podcasts and even to videocassettes and so we're trying to incorporate those things into the program here a White Coat Investor, so we can stay current and relevant and bring information to you in the way that you like to receive it. [00:01:45] It was interesting as I then went from there out to DC because I had a speaking gig at the American College of Emergency Physicians scientific assembly. But that night I met I don't know 80 or 100 or 120 of you and it was interesting that almost everybody I talked to thanked me for the podcast which we always kind of viewed as this little tiny part of what we're doing here at White Coat Investor. But it seems to be becoming a bigger and bigger part. And so we appreciate you listening and we appreciate you sharing it with others. We appreciate you giving us a rating so that this great podcast can be found by those looking for this information. [00:02:21] Our quote of the day today comes from Judge Learned Hands. Who said anyone may so arrange his affairs that his taxes shall be as low as possible. He is not bound to choose that pattern which will best pay the Treasury. There is not even a patriotic duty to increase one's taxes. [00:02:38] Our topic today is how to invest at all time highs. This is a question I've been hearing a lot lately both in person and via e-mail and in comments and so on and so forth. But in reality I view it as an investing teenager question. It is not an investing child question because when you're just getting started as an investor you don't even worry about stuff like this because you don't know it's a problem. You don't really know where the market is at. It's only as you start learning a little bit about investing and that you start worrying about things like this. And then as you become an investing adult you realize that worrying about this doesn't do you any good. And so you kind of stop. But in that transitionary period it's a big concern for a lot of people. So we're going to talk about it today. [00:03:23] I find it interesting that people that ask this question they think this is new, right. They're like oh it's 2017 the market's been going up for so long surely it's going to crash at any moment. Surely I should be investing differently because of it. But they don't realize that. I've been getting this question for six or seven years. The market has been at all time highs since 2012. You know it's very interesting coming out of the crash in 2008 and early 2009. [00:03:49] Throughout the rest of 2009 everybody was talking about the double dip, about how the market was about to crash again, despite the fact that you could buy stocks at the lowest price you've been able to buy them at for years at the best valuations you'd seen in decades and everyone was worried about a double dip. Right. So people always think the market is about to crash. You know in 2010 the market would down a little bit and mid-year and everyone's like well here's the double dip you know. It's going to crash out again and it never got anywhere near the previous lows in 2009. In 2011 we actually had a bear market. You may not have noticed it. It was very quick but we had a drop of just over 20 percent in the market that year. But in looking back nobody even thinks about that. But basically since 2012 we've been at market highs every year. [00:04:40] Is the market going go down eventually? You better believe it. There is a market crash coming. I don't know when it's going to come but it's coming. And you need an investment plan that can handle that and you need a disposition that can stick with your investment plan. The investor is far more important than the investment. [00:05:00] Here's the truth of the matter. If you look historically at how often we get bear markets it's way more frequently than you think. A couple of times a decade is pretty standard. I mean you basically ought to expect a 10 percent correction in your portfolio every year and a 20 percent correction approximately once every three years. And so you know historically that's the case. And so if you're looking forward going how do I need to design my plan? What does my plan need to be able to withstand? [00:05:31] Well what you need to do is realize that your plan if you're going to be investing for 30 years during your career and 30 years during your retirement. This plan of yours is going to have to go through approximately 20 bear markets. This isn't something that just happens every now and then. It happens all the time. And your plan has to be ready for it. [00:05:53] And so the plan I have adopted from my own portfolio is what I call a fixed asset allocation and what that means I put a certain percentage into every given asset class and set up how much risk I'm going to take at the beginning of the year. And then throughout the year, you know one asset class does better than others and you get to the end of the year and something's out of balance. And so you simply rebalance back to those percentages. This forces you to continually be selling high and buying low or the equivalent just directing your new investments to what hasn't done as well in your portfolio over the last year. But the nice thing about that plan is it doesn't require a working crystal ball. I can be completely agnostic about future returns. And be able to stick with the plan that way. [00:06:43] Now it doesn't mean that valuations don't matter. You know obviously buying stocks at today's valuations is not as good a deal as it was to buy them in spring of 2009. That's just the way it is. But the question is what should you do about it. Well let's go back a year right. When valuations were high. The stock market was at all time highs. What should you have done? [00:07:07] Well it turns out the right answer was to stick with your plan because look at the market this year, everybody thought oh Trump got elected the whole market's going to tank and everything is going to be awful. But what happened? Well we had spectacular returns so far this year. And so you want to not try to predict the future, not try to time the market, not try to listen to the talking heads. [00:07:33] Ben Carlson, CFA, who writes a blog called a Wealth of Common Sense. Recently addressed this topic. You know how to invest at all time highs on his blog. He provided some reasonable recommendations. And basically when you look at all these, it really comes down to stay in the course with your plan. So if you don't have a written plan make sure you get one. [00:07:57] But here's what he recommends you do first rebalance. You know if you're worried about where the market's at, Make sure that you have your portfolio where you want your portfolio to be. And that means that the percentages in your portfolio are equal to the percentages you wrote down in your written investment plan. If you don't have a written investment plan you need to make one. In fact he said you could even over rebalance if you're really nervous about stocks. I'm not a big fan of this over rebalancing as basically just market timing right, but it's just a little bit of market timing. So if your portfolio is calling for 70 percent stocks and you worry the market's really high you put 65 percent stocks in your portfolio. OK fine. That's not going to kill you. [00:08:39] If that helps you to stay the course and not end up selling low when the market goes down great. It's a relatively minor change. It's not going to hurt you that much. But the truth of the matter is you time in the market with a small percentage your portfolio instead of a large percentage. [00:08:55] Ben also recommends that you avoid complexity. Well I agree that there's little benefit to complexity just for complexities sake but you also don't want to go the other route. You know I think it was Einstein who said, Make everything as simple as possible but not simpler. So you don't necessarily just want to make your entire portfolio Apple even though that would avoid a lot of complexity. [00:09:17] He also recommends that you have enough cash or very safe assets to make it through a rainy year or three. And I think that is great advice. For example people who retired in 2000 saw a huge bear market right as they went into retirement. But if they had enough cash to get through three years worth of their spending the market was heading back up by 2003. And so you just want to have enough that you're not forced to sell low. In reality you really don't want any money that you know you're going to need in the next five years invested in stocks anyway. Ben also recommends that you DCA or dollar cost average and diversify your portfolio. Well diversification is a no brainer. [00:09:56] Don't put all your eggs in one basket. That helps you to stay the course because generally when one asset class goes down there's usually something that's going up or at least not going down as much. So diversification helps. [00:10:08] What does he mean when he's saying DCA here, is he means continue to invest. You know it's interesting. I had someone put a comment on the blog the other day. You know and he was advocating for whole life insurance. No big surprise I get a lot of comments like that. But his point was you know if you invested money in 2000 your returns weren't very good over the next 17 years. And while that's pretty true it's also terribly terribly cherry pick time period. The truth of the matter is the typical investor does not just invest all his money in 2000 and let it ride. He invests in 2000, 2001, and 2002, and 2003. And if you had done that over the years your return would be far better than the person who just put it all in in 2000 and let it ride. So do periodically invest your money. That will help you to basically get the average valuations and get the average returns over that time period. [00:11:06] Ben also recommends you buy and hold your portfolio. I agree. Are there lots of criticism of a buy and hold. Absolutely there are. I think Winston Churchill said something that can be applied to this, if you warp it a little bit. Buy and hold is basically the worst investment strategy except for all the others. You know I think Winston Churchill said that about capitalism or democracy or something like that. But it applies to investing as well. It's not great. There are problems. [00:11:34] You've got to be able to hold on with these 30 and 40 and 50 percent stock market losses. But it's still better than all these other ways to invest. It's not that you can't find a way that back tests better. It's just that people are far more able to stick with this plan than these other plans that they try to follow. [00:11:56] The other thing that Ben recommends is that you embrace the momentum. Remember that momentum has been proven to be a factor in returns of the stock market. And what I mean by momentum is there is a certain effect that what stock markets have done in the recent past they will continue to do in the near future. And so when things have been going up they tend to continue to go up. And if you embrace that you get to ride the whole ride up. Whereas if you bail out early you miss out on that. For example think about the late 90s. Right. [00:12:31] The chairman of the Fed was saying, hey you know, this is you know a little bit exuberant, this seems bubbly, and that was in 96. If you had bailed out at that point you would've missed the spectacular returns of 97, 98, 99, and not gotten those. And that was like. Altogether it was close to 100 percent return and you would have missed out on that because you didn't embrace the momentum. [00:12:54] Far better to just stick with it and take what the market will give you. You know the truth is, I bet there were a lot of people that bailed out in 96 and then got back in 99 just because they couldn't take being out of the market only to not only missed the run up but then they still suffered the crash, far better off just sticking with a long term plan. [00:13:16] You know it's interesting that people are worried about being able to you know what they should do with their portfolio up market highs. You usually think that the difficulty in sticking with your plan is at market lows. But the truth of the matter is it's just as hard to stay the course at market highs as it is at lows. But you still need to do, it is just as important. [00:13:35] Remember that the market is usually, you know, often, at all time highs. This shouldn't be a surprise when the market's at all time highs. You expect it to be at all time highs. Part of that is because you know the economy is becoming more efficient over the years and the economy's becoming bigger and these companies are really making more profits each year. But don't forget that part of it is because the highs are nominal numbers, right. The stock market goes up with inflation. So beware the money illusion, just because you have more money doesn't mean you actually have more purchasing power, due to inflation. [00:14:11] All right let's move into some of the questions we've gotten recently. This one came in via Twitter. I have an opportunity to get a stem MBA during my gap year with costs covered. Is it worth it to gain some financial literacy? [00:14:25] Well I like MBA. I think MBA can be useful in your career. They can certainly give you some alternative career options and open a lot of doors for you. But I don't like MBA just to boost your financial literacy. That's really not what they cover in an MBA. It's not about budgeting. It's not about building investment portfolio. You know it's not about, you know, dealing with insurance agents. You know you can learn those skills from places like blogs and books but you don't learn from an MBA. [00:14:55] In an MBA you learn business skills. And there's a little bit overlap there but for the most part if your goal is just to boost your personal financial literacy I don't think an MBA is the way to do it. I do think it's a great use for a gap year though. If you're not going to be able to get into medical school this year anyway you know it makes your application a little bit more impressive and gives you you know the opportunity to have a little bit more education and hopefully that education that you use throughout your career. [00:15:23] All right the next question came in via e-mail. This is from a doc I'm married and filing jointly. I do not have any existing IRAs. They've all been converted into a solo 401k. My wife quit her job and started her own business. She should be able to open her own 401k to rollover funds into it because she owns a business. [00:15:40] So I have these questions. Does my wife have to roll over old IRAs from previous jobs to a 401k so that I can do the backdoor Roth per protocol because we're filing jointly. And then once she does it, I could then fund the backdoor spousal Roth and backdoor Roth for me. [00:15:57] Ok. I think we probably need to go over a couple of things here with backdoor Roth IRAs. First of all IRA stands for individual retirement arrangement. It's individual. You do not share an IRA with your spouse. And so when you're trying to determine whether you can do a backdoor Roth IRA it has nothing to do with your spouse's IRAs. It's all about your own. And so if you don't have any other IRAs you can do the backdoor Roth IRA. No matter what your spouse has. Likewise if your spouse has some old IRAs and wants to do the backdoor Roth IRA he or she needs to get rid of those IRAs and your two options are to convert it to a Roth IRA and pay the taxes on it. [00:16:40] And that's a good option if it's relatively small. Or to roll it into a 401k either at your employer or into an individual 401k if you're self-employed and you don't need much income. I mean you've got $10 for surveys you can open an individual 401K and roll your IRAs in there. But you can't roll in your spouse's IRA and it doesn't affect your spouse's back door Roth IRA. [00:17:04] Remember that when you report the backdoor Roth IRA on your taxes you do that on form 8606 and that form has to be filled out one for each spouse because their individual retirement arrangements. [00:17:18] Next question also came in by e-mail. I recently found your blog and thank you for the information. Thank you for keeping us updated. Which brokers do you use and what funds do use? I went over your 150 portfolios where you go in-depth with ticker symbols. What allocation do you use? Also have you tried Dan Wieners newsletter? [00:17:37] All right a lot of questions there. You know like many of the questions I get just reading the question I can see that the person asking it doesn't understand a few important concepts and so I try to flush those out when I interact with them and we'll do that today. For example this person is asking what brokerage do you use. Well I use a lot of brokerages. I mean I've got a vanguard brokerage account. I've got a Fidelity brokerage account. I've got a T.D. Ameritrade brokerage account. I've got a Charles Schwab brokerage account. I think they're all fine if you want to use any of those brokerages. I don't have a problem with that. They all have relatively low expenses. Lots of different investment options and do a good job with keeping your money secure and your paperwork simple so I don't think it really matters what brokerage you use. [00:18:23] And then the questioner asks what funds do you use. Well I've written about that various times over the years on the Web site. It doesn't really change very frequently for the most part. We use Vanguard funds. We tend to use index funds like the Total Stock Market Index Fund, the total international stock market index fund, The small value index fund, the REIT index fund. You know I use their inflation indexed bond fund you know for the most part we're using Vanguard funds and we buy them at T.D. Ameritrade and Charles Schwab and Vanguard brokerages. You can buy these anywhere you want to go. [00:19:04] Now sometimes it's cheaper to buy the ETF version of the fund. So we do that usually when we're not at the vanguard brokerage but it's really the same fund whether you use the ETF or whether you use the mutual fund. [00:19:17] Questioner asked I went over 150 portfolios, do you use the same? [00:19:22] I have no idea what they're referring to there. I mean I don't use 150 different portfolios. No. But any of those portfolios are reasonable portfolios. The purpose of that post, which is entitled 150 portfolios better than yours if you want to go check it out on the blog, is to show you what a reasonable portfolio might look like and I go over kind of the rules for what's reasonable. You know it needs to be diversified, needs to involve multiple asset classes. In general there needs to be more than one mutual fund holding although there are some exceptions to that, particularly with a fund of funds, where you own a bunch of different mutual funds by owning just one. [00:20:02] But the point is you need a portfolio that is simple, that you can stick with, and that is right for you. And it's difficult for me to tell everybody what their ideal portfolio is but if you're not sure just pick one of those basic ones and stick with it while you learn more and then you can make changes down the road if you want to. Nothing's permanent. [00:20:23] Questioner also asked about Dan Wiener's newsletter. Dan Wiener is a guy who's been writing a Vanguard mutual fund newsletter for years and years and he has kind of two things that he does with that newsletter. What he talks about some of the changes in the Funds which I think some people find interesting. But he also recommends portfolios. He has recommendations for various kinds of portfolios including hot hands fund which is basically the mutual fund did the best last year as well as you know actively managed mutual funds and index mutual fund portfolio. [00:20:57] And so I think it's if you want to subscribe to that that's fine. [00:21:00] You can certainly learn a lot about mutual funds by reading his newsletter. There's a cost to it. I want to say it's a couple of hundred bucks a year. I certainly don't think it's necessary and I don't think the Dan Wiener can predict the future any better than the rest of us. You know Vanguard actively managed mutual funds have a big advantage over most actively managed mutual funds in that they're low cost and it becomes pretty obvious that the most significant reason the index funds outperform actively managed mutual funds is because they're low cost. So if you can get low cost actively managed mutual funds you've got a lot better chance of beating an index fund than you would if you're using one of these crappy front loaded 1.5 percent expense ratio mutual funds that mutual fund salesmen masquerading as financial advisors like to use. [00:21:53] But if you want to try actively managed funds certainly I think a lot of the ones that Vanguard are excellent and I think Dan Wiener can give you a lot of information about that. Personally I don't like thinking about actively managed mutual funds and their managers. I just buy index mutual funds and then I don't have to think about it. I mean I literally am using the same mutual funds I was using 15 years ago. And they still work. You don't need to be swapping around all the time when you're using an index mutual fund because you've gotten the opportunity to just get the market returns and the market returns are good enough for me to reach my financial goals. [00:22:28] If you’re looking to Boost Returns, Lower Taxes & Build Wealth, join the WCI monthly Real Estate Opportunities list for tips and strategies to maximize your real estate returns and for introductions to exclusive investment opportunities. Expect educational emails that introduce you to syndicators, fund companies, online courses, and online real estate platforms. Go to www.whitecoatinvestor.com/reopportunities to sign up today. You can do this and The White Coat Investor can help. [00:23:02] Head up shoulders back. You can do this. We can help. See you next time.