How to Think About Money with Jonathan Clements – Podcast #105

Intro: 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 Dahle.

Jim Dahle: This is White Coat Investor podcast number 105. How to think about money with Jonathan Clements. Creighton University believes in equipping physicians for success in the exam room, the operating room and the boardroom. If you want to sharpen your business acumen, deepen your leadership understanding and earn your seat at the table. Creighton's executive healthcare MBA is for you. Specifically tailored to busy physicians, advanced clinicians or working healthcare executives, our program blends the richness of on-campus and the flexibility of online learning. Earn a Creighton University Executive MBA in 18 months, 45 credit hours and four four-day on-campus residencies. Learn in a deeply collaborative peer-to-peer cohort and elevate your expertise. Visit www.creighton.edu/chee to learn more.

Jim Dahle: Our quote of the day today comes from Nassim Nicholas Taleb, who said, “When an investor focuses on short-term investments, he or she is observing the variability of the portfolio, not the returns, in short, being fooled by randomness.” Thanks so much for what you do. The work you do each day is not easy. I don't know, sometimes it's difficult to drag yourself out of bed to go in to do it, especially when the ER calls you at three o'clock in the morning to come do it. So thank you very much for what you're doing. I know sometimes we don't get thanked very often by those we actually serve. And so it's good to hear it every now and then. It's not an easy career, and I'm aware of that.

Jim Dahle: Be sure you check out our new white coat investor network member, the physician philosopher. That can be found at thephysicianphilosopher.com. It's a new blog in our network. He's also written a book so check that out as well. The Physician Philosopher's Guide to Finance. We have a very special guest today we have Jonathan Clements on the podcast who I'm excited about. Jonathan is a previous Wall Street Journal columnist, the blogger behind humbledollar.com and the author of eight books, seven financial books and a novel, including one of my all-time favorites, How to Think About Money. He was also a faculty member of the 2018 Physician Wellness and Financial Literacy Conference. Let's bring him on now. All right, welcome to the show, Jonathan.

Jonathan C.: Hey, it's great to be with you, Jim.

Jim Dahle: Let's launch right into our questions today. Let's start at the beginning. Can you tell us about your upbringing and how that shaped your views on money?

Jonathan C.: Well, I think there are two things about my upbringing that really influenced how I think about money. First of all, there is what I always refer to as the great family story. I think we learn a lot about money from the family stories we hear growing up, and in the case of my family, there was a doozy. My mother's father, my maternal grandfather inherited the equivalent today of millions and billions of dollars. He was to the manor born, as they say, and he and his four siblings inherited this huge sum of money in the early 1950s. And my grandfather's four siblings blew the money in short order. I mean, literally within a couple of years they were broke. It took my grandfather somewhat longer to blow the money instead of spending it on wine, women and song he spent it on farming, but it was gentleman farming, he never made any money.

Jonathan C.: Instead, he started with big farms, he ran through his cash. He traded down to smaller farms, freed up some capital that allowed him to go on for a few years longer. And so this went on until the farms got too small, at which point he retired. I grew up hearing the story of how the great family fortune had been frittered away and it had a huge impact on how I think financially and also in my three siblings. I mean, we're all very different the four of us and yet we are all extraordinarily careful about money. And I think it's because of that great family story that's so molded the way we think.

Jim Dahle: It's interesting it's such a different story, I think than many of my listeners have. A lot of us are family stories, one of poverty, you go back two and certainly three generations and you got people scraping by on the farm, you got people mining, like my grandfathers did. And it's not a story of any wealth in the background. That's actually a very unique background, I think compared to a lot of people.

Jonathan C.: Yeah. So there was that one story about how the great family fortune got frittered away. And then the other thing that had a great influence on me, was my early adult years. So I came out of university in England, as the kid who swore that he was never going to get married and never going to have children. Within a year getting out of college, I was engaged, within two years I was married. Within three years, I had my first child. And so I was a 25 year old father with a wife, who was pursuing a PhD, trying to live in New York City on a junior reporter salary. Add the lessons I learned about managing money from basically living with no money have influenced me ever since.

Jonathan C.: I mean, it really drove home the importance of managing costs and being frugal. And I think that, together with that great family story is what has caused me to be so careful about money over the years. And the net result was because of that, I've been so careful. I've essentially been in a position where I haven't had to work since my early 50s. And it's been a wonderful few years for me to be able to essentially explore the world on my own terms.

Jim Dahle: Yeah. And I think what's particularly impressive about that is that you did it as a journalist, right? I mean, I have so many doctors that are eating hand to mouth basically, and on quite a substantial income. And yet we see people becoming financially independent all the time on much lower incomes just through careful management.

Jonathan C.: You shouldn't give me too much credit because one, I did a number of books over the years while I was a journalist, and every one of those advances I got for those books went straight into savings. So that money didn't get frittered away. And then I did spend six years working on Wall Street. After I left the Wall Street Journal, as my friends will tell you, I went over to the dark side. I spent six years at Citigroup as their Director of Financial Education for the US wealth management business. And for those six years, I was ridiculously well paid. And again, I saved as much money as I could.

Jim Dahle: Fair enough to be sure that's definitely a higher income than a typical journalist income. But the money hit prepared hands, and so when the money came, you knew what to do with it. And I think that hopefully is the case for a lot of my listeners that pick up on this in medical school and residency that when the big money comes as an attending physician, their hands are ready to receive it and they know what to do with it.

Jonathan C.: Absolutely. And I think one of the things that is crucial to make sure that you actually use that money properly is one knowledge, obviously, you need to know what you're doing. But two is, you need to have the capacity to save. And what I mean by that, is you need to have your monthly fixed costs at such a level that when you get the big paychecks, you can save as much of that as possible. If you come out of residency, you buy the big house, you lease the expensive cars and suddenly you've got these high fixed monthly costs, there's no way you're going to be able to save even if you have a desire to do so. So you need to keep your fixed costs extremely low. And throughout my time in journalism, and at Citi group, I had a relatively modest home in New Jersey, which is where I raised my kids. My property taxes were low, I had got the mortgage paid off very quickly. And that meant that when I got my paycheck, I was able to save a substantial portion of it.

Jim Dahle: Now I think that despite your books, despite your time on Wall Street, you're probably most well known for that personal finance column you wrote at The Journal. What was that like to be a journalist at the Wall Street Journal? What was the best part and the worst part?

Jonathan C.: I can't really speak to what it's like at the Wall Street Journal today. But I have to tell you, the almost 20 years that I was at the Wall Street Journal, during those years, it was an incredible institution, I mean super ethical, and the senior management were extremely kind, they sort of … I got a huge amount of freedom, great responsibility. I mean, it was just a wonderful, wonderful place to work. And I really feel that I was privileged to be there for those years. I can't speak let's say to what it's like at the Wall Street Journal today, but in that time, it was a great place to be. And I spent most of that time as a columnist for The Wall Street Journal, I was given a column when I was at the tender young age of 31. It was ridiculous that I had a column at such a young age.

Jonathan C.: And the freedom was extraordinary, but it also towards the end became a bit of a burden. I mean, as you know, from running the White Coat Investor, those deadlines come up relentlessly and you have to say, “Okay, what am I going to say this week?” Or for a period of time I was writing two columns a week it was like, “Okay, what am I going to say? What am I going to say?” And as I've joked many times, they're basically only 20 personal finance stories, which meant by the time I quit the journal, I'd written each of those 20 stories 50 times each.

Jim Dahle: Yeah, it's an amazing talent to be able to say the same thing over and over again, different words, isn't it?

Jonathan C.: And the real trick is to make sure that nobody notices.

Jim Dahle: Right. There's so much truth to that in any of this business where you're trying to teach others how to be wise about their money. If you don't go after the fluffy stuff that doesn't matter, there isn't that much to say. And eventually, you've said it all. It's absolutely true. And it really speaks to this notion that your investing really is super simple. I mean, people make it way too complicated all the time. But in truth, it is super simple. Buy a diversified portfolio of stock and bond index funds, save regularly, try not to trade too much and so on. You do all that, and you will end up amassing significant amounts of wealth.

Jim Dahle: The problem is while it's simple, it is not easy. And that's where the repetition does help. Hearing that same message again, again. Yes, you should be diversified. Yes, you should be holding down costs. Yes, you should be indexing. Yes, you should be saving diligently every month. We need to hear those messages again and again, because if we don't, we're very likely to stray from the course.

Jonathan C.: Yeah, it's like Rick Ferri says that, “You got to keep telling the truth about indexing over and over, because so many lies are being told about it.”
Jim Dahle: It's so true. So a couple related questions from your time at The Journal. Why did you decide to leave? And what's it like to see someone else filling that position?

Jonathan C.: Well, let me take the second part of the question first. So when I left The Journal, I recommended that they hire Jason Zweig to take my spot. Not many people know this, but Jason and I worked together in the late 1980s at Forbes magazine. I was hired by Forbes magazine as a what they called a reporter, which was really just a glorified fact checker in late 1986, and Jason was the next hire afterwards. And in fact, there was a period of time when Jason, myself and another guy called Ed Gilton, we would have lunch together almost every day. I was significantly heavier in those days.

Jonathan C.: We would go out, we would find the cheap restaurants in Greenwich Village where they would have 10 or $5 lunch specials. So I had known Jason for years and years and I was really thrilled to have him take my spot. I'll tell anybody who listened that, “I think Jason is far smarter than I, certainly far better read.” And in fact, if Jason hadn't ended up as a journalist, he would have made a great academic. I mean, he is just so smart. I mean, you can't help but talk to Jason and come away impressed. In terms of why I left in 2008. It was because I was suffering some level of burnout. I had sort of cast around for something else to do and I came close to taking a couple of different positions and they didn't work out. And then Citigroup came calling and saying, “We're launching this startup within Citigroup where we're going to try to provide advice to everyday Americans in return for a flat monthly fee. We're going to help people with their entire financial lives. We are going to be heavily focused on index funds.”

Jonathan C.: I mean, it was all stuff that I believed in. I had been looking for a position outside of journal so I signed on. But what I quickly learned was the notion of having a startup within a large corporation is pretty much an oxymoron. Large corporations are not able to innovate. It was just a total mess, I mean, trying to build something novel inside Citigroup was a ridiculous undertaking. And it was made that much harder by the great recession which hit just about that time. And within a year the startup was dead. And I ended up being part of the main stream of Citigroup for another five years until I just got sick of dealing with the lawyers and the compliance people and I realized I had enough money. So I decided I'd go off and do my own thing.

Jim Dahle: That's the fun thing about knowing how much is enough that you don't end up spending any more time than you have to. Let's talk a little bit about your latest book titled, From Here to Financial Happiness. It's written in a different format than the others. It's subtitled Enrich Your Life in just 77 days, and is split into 77 very short chapters. I've called it a bathroom book or a toilet book, not because it should be thrown in the toilet, but because the chapter lanes seem to be just the perfect lane for a trip to the restroom. Why did you choose that format? Who were you trying to reach with this book?

Jonathan C.: The book really pulled together a variety of threads that I've been thinking about. One is I started work on a book where I was thinking about questions that we should be asking ourselves about our financial lives in order to elicit the answers that will help us to get the most out of our financial lives and out of the dollars that we have and also make sure that we do what we need to do to get our financial lives pointed in the right direction. So I had this series of questions that I had been thinking about. I'd also been thinking about putting together a step-by-step guide on how to build a more meaningful financial life. And then as you probably know, from Twitter, Jim, I have this series of daily insights that I've been putting out for a couple of years.

Jonathan C.: And so I had those and I was thinking, “Well, should I do a book, just composed of those daily insights. And it could be one day, my book, befuddled brain, maybe I could put this all together and that's how I ended up with, From Here to Financial Happiness. And I think what's most distinct about the book beyond providing those 77 steps is throughout the book, I'm trying to help readers make the connection between their money and the rest of their lives. I mean, money is just a tool. It's something that we use to try to make our time on this earth better. And yet far too many people, I think money not only gets wasted, but it actually becomes a burden. We look at those surveys, money is the source of misery for so many people, you talk to marriage counselors. Money is the number one thing that people talk about.

Jonathan C.: Money as much as we prize it in this society is a source of so much distress. And yet, it doesn't have to be that way. If you're smart about how you use your money, no matter how much money you have, you can get so much greater happiness out of it. But to do so, you have to resist your impulses, resist this notion that you know with the snap of your fingers what you should be doing financially and instead, pause and think about how best to use your dollars to improve your life. And if you do that, I do honestly believe that money can buy happiness.

Jim Dahle: That is seriously profound. It's interesting. Some people say, “If you don't think money can buy happiness, maybe you just don't know where to shop.” But there are certainly are some ways in which you can use money to increase your happiness. And I think that's a big theme throughout all your writing. Let's talk about some of your other books. I mean, you've now written seven or eight books, including the novel. Which one of your books is your favorite and which one sells the best?

Jonathan C.: So the book that I am most fond of this is the previous one, How to Think About Money. And I think it's because it pulls together not only some of the financial insights I picked up over the past three decades, but also some of the more philosophical thoughts that I've had about how to use money to create a better, happier, more enriched life. And so that little book and it's short, it's only 40,000 words or 41,000 words. It's in many ways, my favorite book. And I think for a lot of readers, it's become my signature book. That book sells month after month, I still get emails on a regular basis from readers who found it to super helpful and thinking about their own financial lives. And indeed, I thought that I would actually like to go back and maybe even revise it further and dwell a little bit more on some of the philosophical underpinnings of how we should think about money.

Jim Dahle: Yeah, that's my favorite book two for sure. In fact, it was a pleasure to buy that for all the attendees at the conference last March and be able to send them all home with that in their pocket. Interesting that the one you like the best is also the one that sells the best. I'm not sure that's what usually happens to authors.

Jonathan C.: Well, as you know, maybe you don't know Jim because your book sells so well. But the personal finance space is a difficult space to sell books in, publishing generally it's not as easy a way to make money as it once was. So it's hard to get sales of books and often even well-written books do not find the audience they deserve. In that one case though, How to Think About Money. I do indeed, I have indeed seem to find my audience. And partly, I have to say, I should thank financial advisors for it. I mean, we in the blogosphere are often critical of financial advisors and feel like more people should do it on your own.

Jim Dahle: The fact is, there are a contingent of financial advisors out there who do a great job for their clients, they appreciate the virtues of indexing, they focus not just on building portfolios, but also helping people with their entire financial lives. And they are focused on these issues like how do you have a more meaningful life using your dollars. And those financial advisors have actually become a big audience for my book. I know, a number of financial advisors who just regularly come and buy 20 or 30 copies of the book, and they give it out to new clients. And I appreciate that they are helping to spread the message.

Jim Dahle: Yeah, it's wonderful to see them do that. I've had some advisors do that with my book as well. I think books are a great way to learn personal finance investing, because the important principles really are timeless. You don't need something that's absolutely up-to-date to learn this stuff. And on that note, let's talk about some other books, not mine, not yours. But what are your three favorite financial books that you didn't write?

Jonathan C.: So I guess I would mention three books. And this is a bit of a idiosyncratic list, but three books that I would mention is one, there was a book by Terry Burnham and Jay Phelan called Mean Genes and it's a great read. It's very entertaining. It's not just about money, it touches on a whole host of other topics. But what it is, is the lay person's introduction to evolutionary psychology and talks about how the hard wiring that we still have from our hunter gatherer ancestors influences the choices that we make today. And if you're looking for a book that's on yeah, a relatively technical subject, but it's super entertaining, I would highly recommend Mean Genes. It was my introduction to the subject. And it's really sort of turned me on to evolutionary psychology and its importance and thinking, not just about money, but also about our entire approach to life.

Jonathan C.: Second, I put in a plug for Winning the Losers Game by Charlie Ellis. Charlie Ellis, I would have to say is a friend of mine. I mean, he lives up in New Haven, Connecticut, which is where my son is currently getting his PhD at Yale. So I see Charlie fairly often and one of the reasons I love to see Charlie is not only is he super gentlemanly and a delight to talk to, but he's been kicking around this business for decades. And indeed, one of the most influential investing books that I read in the 1980s, when I first was starting out with his thin little book, it's only 100 pages, it was called Investment Policy written by Charlie. And later Investment Policy was republished under the somehow catchier game, Winning the Losers Game. And it's still a great read and a great introduction to investing, why you should seriously consider indexing rather than trying to beat the market.

Jonathan C.: And the third book and again, it's more because it's both entertaining, and offers great insights is the classic Fred Schwed book, Where Are the Customers' Yachts? And even though it was written decades ago, what you learn about Wall Street from reading that book is still the way Wall Street is today. I mean, it's still a place where people are relentlessly putting themselves first at your expense. So if you want to know what Wall Street is like today, go back and read Fred Schwed's book, Where Are the Customers' Yachts? It's a great, great read.

Jim Dahle: Yeah. Now I really like Charlie's book and I think the most famous example that's come from his writing has been the idea of investing as amateur tennis, wasn't that his idea originally?

Jonathan C.: Yeah, that's very early on in the book. He talks about how if you're an amateur tennis player, you shouldn't try to win the game, what you should try to do is avoid losing. And I would probably be a much better tennis player if I followed that advice.

Jim Dahle: Yeah, I think that's totally true. It's certainly true in tennis, and I think it's probably true with investing as well. Let's talk a little bit about Humble Dollar, your blog. Why did you start Humble Dollar? What did you hope to accomplish there? And what's its message and I've noticed you have a fair amount of guest posters there and I'm curious how you choose them.

Jonathan C.: So what Humble Dollar has turned into is not what I originally set out to build. For a couple years, I put out this annual money guide and the time and I'm sure you can appreciate this, Jim, I was very taken with self publishing through Amazon, particularly the speed with which you can bring something to market. So I'd earlier done by novel which I'd self-published, I'd learned how the Amazon platform work. And having done that, I realized that you can finish a book today and have it available for sale tomorrow. And that's an extraordinary thing. I mean, if you go to a traditional publisher, the lead time is months, but here I realized you could finish a book on December 31st and have it available for sale on January 1st. And that's when the light bulb went off and said, “Hey, why don't I do an annually updated money guide.” And that was actually the project I left Citigroup in order to devote myself to.

Jonathan C.: So I created this money guide, which covered every financial topic conceivable. And I put out two annual additions. And it worked just as I described, I would wrap up the book on December 31st, there was no champagne for me, it was literally like, the markets closed and I started updating all the numbers in the book, I would submit the publication files to Amazon and the next day they would be available for sale. It was completely cool. But what I realized was in many ways, it was also not so cool because the book was only up to date one day a year. So while it was completely up to date on January 1, by January second it was a little bit out of date in January 3rd more so.

Jonathan C.: And it's like, this is ridiculous. And so what I did was I took all the book, which I'd been charging and I said, “Okay, I'm going to put it on this website. But I don't want this website to be just about Jonathan Clements. I already did have the URL, jonathanclements.com I said, “I'm going to put it on some URL that is not about me personally.” That's how I came up with Humble Dollar. So the idea was, put this money guide on humbledollar.com, make it freely available, update it throughout the year and give this sort of resource to people. At this point, I feel like I've been extraordinarily lucky. And I wanted to in some sense give back and the only way I know to give back is to try and share the knowledge that I've built up over the years.

Jonathan C.: So that was the idea behind Humbled Dollar. But in launching the site I thought, “Okay, you know what, I'll blog every so often.” And then I started using guest bloggers, and in many ways the bloggers were getting much more notice than the money guide itself. And now the site is running a blog every single day. One time a week, it's by me but the other time it's by these guest bloggers. And so the site is gone from being just a place where I was going to feature the money guy to really being a living, breathing, daily updated website that tries to help people learn about money and it chews up massive amounts of my time job Jim. I mean it is ridiculous. I tell people, I'm semi-retired and I must… I work 10 hours, every weekday on it, and at least three or four hours every day of the weekend. Yeah.

Jim Dahle: That sounds pretty familiar. That's a good segue into my next question. Tell me how you view work at this stage in your life. I mean, you're retired, you're financially independent, and yet you're working, you just told us sixty hours a week almost. What does work mean in your life?

Jonathan C.: Well, this gets back to talking about that book I mentioned, Mean Genes by Terry Burnham and Jay Phelan. About the influence of our hunter gatherer ancestors and the way we think today. We are not built to relax, we're not built to sit around lying on the couch watching TV. We are built to strive. The reason we are here today is because our hunter gatherer ancestors were relentless in their pursuit of survival, and that impetus is still with us. I mean every day, we want to feel like we're making progress. I mean, that is happiness, feeling like we're somehow moving the ball forward. We get so much more satisfaction from that than from lying on the couch and eating cheese doodles and drinking margaritas. And I hope for as many years I have left, that I'm going to be able to spend those days striving.

Jonathan C.: And my one trick, it may not be a great trick, but my one trick is to write about personal finance, and to make it understandable for everyday Americans. And I hope to continue performing that trick every day for the rest of my life.

Jim Dahle: It sounds like John Bogle talking there, quite honestly, I mean, he basically worked until well into his 80s. And basically, that was a huge part of his life. And I think he made more of an impact after retirement age than he ever did before retirement age. It's pretty impressive that way.

Jonathan C.: Yeah. Well, I'm flattered, Jim, by the comparison, but it's not at all deserved. I mean, Jack was a force of nature. I had the good fortune to know him for many years. And his energy level was just unbelievable, almost right up until the end. I mean, he was an extraordinary man. I hope that I am not quite as driven as Jack is because maybe as much as he enjoyed helping the world, maybe he personally would have had a little bit more peace if he wasn't quite so driven.

Jim Dahle: That may be true. I don't know, it always seemed like he felt like every day was a gift, ever after the heart transplant. He just felt like every day was bonus. And so he just wanted to do as much with it as he could, it seemed like.

Jonathan C.: Yeah, and he did indeed make an extraordinary mark on the world and it was gratifying to read all the reaction to his death. I mean, he really did have a very meaningful impact on the world. The question is do we need somebody else like Jack Bogle to keep the financial business honest. And I think back to the late 1980s when I first got to know Jack, and I would go down to Washington DC for the Annual Shindig of the mutual fund industry, and hang out in the newsroom. And there hanging out in the newsroom was Jack Bogle, because nobody in the mutual fund business wanted to have anything to do with him, he was a pariah.

Jonathan C.: And yet because of his relentless energy and because he had truth on his side, in many ways the mutual fund industry today is Jack Bogle's industry. He through force of his character and his ideas has transformed the investment business. So people are highly focused on these. They are thinking about tracking the error versus the market. They are talking about putting the customer first even if they often don't do it, and that's Jack's legacy. And the question is, is there somebody else out there who's going to help to hold the industry speak to the fire or will without a person like Jack Bogle around will they start to backslide?

Jim Dahle: Yeah, I sure hope it's the former and maybe it's going to take multiple people, I don't know that any one person can fill those shoes.

Jonathan C.: That's true.

Jim Dahle: You came out to Park City last year to speak at the Physician Wellness and Financial Literacy Conference, our inaugural conference and listeners, in fact, can still catch your talk by buying the online version of that conference. That talk was very well received and well rated. What do you think of that experience of coming out and talking to all these doctors?

Jonathan C.: Well, two things about that trip that sticks in my mind, Jim. One is I was appalled to discover that I could no longer ski. It had probably been six or seven years since I'd put on a pair of skis. And when I came out to the conference, I brought my son with me and the idea was we would attend part of the conference, and go skiing. And I got up on a slope and it was almost like I'd completely forgotten how to ski. It really was just a horrible reminder of aging and mortality.

Jim Dahle: Geez, I'm sorry about that.

Jonathan C.: Yeah, no, well-

Jim Dahle: Maybe I should provide lessons for the speakers at the conference, if we do another ski conference.

Jonathan C.: You almost certainly should. One of the things that I talk about with people it's if you're going to manage your money, so that you can have a long and prosperous retirement, you want to make sure your body last almost as long. Right? There's no point in smoking two packs a day and retiring with a seven-figure 401k. Those two don't go together. So you need to take care of yourself physically but what I see as I grow older is, bit-by-bit these physical capabilities get taken away from you, and it's just horrible. I really don't like that part of aging. As they say, getting old is not for sissies. So that was the downside of the conference. But the upside was meeting the people who are there. And it's… Despite the reputation that doctors have for being terrible investors, it's rare that I've had the chance to be among so many people who are so clued into investing, so interested in investing, can speak in such an articulate manner about it.

Jonathan C.: It was great from that point of view, it's so wonderful to meet people who understand what managing money is all about. Because so often the discussions that we have about money are completely ridiculous.

Jim Dahle: Yeah, that's for sure.

Jonathan C.: So many people are just boasting about investment winners not telling you about their losers, so many people are obsessing over the next purchase that's really going to bring them very limited happiness, and to be among a group of people like you had there in Park City last year, who have an intense interest and an intelligent interest in money, was great.

Jim Dahle: Doctors are notorious for being bad with money, maybe not the group we assembled for that particular conference. Although there were a surprising amount of newbies to personal finance in that group once you survey them. But docs they're notorious for being terrible with it. Why do you think that is?

Jonathan C.: I would imagine it's in part because doctors do face a unique financial conundrum. They have a truncated career. They often start out with massive amounts of debt. They've gone through this period of deprivation where they've lived as residents and not only had to work obscene hours, but been paid relatively little, and suddenly, they're in the workforce. They're making a decent income. They've got this debt to service, they have a relatively short time until retirement. And they have this pent up demand and you put it all together and the risk that they're going to start making foolish investment mistakes, as well as foolish purchasing decisions, is enormous.

Jonathan C.: And as you counsel so often, you heard the key is to continue to live like a resident, is pause and not make those snap decisions about purchasing not only the bigger house and the fancier car, but also, when it comes to purchasing investments, you just need to restrain yourself. And maybe also on top of this, I should have mentioned this, of course, if you're a doctor and you're used to making life or death decisions, deciding whether or not to buy this stock, or that alternative investment may seem a relatively low key decision by contrast. And you have the self confidence to make those life or death decisions, why wouldn't you the confidence to decide, “This is a better investment than that one.”

Jim Dahle: Yeah, it's interesting that I see errors on both sides. I see both the classic overconfident surgeon that's sometimes right sometimes wrong and never in doubt. And then I see doctors who are absolutely paralyzed, paralysis by analysis and leaving money sitting in their checking account hundreds of thousands of dollars. So it certainly goes both ways with the confidence. Unfortunately, a lot of people don't get that message earlier in their career, to live like a resident, take care of business early on. And they find themselves in the second half of their career kind of embarrassed about the sorry state of their finances. What advice do you have to those doctors who have already kind of screwed it up in the first half of their career?

Jonathan C.: Well, if anybody can make up for time lost, it's going to be doctors because they do have substantial incomes. I mean, if you look at the 20 highest paid professions as identified by the Bureau of Labor Statistics, 14 of the 20 are some form of physician. Doctors do make more than the vast majority of Americans, which means that even if you screwed it up today, if you can get your living costs low, if you could trade down to a smaller home, you can get rid of the leased cars and buy used automobiles and so on. Suddenly, you do have this chance to save substantial amounts. And that, in the end, is the key to financial success. Despite all the blabbery that goes on CNBC and in the media, in the end, great savings habits are the key to financial success.

Jonathan C.: And if you're late to the game, and you've screwed up until now, what you need to do is to set yourself up to be a great saver and the way you do that is to lower those fixed living costs, and then you'll be away, and you'll have an opportunity to save in the way that most Americans don't. If you're a 55-year-old middle manager who's screwed it up to date, you're toast, but if you're a 55 year old physician yeah, with a handsome salary, if you can get your costs low, then you can save a substantial sum and you can make up for lost time.

Jim Dahle: That's good advice. Let's turn a little bit to some more hardcore investing topics. Since the 2012 JOBS Act, the number of available alternative investments has skyrocketed. What role do you see for these in a portfolio? Should investors stick with boring old index funds? Should those alternative investments be for play money only? Or does it make sense to allocate a substantial portion of the portfolio to them?

Jonathan C.: I would argue that most investors do not need alternative investments. I mean, the reason you buy alternative investments more than anything, is to provide something that will do well when stocks don't. But we already have an asset that we know is going to perform well when stocks don't and that is high quality bonds. If you want great long-term returns, you put your money in the stock market. If you worry about what's going to happen when stocks turn lower, you include some bonds, it's as simple as that. And the easiest way to get those, that exposure is with low cost index funds so that you capture as much of the markets return as possible. All these other alternative investments, alternatives other than bonds, more often than not, they're too high costs. They're overly complicated. And I think people buy them because they have sort of this patina sophistication. But when we say sophistication, what it really means is people don't know what they're buying.

Jim Dahle: How about factor investing? What's your take on that? Such as tilting a portfolio towards small and value stocks.

Jonathan C.: So I do this Jim in my own portfolio, I have a tilt towards small and I have a tilt towards value. And I do that both within the US and in overseas market. And I will tell you that even though I've had these tilts for a substantial period, obviously, for the last 10 years or so, it's been the wrong thing to do. Right? Tilting towards value and tilting towards small has not benefited, but I do believe that it will over the long haul. But there are no guarantees. If somebody said to me, you know, do I need to tilt my portfolio towards smaller value or any of these other factors, I would say absolutely not. If you just want to buy a plain vanilla portfolio that consists the total US stock market index fund, a total international stock market index fund, and a total US bond market index fund, go for it, knock yourself out.

Jonathan C.: That is a great portfolio, it's going to be better than what 90% of Americans own. If you want to tilt towards value and towards small, I believe over the long haul that that will add, but there are no guarantees and it does mean that you will go through long periods like we've seen of late, where your portfolio will do less well than those who simply have a cap weighted portfolio that replicates the global markets.

Jim Dahle: Yeah, certainly when large growth stocks do well, you certainly feel that pain. I think, particularly the last two years, I've noticed that large growth has been outdistancing small value by quite a bit. And I think it takes a real serious commitment to smaller value, stick with it through times like that. That's why I always tell people, don't tilt your portfolio more than you believe that these are really going to outperform in the long run, because that tracking area is very real. And I think a lot of people do have trouble with it and end up bailing out of strategies like that, just at the wrong time, just like end up buying high and selling low in the stock market overall.

Jonathan C.: Yes. Well, the problem is that when we say to ourselves, the stock market, we all think about either the Dow Jones Industrial Average or the S&P 500, I mean, that's the headline number that gets reported on the evening news that's in those stories we read about in the newspaper the following morning, wherever it is. We think about the S&P 500 or the Dow Jones Industrial Average. And in the case of the S&P 500 what that really is more than anything is a large cap US index with something of a growth tilt. So, if you own anything else, you own smaller stocks, you have a value tilt, you have a substantial portion in foreign stocks, there will be periods when you do not do nearly as well as the S&P 500. But what people forget is that you go back to the first decade of the current century, and if you would own the S&P 500 you would have lagged behind bonds, you would have lagged behind small stocks, you would have lagged behind value stocks, you'd have lagged behind developed foreign markets, you would have lagged behind emerging markets.

Jonathan C.: In the first decade of this century, the S&P 500 was one of the worst places you could have invested. Today it looks totally different, but 20 years from now, I think it may look totally different again.

Jim Dahle: Yeah, it certainly does swing, it's a very cyclical thing. And you do have to stay the course, whatever your plan is, I think it matters more that you stick with it than what the actual plan is.

Jonathan C.: I think that is so true. People tend to change investments at just the wrong time.

Jim Dahle: What are some of the other important behavioral traps that high orders fall into?

Jonathan C.: One of the things we've already touched on, which is this notion that if you have a higher income, or you have a larger portfolio, that somehow you should have something special, you shouldn't be buying those broad market index funds that anybody with $1,000 can get into. And yet I would say whether you have a $10,000 portfolio or a $10 million portfolio, that having the vast majority of your money in broad market index funds is the way to go, that if you go out and you try to find something special that is suitable to your wealth level or your income level, that more likely will not you're going to end up with something that's going to be very high cost and deliver disappointing performance.

Jonathan C.: I mean, it's astonishing to me that people still seem to think that hedge funds are something special. Whereas we know from the numbers that most hedge funds have terrible performance. You'd be much better off in a portfolio of index funds, yet people still want to own those hedge funds because they think that somehow that's what the Smart Money owns.

Jim Dahle: Yeah, it's interesting that so many of them have such poor performance but everyone always assumes their hedge fund managers can be one of the to 5% that seems to do okay.

Jonathan C.: And probably that hedge fund manager has somehow cheated up the numbers. So they are indeed in the top 5%.

Jim Dahle: Yeah, exactly. That's the problem with a little bit less transparency there. What about those who are afraid of stocks? I think that's what drives a lot of people into alternative investments is they hate the volatility of stocks, they hate seeing their money going up and down every night on the evening news or on the internet, and they're getting statements every month from their 401k showing how much money they've lost. What advice do you have for somebody like that? That's afraid to invest in stocks, particularly at stock market high like we're essentially at right now.

Jonathan C.: So it's a huge mistake to put money into the stock market, if you think you will panic and sell when the market goes down. I mean, I believe the stock market is the best place for everyday investors to put their money and I think if you said to somebody, “30 years from now, do you think the stock market will be higher or lower?” Almost everybody would say, “Of course, it's going to be higher.” So the question is, how can you get to that point 30 years in the future where you will look back and say, “I'm so happy that I was on this roller coaster for this ride.” And I think there are a couple of things that you can do to make it more bearable. But in the end, you don't want to put more into stocks than you can stomach, because the amount of financial damage that you will do by selling at a market bottom it'll wipe out any potential gain that you would get by being in stocks over the long haul.

Jonathan C.: So, what should you do? Well, if you're currently sitting in cash, the thing I mentioned to people all the time is decide how much you want in the stock market and if stock market really makes you nervous, maybe it's only 40% of your portfolio or 30% of your portfolio, and then save yourself. Okay, I don't know what the market is going to do over the next couple of years. So what I'm simply going to do is I'm going to take the money I have that I want to put in stocks, and I'm going to test it, say 124th every month for the next 24 months. And that way, I will get from where I am now, zero percent stocks to say the 40% stocks that I'm aiming to get. And then if the market goes down, what you do is you increase the amount you invest every month.

Jonathan C.: So if the market drops 15% from its all time high, and let's say you were putting in $10,000 every month into the stocks, you would double the amount you invest every month. So now you're putting in $20,000. So you've sped up the speed at which you're getting into the market. If the market goes down 25% or more then you triple your monthly investment. So instead of doing $10,000 every month, now you're doing 30,000. And the idea is that when the market goes down, instead of seeing that as a disaster, the hope is to change the psychology so that you see it as an opportunity and you start increasing the amount you invest. And also course it would have that benefit, the fact that it forces you to put more in as prices go down. I think a program that that can get people invested in the stock market, but again, you don't want to put more in total than you can truly stomach. And to some people it might only be 30 or 40% of their portfolio.
Jim Dahle: Do you think it's the right thing to tell them to do? To dollar-cost average like that? Or is it better to just tell them, “You know what, you got to kind of suck it up. This is the way stocks work.” I think it's Phil DeMuth that said, “Your risk tolerance should have nothing to do with your portfolio, because basically, you have a need to take on risk.” I mean, at the end of that 24-month cycle, you're 100% invested Anyway, why not be 100% invested today if you're going to be 100% invested in 24 months.

Jonathan C.: The reason is this Jim, on average, we know that if you invest all the money right away, you will get a higher return than if you dollar-cost average into the market. But the fact is, you do not get an average result. If you put everything into the market, you get you a sample of one. And it may be that you decided to put everything in, in October 2007, just ahead of a 57% decline by the S&P 500. I am not willing to advise people to invest based on an average that may be completely inapplicable to their financial situation, which is why dollar-cost averaging makes a ton of sense.
Jim Dahle: What about the alternative of rather than dollar-cost averaging, simply investing it all right away, but into a less aggressive asset allocation. If they're having trouble going to a 70, 30 allocation, maybe they should only be at a 50/50 allocation, should do it today rather than over the next 24 months. What do you think about that approach?

Jonathan C.: Let's separate that out. So first of all, whatever you do, whether you invested right away or you invested over time, if you're nervous about stock market, you shouldn't be putting everything into stocks no matter which strategy you take, right? And if you dollar-cost averaging in you should only be dollar-cost averaging in that portion that you want at the stock market. If you still want to have 60% of your money in bonds, even if you're dollar-cost averaging, you shouldn't be going above 40% stocks, right? I mean, let's make that clear. You don't want to end up with a portfolio that's risky than you can stomach. The question is, should you put it in faster?

Jonathan C.: Again, if you put it that 40% in today, and it turns out to be October 2007, and the market starts dropping and you panic in early 2009, when the market is down by more than half, you've screwed yourself. So telling people to put everything in, right away or everything they have in the stocks right away. It's just not good advice in my book, because I don't want to be responsible for that person panicking and selling at the wrong time.

Jim Dahle: Now, you introduced a term I think I'd seen before with different names on it, but I'd never heard the term used for it. Naive diversification. This was in your book, your latest book From Here to Financial Happiness. You talked about that naive diversification. What do you mean by that? And how can investors avoid it?

Jonathan C.: So when I say naive diversification, I mean that people tend to spread their money around in ways that make them feel like they're better diversified, but they aren't really. And so they will do this by having multiple brokerage accounts, or multiple mutual fund companies or even multiple financial advisors. And the consequence is that they've made their lives much more complicated, but in many times they've ended up with a worse portfolio. So let's take the example of having more than one financial advisor. So if you go to a financial advisor, they'll talk to you about your goals, they'll find out how much risks you can stomach, your time horizon, and so on. And they'll put together a portfolio for you.

Jonathan C.: That's great. Great. But then you go to another financial advisor, and they'll ask you about your goals and your risk tolerance and that time horizon, and they'll put together another portfolio for you, which in many ways will replicate what you already own. And so what have you achieved? Now you've got more hassle in your financial life, you probably got a lot of duplication. You may be paying more in fees because you don't get the price breaks from being a larger investor with any one individual advisor, and the net result is you're worse off. That is naive diversification. The only time that I can think that spreading your money across sort of multiple institutions make sense is when it comes to getting FDIC insurance.

Jonathan C.: Yes, if you have a lot of money in the bank, you want to make sure you're covered by FDIC insurance, by all means, have multiple bank accounts. But beyond that, I don't see much point in having multiple brokerage accounts. Multiple financial advisors are dealing with multiple mutual fund companies.
Jim Dahle: All right. We're coming to the end of our time here, and I sure appreciate you being on the show today. But I wanted to give you a chance to ask you if there's anything else you think the 20 or 25,000 people who will listen to this podcast ought to know about money.

Jonathan C.: I mentioned early on that money is just a tool. And for it to be a tool that we use effectively, what we need to do is use our money in ways that are meaningful to us. So much of what we do with money is things that others tell us are meaningful. So we're told by advertising and marketers and salespeople that having a big house is meaningful to us, or driving a luxury car is meaningful to us. But the question you have to ask yourself is, is that really meaningful to you? Is that really how you want to use your money? And will it truly enhance your life? And I think part of the problem with so much money management is that we're doing what other people are telling us is right for us without really thinking through what would be meaningful for us.

Jonathan C.: And I think it's one of the reasons money has failed to buy happiness to so many people. So I would say to listeners, sit down, think about what it is that you could do with your money that will really enhance your life. What would take those dollars, which are just dollars and make them more meaningful to you. And once you know that, then you'll be in a position to squeeze greater happiness out of your money.

Jim Dahle: Thank you so much. A lot of wisdom there. I think you just summed up several of your books with that short statement about how to really buy happiness with your money. You can learn more about Jonathan and his writings, you can check out his books on Amazon. We'll have links in the show notes to those as well as to his blog at humbledollar.com. Jonathan, thank you so much for being on the show today.

Jonathan C.: Hey, it's been my pleasure Jim. Thanks for having me on.

Jim Dahle: What a wonderful opportunity to have Jonathan Clements on the podcast. That was really great to hear from him. I always love hearing his accent. It's fun to hear his voice again. I haven't heard it since the conference a year ago. Our sponsor for this podcast is Creighton University's MBA program. They believe in equipping physicians for success in the exam room, the operating room and the boardroom. If you want to sharpen your business acumen, deepen your leadership understanding and earn your seat at the table, Creighton's Executive Healthcare MBA is for you. Specifically tailored to busy physicians, advanced clinicians or working healthcare executives, our program blends the richness of on campus and the flexibility of online learning.

Jim Dahle: Earn a Creighton University Executive MBA in 18 months 45 credit hours and four four-day on campus residencies. You'll get to learn in a deeply collaborative peer-to-peer cohort and elevate your expertise. Visit www.creighton.edu/chee to learn more. Also, be sure to check out our newest White Coat Investor blogging network member, the physician philosopher and his new book. A lot of great insight there that you can apply to reduce your burnout, increase your contentment, as well as financial tips for those who are still relatively early in their career. Unlike the other network members who are basically already financially independent, the physician philosopher is less than two years out of residency and still building his portfolio, so be sure to check that out. Head up, shoulders back. You've got this, we're here to help you and we'll see you next time on the White Coat Investor podcast.

Disclaimer: My dad your host, Dr. Dahle is a practicing emergency physician, blogger, author and podcaster. He is not a licensed accountant, attorney or financial advisor. So this podcast is for your entertainment and information only. It should not be considered official personalized financial advice.