Investing Questions

INTRODUCTION

This is the White Coat Investor podcast where we help those who wear the white coat get a fair shake on Wall Street. We've been helping doctors and other high-income professionals stop doing dumb things with their money since 2011.

Dr. Jim Dahle:
This is White Coat Investor podcast number 433 – Investing Questions.

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All right, welcome back to the podcast. It's summer. That means we're all trying to take time off around here at White Coat Investor. It's amazing to look at the weeks and see how many of our staff are gone in any given week. But that means when we're together, we wedge everything in and try to get the work done.

Unfortunately, that's the way emergency medicine works too. And I've apparently taken too much time off in this month. And so, here I find myself this week working seven days straight. Now, it's not unusual for docs. I know docs do that all the time, but for me, it's a little unusual. I only work six shifts a month and I've got five of them this week between shifts for July at the end of July and shifts for August at the beginning of August.

You can tell I'm recording this on the last day of July. And then, of course, the other two days in the week are chock full of WCI stuff. So I'm feeling a little crispy right now, not going to lie, but I'm going to spend all next week backpacking. So, should be okay. Looking forward to going to the Uinta Mountains with some young men from our church group. So it should be a lot of fun.

RUNDOWN ON FINANCIAL DETAILS OF A STOCK QUOTE

All right, let's get into your questions today. We've got a lot of great questions to talk about today. The first one comes in from somebody who sent me an email. Said, “I have a suggestion for a blog post.” And I said, sounds better to cover on the podcast.

Said, “A rundown on the financial details in a stock quote. I agree with your preachings against picking and owning individual stocks, whoever chumps going to chump. And one of those chumps is my wife who recently enthusiastically brought me the quote on her latest stock interest.

The reason she was so excited was that the price per share was $5, which she considers a steal. I tried to explain that the price per share is meaningless without considering the underlying value per share, but she wasn't having it. Just like with free handbags, she believes that the price is the value. That got me thinking that a rundown on the stock fund, ETF, et cetera, quote items, especially the significance of price per share may be beneficial.”

Okay. Well, let's talk about this. First of all, the reason there are publicly owned companies is that once people owned a company and decided they didn't want to own it anymore, they would rather have cash than own the company. So they sold it.

Sometimes you feel like you can get a better price by selling it to everybody than by selling it to just one person or one company. And especially if it's a particularly valuable company, you can't find any one person to buy it. You have to go sell it to everybody. And that's called going public. That's when a stock becomes a stock, when it gets on the stock market. It goes from being a public company or a private company to being a publicly traded company.

And in order to do that, you have to try to figure out about what the company's worth. And then once it starts trading on the stock market, everybody, the market gets to decide what the company's worth. And that changes by the second during the day. That's why the price of your stock goes up by 1% or down by 7% in a single day, because the market changes their opinion. As things go along, the market is all of us weighing in on what the opinion is.

The way you determine the value of a publicly traded company though, is you count up the number of shares and you multiply that number of shares by the price per share. That's not that hard to do. Basically that information is available for any publicly traded company.

So, if we put in Tesla stock into Google, what pops up is Tesla Inc. It says it's traded on the NASDAQ, gives you the ticker TSLA, and tells you what the market cap of the company is. And according to this, it is $967 billion. $967 billion is a market capitalization. That's how much the company is worth. The value of the company at this second is $967 billion, almost a trillion dollars.

That makes it a big company. This is a large cap company. There are mid cap companies and there are small cap companies. But when you're worth a trillion dollars, you're considered a large cap company.

But if you look at the information available on that, you can see all kinds of things. The most interesting thing that we look at most often is probably the stupid chart that pops up. And you can change that chart. It'll show you how the price has varied over the last day.

As I record this, it looks like Tesla's down today. It's gone down from 09:00 A.M. It was $320 a share, and now it's $308 a share. If we lengthen that out and look at the year to date number, we see that Tesla was not an awesome thing to own this year. It peaked in January at $428 a share. And again, today it's $308 a share. So, it's down like over 25%, 26%, 27% this year.

Now you understand why I don't talk about politics so much on this podcast. When the CEO of Tesla gets involved in politics, his company becomes worth a lot less. Lesson learned there, I suppose.

This also tells you the high and low prices for this stock during the day. It's been anywhere from $306 a share to $321 a share. It will tell you the price to earnings ratio, the PE ratio, basically how much you're paying per dollar of earnings. And it's pretty ridiculous for Tesla. According to this, it's $179 for a dollar of earnings. The PE ratio is 179. Pretty impressive that people would be willing to pay that much for this company.

Basically what that says, when you're willing to pay that much for a dollar of earnings, you're saying, I think the earnings are going to grow, and I think they're going to grow faster than the typical company. That's why you're willing to pay 40 or 50 or 100 or 200 times earnings, because you think the earnings are going to grow.

Okay, that tells you lots of things about it. But as the emailer notes, the price of the stock doesn't matter. It doesn't matter if there are 10 million shares of the stock and it's worth $100 a share, or if there are 5 million shares of the stock and it's worth $200 a share. It doesn't matter. The company's worth the same. A stock that is $5 is not cheaper than a stock that is $10. It doesn't matter if you buy two shares of the $5 one or one share of the $10 one. Same, same.

The way we look at what's cheap are valuation type things, like a price to earnings ratio, a PE ratio, or a price to book ratio. These sorts of things are how you tell which stocks are cheaper, which stocks are more expensive. And sometimes it's okay to buy a more expensive stock. Sometimes it's worth more, but you don't judge that by the share price. You judge that by the PE ratio. The share price is irrelevant.

I guess if you're so poor that you can only buy one share of stock and Tesla's $308 and you don't have $308, so you got to buy something else. Well, I guess that's a concern. But for most of us, you can buy any stock you want. That's not going to be a problem. You're going to be buying multiple shares of those stocks if you're buying stocks. So the share price is really pretty much irrelevant. Don't get too hung up on that.

All right, if we put in a mutual fund or an ETF, let's put in VTI. This is the Vanguard Total Stock Market Index Fund ETF share class. This is a big piece of our portfolio, about 25% of our portfolio is invested in this or something very similar to it we tax loss harvest to. You can see that the share price is $310, about the same as the price of Tesla stocks. So, it asks if that is worth more or less.

Now, this is interesting. I look at the market cap on this and it says 254 billion. I'm not sure that's right. Maybe that's right just for the ETF share class. But if I go to Vanguard's site, I'm pretty sure there's a lot more money in the Total Stock Market Index Fund than just a quarter trillion dollars.

Let's see what the actual website says here. Portfolio composition, number of stocks, median market cap of those stocks, the earnings growth rate, and maybe that's what they're reporting. Maybe what this fund is reporting is the median market cap for those rather than how much is actually in the fund.

The fund's net assets as of the end of June was $1.9 trillion. So that's not what the ticker is reporting when you put that into Google. It must be the median market cap that it's recording. The median market cap of the stocks in the fund or the average market cap, I'm not sure it's even the median.

Lots of interesting information there. But mainly when you're looking at these things online to click on this stuff, you're just looking for a quick read on what is done this year or today or this month or whatever, rather than looking for detailed information.

If you want detailed information, I think one of the best places to go is the Morningstar website. All the time I'll type in VTI and Morningstar. If you wanted to learn about Tesla stock, you'd put in Tesla and Morningstar. And that'll give you all kinds of fun detailed information there. Tells you the previous closed price, what it closed at yesterday when the market closed. Tells you the 52-week range of what it's traded between. Apparently it's been as low as $182 a share and as high as $488 a share over the last year. It tells you the bid and the ask price. Because this is a market.

The bid price is what people are offering to buy your shares. The ask price is what people are asking if you want to buy shares. And there's a slight difference between them. With a very liquid security like Tesla stock or like VTI ETF, those prices are very close together.

But the difference between them is what the market maker gets paid. Because somebody's got to hold onto that thing to take it from the buyer and give it to the seller or take it from the buyer. And that's what they make is the difference between the bid and the ask. And right now that's 4 cents on a share of Tesla. But that really adds up if you're doing it by the millions and millions of shares of stock that are exchanged every day.

For Tesla, it says here there's 3.2 billion shares outstanding. The market cap is just under a trillion. It tells you how many shares trade every day. 85 million. That's a lot of shares it's trading around. Of the 323 billion, 85 million of them trade every day. This says the price earnings is $154. Price per sales ratio is 12. It gives you all kinds of information about the stock.

And if you do the same thing, if you put in VTI Morningstar, it'll give you all kinds of information about funds and about ETFs. And you can click on a different tab and look at the performance. You can see what's in the portfolio and really figure out what's in there. It'll tell you where the stocks are. Of course, with VTI, they're all in the US. It'll tell you how many there are. There's 3,547 holdings in the fund. 32% of the fund is in the top 10 holdings. Their turnover is 2% per year, which is what you'd expect when they just buy and hold everything. You wouldn't expect a lot turnover there.

The biggest stock right now is Microsoft, actually. Microsoft is the biggest stock in the stock market at 6%, 6.19%. NVIDIA is next at 6.13%. Apple is next at 5.13%. And apparently 32% of the US stock market is in the top 10 holdings. That's historically relatively high. It's pretty concentrated at the top. That's because large growth has outperformed small value stocks dramatically over the last 15 years. And in fact, the gap in valuations between those two types of stocks has not been as large as it is now.

I don't know if it has ever been as large as it is now. That doesn't tell you that small value is going to outperform anytime soon, but you got to think the pendulum is probably going to swing back at some point. It didn't this year. The international, the US pendulum swung back this year, but the small value to large growth one did not.

All right. I think that's enough talk about that subject. But yeah, the stock price doesn't matter. That's not what makes something cheap. It's not a good deal because it's $5 and another stock might be $80. That really doesn't matter. The stock price really doesn't matter at all. In fact, when it becomes inconvenient, they just split the stock. And so, instead of having whatever, 10 million shares at $500, they've now got 20 million shares at $250. And everyone rejoices and bids up the stock because it's split. It's irrelevant. It doesn't matter at all.

TRACKING RETURNS

Okay. Joe wants to talk about tracking the returns on his portfolio. Let's take a listen.

Joe:
Hey, Jim, I have a question for you about return tracking and specifically what return you use for your comparators in order to provide a benchmark for your stock portfolio. I do keep an individual stock portfolio as a small portion of my allocation, and I track these dollar-weighted returns, which have actually been quite good in the range of 24% to 25% since 2012.

However, I acknowledge that as stocks get what I feel overvalued, I tend to move out of individual stocks in favor of broadly diversified ETFs to try to minimize my individual stock risk as values change.

I have been out of the market in terms of individual stocks during some larger downturns, for example, during COVID and during 2022. As such, I'm trying to decide how to best compare my individual stock returns in a dollar-weighted approach, but I find that it's actually quite challenging to do a true dollar weighted adjustment based on when my money flows in and out of individual stocks.

I do use VTI as my comparator as I'm trying to base myself against a large cap index, but not sure whether I should be using a dollar weight or a time-weighted tracking return. Thanks.

Dr. Jim Dahle:
Okay, let's talk about stock picking, Joe. Long-term White Coat Investors know I'm not a huge fan of stock picking or timing the market, both of which you're doing. You tell me you've been doing this for a long time though, 12 years, something like that, more? I don't remember what year you just said it was that you started, but it's been a long time. And you're telling me you're making 24 or 25%.

I assume that's true, that you can actually accurately calculate a return. I'm not 100% sure of that because that's what your question is, is how to actually do this. But if it's true, if you're really making 24 or 25% a year because you're particularly talented and skilled at timing the market and picking stocks, I'm not sure you should just be managing your own money, Joe. There are a lot of people out there trying to do this and not having much success at it. They're certainly not whooping the market by 10% or 15% a year.

So if you can truly do this, if you're truly one of those very talented people out there, you should be managing billions of dollars, not your own measly $100,000 or $2 million or however much money you have.

So, keep that in mind. If you want to be a stock picker, track your returns, track them rigorously. And if it turns out you're really good at this, maybe you missed your calling. Maybe you shouldn't be in medicine or law or whatever has caused you to listen to the White Coat Investor podcast. Maybe you should be out there managing money. It is no small feat to have those sorts of returns long-term.

Let's talk a little bit about how to track your returns. And I find the easiest, most accurate way to do this, maybe it's not the easiest, but it is the most accurate, is to use a spreadsheet. If you use a spreadsheet, whether it's Microsoft Excel or Google Sheets, you use a function called XIRR. It gives you the internal rate of return of the investment. This is a dollar-weighted return. It's not a time-weighted return.

Morningstar will put out these studies every now and then saying that investors in general underperform their funds. They give you the fund's time-weighted return. That's what funds report. And they give you the investor's dollar-weighted return because that's the return that investors get. And because investors chase performance, the dollar-weighted return tends to lag the time-weighted return by several percentage points. You also see that because the market generally goes up over time and investors are, of course, putting money in as time goes along.

If some of your money went in in April and some of it went in in October and some of it went in in November this year to that investment, of course, you're going to underperform it if it went up over the whole year. Because the time-weighted return assumes you have the same amount of money in there the whole year and you actually didn't.

If you're tracking your own returns, I think you ought to use the dollar-weighted return. And that's what XIRR gives you. You can practice this. And there's a blog post on the website about it. If you Google XIRR or calculate your return on the White Coat Investor website, it will walk you through this process and show you how to do it. But basically there's one column of dates and you have to use the date function. You can't just type in the date. You have to use the date function in the spreadsheet. And then the other column is your cash flows. If you're putting money into the portfolio, it's negative. If you take money out of the portfolio, it's positive. And then you have your starting values, a negative number at the top, your ending values, a positive number for whatever it's worth right now at the bottom, and it gives you the return.

That's an annualized return. If you're doing this for a period of time less than a year, it's going to annualize it out. If you made 8% this year and you're only halfway through the year, it's going to tell you 16%. And over a multi-year period, it's going to annualize it, as well. If you tell them it's an eight-year period and it gives you a number, that's going to be a return per year that you're getting. That's what the IRR is, is it's an annualized number, which is the one that matters. That's the way you track your return.

Now, if you're trying to figure out how you're doing with your stock portfolio, with your stock picking prowess, all you have to keep track of is when the money goes into the account and when money comes out of the account. You don't have to track every individual stock that you're picking and buying and selling and day trading or whatever. All you have to do is when you take money out of the account. When it sits in cash, well, it's still inside the account, so you don't have to take that out of the account if you're going to measure the return of that account.

That's the way I would do it if I were you. And if it turns out you're really as talented as you say you are, you've got to ask yourself, are you lucky or are you good? And if you have a conviction that you're good, you ought to go start raising capital, start investing money for more than just yourself and start running a hedge fund or whatever. Because I know a lot of people that would love to have 25% a year returns. You can own the entire world in like one generation or two generations if you can get 25% returns a year. They're pretty awesome.

QUOTE OF THE DAY

Our quote of the day today comes from Abraham Lincoln, who said, “You cannot escape the responsibility of tomorrow by evading it today.” I think there's a lot of wisdom there.

INTRODUCING BONDS TO YOUR PORTFOLIO

Ricardo has got a question about bonds. Let's take a listen to your question, Ricardo.

Ricardo:
Hey Jim, it's Ricardo in South Florida. I have a question about investing in bonds. I am in agreement with the three-fund portfolio investment philosophy. With that in mind, I already have VTI and VXUS in my investment portfolio. And I've never actually had bonds before. I want to introduce them. I was wondering how I should do this.

Some background, I am 50 years old, primary care internal medicine doctor. I have a small amount of student loans, about $30,000 at 2.75% and a mortgage about $200,000 for my home at 2.75% also. I don't have a lot of space in my tax protected account because I've been doing the backdoor Roth IRAs and I don't have a traditional IRA.

My question is, since I need to invest in taxable accounts in my brokerage account at Vanguard, how should I go about doing this? I am in agreement with your recommendations to do 50% in tax protected bonds and 50% in inflation protected bonds.

The question is then, which bond ETF or mutual funds should I choose for my taxable brokerage account at Vanguard? Like I said, I do live in Florida, so I don't have state taxes, but I do want to avoid federal income taxes. Thanks for everything you do. And I really appreciate your help.

Dr. Jim Dahle:
All right. There's a lot in that question, Ricardo. You stuffed a lot into 90 seconds, however long your recording was. Let's talk about the three-fund portfolio for a minute. This was made famous by my friend, Taylor Larimore. He published a book. I think it's called The Boglehead's Guide to the Three-fund portfolio. And I don't know that the Bogleheads ever really sponsored or voted to authorize this book being published. Taylor just published it. And Taylor likes his three-fund portfolio.

But the truth is, I don't know that there's any defined three-fund portfolio other than what he said it was in his book. This is a Taylor thing, not even necessarily a Bogleheads thing, but it's become very popular over time. And per Taylor, the fund is a total international stock market index, a total stock market index, US stocks, and the total bond market index.

So, it's US bonds, US stocks, and international stocks. That's the three-fund portfolio. And there's lots of Bogleheads that like this. It's relatively easy to implement because there's only three investments, three asset classes. And it's pretty straightforward to do. And it's probably good enough. The truth about portfolios is you just need good enough. You get a portfolio that's good enough, you fund it adequately, and you stick with it long term, it'll probably do you just fine.

There are some awesome things about the portfolio. First of all, you can buy these investments at just about any type of brokerage. And most 401(k)s will have something pretty darn similar to these funds. And so, it's relatively easy to implement in all of your accounts. Even if you want to implement it in your HSA and your 529, your Atlas, you can do that because these funds tend to be very, very widely available.

They can be very cheap. If you're buying them at Schwab and Vanguard and iShares and Fidelity, you can get these funds very, very cheap, basically free. You can buy all the stocks in the world and all the bonds in the US for less than 10 basis points, which is essentially free.

It's free, it's very broadly diversified. And Taylor likes it. And he's 100 years old, 101, 102, whatever he is this year. So why not? But I wouldn't feel like you have to invest in this portfolio. There are lots of reasonable portfolios. All you have to do is pick reasonable, fund it adequately, and stick with it. Those are my thoughts on the three-fund portfolio.

This dogmatic approach to it that you see sometimes, particularly on the Bogleheads forum, I'm not a huge fan of. In fact, I once wrote one of my most popular blog posts called 150 Portfolios Better Than Yours. I think I've got 200 portfolios on it now. But the point was that any of these are okay. Don't get too fixated on the 3 Fund portfolio or any other portfolio, really.

Okay, assuming you still want the three-fund portfolio after that diatribe, the question is where you should put it. First of all, we got to address something else. The other thing you mentioned was my recommendation of half your bonds in tax-protected bonds and half in inflation-indexed bonds.

Number one, I don't have a recommendation about bonds. I don't have a WCI-approved or recommended portfolio. Pick something reasonable, stick with it. My portfolio, half the bonds are nominal and half of them are inflation-indexed, and I think that's a reasonable thing to do. But there's a big wide range of what reasonable is when it comes to bonds in your portfolio. And all you have to do is get in that range, fund it adequately, and stick with it.

All right, you want to put your bonds, it sounds like, in taxable. And that's fine. At these interest rates we have these days and the higher interest rates, it often makes sense to have your bonds in a tax-protected account because they're not very tax-efficient investments. The entire return is essentially paid out every year and it's taxed at ordinary income tax rates. So, it's not very tax-efficient investment. A lot of times, unless interest rates are really low, people will try to have it inside tax-protected accounts.

Typically when people are having to put something into a taxable portfolio, they're moving the most tax-efficient thing first, which is often something like the Total Stock Market Index Fund.

If I had to choose between the Total Stock Market Index Fund, the Total International Stock Market Index Fund, and the Total Bond Index Fund, and I had to move one of them to my taxable account, the first one I'd move would be the Total Stock Market Index Fund because I think it's the most tax-efficient of those three funds.

Not nearly all the return is paid out. The yield right now on that is like 1.2%. So if this thing's making 10% a year on average long-term, it's only paying out like one-tenth of that, a little more than one-tenth of that in income a year. So most of the return doesn't get taxed every year. And what is paid out is almost all qualified.

I was just looking it up this morning for a blog post I was doing, 97% of the dividends out of the Total Stock Market Index last year that I received were qualified dividends. It's a very, very tax-efficient investment. It's not the most tax-efficient investment, but it's very, very tax-efficient.

If you can, most of the time, people try to keep their bonds in their 401(k) or something, and put their stocks, particularly US stocks these days, in their taxable account. But if you have to put bonds in taxable, and our taxable account has gotten so large relative to our tax-protected accounts that we have to invest in bonds in taxable if we want to have bonds. And we do.

The bonds we have in our taxable account, for the most part, especially on the nominal side, are municipal bonds. And that's because we're in a high tax bracket. We're in the top tax bracket. And so, if you're in a high tax bracket, you will probably find that your after-tax return from municipal bonds is higher than your after-tax return from a regular bond fund, like total bond market fund, the one in the three-fund portfolio.

Keep that in mind. If you're really going to put them in taxable, maybe your three-fund portfolio is the total stock market index fund, the total international stock market index fund, and the municipal bond index fund at Vanguard. I think it's available in an ETF as well if you want that version of it.

If you want to have some inflation index bonds in there as well, well, you're talking about a four-fund portfolio. But you could put a bond fund in there that owns TIPS, Treasury Inflation Protected Securities, into your taxable account. We do have to do that as well.

Like I said, we have a bigger asset location problem than most people do. Certainly, TIPS are one of the last things I would move out of tax-protected accounts. They can be kind of annoying for various reasons. They're a little bit complex as far as how they pay out the return. And particularly if you're buying individual TIPS, you get phantom income. You got to pay taxes on it, but you didn't actually receive the income. So it's definitely better to have in a tax-protected account than most things that you can put into a tax-protected account of some type.

I hope that's helpful. But if you're putting bonds in a taxable account and you're listening to the White Coat Investor podcast, there's a good chance those bonds should be municipal bonds. Municipal bonds, the interest they pay out is federal income tax-free. If they are state-specific bonds to your state, they might also be state tax-free.

Obviously, in Ricardo's case, he's in Florida, he doesn't have a state tax. He could just use a general municipal bond fund like the excellent ones offered by Vanguard that we use. That's how I would implement a three-fund portfolio. If I had to put the bond in a taxable account and I were in a high income tax bracket, I'd use municipal bonds. Hope that's helpful.

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We've got all these online courses. We have versions for students, versions for residents, versions for attendings, versions that offer CME, and they're all available if you go to whitecoatinvestor.com, you'll see the link for courses and you can check out all of our courses.

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Okay, we've talked about bonds, we've talked a little bit about tracking returns, let's talk about gold. Everyone likes to talk about gold, especially when gold has done well more recently, and then of course, you don't hear about it for a decade, because that's the way gold is. It has good returns for a year or two and then nothing for 15 years, and then good returns for a year or two. That's kind of the way gold's been historically. But let's listen to the question, see if we can answer it.

IS INVESTING IN GOLD POINTLESS?

Speaker:
Hi, Dr. Dahle, I'm a radiologist in the Southeast and I have a question about gold. I don't invest in it, but I do see it as an asset class and I hear people going to it as a flight to safety, buying bullion from Costco and things like that. But I'm skeptical that in the times that you would really need gold, that you could get your value for it, that you put in.

Even though it's increased in value over time, it seems like the times that people are buying it for would be times that were duress, disasters, and times when these things would be illiquid and you could run the risk of then losing your gains or a lot of your investment, having to sell at a relative loss when you really desperately need the money. I'm curious about the sale component of investing in gold. Thanks.

Dr. Jim Dahle:
Okay, those who know about my portfolio know I don't own gold. I don't own silver, I don't own platinum, I don't own precious metals ETFs. I really don't invest in this asset class at all. I've got some gold in my finger. Katie's got a little bit of platinum on her finger. Although when I got her a 25th anniversary ring, we decided to go with white gold rather than platinum, mostly due to my experience of cutting rings off people in the emergency department.

It's way easier to cut through gold than any of these other fancy metals, by the way. If I have to go through like three blades in a half hour of trying to get your ring off, you've picked the wrong precious metal.

But precious metals as an investment, I'm not a big fan of. And the reason why is because they are a speculative investment. Now by speculative, I don't mean it's risky or it's stupid or something like that. When I say speculative, I mean that it doesn't produce anything.

Bonds produce interest. You put your money in your savings account, it pays interest. If you buy a stock, you get the earnings of the stock. If you buy real estate, you earn rents. These are productive assets. Gold is not a productive asset. It is a speculative asset. Other speculative assets include empty land, include Bitcoin and other sorts of crypto assets. Commodities, anything that's not producing something is a speculative asset. Just as a general rule, I don't invest in those. So I don't invest in gold.

Now I have to speculate on why some people do. Some people see that gold went up and they want to buy it. There's a lot of people out there that's seriously the way they invest. They own Bitcoin because Bitcoin went up, not because they bothered learning about any sort of blockchain technology or they're into it or they have a deep-felt conviction on the long-term use of Bitcoin as a currency or anything like that. They're like, “Bitcoin go up, must buy Bitcoin.” Same thing with gold. That's why people buy it.

My parents, many of you know, I helped take over their portfolio a little over 20 years ago and they're maybe not the most informed investors. Luckily, they haven't had to be for the last 20 years. But at one point when I was a child, I remember there was a bucket of silver coins in my closet. They've subsequently liquidated that, but somebody told them silver was a great investment and silver was going through the roof and so they bought a bucket of them and for some reason hid them in my closet.

I don't know how much a bucket of silver coins was worth back then, but this was probably the 80s. So it was probably worth something pretty good. I never was smart enough to grab all the silver and run, but that's how people invest in this stuff.

I don't know what they're thinking. Think about the last 100 years. We've had lots of bad economic times happen in the last 100 years. We went through a pandemic when you couldn't even get toilet paper. Interest rates went up 4% or 5% in a single year in 2022. In 2008, the world's financial markets were going to crash. Our real estate went in a hole that it didn't recover from for a decade.

We look at 2000. The dot-com crash. We look at the 1970s with stagflation. We look at a day in 1987 when the markets dropped 22% in a single day. We've had World War I and World War II and the Korean War and the Vietnam War and a couple of wars in the Gulf. And we spent 20 years in Afghanistan. Had the Great Depression. We've had multiple depression-like events in the 1800s. All these things that have happened.

Now, if we think back to all of those, in which of those times did you take a hunk of gold bullion down to the store and buy your groceries and buy your gasoline and exchange it for something you needed? None of them. This idea that this flight to safety, this asset you can have when times are really bad is a little bit hokey.

If you really end up in the zombie apocalypse, nobody's going to want your stupid gold. They want bullets. They want canned goods. Have you guys watched The Walking Dead? Nobody's looking for gold in The Walking Dead. They're looking for someplace safe. They're looking for some weapons. They're looking for some food. They're looking for some gasoline. Those sorts of things. They're not looking for gold.

I don't know what your plan is to spend this in a terrible economic downturn. Are you going to slice little bits off it like a little loaf of bread and weigh them on a scale and use that to buy things? What's your plan, really, when it comes to gold? It probably doesn't make any sense to use it in that sort of a thing.

Now, I know people escaped Nazi Germany with some gold in their pockets or some jewelry in their pockets or diamonds or something like that. But the truth is, if that's what you need to do, if you need to get value across an international border without getting caught, I think you're much better off with a crypto asset. This is one of the few really great use cases for Bitcoin. I probably wouldn't use gold for that. So if that's what you're buying gold for, probably think about Bitcoin instead.

Why do people buy gold? Well, they buy gold because gold went up. And gold's gone up now for the first time in a long time. Just looking at the historical price of gold, if you pull up a chart on Google, I see, okay, this is pretty exciting here. I see in 2015, it was like a little over $1,000 an ounce. And now it is $3,400 an ounce. It's worth three times as much as it was 10 years ago. This is why people are interested in gold.

But if you actually go back to some sort of historical numbers, you'll see probably a different scenario. Okay, here's gold price over the last 100 years. It was super high in the 1970s. $2,400 an ounce in like 1978 or something like that. And then it plummeted to $400 an ounce during the tech run-up, the late 1990s. That's kind of what gold does. And now it's back up to $3,500 an ounce or something.

But basically, if you look at gold, the price of gold over the last 800 years or so, it basically keeps up with inflation over the long-term, but with dramatically more volatility. 800 years ago, an ounce of gold bought a nice man's suit. And today, an ounce of gold buys a nice man's suit. It keeps up with inflation and that's about it. So that's what I would expect out of gold. I would expect to do nothing for many years, maybe decades, and then have a spectacular two or three or four years, and that to all average out to more or less inflation in the long run.

I don't make recommendations on what to have in your portfolio. If you want gold in there, keep it to less than 10% of the portfolio. A single digit kind of number, it's fine. If you want to stick with it for the long run, you say, I'm going to put 5% in gold. I think that's fine. There'll be times when it does well, like the last decade, especially the last few years, there'll be times when it does poorly like the 1990s.

But if you're willing to stick with it through thick and thin, you keep it to a small percentage of your portfolio, I think it's fine to have it in your portfolio. I'm not going to put it in mine. Not only does it not produce anything, but it costs something to maintain. You got to pay to store it. You got to pay to protect it and insure it. And I don't know. It's just not a very attractive asset class to me.

But if you want it, I think it's fine. I'm going to tell you the same thing about it. I'm going to tell you about Bitcoin. Single digit percentage of your portfolio. And if it does really well over a few years, don't let it start dominating the portfolio. If it's crept up to 20% of your portfolio, you need to sell some of it and diversify.

All right, let's talk about something else. No one wants to talk about boring old stock index funds. Everyone wants to talk about something else, even though 85% of my portfolio is in boring old stock index funds. And hopefully a very large percentage of yours is in boring old stock index funds.

But it's hard to fill 52, 30 to 60 minute long podcasts a year, talking only about boring old index funds. I don't know what else to tell you about them. Go buy a bunch of index funds. They're boring, but they really work if you hold onto them long-term and you're very well diversified. It's basically free to buy all the most profitable corporations in the history of the world. But apparently now we need to talk about private equity.

INVESTING IN PRIVATE EQUITY

Ash:
Hello, Jim, this is Ash from Virginia. I was speaking with my financial advisor recently, and he recommended that I invest in private equity as a way to diversify and reduce market correlation. Otherwise, I am heavily invested in index funds, Vanguard index funds. I was wondering if you thought this was a good idea, neutral, or a bad idea. Thank you so much.

Dr. Jim Dahle:
The problem I have with private equity is that the term is so broad, it means almost nothing. All private means is that it's not traded on the stock market. Private equity is all the businesses in the world that are not traded on the stock market. That includes the self-employed person in some developing country in Africa and a sheep herd. Private equity. He raises the sheep, he sells the sheep for profit, he gets some milk from the sheep, whatever. Private equity. The White Coat Investor, private equity. It's privately owned. It's not owned by the stock market. It's not owned publicly, so it's private equity.

A lot of real estate is private equity real estate. If you're investing on the equity side, not the debt side, it's private equity real estate, and obviously I own some of that. Some of our advertisers on this podcast offer private equity real estate investments.

When we talk about private equity, it's a little hard to know exactly what people are talking about, but it's this cool catchphrase that everybody thinks sounds really smart, and so everyone says, “I should invest in private equity. You have any private equity investments?” And guess what? If you ask for it, and it can be sold, and a profit can be made on it, somebody will offer you that to invest in.

Whether you should invest in it or not is a completely different story. There's lots of benefits to being in the public markets. You get very liquid investment. It's very transparent, it's regulated. The price changes minute by minute throughout the trading days, so you're always getting current pricing. There's lots of benefits of being in the public markets.

There are also benefits to being in the private market. Imagine if we had to figure out what White Coat Investor was worth every day, and that affected how we ran the company. You don't need those sorts of pressures, and lots of other people have decided, “I don't need those sorts of pressures in my business either, so I'm going to stay private.” Even public corporations sometimes go private. They basically get bought out, and somebody takes them private, they're no longer traded on the stock market.

So lots of ways that you can invest in private equity. But there's lots of funds out there that call themselves private equity funds, and they're doing all kinds of different things. Sometimes they use a whole bunch of leverage, and they're buying something and trying. This is what happens with physician groups and hospitals, they try to pull as much profit out of it as they can, and then resell it in three or four or five years for a higher profit.

And obviously, you know how that affects how that business runs. You've seen it happen in your hospitals, you've seen it happen in your physician groups, lots of things implode. It can be pretty bad when something's backed by private equity.

Those of you who have been sending emails to me about this hospital corporation that's gone bankrupt, it owned my hospital just a year or two ago, and it wasn't good. While the CEO and other staff were enriching themselves off the money in the company and running it into the ground, we couldn't get somebody to come fix the CT scan. They wouldn't come out because they hadn't been paid in six months when the CT scan broke. So we were literally putting people in an ambulance to send them to another campus of our hospital to get a CT scan. Meanwhile, that campus was sending people to our campus in order to get ultrasounds. And we were going to a third campus to get MRIs. It's ridiculous.

If you run businesses primarily for profit, they usually don't last very long. You got to put the mission before profit. I mean, no margin, no mission, but you got to put the mission before profit or the company's just not going to be around very long. And that's what a lot of private equity type investments have been accused of. So, keep that in mind if you decide you want to support that sort of model by doing that.

Okay, now there is a big trend toward this though. In fact, Vanguard just announced a partnership and I was hoping not to talk about this until the fall when it's really a little bit more sorted out exactly what they're doing. But they've launched a partnership, I think with BlackRock to have some sort of private public fund they can offer to their advised clients and even their non-advised clients with this idea that adding some private equity to your portfolio can juice your returns.

Well, maybe it can, maybe it can't, time will tell. I don't have plans right now to add a private equity fund to my portfolio. I certainly have plenty of my net worth invested in private equity already with the White Coat Investor. And I've got a good chunk of my real estate on the private side as well.

So, here's my cautions for private investments. One, you often need to be an accredited investor to buy them. The rules for that, the legal rule is you got to make $200,000 plus a year for each of the last two years, or you got to have a million dollars in investable assets.

That is an inadequate rule in my opinion. If you're going to invest outside the publicly traded markets, I think you need to be a real accredited investor. And I define that number one, as you can evaluate the investment without the assistance of an advisor, accountant or attorney. And number two, that you can lose your entire investment without really affecting your financial life in any significant way.

If you meet those two criteria, I think it's fine to wade into the private markets and buy some investments. You still need to follow the good principles of diversification and portfolio construction. You want high returning assets with low correlation with each other. You're trying to build a portfolio here, not just build a collection of investments.

Keep that in mind, but I think it's okay to add some private investments to your portfolio. Keep in mind the liquidity issues in the private markets. And often you can't get your money back for years. If you needed a whole bunch of money this year, you're not going to be able to get it. Only some of your portfolio is appropriate being illiquid investments.

Keep that in mind, but I don't know that you're going to juice your returns in the private equity markets. Maybe you'll have higher returns. Maybe you'll have higher risk adjusted returns. Maybe they'll have a low correlation with your publicly traded investments, but it feels faddish to me. It feels like a trend.

So, let's watch it. There's no rush to invest in anything. Let's see how this Vanguard partnership goes. There's a bunch of other ones coming out this fall as well. Let's watch them for a year or two, see what they do and decide, “Hey, is this something I want to add a slice of to my portfolio or not?”

Keep in mind, this is a game with no called strikes. You don't have to swing at any given investment. You can just let them keep on coming by and you don't have to invest in everything to be successful. You don't have to have gold and Bitcoin and private real estate and private equity and all this stuff, small value stocks and Hong Kong stocks.

You don't have to have all this stuff to be successful. You need something like three to 10 asset classes in your portfolio. You want each asset class to be broadly diversified like what you'd get in an index fund. And then you need to fund it adequately and stick with it in the long-term.

That's what leads you to investing success. That's what leads you to completing, reaching your financial goals. That's the goal. Investing is a one person game. It's you against your goals. It's not you trying to beat the market. It's not you trying to beat anybody else. Balance your FOMO against your fear of loss and don't go chasing the latest shiny thing. That's a sure pathway to investment failure.

Let's keep an eye out on private equity. I'll be writing more about it, talking more about it this fall. It's definitely out there. It is probably going to show up in some 401(k)s and it's going to show up at your favorite brokerages. But every investment is individual and has to be evaluated on its own merits. It's unlikely there's ever going to be an index fund for private equity investments. All of them have to be looked at individually if you want to invest in them.

All right. Thanks everybody out there for what you do. It is not easy work. As I mentioned, I got five shifts this week. I've done three. I got two more in the next two days. And it's good to work like a real doc this week and remind myself of my roots and where I come from and take care of people.

There's a lot of people out there who are much less fortunate than we are, who deserve good medical care and they're looking for some relief and comfort in a terrible time in their lives. And it's a pleasure and honor to be able to help them do that. Thanks for those of you who have chosen to do this with your life. And I know some days are rougher than others. And if today's one of those days and nobody told you thanks all day, let me be the first.

VANGUARD AND SPEC ID

Okay. We need to talk about another issue here. People are hounding me with emails about this issue. I have written the blog post. It's going to run between the time I'm recording this. And when you hear this, this is an issue about a letter Vanguard is sending out. Let's hear the question to start with. And a bunch of you I know have gotten this letter.

Marcy:
Hi Jim, this is Marcy from the Midwest. Quick question. Got a letter from Vanguard saying that they are no longer doing Spec ID as the preferred cost basis method for their holdings. And now they're going to an automated either first in first out, a minimum tax or a highest in first out option when selecting for cost basis. They say that it's to help with automation of certain loss. We use the spec ID to help with tax loss harvesting. Do you have an opinion on how this affects us or which one we should choose? Thank you so much.

Dr. Jim Dahle:
Okay. First of all, go back and read the blog post. It's scheduled to run on August 2nd. That should be before you ever hear this podcast. But the letter they're sending you says this. It says, “Dear investor, whatever your name is, we noticed you've selected specific identification as your preferred cost basis method for certain holdings in your account. While you'll still be able to use spec ID for individual transactions. While you'll still be able to use spec ID for individual transactions.”

Did you hear that? Nothing else matters in this letter. You'll still be able to use Spec ID for your individual transactions. I use specific identification. Cause I do the same thing you do. I'm tax loss harvesting and I want to harvest the losses. All they're asking here you to do is they're asking you to pick an automated method of cost basis.

In the event that you had some sort of automated thing set up, for instance, you had set it up such that it automatically sends you $400 a month out of your brokerage account so you can live on it. Well, it needs to know, well, what are we supposed to do? Are we supposed to do first in first out? Are we supposed to do min tax? Are we supposed to do highest in first out? That's all they're asking.

But hopefully you're not selling any of your taxable holdings that way. You're specifically identifying which tax slots you want to sell from. And so long as you do that, this question doesn't matter at all. Doesn't matter what you pick. But if for whatever reason it happened automatically, you probably want it to do what they call min tax or minimum tax, because that's what you do most of the time when you're trying to sell your shares is you want the one that's going to cost you the least in taxes.

Choose min tax and recognize that when you go in there to tax loss harvest your taxable account, you're still going to be able to do specific identification. Then go check out that blog post if you want to hear about all the other methods of cost basis methods. I got all the ones in there from Fidelity and there's way more at Fidelity than there is a Vanguard. All the ones in there from Schwab. They got all these cool ones, low cost short term and high cost long term and tax sensitive short term and tax lot optimizer.

There's all these other methods of cost basis selection out there. But just set it as min tax and recognize you can still do specific identification when you actually go in there to sell shares. Hopefully that's helpful.

All right, I think we've got another question here from Ricardo. Maybe it's the same Ricardo as the other question but let's take a listen.

TAX LOSS HARVESTING

Ricardo:
Hey Jim, this is Ricardo again. I had a question regarding tax loss harvesting. I do own my own internal medicine primary care practice and I've had it for the last 16 years so I anticipate eventually to sell it and at that point make a capital gains and be responsible for that tax. One strategy I wanted to use is to have tax loss harvesting and use those losses to offset that capital gains when I do sell my practice.

My question is how to exactly do this? And I know you did an excellent post detailing in detail through Vanguard how to do the tax loss harvesting. But on an emotional basis, when I do see a loss, let's say there's $50,000 loss in my portfolio, I get nervous because I've always heard “Don't sell low and don't sell a loss”, but that's exactly what we're doing when we tax loss harvesting.

Now, I understand you have to buy another stock which is similar but not identical, but emotionally I just have a hard time selling when I'm at a loss. So just please reassure me that this is the right process that you do sell a loss, but then you buy another stock which is similar but not identical.

If I don't feel comfortable doing this, do you think that's something for tax loss harvesting? Is that something that's worthwhile getting one of the recommended financial advisors on your website? Thanks again and really, really appreciate everything you do for us.

Dr. Jim Dahle:
Okay, good question. First, let's talk about the emotional aspect here. These are losses, it hurts to sell low. You don't want to buy high and sell low. That's a recipe for investment disaster and financial catastrophe. But that's not what you're doing when you're tax loss harvesting. You are selling low and buying low. You are exchanging. You're really not changing your portfolio at all.

I hope you're not investing in individual stocks because it's really hard to tax loss harvest because you know what? Tesla is not the same as Microsoft. You cannot get something very similar when you're tax loss harvesting individual stocks. It's very hard. Maybe there's something similar, but for most of them, there's nothing that's really very similar.

That's not the case when you're using ETFs or mutual funds. You can sell the Vanguard Total Stock Market Index Fund and you can buy the iShares Total Stock Market Index Fund 18 seconds later and you've sold low and bought low. And you basically have the same portfolio, but you know what? When you get your 1099 div at the end of the year, you're going to have that $50,000 tax loss and you can save those up. You can only use $3,000 a year against your ordinary income. You can use an unlimited amount against tax gains, but hopefully you're not generating too many of those throughout your career.

And then hopefully you've got hundreds of thousands of dollars or millions of dollars of these tax losses saved up for the end of your career when you sell your practice. By the way, great job establishing a practice and building some value there that you'll be able to sell later.

But this would be great. If you could line up half a million dollars of tax losses throughout your career and then you sell this practice for $750,000, that's $500,000 of that gain that you don't have to pay taxes on. That might save you $100,000 in taxes. It can be a lot of money.

That's the idea behind tax loss harvesting. I tend to do mine manually. I think maybe someday I'll sell the White Coat Investor. Tax losses would be pretty useful to me. So I keep acquiring them, even though I have far more than I'll ever need at $3,000 a year. And I really don't expect to ever realize any capital gains in my taxable ETF portfolio. We tend to flush them out doing charitable giving. And our basis really isn't even all that low, but we keep acquiring these tax losses just in case we sell our house or we sell our business or whatever. We're doing the same thing you are.

Now, there are companies that try to get you more tax losses out there. They maybe have a special algorithm where they're trying to do this with various ETFs or they're doing direct indexing. And if their fees are very, very low, it's possible that the tax losses will be more valuable than what you're paying in those fees, but you have to be careful.

If you're paying 0.7 or 0.8% a year just for tax losses, you're not going to have the value there that you're looking for. And certainly if you're going to a full service advisor that's charging you 1% a year on a multimillion dollar portfolio, I'm not sure the value's there either, especially compared to what you can do yourself. This isn't that complicated. It sounds like you're managing your portfolio yourself. This is not a big add to somebody. You can handle the rest of their portfolio chores.

But if you need some help, it doesn't hurt to go use one of these financial advisors that specializes in validators that helps you teach you some things for a year or two, and then you can go out on your own. It's not like you have to use the advisor for the rest of your life just because you needed some help learning how to do some of these things.

A lot of those people on our recommended list do specialize in helping validators to become do-it-yourselfers, but the value of tax losses depends on your financial life. You sound like you are going to have a big taxable gain at some point in your life so you have a little more value to a tax loss than other people do. I think it's well worth learning how to do this yourself and it's probably worth considering getting somebody to help you do it professionally.

I think we covered on this podcast a few months ago direct indexing. You could convince me that paying 10 basis points a year to do direct indexing might be worth it for you given your situation, but I don't know that everybody needs to do that sort of a thing.

Really you have to step back and ask yourself “How much are additional tax losses worth to me?” Because just about every White Coat Investor with a taxable account can get enough of them pretty darn easily to have $3,000 a year to use against their ordinary income.

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INTRODUCTON

This is the White Coat Investor podcast Milestones to Millionaire – Celebrating stories of success along the journey to financial freedom.

Dr. Jim Dahle:
This is Milestones to Millionaire podcast number 236 – Physician takes a youth sports team to the state championship.

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

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

We got a cool thing coming up on August 19th. We have something that's pretty special. We're calling it Financial Crash Course. I'm going to spend an evening with you and we're going to help you to get stuff figured out that you're still working hard on. While you didn't become a doctor to get rich, you worked far too hard not to be financially successful.

Too many physicians are still living paycheck to paycheck, stressed about money and unsure how to turn a high income into real wealth. So next Tuesday at 06:00 P.M. Mountain, I'm hosting a free Financial Crash Course to help change that. This is a live experience. We'll walk through how to become debt-free within five years of residency and set yourself firmly on the path to multimillionaire status.

We're going to cover what actually matters, what to do next with your money, how to invest with confidence, how to reduce your tax bill legally, how to protect your wealth through insurance, estate planning and asset protection. Most importantly, how to actually use your income to build a life you love. Register now, whitecoatinvestor.com/crashcourse.

If you can't make it live, we'll send you the replay to everyone who registers, but it's going to be a presentation and it's going to be a lengthy Q&A session afterward. If you attend live, you'll get a free bonus download, a financial plan template that will serve as your personal roadmap to building wealth.

And to top it off, we're giving away five free enrollments in the Fire Your Financial Advisor attending course. That's a $799 value. You've done the hard work to earn this income. Now let's make sure it's working for you. So join us live Tuesday, August 19th. Register at whitecoatinvestor.com/crashcourse.

All right, we have a podcast sale. That means it's a sale on our stuff that's only available to those of you who listen to the podcast because you got to listen to the podcast to get this code. If you will use code PODCAST20 before Friday, August 29th, you'll get 20% off all our White Coat Investor courses. And that makes the new Fire Your Financial Advisor student course just $79. All of our courses though are 20% off, whether it's the real estate course, whatever version of Fire Your Financial Advisor that's appropriate for you, whether it's our annual continuing financial education course, all of these 20% off through August 29th. All you got to do is put in the code PODCAST20.

Be aware that some of these courses are also eligible for CME. There's a version of Fire Your Financial Advisor that qualifies for CME. And of course, the Continuing Financial Education course is always qualified for CME because they come from the conference that qualifies for CME.

Speaking of the conference, it's coming up soon. You can't sign up yet, but you will be able to in a few more days. The Physician Wellness and Financial Literacy Conference of 2026. The speakers have now been announced. You can go to whitecoatinvestor.com/wcicon to see the full lineup and session topics.

Start lining up your friends to come with you. You can come alone. We make it so it's very easy. It's a very welcoming community to come alone. But lots of people like to bring their friends and we certainly encourage that sort of behavior. The more, the merrier.

Be aware that the last time we held this conference in Las Vegas, it sold out in 23 hours. Now, I don't know that it's going to sell out this time at all. I don't know if it's going to sell out in 23 hours, but I wouldn't necessarily wait. It's going to be a great conference. It's in Las Vegas. It's not on the Strip. If you don't want to go to the Strip, you don't even have to go to the Strip the entire time you're there. But if you're there, if you want to go there, it's not very far away. So, you can go check out shows or whatever you like to do on the Strip that's available. And of course, it's close to Southern Utah and the Grand Canyon and all that kind of stuff. If you want to make a family trip out of it, that's also a great option.

Mark your calendar to join us March 25th through 28th at the J.W. Marriott Las Vegas Resort and Spa in beautiful Summerlin, just West of the Strip. Whether your career is just getting started or you're planning your exit strategy, this group of finance and wellness experts is going to help you get closer to the life you actually want.

This is a peaceful desert retreat. It's near Red Rocks, one of my favorite places, but it's still close enough to check out everything else that Vegas has to offer. If you've never really been in Vegas or experienced Vegas, it's quite an experience that everybody ought to experience once. It may not be your thing, but if it's not, you know what? Red Rock probably is. And we're even closer to Red Rock than we are to the Strip.

Early bird registration is going to start at the 1st of September. So, put a reminder on your calendar, register with the lowest prices we're going to offer from here till the conference at whitecoatinvestor.com/wcicon. And I hope it doesn't sell out immediately, but if it does, you'll be glad you got on right on September 1st and signed up.

Okay, we've got a unique milestone today, as you heard with the title of this podcast. But yes, we're still going to be talking about finances. This is a finance podcast. You can't come on here with milestones that aren't financial, just FYI. We've got to twist whatever milestone you've accomplished and still talk about finances to inspire others to really take the wheel and take advantage of all the wonderful things that are available to them in this world, if you can manage your finance as well.

Stick around after this interview. I want to talk for a few minutes about sequence of returns risk and some of the methods to deal with it. If that term is totally new to you, you definitely want to stick around after this podcast.

INTERVIEW

Our guest today on the Milestones to Millionaire podcast is Adam. Adam, welcome to the podcast.

Adam:
Thanks, Jim. Really love your podcast. I'm so glad I can be a part of it today.

Dr. Jim Dahle:
Well, we're excited to have you on this. This is actually the last of five podcasts I'm recording today, which is always fun to have a really great one at the end. And this one's going to be a little bit unique. Let's give people a sense of where you're at in life. What part of the country do you live in? What do you do for a living? How far are you out of your training?

Adam:
All right, I live in Eau Claire, Wisconsin. I'm a non-operative sports medicine physician and I am coming up on 12 years out of training.

Dr. Jim Dahle:
Okay, very cool. All right, tell us what milestone we're celebrating today.

Adam:
Well, this year, my squirt hockey team that my son plays on won the Wisconsin State Championship.

Dr. Jim Dahle:
That's pretty awesome. Okay, for those who aren't aware, squirts are like nine and 10 years old are basically what squirts are.

Adam:
Exactly, yep.

Dr. Jim Dahle:
Okay, you won the state championship and that's no small feat in Wisconsin. You're not in Utah here. We have hockey here. We're really proud we've got an NHL team now but let's be honest, we are not a huge hockey state like Minnesota and Michigan, Alaska, et cetera. So this is no small accomplishment in Wisconsin.

But as I told you before we started recording, we can't just celebrate state championships. So we got to delve a little bit into the financial aspects of this. What is it in your life that has allowed you to spend enough time coaching that you can have a state championship team?

Adam:
Well, I would say my story starts coming out of residency and reading books like yours right away. That was right about the time I graduated was when your book came out and following a solid financial plan over the last decade has really allowed me to set things up to where I don't have to worry about money anymore and I'm at a stage in life where I can really just focus on the things that matter now like my faith and my family and my health.

Dr. Jim Dahle:
Very cool. Would you describe yourself as financially independent already or you just feel like you're on the fast track to get there?

Adam:
I would say I'm at coast fire at this point.

Dr. Jim Dahle:
Very cool.

Adam:
If I don't put anything else into retirement from now until I retire, I'll be good.

Dr. Jim Dahle:
Very cool. I'm not sure we've done coast fire as a milestone. We should have done coast fire. That's even better. Okay, we got to hear about the hockey team though. Is this a travel team? I assume it's a travel team if there's a state championship.

Adam:
Yes, this is a travel team. We travel all over the place in Wisconsin. We live about an hour away from the Twin Cities and so we probably play a third of our games against teams in Minnesota which really has helped to grow our program and advance. Just blessed to have a group of kids that really works hard and they all push themselves and as a result, we've had really a lot of success this year and it culminated with a state championship which was really cool.

Dr. Jim Dahle:
Yeah, that's very fun. You got a kid on the team, I assume?

Adam:
Yes, I've got my my second of four, Sam, he's just turned 11 but he was on the team. He had a great year.

Dr. Jim Dahle:
Okay, what position does Sam play?

Adam:
Sam is the center.

Dr. Jim Dahle:
Okay, what line is Sam on? Is Sam the first line center?

Adam:
We rotated two centers on three lines this year and I would say they're pretty equal. It really didn't matter who started.

Dr. Jim Dahle:
Very cool, very fun. At some point along the way this year, especially with you going all the way to the state championship, there were some times when that really didn't work well with work. So, tell us what you did with work when there were conflict.

Adam:
If I had over a month notice, I could take the time off. What a lot of people don't know is that youth sports and as a sports medicine physician, this is the world I live in, youth sports has kind of taken over and so a lot of tournaments now start on Friday and they might even start on Friday morning.

Dr. Jim Dahle:
You have to travel Thursday night.

Adam:
Sometimes, yes, but most of the time it's just early Friday morning. I probably missed the coolest game of the year this year. We played in a tournament in Minnesota and the opposing team coaches were Zach Parise and David Dubnik from the Wild. And so their kids were on the other bench and that was the game I missed.

Dr. Jim Dahle:
Did your team win the game? That's the question.

Adam:
No, actually. I'll make an excuse. The Minnesota kids, they had to use a different birth year. It's June to June or July to July and in Wisconsin, we're January to January. So our kids are ballpark six months younger than their kids, which makes a little bit of a difference in youth sports, especially at this age.

Dr. Jim Dahle:
Yeah. Well, it's interesting is a lot of people don't know this, but some huge percentage, I don't know what it is, 63% or 70% of NHL players are born in January to March.

Adam:
Yes.

Dr. Jim Dahle:
And the reason why is because they're just a little bit older. And so at every level, they're a little bit older, a little bit better than their peers. And so, those are the ones that end up in the NHL eventually. It's a really curious statistic. Okay, sometimes you've got to be there on Friday and what? You rely on your partners, you cancel clinic. What do you do when that happens?

Adam:
I usually am booked out about a week. And so, if I got 30 days notice, I can just shift. I'm not having to really cancel patients. One of the things that I noticed after probably about six years in the area that I'm in is that no matter how hard I work, my system is going to give me about 80 patients a week. And if I can do that in five days a week, great.

There was a point a few years ago that I realized I could really do that in four days a week. And so, I take one day a week off and I just get all the patients in the rest of the time. And it's allowed me to see everybody that I need to see through my system, but also has given me a little bit more family time, a little more time to get things ready, to get practices planned, to get to connect with my wife a little more.

All those things have happened, I guess, happenstance. But that's really worked out because of being paid on production, I can work four days a week and see the same number of people. And I never took a pay cut when I dropped my FTE.

Dr. Jim Dahle:
Yeah, very cool. And those other things, of course, are what life's really made out of, right? All these other things that really are the priorities. Sometimes we don't always remember that or always treat them that way, but they are the priorities.

Okay, give us a sense. You got more than one kid in travel sports, I'm guessing.

Adam:
We have four right now.

Dr. Jim Dahle:
Yeah. Okay, let's talk about the expense of travel sports. What's it cost to be a player on your state championship team? What did parents spend this year to have a kid on that team?

Adam:
$1,500 was the association fee to join the team, about an extra $200 for jerseys, and then four weekends in hotels, each weekend ballpark $500.

Dr. Jim Dahle:
Well, you clearly are in Wisconsin and Minnesota, if you can get the whole weekend.

Adam:
Yeah, I guess you call it geographic arbitrage.

Dr. Jim Dahle:
That's it. That's pretty good. Plus gear, of course. Hockey gear is not trivial.

Adam:
Now, hockey is you roll right from the winter season into a spring season, and then you've got a camp all summer, and they're trying to get my kid to play on a fall team now. And I'm going, we need to do some other things. We need to get them, give them a little bit of a break.

Dr. Jim Dahle:
Find a little bit of balance there. But your team fee is actually significantly cheaper than my kid. My kid's in high school now, but he pays that much just for the high school team.

Adam:
I played a little bit in med school. I was in New York City, and I played on Chelsea Pier, which is a really cool rink because it's elevated. It's off a ground level. And the fees there, it was like $1,000 every three months.

Dr. Jim Dahle:
Wow. Just for beer league hockey.

Adam:
Just for beer league hockey.

Dr. Jim Dahle:
Yeah, that's pretty wild. I guess that's what you get in a high cost living area. There's a message about geographic arbitrage there somewhere. If you want to play hockey, go to the Northern Midwest rather than Manhattan, I guess.

Okay, very cool. Well, this idea of coast fire is something not a lot of people have heard of. And that is a reasonable goal in and of itself. Clearly, early in your career, becoming financially comfortable, whatever, was important to you and your spouse. Why? Why did you end up saving enough money that you now no longer have to save for retirement?

Adam:
The answer to that question is probably pretty complex. I was really interested in finance during residency and started reading books about it and started initially listening to Dave Ramsey's podcast about getting out of debt. And then when I started to read that and really tackle the debt, that was before student loan advice was available or else I probably would have done the PSLF route.

But then I started reading other books that was kind of a snowball into books like yours, where I started learning about all the different retirement accounts that I could invest in and set up. And really throughout the last decade, I just maximized everything that was available. Every year we max out a 401(k), we max out a 457 plan, backdoor Roth IRAs. And then I'm lucky enough to work for a company that also would put about $30,000 every year in addition into retirement.

After I had kind of gotten financially literate about four years into training, I approached my system because they weren't offering a mega backdoor Roth and none of our financial people had heard of it. And so kind of talked them into, hey, this is the thing that's available. And after about a year, that was available. And so then I started maxing that out too.

Really just have done everything that has been offered. And we kind of look at things where we pay ourselves first, and then we live on what's left over. And right now that's turned into about $2 million in investable assets.

Dr. Jim Dahle:
Cool. And given that you're only 12 years out of training, there's plenty of time for that double to double once or twice while you're still working, which is pretty cool.

Okay, there's somebody out there sitting around going, “Is this all there is to life? I sure would like to spend more time with my family. I'd like to coach a team. I'd like to do some of these things that you're doing in your life now.” What advice do you have for that doc?

Adam:
The biggest thing is you have to live within your means. You can't spend money that you don't have. That's probably the biggest thing. The way we have our life set up is that most things come out before the paycheck ever comes home. Once the paycheck does come home, we set aside money for our giving every month. And then after that, we live on what's left. And that's been more than enough to cover all of our expenses and everything that we want to do. If there's someone else out there that wants to live life to the fullest, I would say that's the process and the steps.

Dr. Jim Dahle:
Very cool. Adam, congratulations on what you've accomplished. Congratulations to you and your team.

Adam:
Thank you.

Dr. Jim Dahle:
And not only your team, including your spouse and kids that have worked on your finances, but your hockey team. It's got to feel pretty good to take them all the way and put that trophy up in the air and have them enjoy that feeling, that accomplishment, even at the young, tender age of nine or ten years old. So, congratulations to all of you.

Adam:
It's been really, really cool. I also want to put a plug. I know you're a hockey guy. If you're ever interested, Wisconsin hosts the USA National Pond Hockey Championship every year. The way one of my buddies put it, it's like Disneyland for hockey players. And so, it's in Eagle River, Wisconsin, first, second weekend in February every year. They get several hundred teams, 24 rinks. And it is a blast. I know you're an experienced guy, that's an experience. It would be great to have you out sometime to do that.

Dr. Jim Dahle:
One of my fellow coaches on the high school hockey team went out and played this year. I was coaching while he was playing, but it does sound like a great experience. I would like to come out and maybe we can put together a White Coat Investor pond hockey team and go out there and clean up.

Adam:
I would imagine there are enough White Coat Investors out there that we could probably field a solid squad.

Dr. Jim Dahle:
Nice. We'll let you go. Thank you so much for your time.

Adam:
All right. Thanks, Jim.

Dr. Jim Dahle:
All right. That was fun. It's always fun to talk to a hockey player and a hockey coach. And it's fun what we can accomplish when we have our finances on track. You can have evenings to spend coaching your kids or whatever else is important to you in life. If you just get your financial ducks in a row, it's part of the why. You got to have a “why” to do all this stuff. So, let's make sure we do that.

FINANCE 101: SEQUENCE OF RETURNS RISK

I told you at the top of the hour, we're going to talk a little bit about sequence of returns risk, SORR. If you're not familiar with this term, you need to be, particularly if you're getting anywhere near retiree. Sequence of returns risk is the risk that despite having adequate average returns from your portfolio to support your retirement spending, you run out of money because the poor returns came first.

That's what sequence of returns risk is. You had a bad sequence. You had the bad returns first before the good returns came. Because when your portfolio is falling in value and you're withdrawing substantial sums from it, it makes it more likely that you run out of money.

And now obviously there are other ways to return on money. If you don't manage your money, you're going to run out of money. If you don't save much for retirement, you're probably running out of money in retirement. And if you have some massive, huge, unexpected expenses, like you decided you're not going to buy health insurance and you had a cancer or some terrible trauma you had landed in the ICU for, maybe you run out of money. Or some long-term care situation you weren't prepared for, maybe you run out of money. But for the most part, if you've done a good job saving for retirement, you do a good job managing your money, the risk to worry about is this sequence of returns risk. You have crummy returns in the first one, two, three, five years of retirement.

The worry is that you're retiring into the next great depression, that you're retiring into the stagflation of the 1970s. And so, that is something that you probably ought to have a plan for as part of your written financial plan. So, let's talk about what those plans might look like.

First of all, one plan that works for lots and lots and lots of White Coat Investors, it's almost a default plan, an error plan, is to just be rich. If you're very wealthy, if you retire very wealthy, sequence of returns risk just doesn't exist for you.

Let me give you an example. Let's say we got a retired couple, they spend $200,000 a year. And because they did such a great job earning and saving and investing throughout their career, they retired with $10 million. $200,000 a year of $10 million is 2%. If you're only spending 1 or 2 or 3% of your portfolio a year, you're basically bulletproof from sequence of returns risk. The entire world has to melt down for you to run out of money. This is not the people who really have serious sequence of returns risk. If you're perfectly comfortable spending 1% of your portfolio, you're going to be fine.

The truth is on average, if you look at the data used when they're putting together things like the 4% guideline, they note that on average, when people spend 4% of their portfolio, adjusted upward with inflation each year as they go along, after 30 years, on average, they have 2.7 times what they retired with. The sequence of returns issue, the reason why that's only 4% rule instead of the 6% rule or the 8% rule is because occasionally, you get those bad returns first. That is where it comes from.

Another solution besides just being really wealthy, if you're not spending anywhere near 4% of your money, that works fine. Another method is to work late and work a long time. Let's say you're one of those docs that just loves it and you keep working until you're 70, 72, 75.

Well, guess what? If you're still working until you're 75, your life expectancy is probably something like eight, 10, 12 years, something like that. All these studies that look at sequence of returns risk, they're really looking at 30 year time periods. If you are only going to be retired for a decade before you die, even if you live a little longer than you expect and you make it 15 years, guess what? You're not going to run out of money.

The people who really need to worry about sequence of returns risk are the early retirees. If you're retiring at 45, 50, 55, you might have a longer than 30 year time period and maybe that'll result in you spending less than 4% or doing some more of these strategies that I'm going to talk about to deal with that sequence of returns risk.

But working late or at least having the ability to go back to work and work some of those years in retirement has a dramatic effect on how all of this works. All of a sudden, instead of having to withdraw a whole bunch of your portfolio in a year the market is down or a couple of year period when the market is down, you can live off some of the money you earn and it just works dramatically better. You don't run out of money. Sequence of returns risk basically goes away.

Okay, here's another method. Another method is to guarantee a whole bunch of your income. And now social security is a guaranteed income. Obviously, you got to pay attention to who stands behind the guarantee. In the case of social security, it's the US government.

But delaying your social security to age 70 gives you the best deal out there on an inflation adjusted immediate annuity. Basically, you can put the highest floor possible under your guaranteed income, your guaranteed spending. And that can really help a lot in a year when markets are down.

There are other sources of guaranteed income. You might have a pension from a job you took. You can also buy an immediate annuity. You can go to insurance company and give them $100,000 and they might give you something as high as $600 a month for that $100,000. Obviously, you can buy more of those.

If you want more than $600 of guaranteed spending a month, maybe you can buy a quarter million dollar one on yourself, another quarter million dollar one on your spouse. Now we're talking about $3,000 a month of guaranteed income. So you combine that with your social security and all of a sudden, well, that's not too bad. Even if markets are down, we got to cut back our spending a little bit. We've got all of our essential fixed expenses covered by guaranteed income. That's a method that works very well.

Here's another method that works. A big risk in sequence risk and the sequence of returns risk is not just that you have poor returns. It's that you have poor inflation adjusted returns or real returns. The worst time period actually historically, if you look at the data for US stock and bond returns is actually the 70s. And it's not because returns were so terrible. The returns were not good by any means. The problem was inflation went way up.

And so, the real returns were really particularly bad. And you can reduce that risk by having more assets in your portfolio that tend to do well in inflationary kind of period. Now you can buy some bonds that are indexed to inflation like I bonds, like treasury inflation, protected securities or TIPS. Those help protect you from inflation rather than having all your bonds in nominal bonds, especially long-term nominal bonds.

But just having things in there like real estate and stocks also helps protect you from inflation. Sometimes people add some other stuff, commodities or some crypto assets or some precious metals or things like that to help protect from inflation. That's reasonable to do with a small percentage of your portfolio. But if you think about inflation being the biggest risk you're facing, you'll design your portfolio a little bit differently to try to protect you against inflation rather than having 60% of your retirement portfolio in long-term nominal treasuries, which may not be the best move if inflation really rears its ugly head.

The main thing people do when they're worried about sequence of returns risk is they just reduce the volatility of their portfolio. They take less risk. And that's typically during the last few years before you retire in the first five years or so after you retire, more bonds in your portfolio, more CDs, whatever, these fixed income investments that aren't nearly as volatile as your stocks, not nearly as volatile as your real estate.

And so, you can just put a little bit more money in bonds. In fact, that's often called a bond tent. You have a few years where you have more of your portfolio in bonds a few years before and after your retirement date. And then you actually can get more aggressive a little bit later with your portfolio once you've gotten through that really bad sequence of returns risk time period.

Another thing people will do with bonds is they will actually create a ladder of individual bonds. Typically, these are treasury bonds and typically they're inflation protected bonds. So you're making a TIPS ladder. So you actually put whatever you want to spend for those first five years of retirement into TIPS.

Let's say you're going to retire in five years and you want a five-year TIPS ladder to get you through that worst of the sequence of returns risk period. You're buying a five-year TIPS, you're buying a six-year TIPS, a seven-year TIPS, eight-year TIPS, nine-year TIPS. You're buying these TIPS bonds so that you will have that money to spend for that year and maybe you put your entire expected spending amount for that year in TIPS.

Maybe it's $100,000 or $200,000 for each of those years and you make your TIPS ladder for it. Well now even if the market tanks the day you retire and it stays down for three, four, five years, you're fine because you don't have to touch that money. You're going to be spending the money coming out of that TIPS ladder every year.

Now obviously if you only have a five-year TIPS ladder and you have a nine-year period of terrible returns, you can still have some sequence of returns risk but a five-year TIPS ladder is going to get you through an awful lot of that.

Now that's the mindset behind some other strategies. You've heard of the bucket strategy probably and the idea behind that is you put one or two or three years worth of spending in cash and you put you know years four through six or eight or ten in the bonds and after that you invest the rest of the portfolio aggressively.

And in a typical year you replenish each of the buckets. You sell some of the bonds and move it into cash, you sell some of the stocks or real estate and move it into bonds and you replenish the buckets. But in a bad year you don't replenish the buckets. You allow your you know more risky assets to continue to grow and you just realize “Hey, that's what this bucket is for. This bucket was for sequence of returns risk. We're just going to spend from it. We won't replenish it until you know the good returns come back in two years or three years or four years or five years or whatever.” That's one strategy people use.

People use all kinds of different withdrawal strategies and most of them the goal is to manage sequence of returns risk. A popular one right now is called the guardrails strategy and there's these rules involved in the strategy when returns are this and you do this when returns are this you do that and that helps you decide how much to take out of your portfolio, where to take it from and manage that spending to try to minimize the sequence of returns risk.

But the main idea behind it is just to spend less. When the risk shows up you go “Okay, well, I got to cut back.” Now some people are surprised just how much they have to cut back their spending in those years. It's not cutting back your spending just 10%.

That'll help but you might have to reduce spending if this is your only method of dealing with sequence of returns risk. You might have to reduce spending by 40 or 50% and for more than a year one two three five years that's possible. So, if your only method of sequence of return risk mitigation is reducing spending you better be prepared to reduce spending a lot in order to make sure you don't run out of money before the end.

But that's the concept of sequence of returns risk. Those are the basic ways of dealing with it. You ought to know about what that is. You ought to have a plan for it if you're getting close to retirement. You ought to put that plan into your written financial plan. I hope that's helpful to you.

SPONSOR

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Contact Bob at www.whitecoatinvestor.com/protuity. You can also email [email protected], or you can just call him at (973) 771-9100. If you need disability insurance and you don't have disability insurance or you're worried your disability insurance is not very good, get it taken care of now. Don't wait until you develop another medical problem or heaven forbid become disabled.

Thanks for paying attention to this podcast. We appreciate you out there listening. We know your work is important. We know that we only have limited time with you so we try to keep things high yield but we hope these podcasts are beneficial to you.

If you'd like to be on it, we'd love to have you on it. I don't care what milestone you've accomplished. Apparently we can even spin winning the state championship into a financial milestone these days. So, let's celebrate what you've done. Let's use it and inspire somebody else to do the same. You can apply at whitecoatinvestor.com/milestone or whitecoatinvestor.com/milestones. Either one of them works and we'll see you on the podcast.

For the rest of you, we'll see you next week. We'll be back with some other cool milestone and we'll use it to teach you something good about personal finance and investing. See you next time.

DISCLAIMER

The hosts of the White Coat Investor are not licensed accountants, attorneys, or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.