By Dr. James M. Dahle, WCI Founder
There is a lot of misinformation out there floating around about what I think about certain financial topics. So I thought I would take the opportunity to clarify and provide some nuance on these subjects. At a certain level of financial sophistication, people benefit more from clear messaging that does not confuse them and gets them moving to doing things right. That level is best for the satisficers rather than the maximizers. The maximizers out there prefer 4000-word blog posts and then actually read the 200 comments below them and leave with a more nuanced, sophisticated view on a topic.
Today, we're just going to provide some clarity and nuance on a few topics that can be a little controversial, at least in the physician financial blogosphere.
Whole Life Insurance
A lot of people think they know my thoughts on whole life insurance and they're positive I think it is the devil's tool and should never be purchased or kept.
In reality, I think whole life insurance is a combination of crummy insurance and a crummy investment usually poorly designed and sold inappropriately. However, I fully acknowledge that it has a set of characteristics that can be attractive to a few people and if those people fully understand what they are buying and still want it and make sure the policy is designed to maximize their desirable characteristics, then they should go ahead and buy it. It does have a few niche uses. I also fully acknowledge that there are times when it makes sense to keep a policy that should not have been bought initially.
A lot of people think I hate financial advisors and think they should all be fired. It's probably partially my fault as the first online course I designed was deliberately provocatively titled Fire Your Financial Advisor despite the fact that the first module teaches you how to find and work with a good one.
In reality, I fully acknowledge that perhaps 80% of doctors (and similar high-income professionals) want and need and would benefit from hiring a financial planner and/or an investment manager who provides good advice (and service) at a fair price. I would also note that most who call themselves financial advisors are actually commissioned salesmen masquerading as financial advisors and even many fee-only advisors provide poor advice and service. And many advisors who give good advice charge too much for it.
In reality, while AUM fees are not my favorite method of paying for financial advice and investment management service, I do view them as an acceptable way to pay SO LONG AS the client “does the math” each year and calculates out what she is paying in fees for that year AND compares that to the flat fee charged by other advisors for similar service AND ensures she is still getting more value out of that fee than what she is paying. The AUM fee does put a little more onus on the client to do a simple math equation each year, but I don't think that's too much to ask. It introduces conflicts of interest, but so does any method of paying for advice. They are relatively small and fairly easy to overcome by a fiduciary advisor.
Bond Asset Location
A lot of people think I believe all bonds should be put in a taxable account. Again, this is probably my fault, as I once wrote a post with the click-baity title “Bonds Go in Taxable!” It is widely read, but apparently only as far as the title. And almost no one reads the much better-written follow-up post on the topic.
In reality, the point of those articles is that the lower the interest rates, the less benefit you will see from the classic advice of keeping your bonds in your tax-protected accounts. At low-interest rates it just doesn't matter much. At very low-interest rates, for some people, it can even be smarter to place your bonds in the taxable account. It turns out it is a pretty complex decision that has to take into account a lot of factors, some of which cannot be known in advance. But at most levels of interest rates and for most people, the classic advice of bonds in tax-protected still holds true.
Complex Asset Protection Techniques
Many people think I believe using family limited partnerships, domestic asset protection trusts, and overseas asset protection trusts is a waste of time, money, and effort.
In reality, I think doctors dramatically overestimate the likelihood of being sued for a significant amount above policy limits. When I ask large groups of doctors if anyone in the room actually knows a doc who had an above policy limits judgment that was not reduced on appeal against them, I usually get no hands. Recently I got one hand, but that doc's father was a malpractice attorney. However, although the risk is low, it isn't zero. Plus, these sorts of techniques probably have some benefit in reducing the suits that are brought in the first place.
My real advice about asset protection is to make sure you're doing all the cheap, easy, effective stuff very well:
- Buy plenty of professional/personal liability insurance
- Max out retirement accounts, knowing your state asset protection laws
- Use tenants by the entirety titling when available,
- Put investment property into limited liability companies (LLCs)
- Practice good medicine, and
- Be nice to patients and their family,
Then carefully consider the use of these more complex techniques if you have a significant amount of assets that are not protected in some other way.
Real Estate as an Investment
I've run into people who think I hate real estate as an investment that is below doctors who can't be out unclogging toilets at 3 am and still take good care of their patients.
The reality is that I think real estate is an excellent asset class, with high returns and low correlation with stocks and bonds. It is the easiest asset class to leverage, provides my favorite tax break (depreciation), and, at least on the residential side, is a relatively easy to understand business. All but the most complexity-fearing doctors probably ought to include real estate in their portfolio in some fashion. There is a continuum ranging from direct real estate managed on your own, which provides the most control and tax breaks but also the most hassle, to a REIT Index Fund, with the least control and tax breaks, but no hassle and maximum diversification. However, there are a lot of options in between and all you need to do is find your place on the continuum. Since most doctors are accredited investors, the entire continuum is available to them.
I have done everything on this slide (except turnkey) at some point. I discovered I really didn't enjoy land lording or selecting individual syndications, nor was I particularly good at it, so I naturally gravitate toward the right side of the continuum. But 20% of my portfolio is in real estate and it's entirely possible I could double that in the future. I certainly don't hate real estate.
Some people think I hate dividend stocks and believe they're a stupid way to invest.
The reality is that I own all of the dividend stocks. In addition, I tilt my stock portfolio toward value stocks, just like dividend investors do. Dividend investing probably isn't the most efficient way to get that value tilt, but it is one way to do it. And a stock of a real company with real earnings that doesn't pay dividends certainly is not worthless. I do think a lot of dividend investors fall into the trap of taking on uncompensated risk by selecting individual stocks. I also think a lot of them fall into what I call the “Income Investing Trap“, where they don't pay the attention they should to the total return of the investment. I think they also sometimes oversave/work longer than they wish out of a bizarre fear of spending principal. But I certainly have no problem with dividend stocks as an investment. If I didn't like them I wouldn't own them.
Some people believe that I think that Bitcoin is not a real currency that is going to change the world but rather a stupid, incredibly volatile speculative instrument that probably shouldn't be in your portfolio at all.
In reality, they're right. Of course, doctors have a high enough income that if they get the rest right they can afford some pretty significant financial mistakes in their life. It's unlikely that a 5% allocation to cryptocurrency is going to ruin you. Maybe it will even help. Honestly, I have no idea, and that isn't because I don't understand how cryptocurrency or blockchain works (a common argument shared by whole life salesmen and Bitcoin advocates — that if you don't love it and put lots of money in it you just don't understand it.) But I certainly don't have the risk tolerance for that sort of volatility with my serious money. And I have no idea what its long term performance will be. It seems more likely to me to go to zero than to produce the kind of returns most who “invest” in it seem to be expecting. If it ever truly does become a widely-used currency or store of value, I would expect its returns to be similar to gold–quite volatile but only matching inflation in the long run. I simply prefer investments rather than speculative instruments. As Dr. Kingsley Jones says, speculation is a “bet about which there is viable disagreement on the sign of the return.” J. David Stein explains more in Money for the Rest of Us:
Later that day, a friend texted me asking whether he should buy more Bitcoin. Speculation means there is extreme uncertainty about whether the asset will rise or fall in price. A 40% decline is not a dip. A dip suggests a temporary setback before the price continues to climb, but with a speculative asset there is no way to know if it will rebound or continue to plummet. There isn't a correct price because there is no income to determine if the price is too high or too low. Investments differ from speculations because there are objective measures to determine if the asset is valued more or less than its historical average. For example, with a stock you can observe the price that investors are willing to pay for a dollar's worth of earnings, which is known as the price-to-earnings ratio. An investor can compare a stock's current P/E ratio with its historical P/E ratio of companies in the same industry. This allows the investor to make a judgment about whether the stock has a lower or higher valuation relative to its historical average or to its peers. With a speculation, historical comparisons are difficult because there aren't earnings or income streams to compare the price against to determine if the asset is cheap or expensive. All we have are the historical prices and perhaps some data on supply and demand for certain speculative assets like commodities.
I hope today's post was helpful in clearing up some misconceptions out there about what I think and teach around here.
What do you think about these controversial topics? Weigh in below!