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.
Financial Advisors
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.
AUM Fees
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.
I go offshore all the time, but my money doesn't.
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.
Dividend Stocks
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.
Cryptocurrency
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!
But why do you hate Teslas so much?
Why would I hate them? They’re fun to drive. But saying Tesla owners hate me was good for something like 45,000 page views.
https://www.whitecoatinvestor.com/why-tesla-owning-doctors-hate-me/
I do hate docs making bad financial moves they cannot afford and that includes buying expensive cars on credit with an inadequate savings rate and buying individual stocks.
What do you think about ESG investing?
Gimmicky.
With the success of WCI you might be one of those niche physicians who could benefit from whole life insurance someday. Wouldn’t that be ironic?
Absolutely correct. If you owned shares in WCI, LLC you might want the company to have some key man insurance, no? If I’m still doing this 20 years from now, WL could be the way to go.
First off, I think this is your site so you have a right to have whatever opinion you want on anything. Tesla’s/whole life/whatever.
My ONLY issue I take is the approach to the low paid MDs esp in HCOL areas. I know you’ve had some posts (wealthy pediatrician, low paid md in high col area, etc, etc). I think it gets to me since daily I work with residents who have large amounts of debt who if they do gen peds or worse certain peds subspecialties (like endocrine, child abuse, heme onc, etc) are in for another 3 years of fellowship and still low pay. What should I tell these folks? Don’t do peds endocrinology if you’re 500k in debt? I got lucky and fell in love with one of more the lucrative fields in peds. However not everyone wants to to do PICU/NICU/Peds ED.
I get it life’s not fair. Choices. You made your bed, lay in it. However, I think the WCI community is large enough that we can advocate for changes that would bring some equity. For example, (just speaking about peds) if we had medicaid/medicare parity that would boost payments. It’s sad when there’ are nurses in my PICU who with overtime can earn more than some of my residents will out of training.
Once they’re at that stage, I think you should tell them they have two choices:
# 1 Don’t do peds endo or
# 2 Be sure to take a PSLF qualifying job for their first 4-5 years as an attending.
I don’t think you can tell them “the WCI community is going to fix the system so you get paid fairly for your 5-6 years of PGY training.” That’s probably not realistic.
If you can catch them earlier, perhaps you can help prevent them getting to $500K of student loans.
Unfortunately they don’t get a pass on math just because they chose to care for kids.
What do you really think about one of your favourite blogers saying financial advisors, whole live insurance, and AUM fees have their upsides and that 80% of people should use financial advisors, and this occuring after your favourite blogger is partnering up?
I really loved this site as probably the best source of high quality information after bogleheads, up until some time this past year. Maybe you just wrote everything there was to write and/or you’re focusing on growing your own revenue. It was a wonderful read over the years, so thank you, and your success is deserved, even though I’m not finding the content the same as before.
I’m wondering if you haven’t been reading very carefully over the years. I’ve been pretty darn consistent on those messages for years.
If you don’t think financial advisors have their upsides, you simply haven’t talked to enough doctors. There are plenty of doctors out there who want one and frankly are not capable, at least at this time, of managing their own assets. Telling people there are no legitimate uses of whole life insurance just makes you look stupid when they find the few, rare, niche uses of it (for example an ILIT for someone with an estate tax problem.) Bill Bernstein says 99% of doctors need a financial advisor. I’m guessing you stopped reading him years ago?
Although I agree that peds is underpaid, it does not make sense to pick a lower-paying specialty, then complain about the low compensation. That’s what one signs up for.
I agree that, like legal advice, people occasionally need financial advice. Like legal advice, people should get it when they need it. They should pay for it when they need it.
As with legal advice, it would be crazy to pay for advice on the off chance that one might need it. It would be crazy to pay a lawyer a percentage of one’s assets on the off chance that, every few years, one might need legal advice.
If someone wanted an annual one hour check in with an adviser, which seems like more than many need, then pay $200-500 annually for that hour of advice. If an AUM adviser would charge that price, then, crazy as the system might be, the cost would be OK. On a $6M portfolio that would be less than 1 basis point. One percent would be $60,000. That would be 120-300 hours of advice every year!!! Who in the world needs that? I submit that anyone who needs 10% that much advice really needs to redesign their financial life to simplify. If someone comes to an adviser with a complete mess, still hard to see 120 hours. Maybe they would need a substantial amount of advice in year 1. Call it 30 hours for for an initial total disaster. Year 2, maybe 5 more hours to clean up. Year 3, zero if the adviser did a good job. 120 hours a year, every year? No one needs that. So crazy to pay for it.
I agree that WCI has shifted more towards pitching exotic investments with high fees. I don’t begrudge this, everyone has to make a buck. Vanguard probably would pay little to nothing for someone to say “3-portfolio” over and over again.
The most useful WCI posts have been about issues and types of insurance or investments, not about particular products. But vendors apparently will not pay as much to advertise on a site that discusses, say, disability insurance as they will for a site that will pitch what they have to sell.
The more exotic and more expensive an investment, the harder it is to sell. Thus, the greater need to advertise.
I read some of these posts, like the endless permutations of real estate investment offerings, because they are morbidly interesting. Like watching an auto accident, or episodes of American Greed. I would want no part of any of them, but curious to see what they are.
Vanguard definitely pays little to nothing to say “3-portfolio” over and over. I’ve tried a few times to bring them on as a sponsor in the past without success but I plan to keep trying. They do advertise quite a bit so it’s probably a matter of finding the right person.
A bigger problem on a blog is figuring out a way to write “You should mostly invest in index funds” over and over again in different ways twice a week for a decade. Maybe if I was a more talented blogger I could do it in a way that keeps you coming back.
I think I’m quite clear on what I actually own, which is 85% index funds along with 15% “exotic investments with high fees” (100% of which are currently pretty standard real estate funds and syndications in which I have lost $0 in principal over the last 7 years which providing nice returns).
Also, I think you’re a little optimistic on the advisor front. Go ahead. Put together a list of hourly rate advisors who give good advice and their clients who only need 1 hour of advice a year. If you really only need 1 hour of advice/assistance, you probably don’t need any. If you actually need advice/help, you probably need significantly more than that. While they don’t need 120 hours, just meeting with clients once a quarter for an hour is 4 hours a year plus 1-2 hours of prep time for each hour of meeting. And that doesn’t include any time actually managing the investments.
Agree that quarterly one hour meetings makes 4 hours/ year. But I don’t think many people need quarterly one hour meetings. What is there to say “The stock market went down 10%, so the stock part of your portfolio went down 10%. Bonds paid interest and had essentially no price change, so the bond part of your portfolio is up by the amount of interest paid?” What else is there to say?
Lots of people need financial advice, occasionally.
Not many need investment advice beyond “3-fund” and “no, don’t buy that”. I suppose certain clients could generate a lot of “don’t buy that” advice, but they bring those costs on themselves.
The posts that keep me coming back and the deep dives into several complex areas. The series on disability was by far the best treatment I have seen anywhere.
The ongoing discussion of why most should not buy whole life insurance is valuable, although the message does not change. There have been some great posts about the performance of cash value policies that were about as good as this insurance gets, and who might benefit from them.
Even more on universal vs whole would be valuable.
The exotic investments, as you can tell from my comments, are off the table for me based on cost, low transparency and illiquidity. Interesting to hear about them, but I would never buy.
It WOULD be very interesting to see a post about what data there may be on the performance of various methods of investing in real estate. There are a few good papers on REITs vs real estate returns. I have not found much of any value about the aggregate performance of the multiple ways to be more direct than REITs while not doing direct ownership.
One hopes that the investor gets some of the money not paid to the layers of middle people at the REIT level. But whether there are any actual better returns for these closer-to-direct investments is speculative, as far as I can tell. Same questions for volatility, risk of extreme bad returns from deals failing, and performance over the business cycle. Posts like that would be highly useful to those who might consider them if they heard the right answers.
It is probably difficult to get those data, unbiased and complete across the industry. Without them, no way to know whether they are worth investing in.
Another service to your readers would be something like “how to evaluate private equity and venture capital opportunities”. Plenty of your readers would be able to get into some of these deals. Are any worthwhile for someone who cannot invests tens of hundreds of millions of dollars? If so, what are their characteristics?
Plenty of room for more about managing estate taxes. Even at today’s high exclusion some of your readers need to think about this. If the rates revert as scheduled, it will be an issue for many more. Some people have to deal with state inheritance or estate taxes. For someone who will face state estate taxes, how to analyze whether it is worth doing Roth conversions that would not be justified from an income tax perspective to leave more money to heirs? How does that calculation change if one will have federal estate taxes?
Borrowing from taxable accounts instead of realizing capital gains for retirement income. Use of charitable trusts and annuities for income and estate planning. All things that are complicated for the individual physician to learn about and would be great to find a knowledgeable resource.
I would have thought that banks and brokers who offer some of these deals would be happy to advertise where they might find eligible investors. The post need not be about a particular offering at one particular company, but about how the thing works and who would be good candidates.
Some of those I would never consider, others, I don’t know enough about to have an opinion. If someone told me that I would need to pay an AUM adviser to manage those investments that would, almost certainly, make me rule them out. But others of your readers might be interested.
Paying AUM to for someone to manage a simple index fund portfolio is a waste of money. Someone with a legitimately more complicated financial life (not necessarily unnecessarily complicated set of investments) might benefit from the adviser. Still more likely to need 1 hour per year than 10. 20 or more hours every year.
I find it kind of funny you want to hear more about whole life but not real estate investing.
I have plenty of private equity, venture capital, and angel investing firms that would like to advertise with me. So far I have turned them all down (one or two a week maybe) as I don’t feel like the assets classes are very attractive. Surprised you’d rather hear about them than real estate.
It’s impossible to really understand how any of these private investments work without getting into the details. If I’m going to get into the details, why not get paid to do so?
And I’d love to see data comparing overall returns of the various ways to invest in real estate. Let me know if you run into any. I’ve never seen any. Lots of mutual fund investors have no idea how much they owe to Morningstar and the SEC in that respect. Imagine if information on all publicly traded investments were as difficult to come by as private investments.
Hard to turn “If you’re really old, borrow against your taxable investments rather than selling them” into a whole post. It’s more of a tweet. I guess I could do 20 posts on the various state estate tax systems, but it’s hard to imagine that most readers will enjoy that journey. But I can certainly do more on estate taxes and planning. I’ll be honest though, I don’t seem to get much interest in those posts based on pageviews, comments, and search engine traffic.
Not sure how much more I can say about charitable trusts either. Has something changed since this was written:
https://www.whitecoatinvestor.com/charitable-trusts-crats-cruts-clats-cluts/
At any rate, there’s no way in heck my investments could be managed in 10 hours a year (4 401(k)s, a DBP, 37 529s, 4 UTMAs, 6 Roth IRAs, a taxable account, a dozen private real estate investments etc), and that doesn’t include any financial planning. But my parents’ investments can be managed in 1 hour. It really varies a lot so I think your broad statements on the benefits of paying for asset management are not very accurate even if I agree with your general idea that it’s dumb to pay too much for that service especially if you don’t need much of it.
I did not say I did not want to hear about real estate investing. Just that I have no intention of doing it. What I would want to know are the sorts of things I listed. Knowing that a particular firm is offering a particular product? I don’t care. Knowing the expected return characteristics of an approach to real estate investing would be interesting, if the expectations were backed up by data.
Same for the PE, VC and angel investments. I would be interested in hearing about those types of investments, not interested in hearing about a particular offering from a given firm. What are the characteristics of these investments, tax treatment, liquidity, historical performance of unbiased samples, performance in down markets, risk of losing the entire investments, etc. VERY interesting. ABC Investments Inc. is opening a new PE, VC or angel fund- don’t care. To split the difference, how about collecting information from several firms, even list them and get their advertising, but discuss the investments in these general terms. If you go into specifics, do it to compare and contrast variations that are typical in the field. I certainly don’t know but I would have thought such firms would be happy to advertise on something like that.
I don’t have as many accounts as you do, but the vagaries of tax law forces me to have several, at several different firms. For each firm, all the accounts, their holdings and value are reported on one consolidated statement. Since they are all invested in simple index fund portfolios, there is very little “managing” to be done. Check where I stand once a year, occasionally rebalance or have to change investments if the options change. Otherwise- autopilot.
The real estate I can understand might take more work, but then that would be another reason not to invest there.
“It’s impossible to really understand how any of these private investments work without getting into the details. If I’m going to get into the details, why not get paid to do so?”
Completely agree.
The analysis of the borrow rather than liquidate approach could be more granular. How much can you borrow? What happens in market downturns and margin calls? What are the tax consequences when you die with loans outstanding? Work through an example with realistic assumptions about investment returns, withdrawal rates, income tax rates. Maybe a Monte Carlo to illustrate the risk of a margin call, etc. It would be interesting for me, but maybe most people don’t care.
“I can certainly do more on estate taxes and planning. I’ll be honest though, I don’t seem to get much interest in those posts based on pageviews, comments, and search engine traffic.”
That is the best evidence of what interests your readers. I may be an outlier.
Please do not take any of my comments as criticism of the site. It is unique in the value of the articles. Just because I prize simplicity, transparency, low cost and good data more than most does not mean I don’t like the articles.
Data on REITs vs private real estate.:
Unfortunately, the papers I know about were sponsored by the REIT industry. The methodology seems OK, but one wonders whether they would have made it public had the results not turned out the way they did.
https://www.reit.com/sites/default/files/media/DataResearch/NAREIT_CEM_ES_2019_October.pdf
But comparing public to private real estate is tricky because the private is not marked to market daily and the valuations are lagged and smoothed. As discussed in this Wharton review.
http://realestate.wharton.upenn.edu/wp-content/uploads/2017/03/493.pdf
An interesting study on public vs private, with all the caveats
https://www.reri.org/research/files/2018_Arnold-Ling-Naranjo.pdf
A dive into private real estate returns by strategy
https://faculty.chicagobooth.edu/joseph.pagliari/research/working/AnotherLookAtPrivateREReturnsbyStrategy.pdf
A comparison of private to REIT returns
The Nature of Listed Real Estate Companies: Property or Equity Market?
Article (PDF Available) in Financial Markets and Portfolio Management 22(2):101-126 · February 2008 with 1,103 Reads
DOI: 10.1007/s11408-008-0075-9
Another comparison with risk adjustment
https://scholars.unh.edu/cgi/viewcontent.cgi?referer=https://www.google.com/&httpsredir=1&article=1186&context=honors
More on private vs public real estate vs S&P 500
https://pages.jh.edu/jrer/papers/pdf/forth/accepted/the%20information%20content%20of%20the%20ncreif%20index.pdf
From some looking, it seems unclear whether there is a systematic advantage of private real estate investment funds over REITs. Since one has already sacrificed the tax benefits of directly owning real estate, I don’t know whether to expect these private funds to do better than simple REITS.
There is equally conflicting data about performance persistence for managers.
The whole topic looks complicated, without a clear win for private real estate. For me, to be interested in investing, paying those fees, accepting the loss of liquidity, I would want to pretty sure there was a good reason, ex ante, to expect a better risk adjusted return. It should not be this hard to find good data supporting that notion. If it is that hard to find good data, then maybe there are none. If that is the case, then why invest? If private investments really are better in some way than REITS it may take more digging that I am willing to do to figure that out. But I would love to read about it from someone who had done the homework.
Anyway, love the site. Check it regularly and will continue to do so.
I agree it is unclear and I would also LOVE to know the answer. I would LOVE to be able to say “these private investments all underperform publicly traded REITs in the long run.” But I don’t actually believe that from what I’ve seen and experienced. For example, the publicly traded mortgage REIT ETF REM has an 8% yield and massive volatility. Meanwhile, I have a private hard money loan fund that is paying me a consistent 11% (after paying what most index fund investors could consider massive fees) and it’s hardly an outlier.
The equity investments are harder to evaluate due to the longer time horizons, but the ones that have gone round trip I’m happy with. I’m even more amazed when I run into pessimistic Bogleheads who think stocks are only going to return 4% or so over the next decade. If you really only expect 4%, why in the world wouldn’t you invest in real estate that is very likely to produce at least 8% if not double digits in the long run instead?
At any rate, your comments inspired me to do a post on index funds. It’s been a long time, much longer than I thought it had been, since I wrote a post on them. I had great index fund returns this year and in large part thanks to them, an excellent portfolio return. Not counting small businesses, stocks (including publicly traded REITs) dramatically outperformed private real estate this year as near as I can tell.