By Anthony Ellis, WCI Columnist
By Dr. Francis Bayes, WCI Columnist
[EDITOR'S NOTE: Two of The White Coat Investor columnists are at the opposite ends of their investing careers. Anthony Ellis semi-retired at 58 years old, and though he still works part-time as a psychiatrist, he's spending plenty of time in the next phase of his life. Francis Bayes recently graduated from his MD/PhD program, and he's near the beginning of his investing career. We thought it'd be fun to gather them together and ask them questions about investing and retirement planning to see how far apart (or close) their perspective is when it comes to building wealth. Here is the product of our email conversation.]
Here is the conversation between Anthony Ellis and Francis Bayes.
What’s your asset allocation these days, and why did you decide on that? How much has that allocation changed in, say, the past 5-10 years?
Anthony Ellis:
My current asset allocation is not very indicative of my past investing habits, as it is in flux. I am in the process of moving my 401(a), 457(b), and an old 403(b) over to Fidelity, where I have the bulk of my retirement funds. As part of this process, these accounts have been de-risked to some degree, and the 457 and 403(b) are in “fixed income” type funds. The 401(a) is in a stodgy Fidelity 60/40 Puritan fund.
Prior to this, the 457 “bucket” had been 93% equities and 7% bonds that actually beat the S&P 500 for a few years and returned about 15% across seven years at my last full-time job. The 403(b) from a prior job was all in one specialty technology mutual fund. The 401(a) “bucket” was a 70/30 mix that had returned about 11% across seven years. Then, the pandemic changed the game a bit, and 2022 was a tough year for most allocations.
The exact current percentages are as follows:
- US equities: 46%
- International equities: 12%
- Cash: 33%
- Bonds: 4%
- Other, miscellaneous: 4%
So, the allocation currently looks like a 60/40 portfolio with the 40% in cash and other yield investments, rather than bonds. This overweight cash position is related to the transition to Fidelity and the Fed’s anti-inflation interest rate increases. The rapid increase in rates has created a historically unique environment and demolished bonds in 2022 while also crushing the common 60/40 portfolio. The most recent bump had taken rates to a 22-year high with mortgage rates also at a 20-year high. That’s a time frame spanning two-thirds of my investing “career.”
I’m guilty of “market timing” since the 2020 pandemic bear—my old portfolio was generally 70/30, but it held bonds. I sold the bulk of the bonds after the Fed rescued the market in the spring of 2020, and I never fully repurchased them. This turned out well for me. As you know from prior columns of mine, I day-traded my bond money across 2020 and into 2021 and did well as the market recovered quickly in 2020. It was not difficult to trade stocks in a rising market.
I’ve also done a very “non-WCI” thing, having given about half of our nest egg to a fiduciary investment management company. It now manages the bulk of our equities for an AUM fee. My reasoning was that I felt the post-pandemic situation required stock-picking skills I did not have, and I wanted to reduce the stress of “doing it all myself” as I have since 2017. In addition, the company provides market insights and retirement Social Security planning. During my “go-it-alone” tenure from 2017-2022, our nest egg grew three times due to high contributions, decent returns, luck, and the 2022 sale of our McMansion.
Francis Bayes:
Do you plan to compare how well your DIY portfolio does compared to the investment management company’s portfolio?
Anthony Ellis:
No, I do not. They are managing a 100% equity portfolio, and I am managing the rest. Clearly, the equity-only half will take more risk and likely will have higher returns. If you mean my tenure from 2017-2022 as my own money manager, I’d also say no. I hoped that the management company would do better than an S&P index fund in the context of “post-pandemic inflation world,” the historical changes in interest rates, and the “AI tech bubble of 2023.” I may turn out to be wrong, but I think that the company might be better at spotting trends in this “new world.” I’m sure others think there is nothing new about the current situation.
Francis Bayes:
My asset allocation is ~98% stocks and < 2% crypto. More specifically, my stock allocation is: 60% US large caps, 15% US small cap value, 20% international large caps, and 5% international small cap value. I own just enough of each sub-asset class to minimize future regret.
The WCI philosophy may advise against 100% stocks, but I think 2022 has validated that my asset allocation is appropriate. I was excited to not only buy stocks but even crypto! My asset allocation was 100% stocks until I started buying crypto in 2021. I prefaced my crypto column by saying that I follow the WCI principles (e.g., insurance, saving rate, staying the course, index funds) because I expected to receive pushback from some readers. I wonder if any of them were Millennials or Gen Z. Maybe crypto will go to zero many years later, but if I listened to them, I would not have just kept buying before the current rally.
Anthony, knowing that Francis, while still an intern, already knows so much about investing and has already made big strides in his financial literacy, can you think back to what you would do if you were in his spot?
Anthony Ellis:
Well, the biggest mistakes I’ve made have been elucidated in a prior WCI column about all the money miscues I made. Overall, picking index funds, avoiding individual stocks, building a smaller house, and developing some Roth money would have worked out better. Having an investment plan at age 30 instead of at age 50 would have been nice, too.
Francis Bayes:
Now that I am a psychiatry intern, I am curious as to how you would have started your career in psychiatry differently had you been financially literate.
Anthony Ellis:
I started at a local hospital with a combined inpatient/outpatient position. It paid a salary and a bonus based on productivity. I was doing consults at one hospital at 7am, then rounding at another hospital from 8:30-10:30, and then splitting my outpatient time from 11am to 5:30pm with another partial hospital site and regular outpatient work at yet another site. This schedule—along with a growing family, increasing administrative duties, and more hours—led to my first brush with burnout in only seven years. Looking back, I think I chose the most difficult schedule and always ended up becoming the medical director of more sites to establish and then advance my career.
It dawned on me during the 2007-2010 recession that I needed to diversify my income and not have all of my eggs in the same basket at the whim of the economic cycles and ever-changing administrative managers. I was given a bad contract in 2011 by a new administrator and two of the three psychiatrists in our system left, along with other specialty physicians. Instead of doing weekends as part of a job, I changed to an all-outpatient position with a shorter commute and sold my inpatient weekends to another hospital. This change to 8:30-4:30 and no unpaid weekends or holidays boosted my income with the side gig dollars, a large percentage of which went into optimizing all retirement accounts. In addition, I started taking full advantage of a 457 plan and making catch-up contributions in all accounts.
So, the answer for me was to optimize leverage, work outpatient, take no unpaid call, and sell weekend work to stoke retirement accounts. The outpatient positions generally had all holidays and weekends off, and the inpatient units had to pay a premium for this coverage.
As I wrote in prior posts, I should have used the Backdoor Roth IRA strategy, invested more and earlier while being more frugal, stuck to index funds, had a written plan at the start of my career, and perhaps not built the McMansion. It also helped tremendously to work in a position that had a defined benefit pension plan for physician executives.
According to a Bank of America study written about by Nick Maggiulli, “Younger wealthy households (those aged 21-42) were more skeptical of traditional investments and more likely to support sustainable investing (i.e. ESG) than older wealthy households (those 43 and up).” Francis, do you think that’s true?
Francis Bayes:
Morgan Housel wrote about how the circumstances in which we grow up and start earning money shape our investing worldview. My generation likely has fewer gold bugs than previous generations because we have only known secular bull markets for stocks and bonds as well as low inflation. But I think a lot of us (especially Millennial physicians) feel like we are late to the party and have FOMO. We read bloggers like Mr. Money Mustache, WCI, and Physician on Fire and cannot imagine how we would be FI before 60, let alone 50. We feel like we need alternative investments like crypto to achieve FI as quickly as those whose prime working years followed the Global Financial Crisis.
Although Millennials and Gen Z might be more likely than other generations to regard medicine as a “job” rather than a “calling,” I suspect we are more likely to own “meaningful” investments because we also like meaningful consumerism. The marketing behind ESG is similar to those of brands that sell products and “do good” with each sale of socks, glasses, toothbrushes, etc. If Millennials and Gen Z are more financially literate, they would be less interested in ESG. But it is a BIG if.
I am not sure that Millennials and Gen Z would bother to look under the hood of ESG investments because they would ask Reddit a question that has been asked myriad times rather than read a couple of columns that answer their question. For example, I predict that the majority of retail investors who have owned ESG funds were upset at Facebook for how they affected the 2016 election, even though Facebook’s parent company, Meta, is still one of the top 10-20 holdings of the biggest ESG ETF at the three biggest ETF issuers: BlackRock (ESGU), Vanguard (ESGV), and State Street (SPYX). Even Exxon Mobil is in ESGU! Those who sell these funds know what they are doing, and they are betting on younger generations to not educate themselves—just as others (shrewdly) bet on prior generations to not educate themselves about index funds.
If anyone wants to support sustainable investing, I think the best strategy might be FRDM as an alternative to emerging market index ETFs. Its fund manager focuses on “countries with higher personal and economic freedom scores.” I do not own it. But I don't like to oppose something without suggesting an alternative.
Anthony, what are your thoughts about more alternative investments, like ESG investing or crypto? We already know that Francis invests at least some in crypto.
Anthony Ellis:
I have dabbled in crypto but really have no long-term investment or interest there. I’m interested in investments that give me the highest return for the lowest risk, since I am now almost 60 years old. I’m much more likely to invest in an exchange traded fund full of healthy large company dividend payers—like SCHD or NOBL—rather than cryptocurrencies.
At some point, I feel like I might have less cash and more bonds again even though bonds have been mostly losers since the pandemic.
Anthony is wealthy enough to have retired in his 50s. On your current trajectory, Francis, when would you want to retire?
Francis Bayes:
If my mind and body allow (as Dr. Ellis wrote about in his column on functional longevity in retirement), I want to be doing research in any capacity beyond age 70. Even if I stop doing research at some point, I hope that I can work with those who have mental illness into my 60s. I want to be working part-time and volunteering part-time in community clinics and churches once I’m financially independent.
Anthony, at this point in your life, now that you’re semi-retired, what’s your end goal? Do you want to use up every nickel on yourself and your wife? Do you want to leave an inheritance to your kids? Is there something else that you’ve earmarked the money for?
Anthony Ellis:
I would like to leave my children an investment education and a chunk of money each. We also will have paid for a four-year degree for each of them.
Recently, I was given a chance to take a lump sum buyout on a pension I earned from 2001-2011. When I left that hospital in 2011, the pension was only worth $140,000. Recently, the payout amount was $422,000, having almost tripled in the intervening 12 years. I can invest that money and try to achieve a fairly safe 5% return approximating the noninflation-adjusted fixed benefit of around $24,000 per year. But, having taken the lump sum, the original nest egg will stay with us instead of disappearing when my wife and I die. It’s currently invested in a money market fund at around 5%, although it may be harder to safely achieve that amount when the Fed starts cutting interest rates in 2024.
Francis, you’re pretty young in your investing career. Map out the next, say, 40 years of your investing life. Do you have a path you want to take?
Francis Bayes:
As I wrote in my “If you want more money” column, I view stocks as a 20-year investment. Once I’m 50-ish, my wife and I will reconsider my allocation to stocks and start buying bonds depending on how much risk we want to tolerate in my 60s. I think I will be as conservative in “peri-retirement” as I am aggressive now. After buying some T bills for my parents recently, I agree with Dr. Bill Bernstein that the hassle of directly buying nominal Treasuries and TIPS is better than buying funds for “liability-matching.”
Maybe I will dabble in a few other alternative investments (eg, I like art!). I do not think I would want to go through the hassle of K-1s or managing real estate properties, but we will see if my tolerance for hassle changes. After all, I have churned through credit cards, which some view as a bigger hassle. I have a constant struggle between aversion to hassle and curiosity about new opportunities.
Which of these investors do you relate to most? What advice do you have for Francis? What can you learn from Anthony's investing career?
cool discussion guys! Anthony, is that half of your money that’s being managed, is it a market timing strategy that firm is doing? you said that they are “picking stocks” better than you could. I know Paul Merriman does a similar thing where half is next egg is in low cost index funds, and the other half is in a market timing strategy overseen by his financial advisor.
No Rikki,
The fiduciary managing company does not use market timing. They use stock picking, like a mutual fund manager. My choice to hand over half my portfolio was based partly on a premise that is a historically flimsy: stock picking can work.
I’ve seen a hundred or so articles that have found that it doesn’t work that well and that “few money managers beat their index”.
I think we have entered a new investing era. Think of it as a post globalization era accelerated by the COVID pandemic. My hypothesis is that folks like Warren Buffett and other “stock pickers” actually know something that will help.
I also wanted to offload the stress of picking stocks given this premise, which could be wrong. For better or worse, I believe something new has arrived with sticky inflation, the AI revolution and the demographic shifts that are coming in the next decade.
The company also provides some estate and social security planning. If I am wrong, I’ll underperform the S&P 500 by some amount in my equity allocation.
“I think we have entered a new investing era. Think of it as a post globalization era accelerated by the COVID pandemic. My hypothesis is that folks like Warren Buffett and other “stock pickers” actually know something that will help.”
Sounds like a potential column for you to write, Anthony!
Yeah it does! Also, Anthony to include in that column can you truly be fiduciary if you are stock picking firm? Usually, I think of a fiduciary as not a stock picker given the evidence that stockpicking is overwhelmingly and phenomenally difficult to gain any alpha. and then there’s the churning and burning they could be doing stockpicking, which could be painful in a taxable account for you. Also, is them stockpicking helping you to scratch that itch? Or do you still feel the itch to trade your own stocks still despite this company doing it for you?
Just careful man you worked really hard making that dough getting at the hospital at 7 AM day in and day out. Hate for all that hard work to be put in the hands of stock pickers when index fund investing is almost a guaranteed rate of return over stock picking with time. I know for myself, I’d be very nervous having my hard earned blood money not in low-cost index funds, knowing that if I find that the stock pickers underperformed the S&P 500 I would never forgive myself given the overwhelming evidence that index fun investing always beats stock pickers after costs in the long run.
Also, when choosing a firm to do stockpicking for you, what criteria did you use? Historical performance? Possibly factor investing style? Or maybe worldview that was aligned with yours of a post globalization high inflation, new Era?
Interesting points.
1) They are not a brokerage, so no trading fees for churning. They also don’t appear to be doing much churning so far.
2) All of the money they are managing is in retirement accounts at Fidelity and as such, incurs no tax liability.
3) My premise is that the index fund approach might underperform in unexpected and unique circumstances: a once in 100 year pandemic event with sticky inflation, the decline of globalization, and ongoing changes in demographics across the world, especially in Europe and China.
4) I picked a known firm with a long term record, but past success may not predict future results (like for Berkshire).
It’s unlikely to generate a significant negative surprise, but it could. Interestingly, I haven’t looked at the stocks that much, but today I did and noticed that my top six holdings are Apple, Microsoft, Amazon, Google, NVIDIA, and AMD. ( I’m paying an AUM fee on this unavoidable mix and it represents about 33% of the equity portion).
Other notables in the mix include:
Broadcom, Booking.com, Caterpillar, Salesforce, Intuit, Facebook, CapitalOne, and Eli Lilly.
These days it’s easy to get overweight in the “magnificent seven” with certain index funds or ETF’s. The broader market has done a lot of treading water the past two years. In my manager account, it seems I own a lot of them also.
I’ve underperformed the S&P 500 before…and I may again. My children’s Roth accounts are in low cost index funds as they have forty years. I’m 60 next year and do not.
As of today, I have:
63% Equities (80% US, 20% Int)
5% Bonds
31% Cash, CD’s High yld sav, etc.
The large cash position was explained in the article. I haven’t liked bonds much since 4/2020.
The cash mix is yielding about 5.5%.
I plan to add some bond exposure.
Interestingly, I’m still putting a decent amount of money in my retirement accounts and will have access to a vested 5% matching 401A again 2024 and onward.
If I’m not careful, you talk me out of my position and I’ll just buy a magnificent seven ETF and one class A share of Berkshire Hathaway…
Good luck betting that way against all historical evidence. Many people have thought “It’s different this time” only to find out it wasn’t. The reason indexing works is the cost matters hypothesis, not the efficient markets hypothesis. All stock picking can’t work, because that is the market. But it’s certainly possible to be lucky enough or good enough to pick or be a talented stock picker. I just wouldn’t bet that way with any significant amount of money, especially in a taxable account.
See above answer.
It’s not a taxable account and from what I can see in the mix of stocks, I may just be paying an AUM fee for handholding advice, estate planning, and Social Security planning…
The fiduciary company involved has a long-term track record that beats the S&P 500 (but not by much) net fees.
Is the S&P 500 the right comparison index or are they invested in something that is not in the S&P 500?
Yeah, I might have to ask them what a fair comparison index is…I think they use a world index.
I’ve always used the S&P 500 as my comparison index but you can’t compare that to the NASDAQ for the past 20 years, can you?
I gave them the $$ in August of 2022.
In a couple of days, I’ll be able to look at a total S&P return with dividends reinvested from August 2022 through December 2023, and compare it to the return on these dollars. The data for December is not in yet.
The return to date on this time frame for the stock pickers, net fees is 20%. Of course, it’s only 17 months total.
I set a three-year timeframe mentally with this company and this money, figuring that some of the near term equity, bond rout, inflation, and Federal reserve oddities will have shaken out by then.
So far, I have not been punished for my financial insolence….
On a side note, when I put in January 2022 to now, the total S&P 500 return with dividends reinvested is less than one percent, but I did not bring them in until August.
also Francis, I know you said you didn’t blink when the market went down last year, but did you really feel the same for crypto. We have hundred year history of the market always coming back with time and I find comfort in that history. The history of crypto is comparatively miniscule. doesn’t that make you more nervous when there’s a crypto bear that it might not bounce back?
Hmmm. The comments by Rikki and Jim to make me wonder about the AUM company and its 1.25% fee. They use the MCSI World Index per my reading today.
It’s funny. I’ve written a lot of articles here and answered a lot of questions, but I’m sort of doing the same thing I did in 2012. Back then, we all took a 40-50% drubbing in the huge bear market of 2009. I waited until the market recovered, and then gave my money to a company to manage for me. About five years later I got rid of them and managed the money myself from 2017 to 2022.
Now, I have engaged another management company as described above after the 2022 bear market. It might be the same mistake again.
The good news is I can change my mind right now and go back to low cost index funds. I may need to go back to the planning phase. The truth of it all is that I have such a large amount of money now that the prospect of 25-45% drawdowns scare me. I never thought I would have done this well.
With the sale of the McMansion and the one time pension pay out, my nest egg has tripled since 2017. I suppose I need to renew a longer term perspective.
I’ll think on it and see what sifts out. Maybe I’ll go to the WCI conference in February, get a refresher, and talk to all the WCI superstars.
We’d love to see you there.
As a general rule, the way to avoid a big drubbing in a nasty bear market is to put less into equities, not hope a manager can somehow sidestep the damage.
Not trying to pile on here Anthony, rather just validate your observations and affirm Jim’s commentary:
If you are anxious about mitigating loss of your newly fortified nest egg due to market volatility, an AUM manger isn’t the answer. They don’t know something you don’t nor have access to any strategies you can’t employ.
This is a matter of asset allocation which you can obviously handle on your own. The easy button here is to ratchet up your bond/cash holdings until you have peace of mind. The “fancy” version is to use a bucket strategy that produces the same peace of mind.
https://www.whitecoatinvestor.com/retirement-bucket-strategy/
Let’s talk about it in Orlando!
So far, that’s three learned opinions a plethora of articles, online reviews, and Boglehead forum discussions that say the AUM company is not worth their layer of fat at 1.25% (fully $18750 for 2024).
I explained to my spouse that I’d like to go to the WCI Conference in February. She is stuck here in NC having been put on call for federal jury duty for January and February.
I missed the block of rooms within a few weeks of the conference registration. I will set it up and come on down to talk with you and others about my planning. Time to recharge my batteries.
Now comes the hard part. Telling the AUM folks that I’d like to go back to “just lil ol’ me” for asset allocation after they turned X into 1.2X in 17 months. They did miss the large correction in September of last year and my chunk dropped 10% in the first month they were on board.
I’ll take a look at the bucket article. I have a friend who uses that approach. She is also working part time and is pulling chunks of funds out of her accounts, paying the tax and recharacterizing the money as Roth money due to worries over future tax rates. Another interesting problem…minimizing taxes.
It’s conceivable that I could max out a 401A, SEP, and a 457 next year, dropping my (already low half-time) taxable income by $60,000. This might make room to “Rothify” some money. I have zero Roth money.
Time to “up my game” again and not make the same mistakes. At present, I’m paying 1.25% on what is essentially a stock mutual fund that is 33% “magnificent 7”.
I am laughing at myself here. Good thing I have minimal financial ego and a good sense of humor.
Why pay $19K when you can get similar service for $5-10K from a flat fee advisor. Heck, why pay 1.25% when there are so many charging 1%?
Let Josh know you’re coming. We may be having another columnist panel and you could participate.
I totally understand that “breaking up” with an advisor can feel uncomfortable given our societal morays around such perceived “confrontations”. However, 99% of the time any anticipated awkwardness does not come to pass in these situations. Just tell them, “Thank you so much for your service, I have really appreciated your help this past year or two. I have taken an interest in personal finance and DIY investing, and feel ready to manage this myself. Please let me know what you need from me to end our management arrangement in the coming days.” They will be understanding and kind in their response, and if they aren’t, that’s further proof you made the right decision.
Regarding contributing to pre-tax accounts to lower your taxable income in order to make space in a tax bracket to “Rothify” older pre-tax money……that’s unnecessarily complex right? If you have access to retirement accounts and want some Roth money going forward, you can just make Roth contributions to those accounts directly (assuming they allow Roth contributions) and end up with the same taxable income you would have had with the more complex plan.
If they don’t allow Roth contributions, then yes, putting some money in pre-tax buckets in 2024 and then doing Roth conversions up to the top of the 24% federal tax bracket is a reasonable idea.
Good point. I’ll check to see if the 401A or the 457 allow Roth contributions.
I’m pretty sure the government 457 does. If I put the max in that, I’ll get about $30.5 in Roth money per year without the complicated scheme above…but then my 457 will be “mixed”. Can I count on the gubment to know how much of the 457 money has been taxed?
Am I supposed to track that? I have no mixed money in any account at present. Does one then need to track the returns on that money and somehow separate them from prior returns too or is that moot due to the Roth rules? Also, doesn’t new Roth money have to be left alone for five years? Seems a smaller but different headache.
The 457 should track that, typically using two different subaccounts. It kind of shows your age that you haven’t yet had a 401(k) etc that has a Roth option! One of my 401(k)s actually has three subaccounts: tax-deferred, tax-free, and after-tax.
Employer provided retirement accounts that offer pre-tax and Roth contributions have distinctly different sub-accounts to keep the pre-tax and Roth money separate (occasionally there is also an after-tax sub-account that can allow participants to use the “Mega backdoor Roth” strategy as well). No need to track anything on your part.
The 5 year rule you are thinking of relates to Roth IRAs and has nothing to due with Roth contributions to ERISA accounts.
Orlando sounds like it can be a rich learning experience for you, I’m excited for you to come. Based on this conversation alone, you can spend ~$15,000 on your hotel room and still come out ahead so it sounds like a good return on your investment!
It’s clear I still have a lot to learn. I’m looking forward to it.