Would the White Coat Investor exist if I had only interacted with good financial professionals, and not multiple ones that ripped us off and caused me to educate myself and take control of our finances? Probably not. So we have that terrible advisor to thank for this podcast which is all about your questions. We discuss the future of home prices in the U.S. We talk about investing in actively managed funds, whether there is a time that it is a good idea with stocks or bonds. One of the good guys in the financial services industry joins us to answer questions on whether you should use bitcoin's hyper volatility to time the market and make more money and if social index fund investing is a good way to invest. Whatever your investing plans says to do, it must all start with a high savings rate. We recommend 20% and tell you why in this episode.

 

 

A listener asked if I had only interacted with the good financial professionals in my earlier years, would I have educated myself and taken control of our finances like I have now? No, I wouldn't have started the White Coat Investor. If that financial advisor I had gone to as an intern had actually treated me right, chances are I'd still be working with that financial advisor. I probably would have never gotten into reading a bunch of financial books. That was definitely the cause of me feeling a need to go out and become financially literate.

I realized at that point, looking back at all of the interactions I have had. I've been ripped off by a realtor. I've been ripped off by a lender twice. I've been ripped off by an appraiser. I've been ripped off by a recruiter. I've been ripped off by an insurance agent who's actually a very good friend of mine.

Then, of course, I went to a financial advisor on the recommendation of a co-resident. Of course, he started selling me actively managed mutual funds. I bought a few, put them in a Roth IRA. Later that year I was on a road trip and stopped in a bookstore where I saw Eric Tyson’s “Mutual Funds for Dummies” sitting on the shelf. And I thought, “Well, I own some mutual funds; I should learn more about them.”

I read the book and I learned that there are A shares and B shares and C shares. And I wasn't really sure what shares I owned. And Tyson also mentioned there were no-load funds. And I'm like, “Oh, I think that's what I have. I have no-load funds because I'm paying this advisor a fee.”

Well, it turned out that this was not a fee-only advisor. It was a fee-based advisor that charges you fees and commissions. And so, when I went home and looked up all those mutual funds on the new-fangled internet, I realized that I did not have no-load mutual fund shares. I had C shares, which are basically a load added onto the expense ratio each year. It's an ongoing load rather than a front-load or a backload like with A shares and B shares; a C share is an ongoing load.

I was mad that I was paying someone a fee and being charged commissions. If I knew how the industry worked, I would have realized that's what was going on. That is what he was talking about when he said, “we charge you more to implement your plan, as opposed to just giving you the plan.” But in the end, I realized that if I didn't start learning more about this stuff, I was just going to be taken advantage of over and over again.

I read a lot of terrible financial books with terrible financial advice. But after a while, I realized the good books are all saying the same thing.

As the years went on, I became more and more financially literate. I started interacting on forums, on the internet, and reading blogs. I realized after a few more years, I was doing a lot more helping than I was learning. I got sick of typing the same thing over and over again into the internet so I started the White Coat Investor in 2011. So we have that terrible financial advisor to thank for the White Coat Investor.

 

Will U.S. Home Prices Decline Over the Long Run?

“Should we be concerned that U.S. homes may decline in price over the long run? The reason I ask is because it seems like prices should be determined by supply and demand. Supply can increase, but the U.S. population growth curve is flattening out and maybe the population will fall. So, could demand fall and prices fall? I think maybe in Japan houses depreciate, not appreciate. This is particularly concerning because there's a lot of effort to try to get more people in housing, especially people with low net worth as a mechanism to build wealth. And I know that housing hasn't been a major generator of wealth through appreciation. I think it's like 1% over the long run. And of course, there are implicit rents, but should we be concerned, maybe have a secular change in housing appreciation behavior?”

My crystal ball is cloudy. I don't know what U.S. housing prices are going to do in the long term. Could they decline? I guess. It seems pretty unlikely to me, but anything could happen. All I know is I just came back from my trip and I got my property tax estimate for next year. It just went up 60% because they think my home is dramatically more valuable than it used to be. And it probably is based on what houses are selling for around here, even without the renovation we've done because I'm not sure that the tax authorities know about the renovation yet.

We don't really know what's going to happen with houses in the long run. If you knew, of course you could capitalize on that, but you don't know. And so, what is the right move to hedge that bet? The right move is if you're going to be in it for a long time, a house is generally a good investment, even if it doesn't appreciate.

Because remember what your return comes from with the house. You are saving rent. I suppose if the price of houses fell, the price of rent would also go down. But at the same time, you've basically locked in that rent with your house when you buy it. And so, that's the dividend that your house pays.

I don't think it's the greatest return in the world, but it certainly provides a solid return for a portion of your money. It also makes sure there's a roof over the head of your loved ones, at least once it's paid off, no matter what happens to you in your financial life.

Once your professional and personal life are stable, I think it's time to buy. Obviously, there's going to be better times and worse times to buy, but you really can't time that to your life because the cycle is so long.

I think it's better not to try to time it. Wait until it's the right time in your life to buy. Remember that in general, in real estate, time heals all wounds. If you're going to be in there for 15 or 20 years, you're probably not going to have to worry about actually having a positive return on your investment.

 

Could There Be a Time for Actively Managed Funds?

“I wanted to ask a good old fashioned mutual fund question. The argument against active mutual funds is that there are just too many sharks, too many active managers out there, all competing to beat the markets. And so, collectively they can't really do it. But what if the share of investors, the share of active participants in the market who are retail investors and ‘dumb' money who could potentially make bad decisions over the long term increases to the point where now maybe they outnumber or outwait active managers. I hear maybe this is going on in China, and in the U.S. clearly there has been a big surge in ‘retail' investors. Is there any theoretical reason to think that in a situation where there just happens to be a large proportion of retail investors engaged in the market, that it may pay alpha or dividends or whatever to invest in actively managed mutual funds?”

Theoretically, that could happen. But there is no sign of it happening. In fact, just the opposite has been happening over the last 50 years. The percentage of investors that are private mom and pop investors have been falling and falling for decades.

It used to be they made up the majority of trades in the market, and now it's a tiny minority of trades in the market, a tiny minority of assets held. Most of them are held by pensions, by university endowments, by mutual funds, etc.

When you are into the market, for the most part, you are not trading with another private investor, you're trading with an institutional investor. That's who is on the other side of your trade. Keep that in mind. The fewer times you go in there, probably the better off you're going to be.

Theoretically, that could happen. That trend could reverse, but I wouldn't count on it. I don't see any reason why it would reverse at all. Now, maybe it would happen for an individual stock. Maybe Tesla is more commonly owned by private investors or something. Maybe cryptocurrencies are like that, that wouldn't surprise me at all. But for the most part, that's not the way the markets are, and that's not the way the markets have been trending now for a long, long time. So, I would not expect that to be a reason to go for actively managed mutual funds.

The truth is that about 10% to 20% of actively managed mutual funds, at least before taxes, are going to beat their respected index fund, even in the long run, even in 20 or 30 years. The problem is identifying that 10% or 20%. It is so hard to do that, it's probably not worth trying.

The right answer is simply to get the easy guaranteed market matching return of an index fund. Especially for those of us with a high income, that's enough. You don't have to beat the market to become financially independent. You don't have to pick the winning stocks. You don't have to pick the winning active mutual fund managers.

All you have to do is earn a decent income, save a significant portion of it, and put it into a reasonable investment for 10 to 20 years. That's it. If you do that, you will be a multimillionaire and you will have a very secure retirement and you can spend your time focusing on things that you would rather focus on than your money.

Recommended Reading:

Why Active Management in Investing Doesn't Work

 

What Should Your Savings Rate Be?

“I want to better understand why you recommend saving 20% of gross income for a goal for retirement savings. Specifically, I want to understand where this 20% number is derived from. And I also want to understand why you base it off gross income rather than net income.”

Your savings rate is how much money you put away, primarily toward retirement, divided by your gross income. I recommend that an attending physician have a savings rate of about 20%. That is not some hard and fast rule. It's just a rule of thumb.

The point of the rule is to get you thinking about what your savings rate is. A 5% savings rate is not enough. Now, it's entirely possible that a 17% savings rate is plenty for you. If you start early, you have a full career, that might be plenty.

You'll listen to people like Dave Ramsey say save 15% for retirement. That probably is fine for the average Joe because much more of average Joe's retirement income comes from social security than it will for a high-paid professional, like a physician, which is my primary audience. It is just not enough for you to save 15%. You need 20% to get to about the same place as far as maintaining your lifestyle in retirement.

Now, where does that come from? That comes from just running the numbers. If you sit down and go, “Well, how much do I need to save in order to more or less keep the same lifestyle in retirement that I had before retirement?” You will find that your answer is going to fall somewhere around 20%. If you use a reasonable rate of return on your assumptions, if you use a relatively full career, let's say 30 years or so from the time you come out of training until the time you retire, then that's what it's going to work out to be.

Obviously, if you can make 20% returns on your money consistently year over year, you don't have to save 20%. Likewise, if you're going to invest for 50 years before you retire, you probably don't have to save 20%. It is all about putting the variables into the equation. But in general, most people who do this are going to land in that neighborhood between 15% and 25%.

Now, if you want to retire early, you probably need to save more than 20%, 30%, even 40%, even 50% for those who are really into FIRE. If you want to punch out in 10 or 15 years, you have to have those really high savings rates in order to do it, unless you're going to have some sort of successful entrepreneurial side gig or use a lot of leverage to speed it up a little bit.

But for the most part, the way to get there reliably is just to have a really high savings rate. The more you save, the less you spend, the less you need in order to maintain that lifestyle. That is the way the math works out.

Now, why do I use gross instead of net? You could use net, as well. If you want to use net, that's fine with me. Just realize that it's still not 20% of net. It's now going to be more like 30% of net or whatever it works out for you depending on your tax rate. But I found it easier to just use gross income because it's really easy to look up your gross income, even without knowing what you're paying in taxes.

It's really kind of the bad news of physician retirement, that it takes a lot of money to retire. In general, it's safe to spend something like 4% a year of your retirement nest egg and expect your money to last reliably throughout a 30-year retirement.

If you reverse engineer that math, you see that you have to take what you spend, subtract out any guaranteed income sources, such as social security or a pension, and multiply that by 25. That is how much you need to retire. It is a pretty big number for most of us. For most of us, that's a seven-figure number. Whether it's 2 million or whether it's 6 million, that takes a lot of savings to get there.

Recommended Reading:

7 Ways to Increase Your Savings Rate

 

Should You Use Bitcoin's Hyper Volatility to Time the Market?

There are a lot of good financial professionals in the industry. I tried to vet them and refer you to the good ones so you can avoid the mistakes I made. One of our recommended financial advisors, Ben Utley of Physician Family Financial Advisors, joins us on the podcast to answer a few listener questions. You can hear more from Ben on his podcast Physician Family Financial Advisors podcast.

The first one is about investing in bitcoin.

“I have a quick theoretical question for you about Bitcoin. I personally haven't really drunk the Kool-Aid of this being a good asset class to invest in, but a friend pointed out an interesting mathematical curiosity to me. It seems to me that if you were to take advantage of its hyper volatility, you could rebalance your portfolio by selling when it's high, buying when it's low. And overall, increasing your net returns, not based on the asset class itself appreciating in value, but based on its ability to be volatile and utilize that in the other aspects of a portfolio. How do you feel about that? Is that just trying to overly complicate things or is that a decent strategy to manipulate the volatility of this asset class?”

Ben's philosophy is that invested money is like soap, the less you touch it, the more you keep. With a strategy that rebalances based on the monthly, daily, weekly, hourly price movements of something as volatile as Bitcoin, it is going to be really hard to keep your hands off the money. He has found that the more often you touch it, the more mistakes you make, the more transaction costs, the more taxes you pay.

“I also see if we looked at this in terms of modern portfolio theory where you hold a basket of assets that have inverse or negative or no correlations, that's the theory, but I don't want to own an asset class that has a zero expected return. And it's hard to say that Bitcoin has a zero expected return, but for me, an investment is something that has the inheritability to accrue value, like in terms of rent streams or dividends or interest without respect to the owner's involvement. So, I don't see Bitcoin as an investment. I see it more like a gold coin or like a U.S. currency. It's a store of value for sure. But for me, it's not an investment. And as a result, I wouldn't put it in my portfolio or recommend it.”

Underlying this question is something that I think we ought to point out as perhaps fallacy, which is the idea that you know when it's high and you know when it's low. I don't think you know that for any asset class, particularly Bitcoin.

For example, if your plan is to trade this, selling it when it's $60,000 and buying it when it's $30,000, but then it goes to $15,000. Well, what do you do now? You just bought it at $30,000 and now it's $15,000. There is a bit of assumption there that you're going to be able to predict the future, as far as its price movements, when you implement a plan like this.

I'm not a big fan of timing the market, whether it's stocks or bonds or Bitcoin. This strategy obviously requires that. Now, if you could buy low and sell high, yeah, you're going to make a killing on something that volatile because you could do it so often. But I'd reject the hypothesis that you can actually do it. I don't think you can. I think it's more an instrument of speculation than it is a real investment.

Recommended Reading:

Should I Try to Time the Market?

 

Passive vs Active Management for Bond Funds

“The case for passive over active management of the stock portion of a portfolio is very strong and has been discussed many times. My question is passive versus active management of one's bond allocation. Bonds are a different animal than stocks, and I am interested in your thoughts on this. Is comparing active management of a stock fund and a bond fund an apples and oranges type of thing? Specifically, I've been looking at PIMCO's bond ETF versus Vanguard's BND ETF. Bonds expense ratio of 0.55% is significantly higher than BNDs ER of 0.035%. However, I'm interested if you think having the active expertise of bonds managers might be worth the added expense.”

Ben sees bonds as the anchor for an all-stock portfolio. They give you a buffer, and you want that buffer to be relatively secure. We want it to be relatively stable and we want it to be there when we need it.

“In terms of active versus passive, I don't know that that's really the question that I would be asking. It's more like, ‘Is it going to be there or is it not going to be there?' And here's an example. Back in 2008, the Oregon college savings plan had an Oppenheimer bond fund actively managed. They made the wrong bet, and it blew up. And that fund irrevocably lost a whole bunch of money. And that happened at a time when you want that bond to be there, to buffer the stock market corrections that we had.

For me, it's not really whether active or passive is better in terms of long run results. It's more likely an operator error. It's the risk you get that this manager will make an irrecoverable mistake. And I feel like that irrecoverable mistake happens in large quantity and it's somewhat likely. So as a result, that outweighs any marginal return that you would get above and beyond traditional bond funds.

Now, in this particular case, comparing the PIMCO bond fund to a Vanguard ETF, you really are comparing apples and oranges. If you look at the top 10 holdings of this particular bond fund, you will see they have a preferred stock. So, it's not true bond exposure. PIMCO's known to use leverage and derivatives, which is part of their strategy. I'm not faulting that, but I'm saying that's very different than what you're going to get in a Vanguard total bond market index. It's apples and oranges. And I would expect similar performance out of them. So, I couldn't begin to compare them regardless of the huge difference in the operating expense ratio.”

You have to look under the hood. That's the most important thing for an investment. What are you actually investing in? If you're buying preferred stocks and you think they're bonds, preferred stocks do not perform the same as bonds, for sure.

The other thing you have to keep in mind is your expenses matter a lot more with a bond fund because the yields, especially these days, are not very high. 50 basis points is a big chunk of your return to pay to an active manager.

The big issue I have with active management is the manager risk. You have this 10% chance of beating the index, but that's just not worth the 90% chance of underperforming the index in my book. Then you have to watch the manager and when the fund manager retires and they get a new one. Now you have to watch that one and decide if you want to stick with that one. I'd rather just set it and forget it. So, I'm a big fan of passive management, both on the bond and the stock side.

“The math that makes index funds work also makes bond funds work. It also makes emerging markets work. It's the same math. Collectively all the managers are going to own all the market. And so, they're going to get the average less the cost of their management. So, generally active management is a losing proposition. It looks great in the short run, but in the long run, it just never looks as good as indexes.”

 

Are Social Index Funds Good Investments?

“I have a question around social index fund investing. I've been looking at the various Vanguard funds around this, and first starting with the VFTNX index fund for socially conscious investing. This is a fund that's been around since 2003. It has a $5 million minimum investment. So, none of us are going to be investing in it, but it seems to have strong returns over the last two decades. In fact, I think it might actually be beating the total stock market index fund as well.

And so, I know I can’t invest in this one, but I look at the one I could invest in—the Vanguard VFTAX social index fund. And that one's only been around two years or so. I would appreciate your opinion on how those two social index funds are different or how they're investing differently from each other versus similarly. I know obviously that crystal balls are going to be cloudy, no matter what fund it is, but as long as the evidence is not pointing that these are so, so much worse, I think a number of docs and other folks might be interested in this route of investing ongoing.”

There is a lot of interest people have in promoting good governance and social equity and helping the environment while they invest. What are Ben's thoughts on these funds and maybe those Vanguard offerings in particular?

“I like the idea of investing in things that you feel good about because the money should feel good when you're doing it right. In this particular case, I think the reason that there's been outperformance in the last 10 years is when you take the things that are socially icky, like oil companies, out of the index, then it's more concentrated in the things that have won in the last 10 years.

So, technology has been really hot in the last couple of years. Oil has performed poorly. And so, if you drop that out of the total index to get this social index, then you're going to have a greater concentration of the things that have been working in the last 10 years.

I don't think it has anything to do with the fact that this is a social fund and it's a good fund or a bad fund. I think it has everything to do with the sector exposure. Another thought is, let's say maybe in your 401(k) you don't have access to the social index, but you want to do something good. You're more or less forced to invest in just a straight up index.

But in terms of really making a difference in the world that we live in, whether or not you own oil is not going to make a huge difference because those companies are going to be in existence. They're going to trade on the exchanges, whether you like it or not, they're out there.

Your investment in a fund is not going to change that because these securities already exist. What will change is if you become actively involved in a charitable organization where you go and you use your own hands or use your own money, maybe take the money that you make in the index, maximize the amount of money that you're going to make, and then go donate that to charity or donate time to charity. Get actively involved. You'll make a far bigger difference there than you will by messing around with which share class you have and whether or not they're socially performing.”

I'm not a huge fan of social investing. Part of the issue with these funds is it's hard to find one that lines up with your thoughts on all of these hot political topics. It is really hard to find a fund that actually lines up with your beliefs. I think that's challenge number one, if you want to do this. Challenge number two, it doesn't make that big of a difference. I think you're far better off earning money as best you can.

Perhaps not starting your own company that you're against, but certainly investing broadly in the U.S. market. Then using your money to donate to the charities that you support. The data a number of years ago was that they substantially underperformed. More recently, it looks a little better. I agree the reason for that is that they're heavier on tech stocks than they are on more value companies, which have underperformed over the last decade. But maybe they're getting better at actually providing reasonable returns. I think the governance factor in particular is promising in that regard. But Ben didn't expect the outperformance to keep going.

Recommended Reading:

Does ESG Investing Really Work?

 

We estimate that 80% of doctors need, want, and should use a financial advisor and/or an investment manager. Some investment gurus such as Dr. William Bernstein think my estimate is way too low. At any rate, if you want to use an advisor temporarily or for your entire life, there is no reason to feel guilty about it—just make sure you are getting good advice at a fair price. 

If you need help updating your financial plan or just getting one in place, check out our list of recommended financial advisors at whitecoatinvestor.com/financial-advisors

You can do this and The White Coat Investor can help.

 

Milestones to Millionaire Podcast

#27 – Academic Endocrinologist Millionaire

This academic endocrinologist follows the WCI advice and reaches millionaire status 3 years and 9 months out of training. How did they do it? They had a written financial plan and automated their finances. You need an investing plan to be successful!

 

Sponsor: WCI Books

 

Quote of the Day

Our quote of the day is from Paul Samuelson. He said,

“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”

 

Registration for 2022 WCI Conference

Save the date 7:00 PM mountain time on September 14th, 2021 in order to register for WCI Con 22. This will be February 9th through 12th, 2022 in Phoenix. Looking forward to a wonderful February in Arizona. Registration will fill up fast so mark your calendar.

 

Full Transcription

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

Dr. Jim Dahle:
This is White Coat Investor podcast number 224 – Actively managed funds, savings rates, social index funds, home prices and more.

Dr. Jim Dahle:

We estimate that 80% of doctors need, want, and should use a financial advisor and/or an investment manager. Some investment gurus such as Dr. William Bernstein think my estimate is way too low. At any rate, if you want to use an advisor temporarily or for your entire life, there is no reason to feel guilty about it—just make sure you are getting good advice at a fair price. If you need help updating your financial plan or just getting one in place, check out our list of recommended financial advisors at whitecoatinvestor.com/financial-advisors. You can do this and The White Coat Investor can help.

Dr. Jim Dahle:
Many of my readers have invested with 37th Parallel and so have I. And I've been happy with that investment. To check them out, hop on over to whitecoatinvestor.com/37parallel.

Dr. Jim Dahle:
Hey, welcome back to the podcast. I hope you've been having a great summer. I know we've been having a great summer. I think we've been on a trip every other week, all summer. Our most recent one, we just came back yesterday from Desolation canyon.
It doesn't sound very attractive when I put it that way, but this is the green river.

Dr. Jim Dahle:
We followed the great explorer Powell track down the green river. And it was an interesting experience. It was nice that the water levels were low and that there were no mosquitoes. And we actually didn't have any upstream wind, which makes for a very nice rafting trip, if you've ever rode a river.

Dr. Jim Dahle:
But unfortunately, with the water being as low as it is out here in the west, it was quite an experience at slow motion rock dodging. And sometimes it was not a question of whether or not your raft was going to hit the rock, it was which part of the raft you wanted to hit the rock. But a good time was had by all, no boats were damaged significantly. I didn't have to pull out the first aid kit at all. And we all had a good time.

Dr. Jim Dahle:
I hope you've also been enjoying your summer and been able to get out and do something fun, whether it's close to home or as some people are starting to travel now, maybe further from home.

Dr. Jim Dahle:
I want you to know about something that's coming up here. And you got to pay attention to this if you want to go. We are having WCI con 22. This is the Physician Wellness and Financial Literacy conference. This will be our fourth one. The first one was in Park City in 2018. The second one was in Las Vegas in 2020. Last year or rather earlier this year we did a virtual one that we based out of Salt Lake City.

Dr. Jim Dahle:
And this one is going to be in Phoenix next February. It's going to be on February 9th through 12th, 2022. It's going to be at the JW Marriott. This is in the Northeastern part of Phoenix, kind of north of Scottsdale.

Dr. Jim Dahle:
It's a beautiful property. I got to walk it last year. My daughter was down in the area for a soccer tournament and she was actually the hero of the soccer tournament. It was really great. She got to kick the winning goal in the shootout, and that doesn't happen to you very often in your life. But right across from there was where this hotel is.

Dr. Jim Dahle:
And it's a beautiful facility. It's going to be a little bit different I think, different field than we had in Park City when we had a ski conference, because the weather is going to be dramatically nicer. So those of you who didn't want to go to Park City because it was way too cold and you don't ski, this might be the conference for you.

Dr. Jim Dahle:
They've got a spa there. They've got 17 pickleball courts. They've got championship golf, they've got five pools and a lazy river, some beautiful luxury rooms. And I think our conference is probably going to fill pretty much the entire resort, the entire hotel. And so, it's going to be great.

Dr. Jim Dahle:
What you need to know, however, and why I'm mentioning this today is because we have registration for this. And the registration is going to be on September 14th at 7:00 PM. And the reason I give you the exact time is because these tend to fill pretty quickly.

Dr. Jim Dahle:
Our first one in park city filled in six days, that was 300 people. Two years later, we had 800 slots in Las Vegas and it was a third full in seven minutes. And the entire thing was full 23 hours later.

Dr. Jim Dahle:
The White Coat Investor community has only continued to grow since that time and it wouldn't surprise me if this one fills even faster. So, it is highly likely that if you don't register on September 14th, you may not be coming to this conference at all. And so, I want you to mark the date, put a reminder in your phone so you can register. And we'd love to see you there in person.

Dr. Jim Dahle:
There will be a virtual component for this conference, but I think in person is where it's at, if you can do it. And so, I want you to be aware of registration for that. Obviously you'll be able to register for the virtual component right up until the conference starts and even while it's going probably, but the in-person conference is probably going to be full.

Dr. Jim Dahle:
We're going to add a few more seats to it. We're going to have about a thousand people there, but that's it. We're not going to be able to put in 2,000 if 2,000 people want to come. There just isn't space for it there.

Dr. Jim Dahle:
We'll be talking more in the incoming weeks about who some of the speakers are going to be, as well as what some of the events are going to be. For example, we're going to have this pretty cool breakout afternoon for partners. And it's going to be a wonderful segment of the conference that we haven't done before. But this is going to be great.

Dr. Jim Dahle:
7:00 PM mountain time is the time to put in your phone on September 14th, 2021 in order to register for WCI con 22, which is again, February 9th, through 12th, 2022 in Phoenix. Looking forward to a wonderful February, in Phoenix down there.

Dr. Jim Dahle:
All right, let's get into some of your questions. We're going to do a whole bunch of your questions today. I'm going to do most of them myself. I've also got Ben Utley coming on the podcast later. He's going to help answer a few of the questions with me as well. But our first one comes from a long-time listener and not first-time caller Tim in San Francisco.

Tim:
Hi Jim. This is Tim in San Francisco. I should also say that on your recommendation we started Utah 529, but realized we couldn't get a tax break in California. So, my family and I will be moving to Utah so we can get the tax break on that Utah 529. So, we're excited about that.

Tim:
My question today is should we be concerned that U.S. homes may decline in price over the long run? The reason I ask is because it seems like prices should be determined by supply and demand. Supply can increase, but the U.S. population growth curve is flattening out and maybe the population will fall. So, could demand fall and prices fall? I think maybe in Japan houses depreciate, not appreciate.

Tim:
This is particularly concerning because there's a lot of effort to try to get more people in housing, especially people with low net worth as a mechanism to build wealth. And I know that housing hasn't been a major generator of wealth through appreciation. I think it's like 1% over the long run. And of course, there are implicit rents, but should we be concerned, maybe have a secular change in housing appreciation behavior? Thank you.

Dr. Jim Dahle:
Good question Tim. My crystal ball is cloudy. I don't know what U.S. housing prices are going to do in the long-term. Could they decline? I guess, it seems pretty unlikely to me, but anything could happen. All I know is I just came back from my trip and I got my property tax bill for the year or estimate for next year, whatever it is. And it just went up 60% because they think my home is dramatically more valuable than it used to be.

Dr. Jim Dahle:
And it probably is based on what housing prices are selling for around here, even without the renovation we've done. Because I'm not sure that the tax authorities know about the renovation yet.

Dr. Jim Dahle:
Our house has more than doubled in value since 2010. Utah is certainly on the edge of the market changes we've seen in the last few years as lots and lots of people moved here for a little mini tech boom. And of course, the space is constrained between the mountains here in Utah. And so, I wish you luck. Of course, you're moving from San Francisco so maybe houses will seem so cheap that you'll say, “Oh, it's only a eight hundred thousand dollars. I'll take two”. I don't know.

Dr. Jim Dahle:
But here's the deal. We don't really know what's going to happen with houses in the long run. If you knew, of course you could capitalize on that, but you don't know. And so, what is the right move to hedge that bet? Well, the right move is if you're going to be in it for a long time, a house is generally a good investment, even if it doesn't appreciate.

Dr. Jim Dahle:
Because remember what your return comes from with the house, right? You are saving rent. And I suppose if the price of houses fell, the price of rent would also go down. But at the same time, you've basically locked in that rent with your house when you buy it. And so, that's the dividend that your house pays.

Dr. Jim Dahle:
I don't think it's the greatest return in the world that you'll ever have, but it certainly provides a solid return for a portion of your money. And it also makes sure there's a roof over the head of your loved ones, at least once it's paid off, no matter what happens to you in your financial life.

Dr. Jim Dahle:
Once your professional and personal life are stable, I think it's time to buy. Obviously, there's going to be better times and worst times to buy, but you really can't time that to your life because the cycle is so long.

Dr. Jim Dahle:
For example, obviously the housing prices have gone up dramatically in the last few years. What you don't know however, if you decide you're going to wait to buy until housing prices crash again is you don't know if they'll even crash down to the level they are at today. You just don't know.

Dr. Jim Dahle:
And so, I think it's better not to try to time it. Wait until it's the right time in your life to buy. And remember that in general, in real estate time heals all wounds. If you're going to be in there for 15 or 20 years, you're probably not going to have to worry about actually having a positive return on your investment. I hope that's helpful, Tim, and welcome to Utah.

Dr. Jim Dahle:
All right, let's take our next question, also from Tim. This one's on actively managed mutual funds, something we're going to be talking about throughout the podcast.

Tim:
Hi Jim. This is Tim in San Francisco. Soon to be Salt Lake City. I wanted to ask a good old fashioned mutual fund question. The argument against active mutual funds is that there are just too many sharks, too many active managers out there, all competing to beat the markets. And so, collectively they can't really do it.

Tim:
But what if the share of investors, the share of active participants in the market who are retail investors and “dumb” money who could potentially make bad decisions over the long term increases to the point where now maybe they outnumber or outwait active managers.

Tim:
I hear maybe this is going on in China, in the U.S. clearly there has been a big surge in “retail” investors. Is there any theoretical reason to think that in a situation where there just happens to be a large proportion of retail investors engaged in the market, that it may pay alpha or dividends or whatever to invest in actively managed mutual funds? Thanks.

Dr. Jim Dahle:
That's a good question. Yes. Theoretically, that could happen. But there is no sign of it happening. In fact, just the opposite has been happening over the last 50 years. The percentage of investors that are private mom and pop investors has been falling and falling and falling and falling and falling for decades.

Dr. Jim Dahle:
It used to be they made up the majority of trades in the market, and now it's a tiny minority of trades in the market. And a tiny minority of assets held. Most of them are held by pensions, by university, endowments by mutual funds, et cetera.

Dr. Jim Dahle:
And so, when you are into the market, for the most part, you are not trading with another private investor, you're trading with an institutional investor. That's who is on the other side of your trade. And so, keep that in mind. The fewer times you go in there, probably the better off you're going to be.

Dr. Jim Dahle:
And so, it’s true. Theoretically, that could happen. That trend could reverse, but I wouldn't count on it. I don't see any reason why it would reverse at all. Now, maybe it would happen for an individual stock. Maybe Tesla is more commonly owned by private investors or something. Maybe cryptocurrencies are like that, that wouldn't surprise me at all. But for the most part, that's not the way the markets are, and that's not the way the markets have been trending now for a long, long time. So, I would not expect that to be a reason to go for actively managed mutual funds.

Dr. Jim Dahle:
The truth is that about 10% to 20% of actively managed mutual funds, at least before taxes, are going to beat their respected index fund, even in the long run, even in 20 or 30 years. The problem is identifying that 10% or 20%. And it is so hard to do that it's probably not worth doing.

Dr. Jim Dahle:
The right answer is simply to get the easy guaranteed market matching return of an index fund. And especially for those of us with a high income, that's enough. You don't have to beat the market to become financially independent. You don't have to pick the winning stocks. You don't have to pick the winning active mutual fund managers.

Dr. Jim Dahle:
All you have to do is earn a decent income, save a significant portion of it and put it into a reasonable investment for 10 to 20 years. That's it. If you do that, you will be a multimillionaire and you will have a very secure retirement and you can spend your time focusing on things that you would rather focus on than your money.

Dr. Jim Dahle:
It's a wonderful thing to be able to go away for a week to Desolation Canyon, have no cell coverage whatsoever, not care one bit what the market does while I'm gone and know that that is going to have no impact whatsoever on my financial life.

Dr. Jim Dahle:
The fact that I'm out of contact for a week, and that's what index fund investing is. A passive strategy, a static asset allocation of mutual funds allows you to do. You can basically just forget about your investments for months at a time. And there's some value in that.

Dr. Jim Dahle:
Speaking of value, there is a lot of value in what each of you do each day. Your profession is not easy. Otherwise, you would not be paid so much to do it. And I know all of us feel a little bit underpaid these days, but the truth is that even poorly paid physicians are still in the top 5% of Americans and the top 1% worldwide. So, we're making good incomes but the reason is because we have difficult work.

Dr. Jim Dahle:
And some of us are still battling the COVID pandemic as we have this Delta variant associated spike. And the rest of us are a little bit back to normal, maybe, but normal wasn't even easy. And so, thanks for what you do, no matter what you do.

Dr. Jim Dahle:
All right. Here's an interesting question from Ben. This one's a little bit more personal about me. Let's take a listen to it.

Ben:
Hey, Dr. Dahle. This is Ben from California. You often mentioned that the only reason you started the White Coat Investor was because you were sick of being ripped off by unscrupulous financial professionals. If you'd only interacted with the good ones, do you think you ever would have educated yourself and taken control of your finances like you have now?

Dr. Jim Dahle:
Good question, Ben. No. No, I wouldn't have started the White Coat Investor. If that financial advisor I had gone to as an intern had actually treated me right, chances are I'd still be working at that financial advisor. I probably would have never gotten into reading a bunch of financial books and probably there would be no White Coat Investor. So that was definitely the cause of me feeling a need to go out and become financially literate.

Dr. Jim Dahle:
I realized at that point, looking back at all of the interactions I have had. I've been ripped off by a realtor. I've been ripped off by a lender twice. I've been ripped off by an appraiser. I've been ripped off by a recruiter. I've been ripped off by an insurance agent who's actually a very good friend of mine.

Dr. Jim Dahle:
And when I was an intern, I had the most commonly sold whole life insurance policy provider out there for physicians. And they talked me into a policy as a medical student, a whole life policy of all the silly things you could buy as a medical student.

Dr. Jim Dahle:
And then of course, I went to a financial advisor on the recommendation of a co-resident. He said, “Hey, this guy has treated me good”. I went in there and of course they sell you disability insurance for a commission. And that was probably the best thing that adviser did for me. Then sold me a term-life policy that was really completely inappropriate term life policy. I think it was a five-year level term. Who sells an intern a five-year term policy? I needed 20 or 30 years, not five years.

Dr. Jim Dahle:
And then of course, he started selling me actively managed mutual funds. I bought a few, put them in a Roth IRA. And later that year I was on a road trip. Actually, it was my annual vacation. I think we got two weeks, twice a year is what we got during residency.

Dr. Jim Dahle:
And so, I stopped in a bookstore while I was on this road trip and as I was walking through it, Eric Tyson’s “Mutual Funds For Dummies” was sitting on the shelf. And I said, “Well, I own some mutual funds I should learn more about them”.

Dr. Jim Dahle:
I read the book and I learned that there are A shares and B shares and C shares. And I wasn't really sure what shares I owned. And Tyson also mentioned there were no load funds. And I'm like, “Oh, I think that's what I have. I have no load funds because I'm paying this advisor a fee”.

Dr. Jim Dahle:
Well, it turned out that this was not a fee only advisor. It was a fee-based advisor that charges you fees and commissions. And so, when I went home and looked up all those mutual funds on the new-fangled internet, I realized that I did not have no load mutual fund shares. I had C shares, which are basically a load added onto the expense ratio each year. It's an ongoing load rather than a front load or a back load with A shares and B shares, a C share is an ongoing load. And that's what I owned.

Dr. Jim Dahle:
And it made me mad. I was mad that I was paying somebody a fee and be in charge of commissions. And if I knew how the industry worked, I would realize that's what was going on. And that's what he was talking about when he said, we charge you more to implement your plan, as opposed to just giving you the plan. But in the end, I realized that if I didn't start learning more about this stuff, I was just going to be taken advantage of over and over and over again.

Dr. Jim Dahle:
I enjoyed that book and decided I should read some more financial books. Luckily, I lived across the street from a little store called Bookmans in Tucson, Arizona. And this is a used bookstore. And I went over there to their financial section and they had tons of books of varying ages. Some of them are pretty old. And I just started reading them.

Dr. Jim Dahle:
I read a lot of terrible financial books with terrible financial advice. There are really a lot of bad books out there, it turns out. But after a while I realized, “Hey, there's a few good books and you know what? The good books are all saying the same thing”.

Dr. Jim Dahle:
As the years went on, I became more and more financially literate. I started interacting on forums on the internet and reading blogs and those sorts of things. And I realized after a few more years, I was doing a lot more helping than I was learning. And I got sick of typing the same thing over and over again into the internet.

Dr. Jim Dahle:
I started the White Coat Investor in 2011. I was kind of on a kick that I wanted to have some passive income too. So, I started as a business from the beginning. It certainly eventually brought income. It didn't really in the first few years, but eventually it did. That income has been anything but passive, however.

Dr. Jim Dahle:
But it's been a wonderful journey. It's been wonderful to meet and help so many of you. And maybe we ought to go back and thank that advisor in Tucson, Arizona for causing the White Coat Investor to eventually be born.

Dr. Jim Dahle:
Our quote of the day today comes from Paul Samuelson. He said “Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas”.

Dr. Jim Dahle:
Our next question is an anonymous listener. Let's take a listen to it. It's about savings rates.

Speaker:
Hi, Jim. I want to better understand why you recommend saving 20% of gross income for a goal for retirement savings. Specifically, I want to understand where this 20% number is derived from. And I also want to understand why you base it off gross income rather than net income.

Dr. Jim Dahle:
All right. Savings rates. Okay, what is your savings rate? Your savings rate is how much money you put away primarily toward retirement divided by your gross income. That's your savings rate. And I recommend that an attending physician have a savings rate of about 20%. That is not some hard and fast rule. It's just a rule of thumb.

Dr. Jim Dahle:
And the point of the rule is to get you thinking about what your savings rate is. The point is that a 5% savings rate is not enough. Now, it's entirely possible that a 17% savings rate is plenty for you. If you start early, you have a full career, that might be plenty.

Dr. Jim Dahle:
You'll listen to people like Dave Ramsey say save 15% for retirement. And that probably is fine for the average Joe. And the reason why is because much more of average Joe's retirement income comes from social security than it will for a high paid professional, like a physician, which is my primary audience. And so, it's just not enough for you to save 15%. You need 20% to get to about the same place as far as maintaining your lifestyle in retirement.

Dr. Jim Dahle:
Now, where does that come from? That comes from just running the numbers. If you sit down and go, “Well, how much do I need to save in order to more or less keep the same lifestyle in retirement that I had before retirement?” You will find that your answer is going to fall somewhere around 20%. If you use a reasonable rate of return on your assumptions, if you use a relatively full career, let's say 30 years or so from the time you come out of training until the time you retire, then that's what it's going to work out to be. That's where 20% comes from now.

Dr. Jim Dahle:
Obviously, if you can make 20% returns on your money consistently year over year, over year, you don't have to save 20%. Likewise, if you're going to invest for 50 years before you retire, you probably don't have to save 20%. And so, it's all about putting in the variables into the equation. But in general, most people who do this are going to land in that neighborhood between 15% and 25% is what it takes.

Dr. Jim Dahle:
Now, if you want to retire early, you probably need to save more than 20%, 30%, even 40%, even 50% for those who are really into FIRE. If you want to punch out in 10 or 15 years, you got to have those really high savings rates in order to do it, unless you're going to have some sort of successful entrepreneurial side gig or use a lot of leverage, those sorts of ways in which you might be able to speed it up a little bit.

Dr. Jim Dahle:
But for the most part, the way to get there reliably is just to have a really high savings rate. The more you save, the less you spend, the less you need in order to maintain that lifestyle. And that's the way the math works out.

Dr. Jim Dahle:
Now, why do I use gross instead of net? You could use net as well. And if you want to use net, that's fine with me. Just realize that it's still not 20% of net. It's now going to be more like, I don't know, 30% of net or whatever it works out to you depending on your tax rate. And so, that's just the way it works.

Dr. Jim Dahle:
But I found it easier to just use gross income because it's really easy to look up your gross income, even without knowing what you're paying in taxes. And so that's why I use gross income. But if I was using net income, the number would be higher than 20%.

Dr. Jim Dahle:
It's really kind of the bad news of physician retirement, that it takes a lot of money to retire. And the reason why is that in general, it's safe to spend something like 4% a year of your retirement nest egg and expect your money to last reliably throughout a 30-year retirement.

Dr. Jim Dahle:
And if you reverse engineer that math, you see that you got to take what you spend, subtract out any guaranteed income sources, such as social security or a pension, and multiply that by 25. And that's how much you need to retire. And that's a pretty big number for most of us. For most of us, that's a seven-figure number. And whether it's 2 million or whether it's 6 million, that takes a lot of savings to get there.

Dr. Jim Dahle:
And so, the only way you're going to get there is by saving a whole bunch of your earnings. And how much of those earnings do you really need to be saving? Something like 20%. I hope that's helpful and answers your question.

Dr. Jim Dahle:
All right, we're going to bring on a guest here. Let's get him on the line. Our special guest today is financial advisor Ben Utley CFP. Ben is the founder of Physician Family Financial Advisors Inc. This is a multi-specialty team of fiduciary financial advisors for physicians who is serving 175 doctors from coast to coast, their flat fee advisor is based out of Eugene, Oregon. Welcome to the podcast, Ben.

Ben Utley:
Thanks for having me.

Dr. Jim Dahle:
Tell us why you became a financial planner.

Ben Utley:
Basically, I wanted to help people. So, years and years ago, I was a chemist. That was my original training and it wasn't close enough to people. And I thought I was giving myself cancer. I was in a lab with a guy who was an investor. And so, we got to talk about investing. And one day I found myself in the library, reading the value line and the Morningstar. And I checked out all the Kiplinger’s and all the money magazines. And that was fascinating.

Ben Utley:
And so, I got my master's degree instead of my PhD, bailed out, volunteered at consumer credit counseling service and enjoyed that. Met somebody who worked at Waddell and Reed, went there, was exposed to the sales culture, and found that really icky. I decided I could run my own shop. And that's when it started. I just started working with folks.

Ben Utley:
Initially, I specialized in a couple of different areas. I tried some of those. And I was referred by one of my original clients to a physician who is just lovely. She's still with me today almost 25 years later and just fell in love. I like what physicians do, and enjoy the healthcare space. And my science background comes into the field there. So, I served her well.

Ben Utley:
She married a guy who was also a surgeon. I had to destroy my practice and rebuild it to make both of them happy. He referred me to somebody who is in his practice, who was married to somebody in another practice who knew somebody in that practice. It just kind of kept going and going until I looked back through about 10 generations of word of mouth all the way back to that car dealer who I originally hooked cold calling on a Sunday.

Ben Utley:
And so, we got to a point where we had a number of physicians, it's about 50%. I renamed the practice with search terms physician financial advisors. I knew that family was important. So, I threw that in there. And today we're 175 physicians strong in about 30 states. There are five people on our team, including myself. It’s all docs with the exception of three or four people who have been with me since way before I rebranded.

Dr. Jim Dahle:
That's a really high percentage, even for a practice that specializes in doctors to have that many of the clients be doctors. What other aspects of your practice are unique?

Ben Utley:
The way that we build is very unique. It is a flat fee subscription model. It's not based on how much money you have. It's not based on how much money you earn. It's not based on how many doctors there are in the household. It is simply the client that has a relationship with myself and the team of the firm. We bill in proportion to the value that we believe that we can bring. And we kind of average that across all clients. So, it's the same level of monthly fee and those fees are present on the homepage of our website in 36-point font.

Dr. Jim Dahle:
36-point font to make sure nobody misses it.

Ben Utley:
Nobody misses it. Yeah. I don't want anybody to call us and say, “Oh, what do you charge?” It's on the homepage. It's fully disclosed so there's no conflicts of interest.

Dr. Jim Dahle:
It's almost a truism in financial advice that if you can't find the fee structure on the website, it's either a bad fee structure or you're paying too much.

Ben Utley:
That's true.

Dr. Jim Dahle:
All right. Well, we want to get into some questions from the listeners and I thought we'd keep you on. Let's talk about a few of them. Our first one is on a popular subject – Bitcoin. This one comes from Sam, the intern. Let's take a listen to it.

Sam:
Hey, Dr. Dahle. This is Sam, the intern. I have a quick theoretical question for you about Bitcoin. I personally haven't really drunk the Kool-Aid of this being a good asset class to invest in, but a friend pointed out an interesting mathematical curiosity to me.

Sam:
It seems to me that if you were to take advantage of its hyper volatility, you could rebalance your portfolio by selling when it's high, buying when it's low. And overall, increasing your net returns, not based on the asset class itself appreciating in value, but based on its ability to be volatile and utilize that in the other aspects of a portfolio.

Sam:
How do you feel about that? Is that just trying to overly complicate things or is that a decent strategy to manipulate the volatility of this asset class? Thanks for all you do.

Dr. Jim Dahle:
Okay. There's an interesting question. Ben, why don't you take a stab at that and then I'll give you my thoughts on it.

Ben Utley:
Philosophically, I believe that invested money is like soup. The less you touch it, the more you keep. And I'm thinking of a strategy that rebalances based on the monthly, daily, weekly, hourly price movements of something as volatile as Bitcoin. That's kind of a strategy it is going to be really hard to keep your hands off the money. I find that the more often you touch it, the more mistakes you make, the more transaction costs, the more taxes you pay. It's very much kind of not a passive approach.

Ben Utley:
I also see if we looked at this in terms of modern portfolio theory where you hold a basket of assets that have inverse or negative or no correlations, that's the theory, but I don't want to own an asset class that has a zero expected return.

Ben Utley:
And it's hard to say that Bitcoin has a zero expected return, but for me, an investment is something that has the inheritability to accrue value, like in terms of rent streams or dividends or interest without respect to the owner's involvement.

Ben Utley:
So, I don't see Bitcoin as an investment. I see it more like a gold coin or like a U.S. currency. It's a store of value for sure. But for me, it's not an investment. And as a result, I wouldn't put it in my portfolio or recommend it.

Dr. Jim Dahle:
Yeah. Even as a store of value, it’s pretty volatile. Yeah, it's interesting that underlying this question is something that I think we ought to point out as perhaps fallacy, which is the idea that you know when it's high and you know when it's low. And I don't think you know that for any asset class, particularly Bitcoin.

Dr. Jim Dahle:
For example, if your plan is to trade this, selling it when it's $30,000 or selling it when it's $60,000 and buying it when it's $30,000, and then it goes to $15,000. Well, what do you do now? You just bought it at $30,000 and now it's $15,000. And so, I think there's a bit of assumption there that you're going to be able to predict the future, as far as its price movements, when you implement a plan like this.

Dr. Jim Dahle:
I'm not a big fan of time in the market, whether it's stocks or bonds or Bitcoin. And this strategy obviously requires that. Now, obviously if you could do that, you could buy low and sell high. Yeah, you're going to make a killing on something that's volatile because you could do it so often. But I'd reject the hypothesis that you can actually do it. I don't think you can. And I agree with you. I think it's more an instrument of speculation than it is a real investment.

Ben Utley:
Yeah. Not, not for me. I'm the rock-solid financial security guy. I don't like to play with these things. My head is off to those who have managed to do this well, and I am really interested in blockchain technology, but I think this is just a nascent thing in blockchain technology. I doubt that this is its highest and best use. I know that that's coming. And so yeah, it's going to be like the internet, but I don't see Bitcoin, I don't see crypto as an investment unto itself. Don't buy the gold, buy the picks and shovels.

Dr. Jim Dahle:
Yeah. It's interesting. The last article I read about it this morning, it had gone apparently in 24 hours from $29,000 a Bitcoin to $39,000 a Bitcoin, based on the fact that Amazon dropped a job listing, looking for a cryptocurrency expert. And it's just amazing that something can change by 33% because one company hired one person. And that is just way too volatile for me to put serious money into.

Dr. Jim Dahle:
All right. Let's take our next question. This one's from Paul. It's about passive and actively managed bond funds.

Paul:
Hello, Dr. Dahle. You have been a very positive influence on my financial health and I thank you. The case for passive over active management of the stock portion of a portfolio is very strong and has been discussed many times.

Paul:
My question is passive versus active management of one's bond allocation. Bonds are a different animal than stocks and I am interested in your thoughts on this. Is comparing active management of a stock fund and a bond fund, an apples and oranges type of thing?

Paul:
Specifically, I've been looking at PIMCO's bond ETF versus Vanguard's BND ETF. Bonds expense ratio of 0.55% is significantly higher than BNDs ER of 0.035%. However, I'm interested if you think having the active expertise of bonds managers might be worth the added expense. Thank you.

Dr. Jim Dahle:
All right, Paul, that's a great question. Ben, do you want to talk about your thoughts on actively managed bond funds?

Ben Utley:
My take on bonds in general is that they're kind of the anchor to Windward for an all-stock portfolio. They're the thing that gives you a buffer and we want that buffer to be relatively secure. We want it to be relatively stable and we want it to be there when we need it.

Ben Utley:
In terms of active versus passive, I don't know that that's really the question that I would be asking. It's more like, “Is it going to be there or is it not going to be there?” And here's an example. Back in 2008, the Oregon college savings plan had an Oppenheimer bond fund and actively managed. They made the wrong bet and it blew up. And that fund irrevocably lost a whole bunch of money. And that happened at a time when you want that bond to be there, to buffer the stock market corrections that we had.

Ben Utley:
For me, it's not really whether active or passive is better in terms of long run results. It's more likely an operator error. It's the risk that you get that this manager will make an irrecoverable mistake. And I feel like that that irrecoverable mistake happens in large quantity and it's somewhat likely. So as a result, that outweighs any marginal return that you would get above and beyond traditional bond funds.

Ben Utley:
Now, in this particular case, comparing the PIMCO bond fund to a Vanguard ETF, you really are comparing apples and oranges. If you look at the top 10 holdings of this particular bond fund, you will see they have a preferred stock. So, it's not true, bond exposure. PIMCO's known to use leverage and derivatives, which is part of their strategy. I'm not faulting that, but I'm saying that's very different than what you're going to get in a Vanguard total bond market index. It's apples and oranges. And I would expect similar performance out of them. So, I couldn't begin to compare them regardless of the huge difference in the operating expense ratio.

Dr. Jim Dahle:
Yeah. You've got to look under the hood. That's the most important thing for an investment. It’s what are you actually investing in? And if you're buying preferred stocks and you think they're bonds, well, preferred stocks do not perform the same as bonds for sure.

Dr. Jim Dahle:
The other thing you got to keep in mind is your expenses matter a lot more with a bond fund because the yields, especially these days, are not very high. 50 basis points is a big chunk of your return, to pay to an active manager.

Dr. Jim Dahle:
But I agree with you. The big issue I have with active management is the manager risk. Yes, you've got it in the long run. You got this 10% chance of beating the index, but that's just not worth the 90% chance of underperforming the index in my book. And then you got to watch the manager and when the fund manager retires and they get a new one. Now you've got to watch that one and decide if you want to stick with that one. I'd rather just set it and forget it. So, I'm a big fan of passive management, both on the bond and the stock side.

Ben Utley:
The math that makes index funds work also makes bond funds work. It also makes emerging markets work. It's the same math. Collectively all the managers are going to own all the market. And so, they're going to get the average less the cost of their management. So, generally active management it's a losing proposition. It looks great in the short run, but in the long run, it just never looks as good as indexes.

Dr. Jim Dahle:
Absolutely. I agree. All right, let's go onto our next question. This one comes from Modi. He's asking about social index funds and investing in them. Let's take a listen.

Modi:
Hi Jim. This is Mo. Thank you for all you do in the amount of research you do on our questions. I have a question around social index fund investing. I've been looking at the various Vanguard funds around this, and first starting with the VFTNX index fund for socially conscious investing.

Modi:
This is a fund that's been around since 2003. It has a $5 million minimum investment. So, none of us are going to be investing in it, but it seems to have strong returns over the last two decades. In fact, my look, I think it might actually be beating the total stock market index fund as well.

Modi:
And so, I know I can’t invest in this one, but I look at the one I could invest in the Vanguard VFTAX social index fund. And that one's only been around two years or so. I would appreciate your opinion on how those two social index funds are different or how they're investing differently from each other versus similarly.

Modi:
I know obviously that crystal balls are going to be cloudy, no matter what fund it is, but as long as the evidence is not pointing that these are so, so much worse, I think a number of docs and other folks might be interested in this route of investing ongoing. Thanks so much.

Dr. Jim Dahle:
All right, good question. One I'm getting more and more frequently, whether you call them social indexes or whether you call them ESG funds, I think is the most common these days. There's a lot of interest people have in promoting good governance and social equity and helping the environment while they invest. What are your thoughts on these funds and maybe those Vanguard offerings in particular, Ben?

Ben Utley:
Well, I like the idea of investing in things that you feel good about because the money should feel good when you're doing it right. In this particular case, I think the reason that there's been outperformance in the last 10 years is when you take the things that are socially icky, like, oil companies out of the index. Then it's more concentrated in the things that have won in the last 10 years.

Ben Utley:
So, technology has been really hot in the last couple of years and over the last 10 years. Oil has performed poorly. And so, if you drop that out of the total index to get this social index, then you're going to have a greater concentration of the things that have been working in the last 10 years.

Ben Utley:
I don't think it has anything to do with the fact that this is a social fund and it's a good fund or a bad fund. I think it has everything to do with the sector exposure. Another thought is, let's say maybe in your 401(k) you don't have access to the social index, but you want to do something good. You're more or less forced to invest in just a straight up index.

Ben Utley:
But in terms of really making a difference in the world that we live in, whether or not you own oil is not going to make a huge difference because those companies are going to be in existence. They're going to trade on the exchanges, whether you like it or not, they're out there.

Ben Utley:
Your investment in a fund is not going to change that because these securities already exist. What will change is if you become actively involved in a charitable organization where you go and you use your own hands or use your own money, maybe take the money that you make in the index, maximize the amount of money that you're going to make, and then go donate that to charity or donate time to charity. Get actively involved. You'll make a far bigger difference there than you will by messing around with which share class you have and whether or not they're socially performing.

Dr. Jim Dahle:
Yeah. I'm not a huge fan of social investing. And it's not that I don't like the environment. I don't like bad governance or social causes. Part of the issue with these funds is it's hard to find one that lines up with your thoughts on all of these hot political topics. You might not care about oil, but you care about guns, or you might not care about guns, you might be the biggest NRA supporter in the country, but you really want to see corporate managers held to their tasks.

Dr. Jim Dahle:
And it's really hard to find a fund that actually lines up with your beliefs. I think that's challenge number one, if you want to do this. And challenge number two, I think is what you mentioned, that it doesn't make that big of a difference. I think you're far better off earning money as best you can.

Dr. Jim Dahle:
Perhaps not starting your own company that you're against, but certainly investing broadly in the U.S. market. And then using your money to donate to the charities that you support. That's what Katie and I do. We don't try to have fancy social index funds. We just have boring old total stock market funds. And then we donate to charity both with our time and our money. So, I'm not a big fan of social index fund investing.

Dr. Jim Dahle:
The good news is I think the data a number of years ago was that they substantially underperformed. More recently, it looks a little better. I agree the reason for that is that they're heavier on tech stocks than they are on more value companies, which have underperformed over the last decade. But maybe they're getting better at actually providing reasonable returns. I think the governance factor in particular is promising in that regard.

Ben Utley:
I wouldn't expect that outperformance to keep going. You know what I mean? It's one thing to go and talk to your Congress person in person and talk with them about how you feel about these positions and issues and to be actively involved. It's another thing to not use a straw because it's made out of plastic.

Ben Utley:
I think it's okay to invest socially, but don't use it as a cop-out. Use it as something that's added on top of the other activities that you're pursuing to actually make a change rather than just feel like you're making a change.

Dr. Jim Dahle:
All right. Well, Ben, thank you so much for coming on the podcast. For those who are interested in learning more about Ben, maybe, hiring him to help you with your finances, you can find him at physicianfamily.com. It's very easy. They got their fees right on the website. They've got their people right on the website. There's a big button in the upper right-hand corner “Get started” and they can get you hooked up there. That’s physicianfamily.com. Ben Utley, thanks for coming on here.

Ben Utley:
Hey, just want to say we also have a podcast, Physician Family Financial Advisors podcast. So, if you're a physician and with kids, maybe you're a physician mom or a doctor dad, give us a listen. We're everywhere you can find podcasts.

Dr. Jim Dahle:
Awesome. Thanks for sharing that.

Ben Utley:
My pleasure.

Dr. Jim Dahle:
All right. That was great talking to Ben. He's one of the good guys out there for sure. He's on our list of recommended financial advisors. You can find that list under our recommended tab at the White Coat Investor, along with a lot of other professional financial service industry folks.

Dr. Jim Dahle:
Whether you need someone to refinance student loans or help you with your insurance or help you with a realtor or student loan advice or whatever. We've got a list of people there that you can trust. So be sure to check out those recommendations.

Dr. Jim Dahle:
We estimate that 80% of doctors need, want, and should use a financial advisor and/or an investment manager. Some investment gurus such as Dr. William Bernstein think my estimate is way too low. At any rate, if you want to use an advisor temporarily or for your entire life, there is no reason to feel guilty about it—just make sure you are getting good advice at a fair price. If you need help updating your financial plan or just getting one in place, check out our list of recommended financial advisors at whitecoatinvestor.com/financial-advisors. You can do this and The White Coat Investor can help.

Dr. Jim Dahle:
Don't forget. Conference registration, September 14th, 7:00 PM mountain time is when it opens up. It will not surprise me if it's full within a few hours. So, if you want to come to the conference, be sure to get on and register there.

Dr. Jim Dahle:
Thanks for those of you who've been leaving us a five-star review and telling your friends about the podcast. Our most recent review comes from eric schaub who says “Essential listening for everyone. I recommend this podcast to every medical trainee who works with me (which is daily at an academic center). The discussions are very relevant to “white coats” but honestly just about everyone else”.

Dr. Jim Dahle:
Isn't that the truth? It's all really the same for all of us. Probably only 5% of it is really physician specific.

Dr. Jim Dahle:
Keep your head up, your shoulders back. You've got this and we can help. We'll see you next time on the White Coat Investor podcast.

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