Sorting Out an Academic Doc’s Finances – Podcast #79

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 professional stop doing dumb things with their money since 2011. Here's your host, Dr Jim Dahle.

WCI: Welcome to White Coat Investor Podcast number 79, sorting out an academic docs finances. This episode is sponsored by Bob Bhayani, at DrDisabilityQuotescom.com. They are truly independent provider of disability insurance planning solutions to the medical community and nationwide. Bob Specializes in working with residents and fellows earlier in their careers to set up sound financial and insurance strategies. Contact Bob today by email at [email protected], or by calling 973-771-9100, that is 973-771-9100.

WCI: Our quote of the day to day comes from Morgan Housel. There are books on economic cycles, trading strategies and sector bets, but the most powerful and important book should be called Shut Up And Wait. It's just one page with a long term chart of economic growth.

WCI: Make sure you're subscribed to the monthly newsletter. The White Coat Investor newsletter goes out on or about the first of each month. That includes a lot of great stuff, including updates about what's going on at the White Coat Investor, some special deals, a market report for the previous month, as well as a collection of the best of the web.

WCI: This includes links to posts both on the White Coat Investor, the White Coat Investor network, the forum and SubReddit as well as links to a blog posts across the White Coat Investor network and from other areas of the Internet that aren't related to us at all, but all the best stuff is there and you get it all for free each month. In addition, there's a special tip which is essentially a blog post that never shows up on the blog, and so if you want access to everything that's coming out of the White Coat Investor, make sure you're signed up for the White Coat Investor newsletter and you can get to that just by going to the main site and under White Coat Investor Plus, going down to the link that says Newsletters Sign Up.

WCI: We've got something new going on with the podcast now, if you haven't heard yet, you can actually get your voice and your question onto the White Coat Investor Podcast. All you have to do is go to www.speakpipe.com/WhiteCoatInvestor. You can also get to that link from the main podcast page on the site, but once you go there, you can record a question of a few seconds up to 90 actually, but please don't leave me a 90 second question, of your question, we'll answer it on the podcast. We're hoping to get a lot more voices on the podcast and get some fresh questions and get your questions answered.

WCI: So please leave us a question there if you'd like to. Don't leave us hate mail there. Just send me an email if you want to send me hate mail or if you have corrections or just want to say hi, go ahead and send an email to [email protected] But if you'd like question actually featured on the podcast, please do record it there. You can do it just from your computer, you don't even have to use a phone to do it.

WCI: We're going to get into our pretty awesome podcast today. We've got another guest that is a regular listener to the podcast, and we're going to go through her finances and see how we can help her as well as help those who are in similar situations as academic physicians. Let's get into it.

WCI: All right. Today on the White Coat Investor Podcast, we have a very important guest with us, a very unique podcast. We've done this once before, but today we're going to bring a doctor on, and talk about her financial issues, her financial questions, her financial successes. She wants to stay partially anonymous and so we're going to do our best to do that. We're going to call her Baby Doctor. Obviously, we're going to have to share some of our financial information or this isn't going to be very interesting or very helpful to anybody, so we'll be talking about that.

WCI: But in the event that some of it seems vague, that's simply to protect her identity as best we can. Baby Doctor welcome to the podcast.

Baby Doctor: Thanks for having me on, Jim. I'm really excited to have this conversation.

WCI: Yeah, we're looking forward to it. We've been doing a little bit for the last few minutes offline, but we'll certainly go back over anything that's particularly important and relevant to the conversation now that we're actually recording this. Would you like to introduce yourself a little bit as far as where you're at in life and what your finances might look like in a general way?

Baby Doctor: Sure. One reason that I reached out to Jim was that I'm an academic physician and plan to be an academic physician for my whole career. I'm probably about halfway through that career. I'm 14 years out of fellowship. And I'm a neonatologist, so I did a three year residency and a three year fellowship, so six years of post med school training. I've been at a single academic institution and don't necessarily envision actually leaving that institution. I have a job that is about 25% clinical and 75% research and teaching.

Baby Doctor: It seems like a lot of the very interesting physician financial websites and blogs such as Jim's site and Physician On Fire, which is where I found all of this stuff, as well as the Happy Philosopher and some of those other things are mostly private practice people. So I thought it'd be interesting to get what this is like from an academic physician standpoint. We're a single income household. So my husband is a stay at home dad and I have a couple of high school and junior high aged kids.

Baby Doctor: Financially, we've always been good savers, but we have had financial advisors that I'm in the process of severing from. The first thing they did was sell us some whole life insurance about 10 years ago from a well known company that I think everybody probably knows where that came from. And we're in the process of trying to disentangle our finances and make sure that we're on track for a nice comfortable retirement in about 15 to 20 years.

WCI: Awesome. So what Baby Doctor didn't mention is she has 26 different projects going right now, 26 different academic projects. It's pretty amazing that she has time for finances at all given all this stuff going on in her life. A few important pieces of financial information I think that people need to understand for the conversation. She's in a Midwest town, so a moderate cost of living, with an annual gross income of around a quarter million dollars. They've done very well on the debt side, they don't have any debts except their mortgage, which is just under $400,000 on a property worth about $600,000.

WCI: And they've actually been good savers. We're just calculating up a savings rate before we hit the record button and it looks like it's over 20% toward retirement, so no doubt the savings is doing just fine, and I think most of our conversation today is going to be about what's going on with the investments and what a money can be directed toward. There's a pretty interesting combination of assets. We're looking at about a $750,000 in retirement accounts, mostly 403(b). There's some old Roth IRAs as well, about $62,000 there. And a great start on the 529 at a $100,000.

WCI: And then a taxable account that we're going to be talking about a lot today, which is a little over $150,000. Let's get into this a little bit. First of all, let's talk about your interaction with the advisor. How do you end up with this advisor in the first place? And how long have you been there?

Baby Doctor: We've been with them for about 10 years, but probably between 10 and 11. When I came to this faculty job, we were a young couple. Well, I guess we were 32, but in medicine that's when you get your first job, right? So we're a young couple with … We had been making resident salaries. We both came from middle class families with no understanding of how to handle money, but we certainly didn't want to do a bad job. One of my colleagues had a financial advisor that he worked with and who basically still gets his business today by just word of mouth recommendations.

Baby Doctor: My husband and I sat down with this guy who's really nice guy. I don't think he's really a shark, I just think our goals don't really align. But at the time we just wanted somebody to help us make sure that we were saving money and really doing a financial plan appropriately. To his credit, he did he made sure that I had a specialty disability insurance. Although yeah, it was a big money whole life policy, he made sure we had life insurance, and set us up with a local attorney so that we could have a will drawn up and do some of that stuff.

Baby Doctor: And then because we were so intimidated by the whole saving and investing thing, we basically just said, “We just want to give you money and then know that we can spend whatever is left and know that we're saving for retirement and for our kids' college.” And he had talked to us about, “How much do you want to save for college? Do you want to pay for state college, do you want to pay for graduate school, do you want to pay for private school?” And then a little bit of talk on risk tolerance to even way back then. But then we basically met with him and now his partner, who's coming on as part of the firm, just about once or twice a year.

Baby Doctor: And gotten a lot of confusing information involving a lot of morning star charts and things and walked away feeling like, “Well, at least we're saving money.” But I'm starting to feel like I prefer to understand it better and now that I'm learning about the fees, we were paying a 1% assets under management kind of arrangement, and I don't think I'm really getting the value for what I'm paying at this point.

WCI: Yeah. After looking through some of your stuff, I'm not quite sure you are either. Baby Doctor mentioned before we came online that she is actually meeting with this advisor to essentially fire him in a couple of days from the time we're recording this. So by the time you hear this, it sounds like this relationship isn't going to exist at all anyway. One thing that's probably worth pointing out, by the way, is that you don't actually have to meet with an advisor to fire them.

WCI: You ought to look at the contract and see what the contract requires. But what it typically requires is just that notice be given, and that can be as simple as sending an email. And then at that point, to move assets away from wherever they're currently being held. The easiest way is usually to contact the institution you want them to move toward, then have them pulled rather than pushed. And that usually works a lot better to actually move assets away. But we're going to talk a little bit about that as well. So it sounds like you were not super happy with the advisor now that you're starting to learn more about personal finance and investing and realizing that maybe some of the advice you were given wasn't so useful, so fiduciary, so appropriate for you.

WCI: Is that really what's driving you to move away from the advisor?

Baby Doctor: Yeah, and actually my first inkling was this whole life insurance thing. Within a couple of years of getting involved with them and buying this, I started to learn about how this is really not a good investment, and that was mostly through Dave Ramsey. Every time he said you're paying 100 times more for your insurance than you need to, and it's the payday lender of the middle class. I would just feel that fingernails down the chalkboard, think like, “Oh Gosh, yeah, we did that, we did that.”
Baby Doctor: And so I didn't have 100% faith in this operation anyway because I was like, “Well, they sold me this product that definitely wasn't in my best interest.” But then once we cashed that out actually to put a down payment on the house that we live in now a couple of years ago. And I felt like, “Well, everything was probably okay.” And I knew about the assets that … how they were getting paid, but then once I started to learn about expense ratios and look into the fact that they didn't seem to have us in any of the funds that were highly recommended, I thought, “I think I'm still getting taken,” which just annoyed me.

WCI: So the whole life insurance policies gone at this point. Correct?
Baby Doctor: Yep.

WCI: You didn't borrow against it. You actually cashed it out?

Baby Doctor: Surrendered. And replaced with term life.

WCI: Now, how much term life insurance are you currently carrying?

Baby Doctor: We are currently carrying a million dollars on myself and a million dollars on my husband. And then I think I also have like $200,000 through my job, but individual policies, it's a million on each of us. I think that's probably reasonable given the nest egg as well and where we're at in life as far as what would happen if one of us passed away.

WCI: Yeah. So basically if you died, your husband would have a couple of million dollars.

Baby Doctor: Right.

WCI: And what's the plan in the event that you did die? Is the plan for him to go back to work, or would the plan be for him to live on that the rest of his life?

Baby Doctor: I'm not sure he's actually trained as a physician but has not practiced in 15 years, and he doesn't necessarily, I don't think have a deep drive to work. But he's also a really frugal guy, so I think he would move into a much smaller paid for house and just live on the nest egg pretty easily.

WCI: Basically, it doesn't involve him going back to work, you're basically saying, “Okay, you're going to live on something like $80,000 year for the rest of your life.” We talked a little bit about your spending, that may be entirely doable even without him leaving the house given how much you guys are living on. That's kind of the conversation to have when you decide how much life insurance to buy. And here's the thing about it, usually, it's so cheap to buy more that if you're at all close to how much you think you need, just tag on another million.

WCI: It's just not that expensive of stuff, especially if you're only going to need it for another decade or so. A 10 year policy is not very expensive. And so tagging on another million there, just to be sure you have enough wouldn't be unreasonable to do. And you can get quotes for that at number of places online, even without giving your private information out. Someplace like term4sale.com, is probably the most frequently recommended and insuringincome.com also can give you quotes on that, of what a million would cost you.

WCI: But bottom line, it's pretty cheap if you're not quite sure you have enough. You can pick up a little bit more. Now, how about your disability insurance? How much are you carrying disability insurance?

Baby Doctor: That's one of the things that I actually do need to meet with the advisor about because they handled all of this. And so I'm sure there are like kickbacks involved and everything. I know it's with a good company, it's with Guardian Berkshire. It doesn't replace my entire income, it's specialty specific. So if I can't be a neonatologist, then it should cover it, but I need to actually get the policy documentation and read through it because as I recall, it's about a $7,000 a month benefit, which was a calculated at the time to combine with the the group disability coverage that I have through work to equal my salary at that point, which would have been substantially lower than what I'm making now. I think probably like 80,000 a year or less probably.

Baby Doctor: I'm probably under insured. But once again, if we think about how much would we need and what our spending is, I doubt it's going to end up making sense to get any more at this point.

WCI: Now, do you still have a policy through work?

Baby Doctor: There is.

WCI: How much is the face or the benefit on that, the monthly benefit?

Baby Doctor: That amount, I think it's 50% of my salary.

WCI: So it's quite substantial. It's bigger than the individual policy you have. So between the two, you likely do have adequate disability coverage. There's no harm in meeting with a independent insurance agent just to review it all and go over it all and make sure you're comfortable with that. But just ballpark figures, you've got that covered, I think. The goal is to have enough not only to live the way you're living in want to live, but also enough to continue to save for retirement from those benefits.

WCI: Now, the one coming from your employer is likely going to be taxable income to you in the event that ended up paying out due to your disability, but the individual policy is likely not going to be taxable income. So that'd be $7,000 tax free, plus basically 50% of your salary in taxable income. That seems like plenty to me. You might want a little more term life, but I think you're good from the disability perspective. So we talked a little bit about the advisor, you're moving on there. We talked about the insurance issues. You're doing pretty well there, it sounds like.

WCI: So let's talk about, this sounds like the biggest question you had coming into this, which is your taxable investing account. Now, a lot of your money is invested in the retirement accounts that come through your employer. Actually, it sounds like you're putting in about $54,000 a year into those retirement accounts through your employer. But you also put about $1,500 a month into a taxable investing account, and there's about $150,000 in there now. Can you tell us about what that is invested in?

Baby Doctor: And I do need to change the allocations in my employer account too because the advisors have been doing that. So they have me in funds with higher expense ratios, but that I know I can do with no tax implications, so that doesn't scare me. I've identified the funds and I'm going to do that. But I have an account with a brokerage that I've already had the advisor removed from so I can make changes on it now, and it's a combination of cash, so there's $5,000 in cash, and then I have actually three individual equities that total about 20 grand right now and that the cost basis was about 18.

Baby Doctor: The thing tells me that I've got $4,700 in gain on that. And then there are also a bunch of mutual funds which are a variety of-
WCI: Let's go through them. Let's just list them out.

Baby Doctor: Oh, okay. Of the mutual funds?

WCI: Sure. Well, what were the individual stocks to start, with just out of curiosity sake?

Baby Doctor: One is ABBV Inc, which I don't even know what that is. I should probably look that up. Which is ABBV is the ticker. Then some Disney, which I guess I don't mind.

WCI: Everybody loves Disney.

Baby Doctor: I don't mind going to Disney. I Love Disney. And then SLB, which is Schlumberger limited. Don't even know what that is either, but I own $5,000 worth of it.

WCI: What are the mutual funds?

Baby Doctor: Mutual funds are a bunch of first trust funds particularly so there is a US equity one, FPX. They are all ETFs. FV which is First Trust Dorsey Wright Focus Five, whatever that means. There's a, looks like a real estate thing here, RFDI First Trust RiverFront Dynamic Developed International, a value dividend index FVD, and then three INVESCO funds. Diversified Dividend, which is LCEYX, High Yield Municipal, ACTDX, and Equally Weighted SNP, which is VADDX. So a variety of different mutual funds and EDFs. That's the majority of the account, that's $130,000 value right now with $20,000 of gain.

WCI: $20,000 of gains on the mutual funds?

Baby Doctor: Yep.

WCI: Let's start at the beginning. First of all, the cash is very easy, right? No brainer there. You can just use that to invest in whatever your investment plan calls for you to invest in. There's no tax consequences there. Then we get to these three individual stocks. Yes, you have some gains there, but it's not all that much and you got a four or $5,000 worth of gains. So if you sell that in your tax bracket, I don't know, you might even be able to get down pretty close to not having to pay capital gains taxes on it, but I think you will owe a 15% capital gains taxes on those gains.

WCI: So 15% times $5,000 is what it's going to cost you to cash out of those individual stocks. Now, it always hurts to pay capital gains taxes, so there's a few alternatives to pain them and using that money to invest in what you wish you would have invested in the first place. The first alternative is donating to charity. Do you donate large amounts of money to charity every year by chance?

Baby Doctor: Not Large, maybe like 3000 bucks or something total between a few different places. But that's all.

WCI: So if it was all going to one place, that might be an option to donate shares, appreciated shares instead of cash. And basically what that does is, it flushes the capital gains out of your portfolio. Not only do you get the whole charitable deduction out of it, but neither you nor the charity pays the capital gains taxes. So that's one option. The second option is hold the thing until you die and never sell it, and that basically gives your kids your heirs a step up in basis on that. And so it's like they bought it on the day of your death, and again then nobody has to pay the capital gains taxes on it.

WCI: Then of course the final option is to just sell it, bite the bullet, pay the taxes and invest in what you wish you would have invested in. And I think for a gain that's only four or $5,000, that's probably what I would end up doing. I would probably cash that out, pay the taxes, count it as, Dave Ramsey likes to put it, stupid tax, and move into investments that I'd rather own. If you decide not to do that, you can build your portfolio around the mutual funds and around the stocks that are these legacy holdings, and just say, “Well, if I've got … ” For example, one of those mutual funds was basically an S&P 500 fund. I think it's an S&P 100 fund, is technically what it is.

WCI: And if you really didn't want to pay the taxes on that, you could just consider that to be part of your total stock market allocation in your portfolio and just hold onto it. You wouldn't reinvest the dividends. You'd never put any more money into it, but you would continue to just hold it and basically for your entire career and into retirement. So that's always an option to just build the portfolio around those legacy holdings if you don't want to pay the taxes.

WCI: But honestly, we're talking about a total of $25,000 in gains. So you're really only going to be paying $4,000 in taxes. And so I looked pretty closely at just biting the bullet, paying the taxes, and starting over.

Baby Doctor: A couple of these as I'm looking at them, actually have loss.

WCI: Those are great.

Baby Doctor: There is one that has a 9,200$ and has a $300 loss so that I can sell and get that 9,200 bucks and tax free, and just invest that.

WCI: It's better than tax free because not only do you get the $9,200 tax free, the $300 offsets the capital gains from somewhere else. And so yeah, anything with a loss is a no brainer to sell today basically. And add it to the cash holdings that you have there, anything with a minimal gain is a no brainer to sell today. It's only the things with large gains, and usually this is stuff you've held for decades where, you paid $10 a share for it and now it's worth $80 a share and you go, “Aha, maybe I can build my portfolio around this one.”

WCI: But it sounds like from the description of what you're holding there, this isn't stuff you really want to hold long term. Over the long run, I think you're going to come out better from having better funds with lower expenses even though it's going to cost you some taxes upfront now. For example, this first trust ETF, the FPX, and this is basically an index fund, but it's an index fund with an expense ratio of 0.59%. If you go to Vanguard and buy a total stock market index fund, the expense ratio is 0.04%

WCI: So you're basically paying 15 times more in expenses for this fund than when you would choose at this point, now that your level of knowledge about investments is a little bit higher. And so I think you probably won't regret just cashing these out and biting the bullet and paying the taxes and moving on. That's probably what I would do. If there's any that have been bought in the last 12 months that you have a big gain on, you might want to wait until it hits 12 months. That'll help you reduce the capital gains taxes from short term capital gains, which is essentially your regular income tax bracket to long term capital gains, which for you, is likely going to be about 15%.

Baby Doctor: That sounds a lot less daunting.

WCI: Yeah, it's not so painful. You're going to end up paying, it sounds like four or $5,000 in taxes, and then you get to start over and you basically got $150,000 in cash to allocate into your plan. Now, you mentioned that you'd looked at your 401(k) and other employer provided accounts and you had identified some funds there that you liked. What funds are in there that you thought were attractive?

Baby Doctor: There are some of the Vanguard funds, not the biggest ones, but there are some institutional shares, classes in the S&P 500 fund that Vanguard has, not the VASTX, all the bloggers write about. But then, TIAA-CREF actually has some reasonable low expense ratio, targeted retirement fund kind of things that are just simple total stock index and a bond index. And I'm going to meet with the guy that is our free service TIAA, provided by my employer to go to learn a little bit more about some of those different funds. But it looks it's going to be pretty easy to switch because that account also has, it's got real estate stuff in it, it's got cash, it's got these like 1% expense ratio, real estate fund in it.

Baby Doctor: And then a bunch of American funds, which my advisor must get a kickback from them because we're in those with the old Roth IRA to which I'm just going to get pulled into a different institution, basically just to open Vanguard account.

WCI: That's relatively easy to liquidate those and move to Vanguard. And yes, your advisor did get a kickback on those. Those are generally considered loaded mutual funds, and probably 5.75% of everything you invested there went to the advisor. So that's just the way it works. And unfortunately, most of us have made this mistake. I made this mistake, the first funds that went into my Roth IRA were loaded mutual funds sold to me essentially by a commission salesman masquerading as a financial advisor. And the truth is, most doctors have made mistakes like the ones you've made.

WCI: I owned a whole life insurance policy, I bought commissioned mutual funds, I didn't have really any sort of comprehensive financial plan when I first started out. And some of us corrected things sooner than others, some did it in our 30s, some in 40s, some in 50s and some still haven't done it. And so it just depends, I think when people become a little more financially interested and knowledgeable about it. Certainly, that institutional index fund that you're talking about would be a major building block in your portfolio. Just because it's an S&P 500 fund instead of a total stock market index fund, yes, I like total stock market a little bit better. It's got more stocks in it, but the truth is, the correlation between the two is like point 0.99.

WCI: It's basically the same fund, and so that is probably going to end up being a major building block in your portfolio. But the difficulty I think you're running into is one that a lot of people run into, where they go, “What funds should I pick?” And the truth of the matter is they're skipping a few steps in the financial planning process. The first step is to set your goals, which you have, you want to retire in 10 or 15 years and you know about what you're spending, so you'll want to replace that amount of spending.

WCI: But what you don't have, what you don't seem to have done is step two, which is an asset allocation, which is the percentages of your retirement money that you're going to put into each type of asset class or type of investments such as US stocks, international stocks, real estate bonds, etc. Have you given any thought at all to what sort of asset allocation you wanted to have?

Baby Doctor: No, I've just started to read some stuff about that. I read the Simple Path to Wealth the other weekend. And so, I sort of know it's something you need to do, I just don't really know how people make those determinations. I assume it's relatively personal, like there's no one right answer or it would have been spelled out for me somewhere.

WCI: Yeah. The difficult thing about it is, it can be personal, but the key is you want something that you can stick with in the long run. And the problem with doing it, is nobody knows what the best asset allocation is going to be going forward. And so I wrote a post one's called 150 Portfolios Better Than Yours, which is a little bit of a tongue in cheek title, but basically, it demonstrates a 150 reasonable portfolios. And that's your goal with an asset allocation, you want something reasonable. And sometimes, until you've seen a whole bunch of portfolios, you're not sure what reasonable looks like. So a few guidelines that would help with reasonable.

WCI: First of all, most of us have significant need to take risks with our portfolios, we need them to grow and we need them to grow faster than inflation. So that means the majority of the portfolio is going to need to be in something that is likely to have returns higher than inflation, which historically, have been around 3%. So that argues for the majority of the portfolio being in things like stocks and real estate. And so when you look at the total percentages, the most important percentages as far as how your portfolio is going to perform, is basically your risky assets like stocks and real estate to your less risky assets like bonds.

WCI: And so there's been guidelines given out for that over the years, they used to have your age in bonds or age minus 20 in bonds. There's lots of guidelines out there, but they're just rules of thumb. The reality is, you basically want as much stock in the portfolio as you can tolerate in a nasty bear market, like 2008, because you're likely to lose about half of it. And if you could tolerate losing 30% of your portfolio without panicking and selling everything at a low, then it tells you that you can have about 60% of your portfolio in stocks.
WCI: If you think you can lose about 50% of your portfolio without panicking, maybe you can get closer to 100% in stocks. But for everybody, that's a little bit different and most of us don't know how we're going to react in a nasty bear market until we pass through one. Now, I don't know how much attention you were paying to your investments in 2008. Was it something that was just out of sight, out of mind? Or do you recall your reaction to losing money then at all?

Baby Doctor: I actually found it was interesting because it was a couple of years into having … I was five years or so into my attending salary, and so we had the retirement account, had like what looked like real money in it. And then we didn't have the taxable account yet though, so I don't know, but I remember our advisors saying to us during that time that they wished that they had like 100 of us. And the other thing that he has said to me a couple times is, you would do fine with $55,000 a year. You would still save the same, proportionally of course. But I don't even think about all that money as my money, I always think of like the money that's my money is the money that's in my checking account.

Baby Doctor: I remember that it went down like 35% or something like that, and some of my older colleagues who are the age I am now, or a little bit older, we're freaking out and some of them sold everything and put it into cash. And I like to think that I would just be like, “Well I guess I'll just work longer, if this is what's going to happen.” Because I have a lot of faith in my ability to earn an income and then the investment money just doesn't really even seem like it's real at this point, but maybe it will seem a lot more real the next time that this happens.

WCI: It likely will for a few reasons. One, you're a little closer to retirement, two, you no longer have the advisor. I think back then you were thinking, “Oh, I got a money guy. He's taking care of that. I'm not going to pay attention to it.” Now, you know that it's your baby and you've got to take care of it. So it might be a little bit harder next time because of those reasons. Benjamin Graham suggested that nobody ever have more than 75% of their portfolio in stock or less than 25% of their portfolio in stock. And I think that's a pretty good general guideline.

WCI: But I think the next step you've got is to really decide on an asset allocation. And I wouldn't panic about it too much because the truth is it doesn't matter that much. The investor matters far more than the asset mix, and the main thing is that you can stay the course with whatever you choose through thick and thin. And so I would pick something relatively simple, but something that makes sense to you and write down the reasons for adding each asset class in there and why you put that percentage in and then go with it.

WCI: And then every time you're wondering why you did that, you can refer back to your notes and see, “Oh yes, I decided I was going to put more in US stocks, international stocks because I plan to spend dollars in retirement,” for instance. And so maybe you decided to put two thirds of your stocks into us stocks and one third into international stocks, for instance. And maybe add some real estate in there, you just had to put 10% of the portfolio into real estate. And the goal for that was to still have high returns, but have low correlation with the rest of the portfolio.

WCI: And then when you come to a time when real estate's done crummy for three or four years in a row, you can look back and go, “Oh yeah, I wanted something that wasn't correlated with stocks and now this is what happens with diversification. Everything doesn't go up all at once.” But when you have one of those periods of time where stocks aren't doing great and real estate is doing great, you'll be glad you own it. And so I think just picking something reasonable and maybe reasonable is 40% in US stocks, 20% in international stocks, 30% in bonds and 10% in real estate.

WCI: That's a four fund portfolio. It's a very reasonable, nobody's going to argue, “That's a crazy portfolio.” But whether that's the ideal one for you or not, only you can really decide. But let's assume that you decide on something like that. Now, when you go to your 401(k), you look at what's in there, you see that there's an international fund and you see that there's a bond fund there and you see this institutional index fund, and you say, “Well, I think we're going to use this to hold a lot of our US stocks because we have this great fund in our 401(k).” And so you decide to use that fund for the majority of your US stocks for instance.

WCI: And then when you go to your Roth IRA you say, “Well, I've got some more options in my Roth IRA here at Vanguard, and maybe this is where I'll put my real estate fund and maybe this is where I'll put some of my international stocks.” For instance. And then when you go to your taxable account, you also have lots and lots of choices, you can invest in basically anything in the taxable account. If you choose to put bonds in there, you can do that using municipal bonds which are tax free. They're typically the ones that are high income professional, like a doctor would use if they're going to hold their bonds in taxable.

WCI: And so you can get something like the Vanguard Intermediate, tax exempt bond fund, and that would give you an option to have bonds there that's a very easy to buy, very low cost and provides tax free income. You can also use other tax efficient funds like the Total Stock Market Index Fund or the Total International Stock Market Index Fund in that taxable account. Those are common holdings there for people who are building their own portfolios, just because they're very tax efficient, don't kick out a lot of income that's going to require a high tax payments each year as your portfolio continues to grow.

WCI: Does that make sense to start with the asset allocation and then work with what your available accounts are in order to pick which funds you're going to be invested in in each account.

Baby Doctor: Absolutely.

WCI: I think that's probably the easier step of the two. Deciding which asset allocation to use, I think is a little bit harder than implementing it once you have it. A lot of people have trouble though across the various accounts, you've got a couple of different accounts with your employer, your Roth IRA, your husband's Roth IRA and the taxable account, you're balancing five accounts already there. I think in our portfolio we're balancing eight or nine different accounts. Sometimes it can get confusing, you actually have to write it down on a spreadsheet to figure out what's going where, and it just seems overwhelming if you've never done it.

WCI: But after you've done it once or twice, you're like, “Oh, this is no big deal. This is just math. This is fourth grade math I'm using to decide how much to put into each account.” But without the underlying plan, it's just completely overwhelming if you don't know what percentage is you're trying to hit with the total portfolio, it can be a little bit tricky. I guess that's what I would do with as far as that goes. Now, let's talk about the 529. So you've got two kids, one of which may be starting college as soon as what, four years from now?
Baby Doctor: Yeah, he's a freshman. So four more years. Yep.

WCI: So where is that held?

Baby Doctor: That is held in our states 529 Plan and I just looked at all the asset allocation for that and that's actually all … It's been in Vanguard funds all along without my knowing and it was in an age based fund that then adjusted into more bonds over time. About a month ago, my husband and I went in together actually and we made them both a little bit more aggressive than they have been, because my son's was all the way down to like I think 60 to 70% bonds as school gets closer, but as you know way better than I do, that's one big pot of money that can be used because it can be allocated differently between the … reassigned to different beneficiaries as we need to use it.

Baby Doctor: We actually put them both into, I think it's like 70% stock, basically total stock market index and 30% bond index funds and it's all Vanguard products. So it looks like it's good, it has been a fairly conservative performer over the years because there are higher bond allocation in there, but we have enough money to send the one kid for sure already in hand and then I'm planning to cashflow it as we go as well.

WCI: Right. And I don't think we mentioned this earlier in the program, but you're putting $750 a month into those 529. What's not in there yet is probably going to be in there just from your good job you've been doing saving. That's really great with the 529s, they try to make it easy to do the right thing with these one stop shopping choices, these age based funds for instance. And when the 529 provider has gone to the trouble to find some low cost Vanguard funds and they've put down together these nice mixes of them so that you can just pick one even without knowing much about investing and still end up with a good outcome, that just brings a smile to my face, I like seeing 401(k) is doing that as well.

WCI: Just because I think those sorts of solutions or the answer to the financial illiteracy we see in America because then people don't have to become an expert in investing in order to choose their investments. They can just do the default option. It sounds like you've been served pretty well there. I agree with you though, I think it's worth investing aggressively in a 529 for a few reasons. One, it's not as critical, I think, as retirement is. In that, if there's a shortfall in the money, there's other things you can do with it. For example, you can choose a different school, you can go to a less expensive school is one option.

WCI: The student can work. The parents can help cashflow it. You can get scholarships. There's just so many other options for paying for school that the consequences are sure for all are much lesser than they are for a retirement. You can get a loan for college, but you're not going to get a loan for retirement. And so I think being aggressive there is probably a good move. I think you'll be glad you did that, but obviously, that's going to depend on what the market does over the next few years. But even if the market crashes when your first child is 17, you could leave that money in the 529 until his senior year, and pull it out of that point to pay for college after the market's recovered.

WCI: you could also, if the market's taken awhile to recover, you could leave that money to the sibling and use the cash flow that you're using now to fund the 529 for the younger person to pay for school. And so, there's lots of options and lots of flexibility there that I think allows people to really be more aggressive with their 529s, even more so than they can be with retirement, which might not come for a decade after paying for college. Does that make sense at all?

Baby Doctor: Yeah, absolutely. Yeah, I was really encouraged because all the stuff with the advisor that I hadn't been paying attention to and when I looked at it, it was way more complicated and looked like there had been some big mistakes. The 529, which they've never had their hands on. when I looked at those I was like, “Oh, that's actually just fine.”
WCI: Isn't that terrible that you've been paying 1% of assets under management and getting worse advice than what you would have done if you would have done automatically?
Baby Doctor: Yup.

WCI: Yeah, it's really a shame sometimes. At any rate, our time is getting short here. I wanted to make sure if you had any other questions or things you wanted to address that we did so.

Baby Doctor: One thing that I wanted to point out to other people is that, I did have an advantage that I think a lot of physicians now don't necessarily have, although others in my position can take advantage of. I had $130,000 in medical school loans, which is low. I know it right now, but I finished medical school in 1998. So at that point, it was probably higher than the average actually. And I was able to get 90% of that debt forgiven through the National Institutes of health loan repayment program over a six year period when I was a junior faculty member.

Baby Doctor: So people that are planning on staying in academics and doing research as part of their jobs, those, those NIH awards are still funded at high levels, like 30%. And there is no other NIH pay line that is that high. I encourage other people who may qualify that to do that because without that, I would've had to have paid all that money back, which I was clearly willing to do by borrowing it, but it was one benefit that those of us in academic medicine can take advantage of if you're not going to do a public service loan forgiveness, which didn't exist for me, so.

WCI: Yeah. And as I understand that, the two can be combined as well.

Baby Doctor: I believe so.

WCI: You can use both. So that's a great tip. Well, I congratulate you on your success. Here you are, mid career, you're millionaires. You're doing great with your savings. You're now taking control of your finances, you're moving them into excellent investments. And if nothing else, you're going to be saving the advisory fee. So congratulations on … We've talked a lot about some of the mistakes and things you've done wrong here, nitpicking here and there, but by and large, you've done wonderfully. You're doing better than many, many, many of your peers, so congratulations on that. And I wish you continued success both in your practice and in your finances.

Baby Doctor: Thanks a lot, Jim.

WCI: Thank you for being on the show.

WCI: That was great. It was fun to be able to help somebody. And hopefully, help a lot of you that are in similar situations. If you're a regular listener and would like to be on the podcast today, like Baby Doctor was, to talk about your finances, shoot an email to [email protected] to let her know. Also, if you just have a quick question you want answered on the podcast, don't forget you can do that at speakpipe.com/WhiteCoatInvestor.

WCI: This episode was sponsored by Bob Bhayani at drdisabilityquotes.com. They are a truly independent provider of disability insurance planning solutions for the medical community nationwide. Bob Specializes in working with residents and fellows early in their careers to set up sound, financial and insurance strategies. Contact Bob today by email at [email protected], or by calling 973-771-9100. Head up, shoulders back, you've got this. 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 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.