By Dr. James M. Dahle, WCI Founder
It is important to distinguish underlying principles from the minutiae of investing. I am often asked my opinion on a topic or an investment, and I readily share those opinions. However, it is easy for a casual reader or listener to mistake the trees for the forest. Today, I'm going to tell you about the forest. These are the hills I'm willing to die on. These are the . . .
12 Points of The White Coat Investor Philosophy
These are all pretty hard to argue against, but if you want to, know that I'm going to vehemently disagree with you and I'll probably win the argument.
#1 Financial Planning Makes You Happier
I am 100% convinced that financially secure doctors are better partners, parents, and physicians. By doing real financial planning, you will have less stress, less burnout, less divorce, and less suicide. You will be happier. You will provide better patient care. Just do it.
#2 Wealth Comes Mostly from Making a Lot and Saving a Lot
Wealth comes mostly from making a lot of money and saving a big chunk of it—not from your investing prowess. When I started The White Coat Investor blog, I thought I'd be writing all about investing. I thought I'd spend a lot of time on estate planning and asset protection. But what really makes the difference is good personal finance habits. Your goal should be to be a good earner and saver and an adequate investor. If you can do that, you will become wealthy and meet all of your financial goals.
It turns out that frugality matters. Try to resist living like a doctor. Save 20% of your gross income and grow into your income as slowly as you can. Make as much money as you can, especially early in your career. Negotiate your contracts well; work hard; and, if you're interested, do a side hustle.
#3 You Need a Reasonable Written Investing Plan
There are many roads to Dublin. I am not going to prescribe an asset allocation to you that you must follow to be successful. I've seen lots of books that have been written like that, giving you the reasons behind some particular asset allocation plan. The truth is that any reasonable plan will do. There is no perfect portfolio, and if there was, you couldn't know what it was in advance. It turns out that the investor matters more than the investment. So, make a detailed investing plan and write it down. If you can't write it down, take our Fire Your Financial Advisor online course and/or hire help until you can. Then, implement it and follow it. As long as it's a reasonable plan and it's adequately funded, it will lead you to reach your investing goals.
#4 Index Funds Are the Best Foundation for a Portfolio
Buying and holding a fixed asset allocation of low-cost, broadly diversified index mutual funds is the best foundation for a portfolio. This method of investing is basically free. There is barely any monetary cost, time, or effort required. Expense ratios are now under 10 basis points a year. That's basically free. Once you put your assets into there, it takes almost no time and effort to maintain them. You put your contributions in each month and perhaps rebalance once a year. This sort of portfolio can literally be managed in as little as an hour per year. It's a great foundation for an investing plan.
This approach allows you to focus your efforts where they matter most (see #2 above). Since nobody actually knows the future, there's no sense in worrying about it or listening to those who are trying to predict it. Avoid market timing and individual stock picking. It is extremely hard to do either successfully long term, especially after-tax and after accounting for the value of your time and additional worry.
Maybe you want to get a little fancy here and there. Fine. Maybe you want to build a real estate empire on the side. That's a viable pathway to wealth, and done properly, it can help you reach financial independence earlier. Go for it. If you want to speculate on precious metals or crypto assets or commodities, limit that to a single-digit percentage of your portfolio.
But the foundation should be index funds. It's better for most of you, and it's certainly much easier for your heirs. Index funds don't buy ads at The White Coat Investor. Don't get me wrong. I'm very happy with the performance of our private real estate investments in 2022, but 85% of our portfolio is still in index funds and similar investments. You should have a very good reason to invest in anything that is not an index fund.
#5 Insure Well But Only Against Financial Catastrophes
I am not anti-insurance. I think you should insure well but only against those things that really are financial catastrophes. What are the financial catastrophes?
- Disability, if you are depending on your income.
- Death, if anyone else depends on your income.
- Health. Illnesses and injuries can get very expensive very quickly, especially when they also keep you from working.
- Liability, both professional and personal.
- Property loss. Most people can't afford to replace their house if it burns down, so they should insure it.
If anybody else is depending on your income, you need life insurance, but you probably don't need it for your entire life. One of the main problems with whole life insurance is you're buying insurance against something that isn't a financial catastrophe (dying late in life). Even if you die at 90, the policy is going to pay out. That is why a typical whole life policy costs 8-10 times as much as a term life policy.
Remember that insurance is, on average, a bad deal. Think about it. Insurance companies do not pay out every dollar they take in in premiums. They cannot do so and stay in business. They have expenses and want to make a profit. So, on average, an insurance purchaser is losing money. Don't buy more than you need.
#6 Live Like a Resident for 2-5 Years Out of Residency
Whether you're going for public service loan forgiveness, or whatever else is happening, it is so much easier not to grow into your income than it is to cut back once you have grown into your income.
That period of time—right when you come out of residency and you're all fired up about your new career and excited to work hard and you're used to working hard and not spending much—is the time to become wealthy. Earn like an attending and spend like a resident. You can take the difference between those two, which is likely a six-figure amount, and pay off your student loans very quickly, catch up to your college peers with retirement savings, and maybe even save up a down payment for your dream home. It's really a great way to become very wealthy very quickly. Nearly every doctor will want options to cut back in some way by mid-career. The best way to ensure you have those options is to live like a resident in your early career.
#7 Spend Intentionally
I don't really care what you value. I don't care if it's a wakeboat, a Tesla, fancy vacations to Europe, $10,000 handbags, Michelin three-star restaurants, or a nice house. I don't care if you're retiring at 40 or putting your kids in private school. I do care that you're spending your money on what you care about most. When you have both financial literacy and financial discipline, you will spend intentionally by being generally frugal and selectively extravagant. You can have anything you want but not everything you want. Choose wisely.
#8 Get Good Advice at a Fair Price
Get good advice at a fair price or learn how to be your own financial planner and investment manager. That is certainly a doable task for somebody with the intellect of a physician, but you have to be interested. If you're interested, you will gain the knowledge required to do this task, and you will gain the discipline required to do it well. If you're not interested enough to consider this at least a minor hobby, you should hire a financial advisor. Get one that's offering good advice at a fair price. Good advice means they're telling you the same sorts of things that you read on this blog and with other reliable sources of investing information. A fair price is a four-figure amount per year. If you're paying more than $10,000 a year, we can almost surely find you an advisor that will give you as good or better advice for less money. Do the math on AUM fees. If you are a millionaire and you're paying 1% a year, you're already paying more than $10,000 a year. Good financial advice and service are expensive, but not that expensive.
#9 Understand and Use Your Tax-Advantaged Accounts
Each of us has tax-advantaged accounts available to us, as long as we have earned income. These include employer-provided accounts like 401(k)s, 403(b)s, 457(b)s, and 401(a)s. They include self-employed accounts like individual 401(k)s and personal cash balance plans. They also include personal accounts like Roth IRAs, HSAs, and 529s. Get your plan documents and read them. You have a second job as a pension fund manager, and you need to actually do something about that job despite the fact that you weren't given any training for it in medical school or residency.
These are all tax-advantaged accounts. They all have different contribution limits and different rules. You need to understand how they work and which ones are available to you—and you need to use them. They will help your money grow faster. They will protect your assets from your creditors and make your estate planning easier. They are the single greatest tax break available to you as a practicing physician.
#10 Pay Cash and Avoid Debt
Doctors generally have enough income that they can waste quite a bit of it and make quite a few financial mistakes and still be OK. However, the principles are the same whether you make $50,000 or $500,000. Here's the principle. It's so simple that even my young kids understand it.
“Would you rather earn interest or pay interest?”
That's right. You'd rather earn it. Get in the habit of not buying stuff that you can't afford. How do you know if you can afford it? If you can pay cash for it, you can afford it. Yes, I understand the math behind borrowing at a low rate and hopefully earning at a higher rate. If you're in one of those situations and you're convinced that you're actually investing the difference, go right ahead. But most of the time, we're human. We borrow at a low rate, we forget to invest at the higher rate, we spend it on something we want, and we end up poorer because of it. Don't do that.
That same drive that causes wealthy people to invest also drives them to pay off debt. Make enough and save enough that you can do both while still living a life where you do not feel deprived.
#11 Minimize Your Taxes and Know the Tax Code
While the tax code can be incredibly complicated, the basics are easily understood. Know the difference between a deduction and a credit. Know an above-the-line vs. a below-the-line or itemized deduction. Know where the various schedules and forms feed into the 1040. There are smaller or larger changes every year, but it's going to be mostly the same system every year of your life. Understand how it works today, and you'll find it much easier to understand the changes as they occur over the years.
I'm always amazed to talk to people who really don't understand how the tax code works, and they just parrot things they hear in the media and assume that they're actually true when they aren't. It's important to understand the tax code. You can't win this game without knowing the rules. Unless your favorite charity is the US government, you would do well to remember what Judge Learned Hand said:
“Anyone may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes.”
#12 Asset Protection Is Easy and Matters Less Than You Think
Too many doctors are terribly afraid of losing everything to a malpractice lawsuit. It is actually incredibly rare for a doctor to lose any personal money in a lawsuit. For the most part in a malpractice lawsuit, you're serving as a defense witness for an insurance company.
That doesn't excuse you from doing the simple, effective asset protection stuff. Buy professional and personal (umbrella) liability insurance. Title your property properly (tenants by the entirety). Max out your retirement accounts. Understand your state asset protection laws. Put your rental properties into LLCs. When it makes sense, form LLCs and corporations. Once you're wealthy, use sensible irrevocable trusts for estate planning purposes and reap the asset protection benefits, too. Most importantly, remember that your biggest asset protection risk is lying in that bed next to you each night. Given divorce rates ranging from 10% (two-doc couples) to 50% (general population), date night is the best asset protection technique.
If you want my opinion on a niche personal finance or investing topic, I'll give it to you. But these timeless principles are the hills I'm willing to die on and the ones that this blog will continue to promote.
What do you think? What are the most important principles in personal finance and investing? Comment below!