The Bogle Center is pleased to present the nineteenth episode of Bogleheads® Live. Our guest for our episode is James M. Dahle, MD, FACEP, FAAEM is a practicing emergency physician and the founder of The White Coat Investor. After multiple run-ins with unscrupulous financial professionals early in his career, he embarked on his own self-study process to become financially literate. After seeing the benefits of financial literacy in his own life, he was inspired to start The White Coat Investor to assist his colleagues.
Jon Luskin: Bogleheads® Live is a weekly Twitter space where the Bogleheads® community ask questions to financial experts live. You can ask your questions by joining us live on Twitter each week. Get the dates and times for the next Bogleheads® Live by following the John C. Bogle Center for Financial Literacy on Twitter. That's @bogleheads.
For those that can't make the live events, episodes are recorded and turned into a podcast. This is that podcast.
Thank you for joining us for the 20th Bogleheads® Live. My name is Jon Luskin, and I am your host. Our guest today is Dr. Jim Dahle.
Let's start by talking about the Bogleheads®, a community of investors who believe in keeping it simple, following a small number of tried-and-true investing principles.
This episode of Bogleheads® Live, as well as all episodes, are brought to you by the John C. Bogle Center for Financial Literacy, a 501(c)(3) nonprofit organization dedicated to helping people make better financial decisions. Visit our newly redesigned website at boglecenter.net to find valuable information and to make a tax-deductible donation.
The annual Bogleheads® conference is on October 12th through 14th in the Chicago area. Speakers include previous guests of the Bogleheads® Live series, including Rick Ferri, host of the Bogleheads® on Investment podcast; Christine Benz, director of personal finance at Morningstar; Mike Piper of the Oblivious Investor; today's guest, Dr. Jim Dahle, aka The White Coat Investor; yours truly; and much more.
There are a few seats remaining. You can register at boglecenter.net/2022conference.
On next week's Bogleheads® Live, we'll have Ron Lieber, author of The Price You Pay for College. The week after that we'll have Dan Otter speaking about fees in 403(b)s.
Before we get started on today's show, a disclaimer: this is for informational and entertainment purposes only and should not be relied upon as a basis for investment, tax, or other financial planning decisions. Thank you to everyone who submitted questions ahead of time. We may not have time to get to all of them.
Let's get started on today's show with Dr. Jim Dahle. James M Dahle, M.D. is a practicing emergency physician and founder of The White Coat Investor. After multiple run-ins with unscrupulous financial professionals early in his career, he embarked on his own self-study process to become financially literate.
After seeing the benefits of financial literacy in his own life, he was inspired to start The White Coat Investor to assist his colleagues. Dr. Jim, thank you for joining us today on Bogleheads® Live.
Let's jump to our first audience question.
David: Dr. Jim, thank you so much for your time today. I have been following your efforts for a number of years. I do recommend your teachings, your website, your podcasts, to any physician friends that I have. So, thank you for your efforts over the years.
I've been studying long-term care insurance and trying to get my head around how to think about funding healthcare costs: stuff that's not covered through Medicare or other insurance products that someone might have.
I'm just wondering: when you talk to your base of professionals—assuming a certain amount of wealth, income, etc.—how do you recommend thinking about long-term care? Are you more in the camp that the long-term care insurance, it's basically a broken product—they haven't figured out how to price it correctly and it's better to self-fund? Or do you think it's worthwhile thinking about long-term care insurance?
I know it's a very difficult question to answer and it's highly dependent on an individual’s circumstances, but just broadly speaking, how do you as a physician and given your knowledge of the healthcare system and insurance companies, how would you go about thinking about this issue of long-term care? Thank you so much.
Jim Dahle: David, thank you for your kind words. It's wonderful to be here with all of you. Long-term care insurance is one of my least favorite products and I hope that my entire audience never has to purchase it. The problem with long-term care insurance, as you astutely pointed out, is that it's really not a fully grown product yet.
Companies keep going out of business, they keep having to raise prices, and right when somebody needs it, all of a sudden it's not there for them. Ideally, you can self-insure for all of your long-term care needs, but that does require a certain level of wealth. I think if you're a multimillionaire, though, I think you can probably self-insure this.
If you look at the average nursing home stay, for those who do go into a nursing home, it's less than five years. And if you look at the average nursing home cost, it's in the eighty to a hundred, hundred and ten thousand dollar a year range. And so, if you do the math there, that's maybe half a million dollars. And the point of long-term care insurance is to protect your spouse: for you not to spend everything on long-term care and leave them impoverished after you go.
So, if you've got an extra half million dollars or so, this is one of those things that you can probably afford to self-insure. And so, I would hope that most of my audience will be able to get to that level of wealth, which is probably in the $2 to $3 million range as far as the retirement nest egg goes, where they can safely ignore long-term care insurance.
On the other hand, if you're retiring on $800,000, I think you need to look at it pretty carefully. That's a really serious risk to your retirement and probably something that you have to buy despite the problems with long-term care.
On the other hand, if you're like a large percentage of Americans, and you just don't have much in assets, well, your plan is probably going to be to spend down to Medicaid if you end up in a nursing home, and probably also don't have a need for long-term care insurance.
So, it's just those people in the middle, in that donut hole, that really need to consider buying product, and I would hope most high-income professionals can get a level of assets above and beyond that.
Jon Luskin: Dr. Jim, I completely agree with you. Certainly, one can self-fund once they've gotten a few million bucks; three to four million is a common rule, two to three million also certainly reasonable.
If your assets are limited, purchasing that long-term insurance policy can help you manage your risk.
Dr. Jim, as a vault question, what are some other considerations with respect to what folks should look for when purchasing a policy for those who do need to purchase it?
Jim Dahle: I think the most important aspect is looking at the total amount of benefit that you're gonna get on a daily basis and actually looking around in your area at what the services you think you might use cost.
Because a lot of these policies are limited on how much they pay out. Maybe they only pay out $100 a day or $200 a day. Well, if you go around, and you're in a high cost of living place, and the cheapest nursing homes around cost three or four hundred dollars a day, maybe that policy isn't gonna be adequate for you.
And so, you've really got tp look, because if you go to a small town in the middle of America, long-term care may not cost that much. On the other hand, if you're in the Bay Area, it might be well more than a hundred thousand dollars a year to be in any sort of a skilled nursing facility.
So, I think the first thing to look at is number one, what are the benefits? How do they relate to what your actual needs are likely to be. Also consider what else they cover. A lot of people don't actually want to be in a nursing home if they can possibly avoid it. Some policies will cover people coming into your home and assisting you in your home, which is what most people prefer, if given the option.
I have a neighbor down the street that I check in on every now and then who is essentially receiving pretty significant nursing care right in their home. That's a real benefit if your level of disability or whatever can still allow for that. See what kind of options like that are available in a policy.
And finally, how long has this policy and the company behind it been around? You don't want a fly-by-night insurance company, especially in a space like this, where there's so many bad products. So, I would consider that as well, if I were shopping for a long-term care policy.
Jon Luskin: Dr. Jim. I certainly agree there. Stick with those companies that are going to have the highest credit rating. Generally, that's going to be New York Life.
From ThreeFundie from the Bogleheads® forums writes: My question for Dr. Dahle: You and I share an appreciation for Dr. Bill Bernstein, who thinks only a small fraction of the population can competently manage their financial lives and save for retirement without professional help.
After more than a decade of helping high-income professionals through White Coat Investor, do you think he's right? If not, how far off is he?
Thank you, Dr. Jim, for the incredible resources you provide through The White Coat Investor. And thank you, Jon, for all the hard work on Bogleheads® Live. That's very nice to say. Thank you for the kind words, ThreeFundie.
Jim Dahle: Well, I would take a little bit of a dispute, maybe with the word can. Can competently manage their finances? I think that's a lot of doctors, a lot of high-income professionals. If you change that to will competently manage their financial lives, that's a much smaller percentage.
Bill has said 1%; he thinks 1% of docs can and will manage their money competently. I think the number’s bigger than that. I don't think it's bigger than 20% though. I think 80%-plus of doctors need and want a competent financial advisor who offers good advice at a fair price.
That still leaves a lot of people though. There's a million doctors in the country; that leaves a quarter million of them that can honestly, and will, get interested enough to actually competently manage their investments themselves.
Jon Luskin: Does everyone need an investment professional? Certainly not. But no matter what you do, whether you are using a professional or you're doing it yourself, you want to stay focused on keeping those costs low. That is going to give you the best odds of success.
This question is from user er999 from the Bogleheads® forums, who writes: Have you ever encountered a physician who has made and kept significant amounts of wealth—half a million dollars or more—through more speculative-type investments like single stock, leveraged ETFs, or crypto? Is there a physician specialty in your experience that tends to attract more live-below-their-means/ traditional-index-fund-type investors? Do higher-paid specialists tend to invest poorer or spend more, or is there no connection between specialty and choice and financial literacy?
Jim Dahle: First have I run into people who have made a lot of wealth doing things maybe they shouldn't have been doing? Yes. It's much more common to do the opposite. For example, I just heard of a doc who lost 90% of his investment in one of these stablecoins, these stablecoin meltdowns that occurred in the last month or so: basically lost 90% of his $50,000 investment. So that's much more common, but when I run into somebody who's done really well, perhaps in a single stock, I think of like a doc, that's put a bunch of money in Tesla and then learned about index fund investing.
And they come to me going, what do I do now? Tesla went through the roof, and now I've got 60% of my portfolio in Tesla, but it's in a taxable account, and what am I gonna do about the capital gains? I'd like to diversify, but I can't because it'd be so expensive. So, I do run into those situations from now to now and again; it does happen. Not everybody loses money doing things they shouldn't be doing when it comes to investing.
If you're smart, you will diversify in those sorts of situations. And maybe you got lucky enough that you can retire in your forties.
It can happen. Absolutely. Is it common? No. Is it a good plan? No. On average does it work? No, but it can work, and it certainly does happen from time.
Let's talk about physician specialties. The investors of medicine are anesthesiologists. The classic stereotype is that they're behind the curtain there while the surgeon's operating trading stocks once they get the patient asleep. Whether that's true or not, I don't know, but as a shift-based specialty, they certainly have more time than some physicians.
I have not yet seen any sort of correlation between higher-paid doctors being better investors or lower-paid doctors being better investors. What I do know is the more money you make, the more mistakes you can afford and still be OK.
I run into docs all the time who've made several mistakes: maybe they're managing their student loans wrong, ended up with some terrible whole life insurance policy, maybe had an overpaid, underperforming investment manager, whatever. It's a lot easier to make up for that when you're making $400 or $600 or $800,000 a year than it is when you are an associate dentist making $150,000 a year or when you're a pediatrician making $180,000 a year. You don't have as much margin there to make mistakes.
And so that's something I definitely notice. This is all easier for dual-doctor couples and really high-paid specialists. There's no doubt about it. But I don't think that necessarily makes them better investors or necessarily worse investors.
What we do know is that if you don't make as much money as some of your medical peers, you've gotta pay a little more attention to the finances. You gotta budget a little bit more carefully. You may have to work a little bit longer. You probably need to pay a little more attention to where your money's going as far as fees go.
It's gonna be a much better deal for you to become your own financial planner and investment manager just on an hourly basis than it would somebody who's making $1.2 million a year, but I’ve never seen anything that says one specialty is particularly better at being an investor.
Maybe the more time you have, the more time you have to learn how to do it and to put toward it, which might argue against a really busy general surgeon or something being a good investor. But I'm sure there's plenty of general surgeons that are great at investing, and maybe it's better if they leave stuff alone and don't monkey with it all the time.
Jon Luskin: There is one doctor that I worked with: he invested in Bitcoin (I want to say in 2013), made over a million dollars, knew he got lucky, sold the Bitcoin, and moved into index funds.
So, I've certainly seen it happen. But I've usually seen the opposite a little bit more frequently.
One gentleman I worked with recently wrote in his little personal profile that all the folks I work with fill out before our calls. He wrote, I had a million in crypto now it's down to 400,000.
This one is from user eosin of the Bogleheads® forums.
Dr. Dahle for the most part of the fundamentals of personal finance and investing are the same, regardless of one's income. Nonetheless, there may be a small number of situations in which conventional investment advice may be different for those with high incomes. Examples that come to mind include preferentially contributing to pretax retirement accounts during peak earning years, avoiding rolling over old 401(k) plans to IRAs so as to avoid the problems with future backdoor Roth IRA contributions, or the use of tax-exempt muni bond funds in higher-cost-of-living states.
In your experience, what are the most important ways in which investment strategies should differ for high-income professionals? Thank you for all that you do.
Jim Dahle: All right. Great questions. And I think you said it exactly right. The fundamentals are the same for everybody. You know, I say this all the time: 95% of what I write or podcast about at The White Coat Investor applies to everybody, and maybe 4% of it applies only to really high-income people, and 1% of it applies only to doctors.
Most of it is pretty timeless stuff and applies to everybody. But there are a few things that are unique about doctors. They're mostly personal finance things though, not investing things.
For example, you're starting out life in a pretty big hole most of the time. On average docs are coming out of school with two or three hundred thousand dollars in debt. So, you're starting the race way behind a lot of people. And managing those student loans well is a big deal in the early part of a physician's financial life. So that's one significant difference.
Another big difference is just the plethora of available retirement accounts to you. Understanding those retirement accounts and their benefits is really critical as a doc, because you have so many available to you, and they matter so much more when you're in a high marginal tax bracket like most docs are.
If you're at an academic center, you might have a 401(a) and a 403(b) and a 457(b). And you can do a backdoor Roth IRA for you and your spouse. And you’ve got 529s for the kids, and you’ve got an HSA. And maybe you moonlight a little on the side, and you open another solo 401(k). Maybe you even make so much over there, you open a personal defined-benefit or cash-balance plan. And of course, you put anything extra into a taxable account. And so, all of a sudden, you're managing seven or eight or nine different investing accounts, where Joe Average has his entire investment portfolio in his 401(k).
And so, that part can be pretty tricky for doctors. I find that a place where they can get a lot of bang for their buck, understanding that situation.
And then the third place is some unique asset protection concerns. Docs are worried about getting sued. Most of us will be sued about once in our career. For some specialties, the average is significantly higher than that. And so, asset protection comes into play. And doctors care about it, even though the likelihood of actually losing personal assets is really, really low. I once calculated it out in my specialty at about one in 10,000 years of practice. So, it's pretty low, but it's not zero. And so, paying attention to some of the things you can do to protect your assets—and I'm talking about the basic, simple, cheap, effective stuff, like maxing out your retirement accounts, titling your home properly—those sorts of tactics are what we're talking about when I'm talking about asset protection, not necessarily the offshore trust kind of stuff.
Paying attention to that stuff, I think is pretty unique to doctors as well. But when it comes to investing, it’s just kind of general high-tax-bracket stuff: using muni bonds if you're having to hold bonds in taxable, making sure you don't mess up your ability to do a backdoor Roth IRA by using a SEP IRA or a SIMPLE IRA instead of a solo 401(k). And not rolling out your 401(k)s into IRAs when you leave an employer: waiting and rolling them into another 401(k). Those are kind of some of the unique ones for, for high income earners to pay attention to.
There also, if you're doing really well, you've got some unique estate tax planning concerns, but honestly, most doctors aren't rich enough to have that problem.
Jon Luskin: Dr. Jim, well said: personal finance is personal; investing, not so much. I think the problem is that, as folks earn more money, as they grow more wealth, they think they need to get fancy with their investments. In my experience and the research I've seen and done on the subject, I haven't found that to be the case.
Yes, you have more money. Does that mean you should be investing in more expensive, exotic assets, such as private equity, farmland, timberland, fine art?
I'm looking at case studies where hundred-million-dollar-plus endowments did this; I found that those endowments were better off with low-cost index funds. Even if you've got hundreds of millions of dollars to invest, and you've got a boardroom full of financial professionals, it's costs that are going to dictate your investment returns. Keeping those costs low: that's going to give investors the best odds of success. Don't let any increased wealth distract you from that investing truth.
Debt: I know that when you're talking about do you want to pay down debt or invest, when you ride the debt out, it's making sure that you actually invest the difference.
I'm curious if that's also true with Roth versus traditional. And I'm wondering, how does someone who's, like, choosing traditional, do you think people that invest in traditional instead of Roth are actually investing the difference?
Jim Dahle: You're probably right. Most people probably aren't investing the difference.
For those who aren't quite sure what he's saying, basically, when you put money into a Roth account instead of a traditional account, if you put $20,000 into a Roth account instead of $20,000 into a traditional account, you’ve saved more money on an after-tax basis.
If you don't account for that—if you don't also invest more money in taxable to account for the fact that you use a traditional account instead of a Roth account—you're just saving less money. In that respect, all these Roth versus traditional arguments that we have, you've got to assume that you're investing the same amount of post-tax dollars, or you're not comparing apples to apples, and you're just fooling yourself. So, in that respect, if using a Roth 401(k) or 403(b) or Roth IRA helps you to actually save more money, well, that's probably a strong counterargument against my usual rule of thumb, which is to use a tax-deferred account during your peak earnings years.
Jon Luskin: Clark Howard makes the same point: contributing to a Roth account is a sneaky way to save more money.
529: Kind of about 529s. So, my understanding is the beauty in the 529 is that the gains are not taxed. So, does that mean that if you want to take the most advantages that you can of whatever tax-protected or tax-advantaged space you have as a doctor, and you think you're gonna pay for your kids' tuition, would you want to preferentially max out, like super-fund, 529s? Because then when you look at the ratio of money you're actually putting into it and benefits you're getting from the 529, it seems like there's more if you start earlier, so does that mean that maxing out 529s or super-funding should be higher on the list for well-paid professionals?
Jim Dahle: I wouldn't necessarily put them any higher on your list. There are a lot of people that just have the money that they can super-fund these. You may have a kid, and all of a sudden they put five years’ worth of contributions into a 529. I don't know what their plans are for the kid going to a college that costs $90,000 a year and then going to a dental school that costs $120,000 a year or something. But some of these people are on track to have $400, $500, $600,000 per child in a 529, which is just a huge amount of money, especially if it starts compounding.
So, I don't think most docs are able to do that. And so, they save where they can. By the time they're actually got their own student loans paid off their kid’s already 10, and they're trying to figure out how to save 20% for their own retirement, which should obviously be a bigger priority than a 529. But sure, if you're able to meet all your other goals and put a whole bunch of money into a 529, super-funding is great.
Related to your point, I've always been a big fan of investing a 529 very aggressively. And the reason why is that the consequences of shortfall are so much less than they are the consequences of a shortfall when it comes to retirement savings.
If you run out of money in retirement, well, now you're eating Alpo®. If you run out of money in a college savings fund, or it doesn't perform as well as you like well, they can go to a cheaper school. They can take out student loans. They can apply for more scholarships. They can work as they go along. There's just so many other options that I think the risk is just much lower.
So, I've always invested my kids’ 529s very aggressively: actually half of the money in the 529 is in small value stocks and the other half in international stocks. But it's a hundred percent in stock with a big, heavy tilt, because I just feel like it's a place you can take a lot of risk. And if it's not doing well, like I've got my oldest starting college this year, and the markets are down 25% or 16% or whatever it is year-to-date—I haven't looked lately—no big deal. I can help cash flow it from my current earnings, and we can take the 529 money out of the end of the year. Or we can just use it for next year. There's just so many other options of what you can do with 529 money.
And if she doesn't spend it, or she doesn't end up going to medical school like she's talking about, well, we'll just change the beneficiary to her children.
So, no big deal there either, but yeah, I think 529s are great. I definitely use them, but I think these people that invest them very conservatively, like they have no other options if there's a loss just before your kid starts college, I think you’re probably mistaken most of the time.
Jon Luskin: This one is from chrisdds98 from the Bogleheads® forums, who writes: Are you considering changing your bond allocation considering how low the break-even inflation rate is? I believe you’re half TIPS. Why not increase that percentage with the five-year at only 2.1%? And he links to the Federal Reserve site on the break-even inflation rate.
Jim Dahle: No, I don't have any plans to change my asset allocaton. When I chose my asset allocation, the idea was to pick something reasonable that would perform reasonably well in all potential future economic scenarios.
Now, there are times when one asset class outperforms other asset classes. As you might expect, some of the stuff I've invested in has not done awesome for the last 18 years that I've been investing. For example, I have an allocation to the TSP G Fund as part of my nominal bond allocation. It's been a terrible performer for the last 18 years. It's really good the last six months. But prior to that was not really great, but it's now getting its day in the sun.
Likewise, there are times when TIPS get their day in the sun, times when nominal bonds get their day in the sun. And what I have found is I am a terrible predictor of the future. My crystal ball always seems to be cloudy.
So, using data like this calculation, if you will, of what break-even inflation is, is obviously much lower than what current inflation is right now. What that tells us is the market is expecting the Fed to get inflation under control pretty quickly. And what you are doing by changing your asset allocation in response to that is making a bet that the market's wrong.
You're basically betting that nope, the Fed is not gonna get this under control. We're gonna sit here at seven, eight, nine percent inflation for the next five years, next 10 years. And I'm gonna come out way ahead because I put my money all in TIPS instead of nominal bonds. Well, I don't know if that's gonna happen.
I just stay the course with my plan. I split my bonds right down the middle: half nominal, half TIPS. And sometimes the TIPS work out better. Sometimes the nominal work out better. But I don't have to worry about it. I can go rafting next week, which is my plan for next week is to be totally off the grid for an entire week. I don't have to look at the markets; doesn't matter what they do, because I'm not gonna change anything in response to what the markets do. And that approach has served me very well over the last couple of decades and allowed me to stay the course through some pretty unique economic times.
If I could time the market; if I could foresee what's gonna happen; if I could make all the advantageous changes as we go along; then, yes, I would come out a little bit ahead.
But at this point I'm already financially independent. I don't need to score these sorts of bets correctly in order to reach my financial goals. And I think that's a good place to be. And I think having a static asset allocation that you don't change in response to market conditions is a relatively straightforward and psychologically easy to follow method of investing.
Jon Luskin: Dr. Jim, you said that magical phrase twice in there now: stay the course.
We don't know what's going to happen with our investments. We don't know if inflation is going to come in higher or lower than expected. Staying the course is going to help us avoid taxes, investment transaction fees, and some unlucky market timing.
Dr. Jim, any final thoughts before I let you go? Anything else you'd like to share with the group to
Jim Dahle: Well, I hope a lot of you will be able to make it out to the Bogleheads® conference. I'm looking forward to going back. This will be, what, my third Bogleheads® conference I'm going to.
I'm in charge of kind of what's really the opening session, which is Bogleheads® University. And we're gonna have Allan Roth and Rick Ferri and Christine Benz. I think Mike Piper's going to be helping us out with that and really just do a very straightforward and yet deep dive into the basic tenets of the Boglehead® investing philosophy. So, I encourage you to come to the conference, number one, and if you do come, be sure to get there early enough to catch Bogleheads® University.
I think it's gonna be great. It's the first time we've done it, and I’m putting a lot of planning and preparation into it. I hope it'll be great. I hope to see you there.
Jon Luskin: Well, that is absolutely fantastic. I'm looking forward to that. Folks, to register go to boglecenter.net/2022conference. And folks that's going to be all the time we have for today. Thank you to Dr. Jim Dahle for joining us today. And thank you for everyone who joined us for today's Bogleheads® Live.
Next week, our guest will be Ron Lieber, author of The Price You Pay for College and The Opposite of Spoiled.
The week after that we'll have Dan Otter schooling us on 403(b) fees. Pun intended. Between now and then you can access a wealth of information for do-it-yourself investors on the Bogleheads® forum, the Bogleheads® Wiki, Bogleheads® Facebook, Bogleheads® YouTube, Bogleheads® Twitter, Bogleheads® local chapters, the Bogleheads® on Investing podcast, and Bogleheads® books.
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Thank you again, everyone. Look forward to seeing you all again next week, where we'll have Ron Lieber answering your questions about The Price You Pay for College. Until then, have a great week.