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HomeInvestingThe Importance of Asset Allocation

The Importance of Asset Allocation


Today, we are answering your asset allocation questions. We talk about how to adjust your asset allocation and when to do it, what changes with asset allocation when thinking about your long- vs short-term investment plan, how to make the most of your asset allocation, and more. We also have a philosophical discussion about economic growth and answer a question about if you can pass on bonds if you have a high-risk tolerance and a long investing horizon.




 

Mechanics of Adjusting Asset Allocation

“Hi, Jim. This is John from New Jersey. My question concerns the mechanics of adjusting asset allocation. Currently, I am invested 100% in equities per my investment policy statement. But I’ll add bonds next year when I turn 40. I’m concerned about the market dropping right before I adjust my asset allocation, which would cause me to sell equities low. What do you think of tying the reallocation to the market trend rather than strictly age? For example, say I want to have a 20% bond allocation. If the Vanguard total stock index fund is within 1% of its all-time high, I would rebalance all at once when I turn 40. If not, I would stay with 100% equities for another year. If it is still not within 1% of the all-time high when I turn 41, I would rebalance halfway to 10% bonds. In another year at age 42, I would finally rebalance to 20% bonds no matter what the market is like. I feel like this would improve my chances of selling equities high since stocks are more likely to be up over a longer period of time. However, this seems like a form of market timing, and it obviously would be disadvantageous if there is a prolonged market downturn.”

How do you adjust when you decide you are going to adjust? First of all, I would do it in advance, not in some emotional way while watching the market move around. I would write it down in your financial plan. That plan, as you have outlined, is fine. Put it in your written investment plan and follow it. I do not have a problem with that. But trying to do it based on how you feel about the market one day is, I think, a mistake and allows your behavior and your feelings to overcome logic.

Obviously, this can work out badly if you follow your plan. You might be better off just doing it all at once in a prolonged downturn. You could get burned either way. Either way is fine. You might come out ahead, you might not, but I would make it automatic and emotionless as much as you can. I would write it down on paper and I would follow it no matter what happens. The most important thing when it comes to a long-term investing plan is sticking with it. That matters way more.

That said, your plan seems really complex, and there is a lot of benefit to simplicity. I am reminded of this all the time when I talk to Katie about stuff. I am always wanting to add complexity to our financial plans and to our investment portfolio. And she always says, “Why do we need to do that?” She is right. We do not have to. Do not add more complexity than you have to. A lot of us, those of us who listen to this podcast every week, are optimizers. This is a hobby for us. We like to play with our money. You do not have to play with your money. You can just make these changes, make them once, and forget about it for the next year.

If it really bothers you, maybe your plan was too aggressive to go from 100% stocks to 80% stocks all in one year. Maybe you should go down 5% a year over the next five years. Maybe that would make it so it did not bother you so much to make the change all at once. Just a thought.

More information here: 

How to Build an Investment Portfolio for Long-Term Success 

Chasing Markets Can Be a Poor Long-Term Investment Strategy

 

Long-Term Investing Plan and Asset Allocation

“I am a do-it-yourself investor. I have been out of residency for about two years, and I have been investing for about five years total. I have a written financial plan, and I set my reasonable asset allocation when I first started investing. I recently used your blog post on using the XIRR function in Excel to calculate returns, and I just did this for the first time with my portfolio. My question is, how do you recommend using this information in managing your money over the long term? Since you and other experts recommend setting a reasonable plan and sticking with it, it seems like doing these calculations periodically should not necessarily influence any changes in my asset allocation. Should it influence me to change other variables in my financial life, like my savings rate or when I plan to retire? I’m just looking for some guidance on how to best use this information in a meaningful way over the long term.”

You are doing so good! I’m so proud of you. Two years out of residency, and you’ve already been investing for five years. You’re asking questions like this. You win. You’re doing it. You’re going to be so successful. Chances are none of this stuff’s going to matter to you because you’re going to have so much money. Your biggest issue is going to be who you leave it to and how much you give away each year and those sorts of issues. Congratulations to you. It’s pretty awesome to be two years out of residency and asking questions like this. It is an incredibly smart question. Why bother calculating these things if it’s not going to change what we do?

I think it’s good to know how things are going, No. 1. That’s the main reason I would calculate this stuff. When you run your long-term projections, for instance, I tend to use a figure of 5% real, 5% after inflation for my portfolio. If there was a long period of time where I realized I’m not getting 5% real out of my portfolio, I might start using a different number to run projections. I might start saving more money. I might plan to work a little bit longer. Yes, I think it would affect my financial plan. Plus, I think it’s interesting. I’ll bet, given your level of expertise and the time that you have put into this over the last five years, I bet you find it’s interesting, too. It’s probably worth your time just in that respect.

You might change your asset allocation, too. If you think, “Oh, I thought I was going to be able to reach my goals with the 60-40 allocation, maybe not. Maybe I need to be a little bit more aggressive. Maybe I’m going to go to an 85% stock allocation, for instance.” That’s another way that knowing those results could help. Should you make some big change based on last year’s returns? Obviously not. Longer term, if you’re starting to see that these things are not working out the way you expected them to, not even within the range of what you expected, it might cause you to make some changes in how you live your financial life. Good question.

More information here: 

The Benefits of a Fixed Asset Allocation Portfolio 

 

Do You Need Diversification Even If You Have High-Risk Tolerance?

“Hey, Jim. Brandon from California. I have a question that’s been asked before on the podcast, but I figured I’d ask it in a slightly different way in case you might give a different answer. In the hypothetical situation where you have a young investor who has 100% confidence and discipline to maintain an aggressive asset allocation in a bear market, would you still recommend holding some percentage in bonds for diversification purposes in case bonds outperform stocks and equities in a 40- to 50-year investing horizon?”

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It sounds like you have a pretty good understanding of the underlying issues. Yes, we expect stocks to make more than bonds in the long term, assuming you can stay the course and not panic-sell out of them. But there is the possibility that bonds will outperform stocks, even in the very long run. That’s one argument for having some bonds in your portfolio. Not only to reduce the volatility and make it a little easier to tolerate the ups and downs of the market but also just in case bonds work out better in the long term.

You can do what you want. There are white coat investors that have 100% stock portfolios. There are white coat investors who are very young, who started with bonds in their portfolio and still have bonds in their portfolio. I’ve always had bonds in my portfolio from the very beginning. I like that. It works for me. In big, nasty bear markets like 2008, I was really glad I had some money in bonds.

I do think it’s folly to assume that this is a brain thing and not a stomach thing. Until you’ve been through a big, nasty bear market where that money you could have spent on a kitchen renovation disappeared, I’m not sure you really know what your risk tolerance is. I would encourage you to have an asset allocation that’s a little bit on the more conservative side until you go through a bear market or two and you’re sure that you can handle an 80% stock or 100% stock portfolio.

The other thing to keep in mind is there’s no hard limit at 100%. You can borrow money and have an asset allocation that’s actually more than 100%. In fact, most young investors actually do because they have so much money borrowed. You’ve got $400,000 in student loans and you’ve got a $300,000 mortgage and you owe $20,000 on a car and you’ve got $10,000 in credit card debt and you’ve got a $50,000 portfolio. Your asset allocation is actually really aggressive if you count all that debt toward you. I’m not going to tell you you can’t be 100% stocks. There are lots of people with 100% stocks, and it works just fine for them. Obviously, in the past, that was the way to bet. No guarantees about the future.

More information here: 

5 Diversification Errors That Are Increasing Your Portfolio Risk

 

If you want to learn more about the following topics, see the WCI podcast transcript below: 

  • Philosophical discussion about economic growth
  • How to go about tilting your portfolio
  • Do you have to invest your settlement fund at Vanguard into a money market fund?

 

Milestones to Millionaire

#170 — Orthopedic Surgeon Completes His Military Commitment as a Millionaire

Today, we are celebrating this orthopedic surgeon completing his military commitment and becoming a millionaire. This doc served our country for 16 years, and he is now moving to a civilian job. They are moving from California to Minnesota and are looking forward to a dramatic salary increase and a cost of living decrease. He worked hard moonlighting on the side and grew wealth by avoiding debt and putting finances first.

 

Finance 101: Itemizing Deductions 

In preparing your taxes, you start with your total income and then subtract certain deductions to determine the income that is not subject to taxes. Initially, you apply above-the-line deductions, which include contributions to self-employed retirement accounts and self-employed health insurance premiums. After these deductions, you arrive at your Adjusted Gross Income (AGI). From the AGI, you can subtract either the standard deduction or itemized deductions to reach your taxable income. For 2024, the standard deduction is $13,850 for single filers and $27,700 for married couples filing jointly. This deduction is automatically available without needing to justify specific expenses.

Itemized deductions, listed on Schedule A of Form 1040, offer an alternative to the standard deduction. These deductions encompass medical and dental expenses that exceed 7.5% of your AGI, state and local taxes (with a combined limit of $10,000, often referred to as the SALT limit), mortgage interest, and charitable contributions. However, the medical and dental deduction is often less beneficial for high-income earners, as expenses must be significant to exceed the 7.5% threshold. State and local taxes can include income or sales taxes, real estate, and property taxes, but the total deductible amount is capped, affecting those in high-tax states more significantly.

Many people, especially those with substantial mortgage interest or significant charitable contributions, find that itemizing their deductions surpasses the value of the standard deduction. This is particularly true for those with large mortgages or who donate a significant portion of their income to charity. A common strategy for maximizing deductions is “bunching,” where charitable contributions are concentrated in alternate years to surpass the standard deduction threshold in those years. This strategy might not be as effective for mortgage interest deductions. Each taxpayer’s situation is unique, and it’s beneficial to review both options annually to determine the most advantageous approach.

 

To read more about itemized deductions, read the Milestones to Millionaire transcript below.

 




 

Today’s episode is brought to you by SoFi, helping medical professionals like us bank, borrow, and invest to achieve financial wellness. SoFi offers up to 4.6% APY on their savings accounts, as well as an investment platform, financial planning, and student loan refinancing . . . featuring an exclusive rate discount for med professionals and $100 a month payments for residents. Check out all that SoFi offers at https://www.whitecoatinvestor.com/Sofi. Loans originated by SoFi Bank, N.A., NMLS 696891. Advisory services by SoFi Wealth LLC. The brokerage product is offered by SoFi Securities LLC, Member FINRA/SIPC. Investing comes with risk including risk of loss. Additional terms and conditions may apply.

 

WCI Podcast Transcript

Transcription – WCI – 367

INTRODUCTION

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.

Dr. Jim Dahle:
This is White Coat Investor podcast number 367 – The importance of asset allocation.

Today’s episode is brought to you by SoFi, helping medical professionals like us bank, borrow and invest to achieve financial wellness. SoFi offers up to 4.6% APY on their savings accounts, as well as an investment platform, financial planning and student loan refinancing, featuring an exclusive rate discount for med professionals and $100 a month payments for residents. Check out all that SoFi offers at whitecoatinvestor.com/sofi.

Loans are originated by SoFi Bank, N.A. NMLS 696891. Advisory services by SoFi Wealth LLC. The brokerage product is offered by SoFi Securities LLC, member FINRA/SIPC. Investing comes with risk, including risk of loss. Additional terms and conditions may apply.

Welcome back to the podcast. We missed you. I’ve been off having fun without you, unfortunately. Today is April 25th that we’re recording this. It’ll run on May 16th. I spent the last five days in the last mapped place in the lower 48, down on the Escalante River. I went to float the Escalante River and do some canyoneering. It was pretty cool for several days. Really didn’t see anybody else other than the group we took in there. Spectacular scenery, fun adventure. And good thing nothing happened because help was a long way away. But it was a lot of fun and I enjoyed it. And I hope you’re able to get out every now and then and do what you think is fun.

 

DON’T PANIC WHEN THERE ARE NEWS ANNOUNCEMENTS

I returned to find an email box full of people panicking. I thought I’d say a few things about this. And you may have read this on the blog where I talked about this; that may have run by the time this podcast drops, but I know lots of you only listen to podcasts. You don’t actually read the blog. So I’m going to talk about it here as well.

I am continually surprised by the amount of panic I see in White Coat Investors who see news announcements that might affect their financial plans. Please remember that there is almost nothing that needs to be done right now in any sort of reasonable long-term financial plan as a result of something you read in the news. You don’t need to email me immediately wondering how this might change your financial plan. You don’t have to know all the details tonight.

As I tell our content director, we don’t need to run a post immediately about these sorts of announcements. Sure, it might help our search engine optimization. You might get more web traffic from it, but we’re not going to be able to compete with CNN and the BBC and MSNBC or Fox News when it comes to breaking news.

You don’t come to WCI because you want breaking news. You come here because you want an in-depth opinionated discussion of what to do in your financial plan. Guess what? It takes time to get details and to form opinions. So, have a little bit of patience with us. If it is going to affect a lot of White Coat Investors, rest assured, we are not going to ignore it. We’re going to be talking about it on the podcast. We’re going to be writing about it on the blog. It’s going to be in the newsletters.

So don’t panic. Don’t feel like you have to do something right away. You don’t need to do anything stat about your public service loan forgiveness plan because WCI runs a post called PSLF Is Canceled. You didn’t realize it was an April Fool’s post for an hour or two. You don’t need to do anything stat because the FTC voted to pass a rule banning most non-compete agreements. You don’t need to do anything stat because Vanguard said it sold off its small business retirement plan division to Ascensus.

These sorts of breaking news things don’t mean you need to do something, just like you don’t need to buy and sell mutual funds because the market went up or down. Settle down. Take a deep breath. If something is going to affect a whole bunch of White Coat Investors, we’ll be talking about it on the blog. It’s going to be a few weeks. We record these things two, three, four, sometimes six weeks in advance. But you know what? You don’t have to do anything in the next six weeks. It’s all right. You can wait, let the details come out, let people think about it, talk about their options, and then act.

It’s a little bit like in medicine. You don’t want to be the first person to adopt a new therapy. You don’t want to be the last person to adopt a new therapy. You want to be in the crowd and doing it in an intelligent way.

 

WHEN ARE NON-COMPETES REALLY GOING AWAY?

All right. Let’s talk for just a minute. The FTC voted on this law to get rid of non-competes. It’s not in its final form. I can assure you of that. From the time they published it in the Federal Register, first of all, it’s 120 days before the rule goes into effect. But in this case, there’s a lot of people that are not very happy about this, maybe most notably the Chamber of Commerce, which is an association of employers, because this is pretty clearly a loss for employers and again, for employees in general, we think.

It’s going to go through some court cases. It wouldn’t surprise me to see it go to the Supreme Court. By the time it comes out of court cases, it might be a different party in control of the White House. Remember, anything that’s passed by Executive Fiat, by an appointed director of the FTC, can be unpassed by another appointed director of the FTC.

That’s the downside. You’ve heard it takes an act of Congress. Well, the nice thing about taking an act of Congress is it takes an act of Congress to undo it. When something is put in place not through an act of Congress, it can be changed without going through Congress.

Keep that in mind. It’s probably not going to be in the current format by the time it actually applies to all of our lives. Give it some time. If nothing else, you’ve got 120 days. That’s four months before it even goes into effect, assuming it doesn’t go to court. In reality, it’s probably one or two years before we really know how this is going to affect you. Don’t go changing something in your financial life, in your career, at your job, because this thing just got passed. It’s not in its final form.

 

ASCENSUS ACQUIRING VANGUARD SOLO 401(K)

Same thing if you have a Vanguard solo 401(k), or as they call it, an individual 401(k). It’s the same thing, a solo 401(k), an individual 401(k). This sale doesn’t even close until the third quarter of 2024. You’ve got at least three months before anything changes. Even then, it’s not like it’s changing dramatically. You’re still going to have the same investments. Maybe you pay a little more in fees. Maybe you get a little better customer service, but there’s no rush. You’re going to be able to do nothing, and that will be an option. They’ll just transition it from Vanguard to Ascensus. And then you’ll have a number of other options.

I’m writing a blog post this morning, actually. I stopped writing to record this podcast, but it’s about the other options you’ll have, as well as some specifics about Ascensus. It’s not like this is some fly-by-night company that nobody’s ever heard of. It’s the biggest retirement plan company in the country. It’s not some Ponzi scheme that Vanguard sold you off to. They just realized they didn’t want to run the charity they were running, to run a small business retirement plan program basically for free, and decided to concentrate on what they’re better at and what maybe brings a little more money into the business.

Don’t panic. You don’t have to run out and make some change to your plan. I come back from the wilderness, and all of my WCI staff is talking about this stuff. I’m like, “Give it a second. We don’t have to get a post out tomorrow, and we don’t have to change all of our individual 401(k)s and all that sort of stuff. You’ve got time.” So, don’t panic when you see newsy things happen. Yes, they matter. Yes, they’re going to affect your financial plan, but they don’t have to affect it today.

All right. Enough ranting about that. By the way, we do two big webinars each year. One is a student webinar we do earlier in the year. The second one is the resident webinar. This year, that’s going to be on May 29th, 06:00 PM Mountain. Sign up at whitecoatinvestor.com/resident.

I’m going to give the presentation. I’m going to make Andrew with studentloanadvice.com come along with me and have him give the presentation he would give if your residency program flew us out there to give you a grand rounds.

This is information directly to you as a resident totally for free. I cannot go to all the residency programs in the country. Number one, I don’t have the time. Number two, none of your programs will pay me to come. They call me up and go, “Hey, we’ll give you a hotel room if you come and do grand rounds at our residency program.”

Well, guess what? I don’t need a CV line. If I had a CV, it would be like 50 pages of blog posts and podcast recordings and webinars and presentations. Nobody cares. I’m not an academic. I’m not trying to get promoted to full professor. I don’t need a CV line. I’m not coming out to speak to your residency program just because you’ll buy me a hotel room night and won’t even fly me out there or pay me anything to come.

But what I will do is do one of these webinars once a year for all the residents in the country, and it’s the same presentation. Yes, it’s going to be over Zoom or whatever platform we use, but it’s the same presentation, same information. It’s live. We take your questions. I think for the student webinar, Andrew and I hung around for two hours afterward answering your questions, and I actually like doing this.

This is my favorite part when I go talk to you in person. It’s the center I’m talking to you afterward about your life situations, answering your questions. We still do that. You get almost the full experience. You don’t get to see us in person, but we’ll be there.

We’re going to talk about having a smooth transition to hit the ground running as an attending, understanding what you need to do with your student loans to minimize the cost, ensuring you have the right insurance protection in place and nothing more. Make sure you’re saving and investing your money to reach your goals so you can spend the rest on whatever you like guilt-free and really understand the basics of investing so you can start building wealth ASAP. Now, there’s not a lot of things you have to do during residency with your finances, but there are a few things, and we’re going to be covering those in depth.

All right, sign up for that, again, whitecoatinvestor.com/resident. It is May 29th at 6:00 PM. If for some reason, something comes up and you can’t make it, still sign up because guess what? We’ll send you a link. You won’t be able to ask your questions live, but you’ll get to hear everybody else’s questions live or everyone else’s questions. It won’t be live, but the ones they asked.

 

UPDATES FROM EPISODE 365 REGARDING HSAS

Okay, let’s do a bit of an update clarification. I don’t know how much of it’s a correction. It’s just something we promised you. This is from episode 365, so two episodes back, two weeks ago. This was a Friends of WCI episode I did with Tyler Scott. We wanted to clarify two things with your HSAs. I was right about one; Tyler was right about the other.

The first one was about saving your receipts. Even if you aren’t covered at the time by the HDHP, high deductible health plan, you can still use your HSA money. Receipts can be pulled out later if you decided you’re doing the stealth IRA thing with your HSA. You’re going to wait 20 years and pull the money out using these old receipts. You don’t have to be covered by an HDHP at that time.

The other cool technique, which I think is way more interesting, is what Tyler brought up that I’d never heard before. I’m actually disappointed with myself that I didn’t know about this technique because starting this year, this is super beneficial to my family. I want to go over this.

If you have a child that is over 19, but under 26, and they’re covered under your high deductible health plan, and no other plan, they or you, anybody can make a contribution, anyone is allowed to contribute to a health savings account. This is in addition to your own family contribution to a health savings account. They can make their own contribution to their own health savings account, or you can do it for them. And you can contribute the family amount.

Yeah, wild, right? $8,300 in 2024, you can put into your own HSA, and you can put it into your kid’s, your adult child’s HSA, and your other adult child’s HSA, and your other adult child’s HSA. Pretty soon, I’m going to have three kids between 19 and 26. I could make four HSA contributions, and you can help them start their lives out with a substantial HSA, a triple tax-free account that can then compound tax-free for decades.

Pretty cool. It seems like a pretty large loophole, but I looked it up through multiple sources, and it’s there, it’s legal, you might as well take advantage of it. There’s a lot of things about 529s and HSAs that I’m not sure people really thought through completely before passing these laws and these rules. Maybe it will change in the future, but for now, that is the law. Pretty cool, right?

Okay, let’s take some of your questions. That’s what you’ve come here for. Here’s a philosophical question off the Speak Pipe.

 

PHILOSOPHICAL DISCUSSION ABOUT ECONOMIC GROWTH

Leo:
Hey, Dr. Dahle. This is Leo, a 34-year-old oncologist from the Midwest. Thanks for all you do. You’ve been beyond instrumental in my financial knowledge and understanding. My question today is really more philosophical than practical. Do you believe in constitutive economic growth? The pitch for investment in index funds is somewhat predicated on the continued long-term growth of a given economy at a rate of return that outpaces inflation.

Individuals often quickly point to the historical Dow Jones or S&P 500 index with the subjects that it would be ludicrous for it to not continue to go up over time. However, historically, from a much more global macroeconomic perspective and over a much larger time scale than 100 to 150 years, no economy has ever displayed constitutive economic growth ad infinitum.

Given our America’s arguably late current position within its long-term debt cycle of the dollar, do you think that this understanding should influence someone’s investing perspective over their lifetime? While short-term debt cycles are volatile and unpredictable, long-term debt cycles have modestly predictable features that allow one to identify where a country exists along the long-term debt cycle spectrum. Some of the best literature I can find is Ray Dalio’s book, Principles for Dealing with the Changing World Order.

While I know that the immediate answer has to do with sticking to one’s written investment plan and that our crystal ball is cloudy for the future, it seems prudent to ask these questions, particularly as a young investor with a long investment horizon. To be clear, I’m very pro-index funds, invest in them regularly and understand their merits. I’m just interested in your thoughts regarding this. Thanks again for all you do.

Dr. Jim Dahle:
All right, great question. It reminds me a little bit of some of William Bernstein’s writings from his years old, decades old blog posts called the Retirement Calculator from Hell. He talked about how silly it was to try to get a safe withdrawal rate that had a predicted success rate of anything better than 80% because the likelihood of some worldwide disaster happening was far higher than 20% over the course of your investment horizon.

If you look at estimates of nuclear war in the next 100 years, resulting in a nuclear winter, they range from 10% to 74%. What should you invest in if we’re going to go through a nuclear winter? Well, that’s likely to last longer than people thought initially. People thought initially, maybe it’d be just a year of nuclear winter. In reality, it’s probably closer to 10, 10 years of freezing cold temperatures, crop failures, mass extinctions, societal upheaval and wars, something out of The Walking Dead. 10 years, you have to survive that.

So, what should you be investing in? Well, bunkers and AK-47s, plenty of ammo, 10 years’ worth of canned goods, that sort of thing. Now, how much of your money do you want put into that sort of a scenario, knowing that if that scenario happens, you’re probably wiped out in the initial blast. Most of the Northern Hemisphere will be, and maybe it’s not worth spending a huge chunk of your portfolio to insure against stuff like that.

On the other hand, if you’re worth $10 million, maybe it’s worth spending $100,000 on a bunker and a whole bunch of canned goods and a few AK-47s. It’s not the craziest thing in the world. But I wouldn’t think that investing in different stocks or buying a little bit of gold or Bitcoin or something is going to save you in that sort of extreme scenario. So, keep that sort of an issue in mind.

As far as what’s going to happen with the United States long term, I have no idea. Is this going to last 1,000 years, like the Roman Empire, or are we going to melt down in 10? It seems like we’re at each other’s throats more and more each year lately. They’ve even got a movie out called Civil War. Somehow, both red Texas and blue California ended up on the same team. I’m not sure how that happened in the movie, but it’s an interesting look at what could happen in the future.

However, I think there’s a couple of points that ought to be made. One is that you are not just investing in a growing economy when you buy an index fund. You are buying profitable businesses. At its bottom line, that’s what a stock is. These are the world’s most profitable corporations. In the history of mankind, these companies make more profit than any other company that’s ever existed. And you own a piece of it. When they make money, you make money.

If these companies don’t make money and become worth less, yes, your investment is going to go down in value. If there are fewer people to sell iPhones too, Apple is going to be worth less. If people stop wanting iPhones for some reason, Apple is going to be worth less, or Tesla, or Exxon, or whatever these companies are. Don’t forget that you’re not just investing in the economy in some vague broad way. You are practically buying companies that make money. That’s point number one.

Point number two is, what’s the alternative? People say, “Oh, index funds, everyone’s buying index funds. I want to be a contrarian.” Well, what’s the alternative? Buying individual stocks? No, it’s pretty much been shown to be stupid. Buying actively managed mutual funds that are trying to beat the market? No, that’s been pretty much shown to be stupid.

Buying speculative investments, putting your money in gold, or empty land, or Beanie Babies, Bitcoin, whatever. Well, maybe you make money, maybe you don’t. That’s the problem with speculative investments, is they’re speculative. 100% depend on somebody else paying you more for them later than you paid for them. A lot of times, there’s some ongoing costs to maintain, insure, store, etc, these sorts of things.

What else are you going to invest in is the question. If you don’t want to invest in index funds, there’s not like there’s some magic thing out there that is going to work dramatically better. If you want to hedge your bet a little bit, if you want to take 10% of your portfolio and put some of it into Bitcoin, some of it into gold, or whatever, short the market, I don’t know, who knows, some hedging strategy, go ahead and do that.

Would I put 75% of my portfolio in there? No. I think when you’re starting to do that, you’re going down the road of somewhat prepper type, extreme views on the world future. And guess what? If you go back and look at the history of that, it doesn’t end well most of the time. Those people are wrong almost always. Wrong, wrong, wrong, wrong, wrong. Maybe they’re right eventually, 280 years from now, after your great-grandchildren have died, maybe they’re right, but most of the time, these people are wrong. They’re wrong for a long time, and it costs them a lot of money, and in a lot of cases, it results in them not being able to have as nice of a life as they could have had if they had stuck with a little bit more conventional strategy. I hope that’s helpful to you.

 

MECHANICS OF ADJUSTING ASSET ALLOCATION

All right. Let’s take a question from John, a little bit more nuts and bolts-y about the asset allocation.

John:
Hi, Jim. This is John from New Jersey. My question concerns the mechanics of adjusting asset allocation. Currently, I am invested 100% in equities per my investment policy statement. But I’ll add bonds next year when I turn 40. I’m concerned about the market dropping right before I adjust my asset allocation, which would cause me to sell equities low.

What do you think of tying the reallocation to the market trend rather than strictly age? For example, say I want to have a 20% bond allocation. If the Vanguard total stock index fund is within 1% of its all-time high, I would rebalance all at once when I turn 40. If not, I would stay with 100% equities for another year. If it is still not within 1% of the all-time high when I turn 41, I would rebalance halfway to 10% bonds. In another year at age 42, I would finally rebalance to 20% bonds no matter what the market is like.

I feel like this would improve my chances of selling equities high since stocks are more likely to be up over a longer period of time. However, this seems like a form of market timing and obviously would be disadvantageous if there is a prolonged market downturn. Thanks for your help.

Dr. Jim Dahle:
All right, John. Great question. How do you adjust when you decide you are going to adjust? Number one, first of all, I would do it in advance, not in some emotional way while watching the market move around. I would put it down written in your plan. That plan, as you have outlined, is fine. It is fine. Put it in your written investment plan and follow it. I do not have a problem with that. But trying to do it based on how you feel about the market one day, I think is a mistake and allows your behavior and your feelings to overcome logic.

Obviously, this can work out badly if you follow your plan. You might be better off just doing it all at once in a prolonged downturn or whatever. You could get burned either way. Either way is fine. You might come out ahead, you might not, but I would make it automatic as much as you can and emotionless. And I would write it down on paper and I would follow it no matter what happens. That is the most important thing when it comes to a long-term investing plan is sticking with it. That matters way more.

That said, your plan seems really complex and there is a lot of benefit to simplicity. I am reminded of this all the time when I talk to Katie about stuff. I am always wanting to add complexity to our financial plans and to our investment portfolio. And she is like, “Why do we need to do that for?” She is right. We do not have to. Do not add more complexity than you have to.

A lot of us, those of us who listen to this podcast every week, are optimizers. This is a hobby for us. We like to play with our money. You do not have to play with your money. You can just make these changes, make them once and forget about it for the next year.

If it really bothers you, maybe your plan was too aggressive to go from 100% stocks to 80% stocks all in one year. Maybe you should go down 5% a year over the next five years. Maybe that would make it so it did not bother you so much to make the change all at once. Just a thought.

 

LONG-TERM INVESTING PLAN AND ASSET ALLOCATION

Another question about long-term investment plans and asset allocation.

Speaker:
I am a do-it-yourself investor. I have been out of residency for about two years and I have been investing for about five years total. I have a written financial plan and I set my reasonable asset allocation when I first started investing.

I recently used your blog post on using the XIRR function in Excel to calculate returns and I just did this for the first time with my portfolio. My question is, how do you recommend using this information in managing your money over the long term? Since you and other experts recommend setting a reasonable plan and sticking with it, it seems like doing these calculations periodically should not necessarily influence any changes in my asset allocation.

Should it influence me to change other variables in my financial life like my savings rate or when I plan to retire? I’m just looking for some guidance on how to best use this information in a meaningful way over the long term. Thanks so much for your help.

Dr. Jim Dahle:
You’re doing so good. I’m so proud of you. Two years out of residency, you’ve already been investing for five years. You’re asking questions like this. You win. You win. You’re doing it. You’re going to be so successful. Chances are none of this stuff’s going to matter to you because you’re going to have so much money, your biggest issue is going to be who you leave it to and how much you give away each year and those sorts of issues.

Congratulations to you. It’s pretty awesome to be two years out of residency and asking questions like this. It is an incredibly smart question. Why bother calculating these things if it’s not going to change what we do?

Well, I think it’s good to know how things are going, number one. That’s the main reason I would calculate this stuff. When you run your long term projections, for instance, I tend to use a figure of 5% real, 5% after inflation for my portfolio. If there were a long period of time where I realized I’m not getting 5% real out of my portfolio, I might start using a different number to run projections. I might start saving more money. I might plan to work a little bit longer.

Yes, I think it would affect my financial plan. Plus, I think it’s interesting. I’ll bet given your level of expertise and your interest in time that you put into this over the last five years, I bet you find it’s interesting too. It’s probably worth your time just in that respect.

You might change your asset allocation too. If you’re like, “Oh, I thought I was going to be able to reach my goals with the 60-40 allocation, maybe not. Maybe I need to be a little bit more aggressive. Maybe I’m going to go to an 85% stock allocation, for instance.” That’s another way that knowing those results could help.

Now, should you make some big change based on last year’s returns? Obviously not. Longer term, if you’re starting to see that these things are not working out the way you expected them to, not even within the range of what you expected, it might cause you to make some changes in how you live your financial life. Good question.

 

HOW TO GO ABOUT TILTING YOUR PORTFOLIO

All right. Here’s another question from Sid.

Sid:
Hi, Dr. Dahle. I’m a radiology resident from Canada. Thank you for all that you do. I started listening to your podcast several years ago as a med student, and now thanks to your teachings, I’ve nearly paid off my loans and maxed out my retirement accounts using my resident and moonlighting income.

I’ve been considering incorporating a portion of my portfolio toward equities with additional risk premiums, such as a small value tilt as part of my overall financial plan for when I start out as an attending in the next couple of years, and trying to plan the best way to go about this.

I’ve considered investing in VBR, which is the Vanguard Small-Cap Value ETF, accepting that this will only cover the US market versus some kind of international small value equity ETF versus a more actively managed ETF from Dimensional or Avantis. How should one go about choosing between these, and specifically, why are the Dimensional and Avantis funds so popular if they’re actively managed anyway, and how do they compare to, say, a Vanguard fund? Thank you.

Dr. Jim Dahle:
All right. Man, a lot of winners out there today. Those of you out there who are hearing these questions, and you’re like, “Who are these people? They’re residents, and they already know this stuff. They’re going to do so well.” Don’t feel bad. If you’re 40 or 50, and you’re like, “What’s an index fund again? I can’t keep it apart from my 401(k).”

These are people who have really taken a deep dive and really become financially literate, and they’re asking hard questions. These are questions that don’t necessarily have right answers. Small and value are factors. There’s some evidence in the academic literature that factor investing, tilting your portfolio towards certain types of stocks, are likely to give you a higher long-term return in the very long run, which is decades.

There are a number of us who tilt our portfolio toward those stocks. These are smaller stocks, which are riskier than big stocks. It makes sense theoretically that if these types of stocks carry more risk, they should, in the long run, provide more return.

Same thing with value stocks. With value, there’s really two explanations for this potentially higher return. One is that the riskier companies, they’re more likely to go out of business. They’re more likely to have something happen to their earnings than the popular growth stocks, your Disneys, and your Apples, and your Teslas, and those sorts of stocks.

The other explanation is that they’re not popular. It’s a behavioral explanation. People want to own the coolest stocks, and so they ignore the K-Marts, and they buy the Walmarts. They ignore the crappy companies that are about to go out of business, even though those companies may actually provide a higher return.

Two explanations. One is behavioral. One is a risk story. Nobody really knows how much of each is responsible for the premium, and in fact, nobody knows that the premium is actually going to be there going forward. It’s there looking back at the historical record, but it’s a pretty limited data set that we have in the historical record.

That said, it seems to be robust, not just in the US, but across multiple countries, across multiple time periods. The academics think that a small cap value tilt is going to pay off eventually.

That said, for my entire investing career, it has not paid off. For the last 20 years, it hasn’t paid off. It did really, really well in the aftermath of the dot-com breakdown, but it really hasn’t since then, and particularly the last 10 years or so, large in growth in US stocks have done dramatically better than small and value in international stocks. Various reasons for that.

Will the pendulum swing back? I think it will. I’m maintaining my tilt towards small and value stocks that I’ve had in my portfolio for the last 20 years. I still think it’s eventually going to pay off, but there’s no guarantee of that.

The easiest thing to do is to just use a total market approach. Buy all the stocks in capitalization weighted proportion as you would get in a typical index fund and forget about it. Concentrate on how much you earn and how much you save and what you want to do on your time off and with your family and do the best you can for your patients and those sorts of things and not make your portfolio any more complex than you have.

But if you’re a hobbyist, you want to try to eke out a little bit of extra return, you want to tilt your portfolio towards small and value stocks, then let’s go on a journey. I’ve got a number of blog posts. I think that’s the best way to really learn about this stuff is the blog posts. It’s hard to really get all the detail in there that you need, including charts and visuals and stuff, in a podcast format.

I’d recommend going to a blog post that was published last October called “Which Small Cap Value Funds Are Best For You” and go through those. In that post, I explain about Avantis and DFA. For those who don’t know, Dimensional Fund Advisors, DFA is a company that’s been around for a long time and believes in this small and value stuff and has said, “Well, are there any ways we can tweak index funds and make them slightly better?” I think for the most part, they did figure out a way to do that, a little bit of execution kind of stuff, etc.

The problem for many years is you had to pay an advisor 1% a year in order to have access to these mutual funds. Was that worth that much? Probably not. So, people didn’t. Then I had some DFA fund in my kids’ 529s, but that was really it.

Well, a few years ago, some people at DFA decided, “We really need to get into ETFs and just sell directly to people rather than only distributing our funds through advisors.” They decided, “Okay, we’re not going to do that. Go away.” A whole bunch of people left the company and started a company called Avantis. It basically uses the same methods, very similar methods of investing in factors that they did at Dimensional. They offer, you guessed it, exchange traded funds or ETFs. Dimensional said, “Oh, I guess we do have to do it.” They pumped out some ETFs.

Now, there are ETFs made by Dimensional, made by Avantis that use these techniques. The way they describe it is they say, well, we have a passive philosophy, but active implementation of that philosophy, whereas a Vanguard broad market index fund has a passive philosophy and a passive implementation of that philosophy.

Is it active? Is it passive? Well, it’s a little bit blurry. They’re still low cost. That’s the thing that matters the most. That’s why passive investing works, is because it costs less. As Jack Bogle would say, it’s the cost matters hypothesis, not the efficient markets hypothesis that matters. By keeping your costs really low, you can maybe eke out a little bit of advantage and actually end up beating the market by a little bit.

Avantis hasn’t been around very long. The track record looks really good for what it is, but I think it’s three or four years long for most of these funds. A lot of the people that are into these small and value tilts, they have now gone to these DFA and Avantis ETFs rather than the corresponding Vanguard small and value funds.

I am one of them. I changed at some point in the last year, year and a half. It’s a gradual change for me because this is mostly in a taxable account. There are tax consequences to me changing and I’m not going to realize capital gains to change. I don’t like them that much.

But as I slowly give away to charity appreciated shares and buy new ones, I’m buying Avantis and DFA. My primary holdings are the two Avantis ETFs. There’s one that’s for the US, a small value fund for the US and an international small value fund for the overseas markets. That’s what we’re using as we need to tax lost harvest. We use the DFA alternatives. They’re very similar, but I like the Avantis slightly more.

I hope that’s helpful. I hope the rest of you didn’t go to sleep as we spent our time out in those weeds. You do not have to invest with Avantis or DFA to be successful just like you don’t have to invest in real estate to be successful. If you want to try to eke out a little bit more, it’s something to consider.

 

QUOTE OF THE DAY

Let’s do our quote of the day. This proverb says, “The art is not making money, but keeping it.” There’s a lot of truth to that.

 

DO YOU HAVE TO INVEST YOUR SETTLEMENT FUND AT VANGUARD INTO A MONEY MARKET FUND?

Okay. Another question from Sam, the intern, who we’ve heard from before on the podcast.

Sam:

Hey, Dr. Dahle. This is Sam, the intern. Thanks for all you do. I have a quick Vanguard question for you. I have a brokerage account where I have some money invested in the Vanguard Federal Money Market Fund. Then my settlement fund is also the Vanguard Federal Money Market Fund. When I went to withdraw funds, I had to sell my shares at the money market fund so that the money got put into the settlement fund, which is also in the money market fund before I could withdraw them.

Am I crazy here? Is there any advantage to actually purchasing the money market fund shares versus just having everything sitting in the settlement funds? I appreciate your thoughts. Thanks so much.

Dr. Jim Dahle:
No, there is no advantage. Just leave it in the settlement fund. I think they do that more as historical accident than anything else. There was a time when you did do that. There are some brokerages where you have to do that. You have to invest it specifically into a money market fund, or it just sits in a sweep account, a settlement fund that’s paying you 0%. I think Schwab pays 0%. That’s how they keep their commissions at $0 because they’re making money on your cash. Vanguard, and this is one of the best things about Vanguard, I think, when you don’t have your money invested, it’s making right now like 5.25%, which I think is pretty awesome. But no, you don’t have to specifically invest it into a money market fund at Vanguard to do that.

Now, keep in mind, your settlement fund is generally that federal money market fund. So, if that’s not the money market fund you want to use, if you want to use the treasury money market fund because you’re in a high-tax state like California, you just trust treasuries more than other federal agencies, or if you want to use the municipal money market fund, you’re going to have to buy that and sell that deliberately.

You can’t just use that as your settlement fund. Keep that in mind. In your case, when you’re using the federal money market fund anyway, you just leave it in the sweep account. It’s fine.

 

DO YOU NEED DIVERSIFICATION EVEN IF YOU HAVE HIGH RISK TOLERANCE?

All right. The next question is from Brandon.

Brandon:
Hey, Jim. Brandon from California. I have a question that’s been asked before on the podcast, but I figured I’d ask it in a slightly different way in case you might give a different answer. In the hypothetical situation where you have a young investor who has 100% confidence and discipline to maintain an aggressive asset allocation in a bear market, would you still recommend holding some percentage in bonds for diversification purposes in case bonds outperform stocks and equities in a 40 to 50-year investing horizon? Thanks so much for what you do.

Dr. Jim Dahle:
It sounds like you have a pretty good understanding of the underlying issues. Yes, we expect stocks to make more than bonds in the long term, assuming you can stay the course and not panic sell out of them. But there is the possibility that bonds will outperform stocks, even in the very long run. That’s one argument for having some bonds in your portfolio. Not only to reduce the volatility and make it a little easier to tolerate the ups and downs of the market, but also just in case bonds work out better in the long term.

You can do what you want. There are White Coat Investors that have 100% stock portfolios. There are White Coat Investors who are very young, who started with bonds in their portfolio and still have bonds in their portfolio. I’ve always had bonds in my portfolio from the very beginning. I like that. It works for me. In big, nasty bear markets like 2008, I was really glad I had some money in bonds.

I do think it’s folly to assume that this is a brain thing and not a stomach thing. Until you’ve been through a big, nasty bear market where that money you could have spent on a kitchen renovation disappeared, I’m not sure you really know what your risk tolerance is. I would encourage you to have an asset allocation that’s a little bit on the more conservative side until you go through a bear market or two, and you’re sure that you can handle an 80% stock or 100% stock portfolio.

The other thing to keep in mind is there’s no hard limit at 100%. You can borrow money and have an asset allocation that’s actually more than 100%. In fact, most young investors actually do because they have so much money borrowed. You’ve got $400,000 in student loans, and you’ve got a $300,000 mortgage, and you owe $20,000 on a car, and you’ve got $10,000 in credit card debt, and you’ve got a $50,000 portfolio. Your asset allocation is actually really aggressive if you count all that debt toward you.

Something to keep in mind. I’m not going to tell you you can’t be 100% stocks. There are lots of people with 100% stocks, and it works just fine for them. Obviously, in the past, that was the way to bet. No guarantees about future.

 

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Don’t forget about our webinar. It’s May 29th, 06:00 PM Mountain, whitecoatinvestor.com/resident. That’s where you sign up. We will help you with a smooth transition to hitting the ground running as an attendant and make sure you have the important financial steps you must take as a resident completed. This is the presentation I’d give you if I was able to come out to your residency and do a grand round. Again, whitecoatinvestor.com/resident.

Thanks for those leaving us five-star reviews and telling your friends about the podcast. A recent one came in from RasaValiauga. He said, “A must listen for all physicians. Dr. Dahle is truly serving the people who serve by sharing his knowledge regarding all things financial. I’ve been listening to the podcast nonstop since I’ve discovered it a few months ago and cannot believe the amount of information I’ve not only learned but retained due to the accessible nature of the podcast. Thank you, Dr. Dahle!” Five stars. Thanks so much for that great review. It’s very kind of you.

All right, that’s it. We’ve come to the end of another podcast. We’ll see you next week. Until then, keep your head up, shoulders back. You’ve got this and we can help.

 

DISCLAIMER

The hosts of the White Coat Investor are not licensed accountants, attorneys, or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.

 

Milestones to Millionaire Transcript

Transcription – MtoM – 170

INTRODUCTION

This is the White Coat Investor podcast Milestones to Millionaire – Celebrating stories of success along the journey to financial freedom.

Dr. Jim Dahle:
This is Milestones to Millionaire podcast number 170 – Orthopedic surgeon completes his military commitment as a millionaire.

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Reach out to PKA Insurance to discuss your disability or life insurance needs at whitecoatinvestor.com/pka or by calling 1-(800) 258-1018 or emailing [email protected].

Don’t forget, coming up here in a couple of weeks, we have a resident webinar. It’s May 29th, 06:00 P.M. Mountain Time. Tune in for that. You can sign up at whitecoatinvestor.com./resident. This is the talk I would give to you if I was coming to your residency and speaking to you.

We’re going to talk about having a smooth transition to hit the ground running as an attending. We’re going to talk about understanding what to do with your student loans to minimize their cost. I’m going to have studentloanadvice.com guru, Andrew Paulson on here with me. I know lots of you will have tons of questions about your student loans. So he’ll be with me.

We’re going to talk about how to ensure you have the right insurance protection in place and aren’t paying for insurance you don’t need. We’re going to talk about saving and investing your money so you can reach your goals and spend whatever the rest you want on guilt-free. We’re going to talk about the basics of investing to start building wealth as soon as possible. So tune in, check that out. Again, that is whitecoatinvestor.com./resident.

This is the Milestones to Millionaire podcast. This is where we celebrate your milestone, whatever they are. Maybe you’ve gotten back to broke. Maybe you paid off your car loan. Maybe you became a decamillionaire. Whatever your milestone is, we’ll celebrate it with you. And we’ll use it to inspire others to do the same. There is somebody else in your situation or someone who wants to be in your situation, I assure you. And so we’d love to have you on the podcast. You can apply at whitecoatinvestor.com./milestones.

All right, we’ve got a great guest today straight out of the military. And we’re grateful for his service. But we’re going to celebrate some milestones with him. Stick around afterward, we’re going to talk about itemizing your deductions.

 

INTERVIEW

Our guest today on the Milestone to Millionaire podcast is Dustin. Dustin, welcome to the podcast.

Dustin:
Hi, Dr. Dahle. Thanks for having me.

Dr. Jim Dahle:
Well, tell us what you are. What do you do for a living? How far are you out of training? What part of the country are you in?

Dustin:
I’m a military orthopedic surgeon, fellowship trained in knee and hip replacement. I’m 16 years out of school and through interesting military pathways, eight years out of residency and five years out of fellowship. So I’m currently out in San Diego’s Station.

Dr. Jim Dahle:
Very cool. And tell us about the milestone, milestones maybe, that we’re celebrating today.

Dustin:
This summer, I’m finishing up my military obligation. Past year, we’ve gone over a million dollars in net worth, over $500,000 in retirement savings. And then most importantly, this summer hit 19 years of being married.

Dr. Jim Dahle:
Wow. Congratulations on all of that.

Dustin:
Thank you.

Dr. Jim Dahle:
So how much time have you done in the military total? Where’d you go to school, first of all?

Dustin:
I went to Des Moines University.

Dr. Jim Dahle:
Okay. So you’re on HPSP?

Dustin:
Yeah, I did an HPSP contract there. Then I did a general surgery internship, two years with a marine unit and deployed with them. And then five years of orthopedic residency. And then two years in Okinawa, Japan as staff and fellowship in Boston. And then I’ve been back in San Diego for five. So that’s 16 years active total.

Dr. Jim Dahle:
Wow. Congratulations. And your obligation is just up this summer.

Dustin:
Yes, sir. Yeah. As you well know, every time that you want to do more training or anything else, they add a little bit more time that you owe. So keep dragging the carrot a little bit farther down the road.

Dr. Jim Dahle:
Have you decided if you’re getting out or not? Now that your obligation is up, it’s an option, I suppose.

Dustin:
Yeah, definitely getting out. I already signed up for a civilian job moving to Minnesota. My wife’s family is up there. I’ve got a lot of friends and family up there.

Dr. Jim Dahle:
Okay. So what kind of retirement benefit are you taking after 16 years? It’s not the classic 20, but you get something now these days, don’t you?

Dustin:
Yeah. They have started doing the blended retirement system. So you get a match up to 5% of your base pay per year. I’ll get that. I don’t get a pension for 16 years. I’ll probably try and finish up in the reserves for the remaining four years, get to 20. And if you can do that, you get a pension at age 60.

Dr. Jim Dahle:
Very cool. Very cool. All right. So tell us, this is an interesting career pathway for a lot of people. Obviously, those of us who’ve been in the military, we’ve kind of seen this drill. But for most docs, this is different. It’s different in what you get paid. It’s different in what you owe. It’s different in how long it takes to build wealth. It’s different in whether you’re able to buy a home or not because you keep moving around. Tell us a little bit about your financial pathway to get to this point.

Dustin:
Sure. Kind of average pay when I look back through the years, range of military income has been about $95,000, which included the housing allowance during residency up to $243,000 for including housing allowance last year. Average has been about $150,000 per year. And then the last five years I’ve been in San Diego, we bought a house here. And after COVID kind of calmed down a bit, we’ve been able to do a fair amount of moonlighting, which has greatly augmented my income. I made about $150,000 last year moonlighting. And average about $98,000 the last five years from that.

Dr. Jim Dahle:
Okay. Well, I don’t know if I’ve said it yet. But if not, thank you for your service. You were in there far longer than I was. And although doctors tend not to be shot at very often in the military, you’ve always got a deployment hanging over your head. And there are lots of other reasons why it can be a sacrifice. Not the least of which is you tend to be paid less.

Now, I’m looking at the Medscape salary survey in front of me for this year. And it says the average orthopedist got paid $573,000. Meanwhile, you’ve averaged about $150,000 as an orthopedist while you’ve been in the military. What are your thoughts on that? And how it affects the military’s ability to recruit and retain specialists?

Dustin:
Yeah, it’s definitely a huge factor. I wrote an article for your site a couple of years ago about just how much military doctors are paid and comparing it to civilian pay. I’m taking a civilian job. My civilian job, the guaranteed pay is going to be triple what my military taxable income was the very first day. So, it’s not the only reason, but it’s a significant reason why I’m getting out.

There’s a large number of, as you said, specialists and surgeons getting out now just because they make so much more money in the civilian world. You can control your life a little bit more. Military is definitely having a retention problem at this point in time.

Military physician pay, the incentive pays per specialty have not increased at all since 2015. There’s been about 30% net inflation since that time. So not too surprising that without increasing that, they’re having trouble maintaining people.

Dr. Jim Dahle:
How much more do you get paid in the military than a family doc?

Dustin:
I get paid $16,000 more than a family doc as a board certified orthopedic surgeon with a year of fellowship training after residency.

Dr. Jim Dahle:
All right. You became a millionaire. Tell us about your balance sheet. Tell us about your assets. Tell us about your liabilities.

Dustin:
Sure. Approximate net worth now, I calculated every month. Last month it was $1.38 million. Little over half of that is in home equity. We bought a house in the fall of 2019 and took the COVID boom, especially down here in Southern California. Home equity is about $670,000. I’ve got $600,000 in retirement accounts. Over three quarters of that is Roth or combat zone tax exempt retirement pay.

My thought process was this is hopefully the lowest money I’ll ever make. So I’m trying to get as much into Roth as possible. And then we’ll start worrying about doing tax advantage after that. $386,000 of that is in my TSP, $160,000 IRAs. And I’ve got about $50,000 in a solo 401(k) for my moonlighting money. And the rest is in cash and high yield savings accounts as we’re getting ready to move and trying to save up for those expenses this summer.

Dr. Jim Dahle:
Any debts besides your mortgage?

Dustin:
Just my wife’s student loans, about $15,900. She did a doctorate degree in physical therapy. And through a combination of military moves and COVID, she hasn’t really been able to work outside the home since our middle one was born about eight years ago. So it definitely has had a financial impact as well.

Dr. Jim Dahle:
Well, you’re already on the housing escalator in California. Is your new job going to be in California or will you be moving?

Dustin:
No, I’ll be moving to Minnesota.

Dr. Jim Dahle:
Okay. Tell us about your thoughts about where you were going to live and practice. You’ve experienced life all over the place in the military, particularly a relatively high cost of living area. I think you said San Diego, right?

Dustin:
Yes, sir.

Dr. Jim Dahle:
Tell us your thoughts as you decided where you were going to locate in the country and what impact the ability to create wealth there had on your decisions.

Dustin:
Yes, we looked at a bunch of different areas. We’ve moved around this much. My wife and I moved, this will be our 10th move in 19 years of marriage. Kind of not really tied to one specific area. Minnesota is closer to family, but then also a cost of living is a huge impact. Orthopedic jobs in Southern California don’t pay as well as Minnesota. I’m probably going to get paid about a third to 35% more for being there. The cost of living is about 35% less. So, it’s definitely a huge impact.

Kind of went through, ran some spreadsheet numbers and back-of-the-envelope math. I’ll be able to retire by living in Minnesota, in the equivalent standard of living, I’ll be able to retire about five years earlier than I would be if I stayed in California.

Dr. Jim Dahle:
When do you think you will retire?

Dustin:
I’m hoping to retire around 60. Maybe a little bit earlier if we get farther ahead. If I can finish up in the reserves, the Navy, I’ll get an inflation adjusted pension once I turn 60. So it’d be kind of nice to have that as a fallback as well.

Dr. Jim Dahle:
Very cool. Well, it sounds like you and your spouse have worked very hard to achieve this level of success. What would you say your secrets are? How did you do it? Lots of people, despite being orthopedic surgeons, despite minimizing their debt, don’t accumulate as much wealth as you have. What would have been your secrets to success?

Dustin:
I think a big key has been my wife. She’s been an amazing partner. We’ve moved so much and she’s handled everything with grace and done a phenomenal job of keeping everything together. We’re both pretty frugal, live within our means. I’ve got a 16-year-old car with 160,000 miles on it that I’m planning to keep driving even after we move. She’s got a five-year-old minivan. We’ve got all of our cars completely paid off.

We’ve tried to avoid debt and focused on putting finances first and making sure that we pay ourselves first, max out retirement accounts when the money comes out at the beginning of the month before we even see it. We’ve got to make sure we do that before we spend anything.

Dr. Jim Dahle:

Tell us about your decision to moonlight. What did you feel like you were sacrificing to do that? What did you gain from it?

Dustin:
I think the biggest thing I sacrificed from it is time. I’m usually one to two weekends a month, I’m going most often up to your native Alaska or Washington State doing primarily independent medical examinations. So, the biggest thing I sacrifice there is time. I miss out on a lot of my kids hockey games and things like that.

But the decision to do it was to kind of look at costs and what everything is around here. And essentially, if I don’t moonlight, my kids can’t play hockey. They’re on four teams between the three of them. I’m doing a little bit of Rookie League hockey, trying not to get injured out there. Without the moonlight, we can’t afford the hockey. We can’t afford the family trips.

We just got back from a hockey tournament up in Mammoth, California. Spent a whole week up there to include a hockey tournament and skiing and stuff like that we wouldn’t be able to do and then also saving up money for the move.

Dr. Jim Dahle:
Very cool. Very cool. All right. There is somebody out there like you. Maybe they’ve got a military commitment, maybe they’re serving active duty right now. They want to get to where you are. What advice do you have for them?

Dustin:
One of my mentors in residency once told me the two most important decisions you make in life is who you marry and what you do for a living. He basically said you can screw everything else up and if you get those two right, you’re going to be okay. And I think those are very key.

I think anybody that’s considering a military contract should definitely consider all the aspects of it. I think a lot of people come in like I did. I was terrified of the amount of loans. The amount of loans I was going to be taking out was I’m pretty sure more than my parents ever made per year for each year of loans. I was scared about doing that.

And as you talked about on the show, military is not a good financial decision. If you want to really be a military doc, it’s a great way to do it, great way to serve your country and take care of some people. But from a financial standpoint, it’s definitely not the best move. I think just focus on keeping your life together. Marry well, as well as you can. We got married at 22, so pretty early on. But hopefully my wife is as happy with that decision as I am.

Dr. Jim Dahle:
Yeah, you got to get the good ones early, right?

Dustin:
Yes, sir.

Dr. Jim Dahle:
All right. Well, congratulations to you on your success. And thank you so much for being willing to come on the Milestones podcast and share it with others.

Dustin:
Thank you very much.

Dr. Jim Dahle:
All right. I hope you enjoyed that interview as much as I did. It’s always great to talk to a member of the military. Thank you all of you out there for your service. The military really is having trouble retaining people because they don’t pay that much. But more importantly, they’re having trouble recruiting people. Not only because nobody’s going in blind anymore. They know what they’re getting into. But because PSLF and SAVE have become so generous that HPSP doesn’t look nearly as good by comparison. Even going to USU doesn’t look as good by comparison.

So it’s a real recruiting problem. If you have a desire to serve the military, there’s some incredible people to take care of and some really unique opportunities. I encourage you to do so. But as you can tell from today’s podcast, it’s not necessarily a lucrative decision. And you need to go in with your eyes wide open.

 

FINANCE 101: ITEMIZED DEDUCTIONS

Now, at the top of the podcast, I promised you we’re going to talk about itemizing. And what happens when you do your taxes is that you have a total income and then you take out a few deductions. Money that you make that you don’t have to pay taxes on. And the first deductions you take out are called above the line deductions. They’re things like self-employed retirement accounts and self-employed health insurance, those sorts of things.

And after you take those out, you arrive at a number called your adjusted gross income. That’s usually at the bottom of the first page and the top of the second page, but it varies by year on your tax form. But after you get to your adjusted gross income, you get to take one more deduction away from it to get to your taxable income. And that deduction is called the standard deduction.

In 2024, your standard deduction, if you are single or married filing separately, is $13,850. You double that if you’re filing married filing jointly. So it’s $27,700. You get that just for being alive and breathing. It’s kind of the same reason they give you student loans in medical school. If you can get in medical school and you have a pulse, you get student loans. It’s great. But that’s what the standard deduction is.

Another option, if you don’t want to take the standard deduction, is you can try to get a bigger deduction. And we call that itemized deductions. And itemized deductions are listed on Schedule A of Form 1040. And there’s just a handful of them.

The first one is medical and dental expenses. However, there’s a limit on these. You basically only get the expenses that are more than 7.5% of your income. And I think it’s adjusted gross income. So, that’s kind of hard for doctors. If your adjusted gross income is $300,000, well, you got to spend more than $21,000 on those medical and dental expenses before any of them are deductible. And then only the amount above that is deductible.

So, who really gets this as doctors? People who do an IVF, that sort of a thing. Something that’s not covered, that’s typically your max out-of-pocket on your insurance is less than that amount for a doctor. So, this isn’t a real common deduction for people to take.

One that is very common for doctors is taxes that you pay. And these include state and local taxes. They also include your real estate taxes, your property taxes. You also get the choice, actually, between your income taxes or your sales taxes. But for docs, it’s almost always going to be more for your income taxes, unless you’re in a tax-free state.

However, there’s a limit on this. The limit is $10,000. And you’ve probably heard this, it’s called the SALT tax limit, state and local tax. It’s $10,000 a year and there’s a lot of people that are very salty about that. Typically, people who live in places like New York or California where they have big property taxes on their expensive homes and where they have big, huge income taxes. But it affects pretty much all of us that are doctors and not in one of the seven income tax-free states.

There is a workaround if you’re self-employed in many states. It’s called the PTAC. And it’s basically a way your business can pay your state tax bill. And that way, it gets deducted as a business deduction. And that’s totally legal, totally legit. We do that here at the White Coat Investor in Utah. The White Coat Investor pays my state taxes. And so, I’m actually able to deduct those. That’s the workaround for that. Maybe it’ll change the next time we change our tax system. But for now, if you’re not self-employed, you’re limited to just $10,000 there.

The next category, and probably the biggest one for lots of people, is mortgage interest. You can also throw some other interest in there like investment interest. But for most people, mortgage interest is the big piece here. So if you got a big fat mortgage that you’re paying tons of interest on, like lots of people are now that people have 7% mortgages, this might be a pretty significant deduction. This alone might get you above the standard deduction.

And then finally… Well, not finally, there’s one after that. But the other big category is charity. If you’re a charitable person, if you tithe, if you’re making $400,000 and you give $40,000 a year to charity, that’s a pretty big deduction. You’re going to want to be itemizing, because that alone is going to get you above the standard deduction. You add that with the mortgage interest and then $10,000 of your taxes. And that’s typically what people get. You can also deduct casually in theft losses and a few other obscure deductions on Schedule A.

But the big ones are charity, mortgage interest and $10,000 of taxes. If that all adds up to more than your standard deduction of about $14,000 or about $28,000, then you itemize. If it’s less, then you take the standard deduction.

And you don’t have to do the same thing every year. In fact, what a lot of people do, if you’re a big charitable giver, you might give to charity twice as much every other year. Basically bunch your deductions. You give for last year on January 2nd, you give for this year on January 3rd and you deduct it all in this year. And then last year, you took the standard deduction. So a lot of people use that technique as well if that’s your main deduction.

Obviously, if mortgage interest is your main deduction, that’s not going to work nearly as well. Sometimes people try to push their taxes into the next year or pay them in advance to try to help that when they’re bunching. But I would say probably most docs are not bunching their deductions. They’re just taking the itemized deductions each year, but that’s the way it works.

All right, I hope that’s helpful to you.

 

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Thanks so much for your time on the podcast today. Keep your head up, your shoulders back. You’ve got this, we’re here to help. See you next time on the Milestones to Millionaire podcast.

 

DISCLAIMER

The hosts of the White Coat Investor are not licensed accountants, attorneys, or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.



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