Index Funds, Real Estate, and Buying Into Your Practice - WCI Podcast #394

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.

This is White Coat Investor podcast 394. 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@whitecoatinvestor.com Sofi loans originated by Sofi Bank NA NMLS 696891 advisory services by Sofi Wealth LLC. The brokerage product is offered by Sofi Securities LLC. Member FINRA SIPC. Member investing comes with risk, including risk of loss. Additional terms and conditions may apply. All right, we are back to a regular White Coat Investor Podcast episode. I'm not going to spend all day today talking about climbing. If that was super boring for you the last couple of weeks, I'm sorry. It was a big part of our lives for a while here and so we felt like there were enough people interested in the story and we thought it was an interesting enough story that we decided to spend some time sharing it with you. But we're not going to be doing that today. We're going to be talking about finances, a lot of finances. And that's okay because this is what we do. My goal is to help you to be financially successful. This is just as important to me now as it was a year ago and 10 years ago. And that's because I believe in what you do. I think what you're doing is important whether you're a doctor, and I have obviously a great new appreciation for doctors, whether you are a attorney, whether you are a business owner, whatever you're doing, you're doing some great work for some people out there and you ought to be proud of yourself. And thank you for doing that. It's a big deal and we want to help you to be successful. You've worked way too hard to not be financially successful. All right, let's start with a few corrections. The first one, thankfully, is not even my mistake, but we ought to correct it. This was something Margaret said and just got a little bit backwards. I think she understood this, but just the way it came out didn't come over quite right. She said that you were allowed to roll money over from a Roth ira to a 529. That is not the case. Right. The new thing that came out with The Secure Act 2.0 is that after you've had the money in a 529 for 15 years, you can actually roll some of it out to a Roth IRA in place of your regular or the beneficiary's regular Roth IRA contributions, a total of $35,000. Now obviously that's going to take a few years to get $35,000 out of a 529 into a Roth IRA, but that's the way it works. It does not work in reverse. You still can't make roth IRA to 529 rollovers. A more important correction has been coming in over the last few months in response to some of what I've written and others on this podcast have said about HSAs and when they should be used. And I think the moral of the story is that we need to put a little more nuance into this discussion of whether to use a high deductible health plan or not. Obviously, we all think it's great because you get this cool triple tax free account and you can put more than $8,000 in there a year if you're a family. And it's really cool, right? Because you can invest your HSA and then it can be a stealth ira and it's a great, great account to invest in. It's the first thing we max out every year. I mean, this is first week of January kind of stuff around here at the Dolley household. But there is some nuance to this discussion that maybe we need to have today. The first one is some interesting data that was provided to me by email from one of you listeners. And basically I'm going to read a little bit from this this listener said, I think it's important to emphasize to the white coat community that the high deductible health plans that allow the use of an HSA may carry some downsides, which the HSAs may only partially counteract. In a talk at June's ASCO the American Society of Clinical Oncology meeting, Justin Barnes from Washington University gave a talk demonstrating that individuals with high deductible health plans are more likely to be younger, privately insured, and have a higher income than those with non high deductible health plans. Okay, well, that's kind of expected, right? And yet cancer survivors among the high deductible health plan subscribers have an increased risk of death as compared to survivors with non high deductible health plans to the tune of a hazard ratio of 1.46. That confidence interval is significant, 1.19 to 1.79. This is fascinating to me, right? I've never heard this before that anybody had studied this. Basically, people with high deductible health plans were more likely to die from cancer than those that did not have high deductible health plans. So Dr. Barnes hypothesized that the high deductible health plans may financially disincentivize cancer survivors from using necessary medical care, compromising their outcomes even among patients with good prognostic features like higher education and income. The emailer said, not presented in this talk but referenced by the presenter is that the ACS has shown that an HSA might mitigate the excess risk. Now, there's some limitations to that analysis, right? There's some selection bias. Maybe a generic definition of a high deductible health plan, right? It's the IRS making that definition and the one time assessment of patients who might have recently transitioned to or from high deductible health plans and of course the small number of patients that are diagnosed with cancer. So this is not gospel until it is shown to happen over and over again in confirmatory studies. But it's something to think about, right? Maybe a high deductible health plan isn't the cat's meow even when it gives you access to a health savings plan. I have always emphasized for years that you need to choose the right plan for you and your family first and then if that right plan happens to be a high deductible health plan, then use an hsa. Now there are some additional benefits of the HSA that maybe ought to be added into that decision, right? But don't do anything to get an hsa, I think is the point. It's possible that'll even lead you to get worse healthcare outcomes. So I think that was an important discussion to have, an important thing to add to our discussion. Another email I got recently was an interesting situation that a doctor had and it also made them wonder about kind of rules of thumb around HSAs that are out there. This listener said, my husband and I are both employees of a large academic medical center and research foundation. One of the executive compensation benefits provided to physicians and scientists on staff is a reimbursement account of $10,000 per staff member per year. It can be used to reimburse oneself for qualifying dental services, orthodontics or co pays for some out of network medical services because My husband and I each qualify for this benefit. Due to our employment roles as a family, we have access to up to $20,000 per year of free money for qualifying expenses. While navigating through our HR system to change our medical insurance selection at the high deductible plan, I discovered that making this switch would eliminate eligibility for our reimbursement accounts. And they typically used like $3,000 per year of those reimbursement dollars. The point that the emailer was making was it didn't make sense for them to use a high deductible health plan, right? Even though it gave them an hsa because they were giving up this other huge benefit that their employer offered. Now, I don't think this particular employer benefit is very common at all, but if you have it and you lose it by using a high deductible health plan, there's a good chance that's not the right plan for you. The bottom line is it's really hard to make rules of thumb about what health insurance plan you should use. You got to look at your situation. You got to run the numbers both ways, right? For a high deductible plan versus a PPO plan or some other type of non high deductible plan. And you got to make a decision that's right for you. You ought to take in the tax benefits of the health savings account into that discussion. Run the numbers, make the best guess you can. Now, obviously some years you're still going to pay your max out of pocket. 2024 was a year like that for us. We generally don't pay our max out of pocket. We usually don't even pay our deductible most years. Deductible health plan works very well for us. But guess what? This year I spent an awful lot of money on health care. My three day ICU stay where the main treatment there was me sitting up in bed for three days. You know, the bill for that was over $100,000. Even after insurance, it was over $50,000 just for that portion of my care. But I get my max out of pocket before I ever got to the hospital. So if you're using a lot of healthcare, if you're consuming a lot of healthcare, there's a good chance that whatever has the lowest max out of pocket is going to be the best deal for you, even if the premiums are a little higher or even if that means you can't use an hsa. But you got to run the numbers, okay? I don't think we can just use rules of thumb and make that decision as easy as I would like it to be. You got to put a little more into choosing the right health plan each year. I'm sorry. I wish our medical system wasn't so complicated, but it is and most of us are just trying to live within it, earn our incomes and take care of our families as best we can. Let's get into some of your questions now. This one comes from Chris. He has a question about index funds, so let's take a listen to that.

Hi Dr. Dali, this is Chris in Florida. First of all, thank you for all that you do. I have been binging the podcast for the last two years or so while keeping up with new podcasts that have come out as well and have almost caught up. Obviously, after listening to all that content, I know how much of a fan you are of low cost index funds. I was even at your keynote address about index funds at this year's WC Icon in Orlando. I was hoping you could explain more about how these funds actually work in regards to their top 10 holdings. The information about the top 10 stocks held in these funds is easily found in a basic Google search. But how, for example, in a total Stock Market index fund do the top 10 stocks in the fund come to account for nearly 30% of the total fund at the time of asking this question, 29.69% of VTI is made up of of the top 10 fund holdings despite having over 3,700 stocks in the fund. Can you walk us through how this came to be? Is this the goal of the fund? Is new money in the fund buying more or less of these companies? Are there any regulations or bylaws the funds have to follow? Any insight you have would be graciously appreciated. Thanks again.

Okay, good question. Let's talk a little bit about index funds. Okay. An index fund is a passively managed mutual fund. Mutual funds we like mutual funds are good. They give you professional management. They give you an economy of scale on the costs of running a fund. They give you wide diversification. They give you daily liquidity. It's a good thing. And the data is very clear that in the long run, passively managed funds, AKA index funds, are likely to outperform the vast majority of of actively managed funds investing in the same stocks. So I think it's pretty clear that index funds are the way to invest in stocks. I don't think there's a lot of doubt about that. I think most wciers know this, but let's get into a little bit of detail about these. Now, everything, all the facts you listed in your question are true. As I go to Morningstar and look up BTI or BT Sachs, which is the mutual fund version of the Vanguard Total Stock Market Index Fund, I see that Apple makes up 6.1% of the fund. It's a big company, right? Look in your pocket. What's in there? That's right. There's a fifteen hundred dollar computer in your pocket that contains the world's knowledge. They make a lot of these. And guess what? The computer is sitting on my desk. Both of them are Apples, right? We buy a lot of Apple crap and Apple makes a lot of money. It's a very valuable company. And when it makes money, I make money. When it makes money. If you own VTI or VT Sachs or some other index fund, you also make a lot of money. But because it's such a big company, it does make up 6% of that index fund. Index funds, the vast majority of them anyway are capitalization weighted. Right? The bigger the company, the more of the index it makes up. It turns out that Apple is a bigger company capitalization wise than hundreds of the smallest companies in the country. It's a very, very large company. It makes a lot of money, it has a lot of employees, has a great deal of profit, a great deal of sales, et cetera. Okay? It's just really big. And that is how funds are designed. Now, there are some great benefits to a capitalization weighted index. You know, basically you already own the next Apple. You know, whatever it may be, whatever's going to be huge 15 years from now, you already own it, you probably bought it low, it wasn't worth nearly as much. And in 15 years you're going to be super happy that you got to ride it, you know, enjoy its ride to the top of the charts. But that's the way capitalization works. You're basically taking the stock price times the number of shares that are out there. That's the market capitalization. The next biggest company is Microsoft, 5.7%. Then Nvidia 5.1%. They weren't that big of a deal. They mostly just made graphics chips for gamers for a while. But it turned out that those chips were really important when AI came along. And now Nvidia is the third largest company in the US. Amazon's fourth at 3%. Meta. Right. Facebook's 2% Alphabet or Google's almost 2%. Berkshire Hathaway. Right. Warren Buffett's insurance company, it's 1.5%. Eli Lilly. Right. We've heard of that one before. That comes next. Alphabet, class C. Right. So their class a shares are 1.7%. Their Class C shares are 1.45%. So together, Google's basically 3% of the US stock market index capitalization and Broadcom comes last in the top 10 holdings. Now, is the US market currently a little more concentrated in the top 10 holdings than usual? Yes, it is. It is more concentrated, but always it has been concentrated in the top 10 holdings because it's capitalization weighted. And these are the biggest companies. So you know, I think historically if you look back at might only be, you know, 15 or 20% or whatever on average. I don't know what the average is, but it's less than 29% or whatever it is now. But this just reflects the incredible run that number one US Stocks have had. Number two, large stocks have had, number three growth stocks have had, and number four, tech stocks have had. So these large US Growth tech stocks have grown dramatically in comparison to the rest of the U.S. stock market. And that has resulted in them being at the top of the list and then making up such a large percentage of the overall stock market. And obviously the pendulum swings, right? We don't know when it's going to swing, but it does swing. The stock market looked kind of similarly back in early 2000 and then it swung. It swung away from the large growthy techie stocks, right? And the small and valuey and boring stocks and the international stocks did better for like a decade. The US overall stock market index didn't do very good from 2000 to 2010. It was basically flat. I think it was slightly better than flat, but not by much. Whereas international stocks did better, small stocks did better, value stocks did better. So if this is something you worry a lot about out, you might want a portfolio that looks somewhat similar to mine. Now when we look at our US stocks in our portfolio, we've got 25% of the portfolio in boring old VTI or VT Sachs, right? A total US stock market which is of course dominated by large growthy tech stocks. But we've also got 15% of our portfolio in small value stocks, right? Which is like 3 or 4% of the stock market by capitalization. But there's some data out there suggesting that in the long run small and value stocks outperform. That hasn't been the case over the last 20 years. Right. That has been the wrong way to bet over the last 20 years because of this outperformance of large growth tech stocks. But I think that pendulum is going to swing at some point. I have no idea where or when, but we're going to stay the course with the portfolio we've had for the last 20 years. And when small and value stocks outperform, we're going to reap the rewards of doing that. If this is something that worries you a lot, the fact that your money in a total market index is concentrated in a few stocks, you might want to consider tilting some of your portfolio towards something like small and value stocks as well. But otherwise, this is a feature of a capitalization weighted index, not a bug. So I wouldn't spend a lot of time lying awake at night about it. Even after the pendulum swings and small value outperforms large growth for a While, the top 10 holdings in the market are still going to be 15 or 20% of the market, right? That's just the way it's going to work because it's a capitalization weighted market. The alternative to a capitalization weighted market is like an equal weighted index fund. And that puts the same amount of money into every stock. And that's really hard to run for a lot of reasons. It is more complex and more expensive to run. And mostly all you're doing is giving your portfolio a small and a value tilt. So if you want to do that, I just encourage you to put some of your money into a small value fund. And we've talked about that on the podcast before, certainly have blogged about it many, many times on the blog. But I think that's probably a better option than using an equal weighted index. But you'll see a few of those out there and if you think those are cool and cast meow, you can invest in that instead of a capitalization weighted market index. But I think the capitalization weighted ones like VTI or VT Sachs or the Fidelity or Schwab or iShares equivalents are just fine to use and obviously make up a huge percentage of our portfolio. And obviously over the last 20 years that has roared as well. Hope that's helpful. Hey, if you need a little bit of extra income and don't want to spend a lot of time or a lot of effort doing it, I'd encourage you to look into some of these physician surveys we have out there. But if you go to whitecoatinvestor.com paidsurveys, you can look at what's available. For some specialties, there's a lot available. For other specialties, it's less. But the more expensive drugs and treatments you tend to use in your specialty the more likely you are to have lots of surveys available to you. These companies, whether they're pharma or device companies or whoever, they want your opinion, they're willing to pay you for it. And sometimes on an hourly rate that works out better than your clinical work. And you can often do this in kind of downtime. You know, while you're sitting there watching, you know, a really boring high school football game, or while you're commuting on the train, or, you know, while you're watching TV and vegging at the end of the night, you can knock out a survey or two and you'd be surprised. This stuff can add up. I know a few docs that are making tens of thousands of dollars a year on just doing paid surveys. So take a look at it. Check it out. Bycodeinvestor.com let's take our next question from Mike. Hi Dr. Dali, this is Mike from the Midwest. Appreciate all that you've done for us. I had a moderately in the weeds question to ask. I have a solo 401k through mysolo401k.net, which I greatly appreciate your recommendation on. I had taken out a loan on the Solo 401k to invest in some real estate. This year. Partially because of those real estate investments, I'll have a lower W2 income year than most and I therefore wanted to roll my Solo 401 into a Roth IRA. My question is, I know I can roll what I have currently in my solo 401 into the Roth IRA. I have no pro rata issues. The question is, could I also put the indebted part of my Solo 401, which I've borrowed on, into the Roth index? Pay it off in the Roth? My guess is no. But if I could, it'd be pretty cool as a double secret backdoor Roth since I'd be paying my solo and 4k loan back with 9% interest. Appreciate your thoughts and appreciate the show. Thanks. Okay Mike, great question. I love it. I don't think I've ever had this question before, which is saying a lot after, you know, whatever. We're on 400 podcasts or something. IRAs can't have loans. You can't borrow from your IRA. So if you converted this to an IRA, whether it was a traditional IRA or a Roth IRA, basically that loan's going to be treated as a withdrawal and it's going to be a non qualified withdrawal. So you're going to pay taxes and penalties on that. That's no bueno. So I think before you move this money into an IRA of any kind, whether there's a Roth conversion involved or or not, I think you need to pay the loan back. I wouldn't do that. 401k loans are convenient, but really they need to be looked at as pretty short term loans. If you need money for a few months, fine, get it out of your 401, pay it back fast. The limit on this is $50,000 or 50% of your balance, whichever's smaller. So it's never a huge loan. So I would hope that you'd be able to pay that back first before doing any sort of a rollover. The other thing to look into is you may not have to take this money out of the 401k to do a conversion. Right? You can likely, you likely have a Solo 401. This customized Solo 401 you set up. You know, you pay 125 bucks a year or whatever it is, but you get some great features from that. One of which is the ability to do some in plan conversions. So you don't have to take this money out of the 401k. You can just roll it over from the tax deferred side to the Roth side. And I don't think you have to pay the loan back to do that. Now, whether you can convert a loan or not, I'm not entirely sure. That's a question I would probably give to the mysolo401.net guys and ask them whether they would allow you to do that. I suspect they may not. They may roll over money that's not the loan, but I don't know that for sure. I don't know how that alone being converted would be treated. It's a very interesting question. I don't think I've ever heard anybody ever discuss it. Maybe somebody out there that really knows the answer can send me an email and we'll run it as kind of a correction clarification later. But I try not to do that sort of a thing. It's just getting really complex. I'd probably try to keep it in the 401k even if you want to do a Roth conversion. But I might take the money I was going to use to pay the taxes on that conversion and just pay off the loan instead first and think about the Roth conversion later. Hope that helps. All right, we're going to talk for a few minutes. Mike mentioned real estate. We're going to talk for a few minutes about real estate. We've got blog sponsor Paul Moore here We're going to do a short interview and talk a little bit about the current real estate market as well as what they do over at the Wellings Fund, which is one of our sponsors here on the podcast. Let's do that interview and then we'll get back to your questions. Our guest on the White Coat Investor podcast today is Paul Moore. He's a managing partner for Wellings Capital. You may know him from the Wellings Real Estate Income Fund or from his books that he's written or from the contributions he makes with bigger pockets. But today he's obviously a sponsor of the White Coat Investor Podcast and we just wanted to talk with him a little bit about not only what they do at Wellings Capital, but about real estate investing in general. Now, Paul, welcome to the podcast first of all.

Thanks Jim. Great to be here.

Now, the Wellings Real Estate Income Fund is a little bit unique from a lot of our sponsors. A lot of our sponsors invest pretty much only in multi family real estate and apartment complexes essentially. But one of the fun things about the Wellings Real Estate Income Fund is that it invests in several non traditional asset classes, particularly self storage, RV parks, manufactured housing, and there's still a fair amount of multifamily in the fund. But I'm curious if you could explain to the audience what you see as the main advantages of having these other asset classes in the fund.

Well, you know, I wrote a book on multifamily and I called it the Perfect Investment, which I think is a pretty humble title. But we found over the years that multifamily for us at least a lot of the value add opportunities had already been extinguished by great operators who have already acquired these, who have already upgraded these assets. And we found that there are a lot of mom and pop owned opportunities in some other recession resistant asset types like you said, self storage, mobile home parks, RV parks, where the mom and pop operators typically don't have the desire or the knowledge or the resources to upgrade these assets to provide a better situation for tenants to increase the income and, and maximize investor roi. So by taking advantage of these opportunities, we're giving the seller, the mom and pop seller, a great exit. We're also increasing the viability of these, the profitability, I should say, of these assets. And we're actually creating a very nice margin of safety for difficult times, profitable cash flow and hopefully a profitable exit on these assets as our operating partners grow the value and as they continue to add value to these assets. So for example, in self storage, a typical self storage Asset is owned by a mom and pop operator. You can acquire these. Sometimes they'll say, hey, there's six acres out back we don't really use. Well, you know, sometimes you can gravel or pave that and add storage for boats and RVs. You can put a billboard out front. I've seen some put propane filling stations, ATMs out front. There's a chance to put a cell tower in the back. In some cases you can expand the asset. You can add retail items like locks, boxes, tape and scissors. You can add U haul, U haul rentals can add thousands of dollars a month to the net operating income. Can pay for an additional employee or more and sometimes create an additional, let's say, million dollars of value at the asset. Doing these things, you know, it's a hassle. But a professional company like the kind we partner with in our fund, they do this as a matter of course where this would be a huge. Has heavy lift for the previous owner, the mom and pop operator.

Yeah. Now the main value proposition of the Wellings fund is that the investors get pretty darn broad diversification as well as the services of your team doing the due diligence for just a minimum investment of $50,000. You're investing across 20 states, a bunch of different asset classes, bunch of different operators. Of course, that comes at a price in exchange for an additional layer of fees on the majority of the fund. Can you make the case to pay Wellings for those services, that diversification and that due diligence?

Yeah. You know, Jim, last year we reviewed 515 operators and assets. And you know, honestly, if you are a white coat professional or even if you're retired and you're spending time with your family or with your hobbies, it's pretty hard to imagine how you could even really do due diligence on more than 10% of that many. If you had the skills and if you had the knowledge and if you had the software and the different programs that we have. We have a 27 point due diligence checklist and we, you know, we really like to say no. Warren Buffett said that the best investors say no a lot. The very investors, very best investors say no almost all the time. And that's what we do as well. Of the 515 deals we reviewed last year, we only invested in four new operators and 11 opportunities total. And so we do say no a lot are just some examples. We do very deep dive criminal checks, background checks, reference checks on these operators. We fly out to their headquarters, we see how they talk about their spouse, we see how they talk to the waiter, we see how they talk about their investors. We do criminal and background checks on some of their vendors. Last year we were about to invest with somebody. We found out that one of their vendors was in jail for fraud. And that raised a big red flag with us. And we eventually did not invest with that operator. We just do all types of, of due diligence. One of our folks on our team is actually trained by former CIA agents and uncovering facts that you wouldn't know on the surface. We actually do noi audits on these assets as they're being acquired to prove the net operating income really came from where the seller said it did. We do a lot of things like this that an individual investor probably wouldn't have access to even if they had the ability to take $50,000 and somehow spread it across 20 or 30 different investments.

Now, lots of professional real estate fund managers feel like credit and preferred equity is more attractive than common equity right now. Do you agree with that? And if so, why do you think that is?

You know, Warren Buffett invested $5 billion in Goldman Sachs when nobody else would touc in the very worst weeks of the great financial crisis in the fall of 2008. And we believe that was a good investment because he limited his downside risk. But he got preferred or priority returns when things went well. And at times like this, when there's uncertainty in the economy and it's really hard to get double digit returns penciled out, we, we really feel like limiting the risk. And getting a contractual return, even if it's limited, is a very nice place to be. So we're investing in preferred equity in real estate. A lot of these deals are multifamily. These are not rescue capital deals. These are actually either recapitalization or acquisition. Basically what it means is if the debt comes in instead of at 75% like it was five or six years ago or less, let's say the debt comes in at 60% and the equity, instead of being able to fill that 40% gap only, let's say only 25 or 30% is there. We come in in the middle and we typically get a personal guarantee from the sponsor, which is worth a lot. We get depreciation just like common equity. We get cash flow, typically 9 or 10% contractually right on the front end and then on the back end when we are taken out, we typically get another 5, 6 or 7%, sometimes more. And that accruing compounded upside plus the Regular cash flow we get along the way can return IRRs of 17 to 19% for the small check sizes that we're writing. When I say small, I mean two or three up to five or six or $7 million, where a lot of institutional players won't play. They're calling us, and we are filling those gaps on behalf of our investors right now.

Awesome, Paul. Thanks so much for coming on. For those who are interested in learning more about Paul, about Wellings Capital, or about the investment opportunity available there, you can go to whitecoatinvestor.com and get more information. Thanks for coming on the podcast, Paul.

Thanks, Jim.

Okay, our next question comes from Danielle. She wants to ask about buying into a partnership and a whole bunch of other questions. So let's take a listen.

Hi, Dr. Dali, this is Danielle from Illinois. I have a mathematics question for you. I'm going to be buying into partnership in the fall, and historically the partnership has paid about 9% dividends. And on the funds put into the partnership, I have a mortgage that's 5.5% interest and student loans ranging from 5% to 7% interest. I also have three kids and contribute to 529s for them. And Illinois gives a tax break on up to $20,000, and Illinois taxes are about 5% on income. So the question is, how much should I max out the partnership? My husband thinks that we should put in as much as we possibly can since it pays 9% dividends, but there's no guarantee. There's also no limit on the amount I can put in. At least that's feasible to me at this point, and so I could endlessly contribute even on the dividends. But to me, paying off the loans makes more sense since it is a guaranteed debt that we are going to have to pay. The question is just how much do I put into partnership and at what point do I stop and start focusing on paying down the loans as fast as possible? Thanks for your help.

All right, Danielle, great question. This is classic Dr. Financial stuff, right? We all have these questions, especially the first few years out of training, right? We got all these great uses for money, but not enough money to do them all. So we have to choose. We have to choose what our financial goals are and then work toward those goals in the order that they matter to us. I think you've already identified the key points in this decision, right? You have the potential to make 9% on this money, which is a higher interest rate than all of your loans, but it's not guaranteed, right? And in a Risk adjusted way, it's probably not even higher. Right. This is a pretty good risky thing to do to be putting money into a small business right now. Would I still do some of it? Absolutely, I would. You know, I like taking risks. I like ownership. You know, I like the benefits that come from owning your job and owning your business. I think it's a great place to put money. I would much rather see people, you know, buying practices than buying homes, for instance. But you got to balance everything, right? So what I would do is I would sit back and look at your financial goals. What is your goal for paying off your student loans? When do you want to be rid of them, and how much money needs to go toward them each month in order to reach that goal? So I put that much toward the student loans. Same thing with the mortgage, right? When do you want to be rid of the mortgage? How much do you have to put toward it each month in order to reach that goal? Put that much toward the mortgage. How much do you need in the 529s in order to reach your goals? Now you're talking. You get a tax benefit on your state income taxes in Illinois of up to 20 grand. I don't know if that's per student, but that's a lot of money for most doctors to put into $529,000 every year. I mean, if I run the numbers here, if I pull up my Excel spreadsheet and I look at putting $20,000 into an investment, let's say it makes 5% real for 18 years. I put 20 grand in there a year. That adds up after 18 years to $560,000. That's a lot of money in a 529. Right. I don't think you have to put 20 grand a year into every kid's 529, no matter where you're going to send them to school. Maybe if you're going to send them to a really expensive private college and then they're going to go to a really expensive med school, maybe you could blow through $562,000, which would further increase, by the way, during those years they're in school. Maybe you could blow through that. But come on, that's a lot of money for education. I mean, my kids 529s are around 150,000, and I think they're all going to be overfunded, right? They're just not going to use that much for college given the cheap schools they're talking about attending. So I've already Really probably funded all my grandkids 529s and that's far less than $560,000. But you got to look at your goals. How much money do you want to have saved up for college? How much do you need to put in there each year? So I would look at all those things. How much toward the student loans, how much toward the mortgage, how much toward the 529s to reach your goals. And then if you can still invest more and the partnership seems like a good deal, put some money into the partnership, but don't put all your investment money into the partnership. Right? You probably also have some 401s and some backdoor Roth IRAs available to you. You might want to invest some into a taxable account. You probably don't want it all going into the partnership. So figure out the balance. Put some money in there though, right? 9% sounds awesome and it's good to be invested in your business. But don't put all your eggs in one basket, right? Find some balance. There are many right answers to this question, but all you have to do is find the right answer for you. It doesn't have to be the right answer for me or anyone else out there. Sorry. How's that for a non answer, But I hope the reasoning is helpful to you. Our quote of the day today comes from Epictetus. I'm not sure if that is a Greek or a Roman, but it is somebody from the classical world who said wealth consists not in having great possessions, but in having few wants. There's a great deal of truth to that, of course. Okay, let's take this question from Bob, who's got a question about portfolio management and behavioral economics.

Hi Dr. Dali. I have a question about portfolio management and behavioral economics. It specifically concerns the topic of the recommended frequency of rebalancing. I DIY my portfolio about 1.2 million in liquid assets, about 85% equities and 15% bonds. All broad market ETFs or mutual funds. I've heard that the recommendation in general for time based rebalancing is about one year to 18 months and that evidence shows no significant benefits at more frequent intervals. I've also heard that for criterion based rebalancing, the recommendation is to trigger rebalancing when an asset class deviates more than 5%, say. And the assumption here is that triggering at smaller deviations doesn't yield any greater benefits. My problem is that I like to tinker. I think on the one hand that's what gives me the Wherewithal to diy. But I also know I need to keep it in check all the time. For example, I have urges to check my portfolio to change asset allocations based on market predictions to performance chase, buy and sell individual stocks, all the things that I know would get me in trouble. My theory is that frequent rebalancing satisfies this maximizer urge and allows me to systematically buy low and sell high. So my question is really, what is the problem with rebalancing too frequently? From a relative perspective, wouldn't rebalancing a portfolio with a fixed asset allocation always lead to buying low and selling high? Assuming it's done in a tax conscious way, and if it scratches an itch, what's the harm of doing it monthly or even weekly when there are big market swings, such as those in April, May and July, August this year? Looking forward to hearing your thoughts. Thank you.

All right, Bob, we got to get you a new hobby. All right? Rebalancing your portfolio every month, every week, every day is not a good hobby. All right? Maybe you shouldn't take up rock climbing. I heard bad things can happen when people do that. But you need to look around and see what other ways you can use your time in a way that will improve your life. We've only got limited resources. We've got limited money. We've got limited time. We've got limited health. It's not all about just maximizing the money aspect. You've also got time and health to consider. So maybe that time ought to be spent out walking rather than rebalancing your portfolio. I know that might not meet your desire to tinker with your portfolio, but maybe there's something else in your life you can tinker with because this is not an effective way to do it. Rebalancing's somewhat important, right? This is not a really important part of personal finance or investment management. It's interesting to look at the data. The data suggests that the proper interval is. Yes, between one and three years. As far out as every three years. Rebalancing once is okay. You don't have to be rebalancing any more frequently than that. And that same data suggests that rebalancing less, more, more frequently than once per year is actually detrimental. Well, how can that be? How can it be detrimental if you're selling high and buying low? Well, it's because the high is going to go higher first. Right. For example, let's consider 2024. Stocks have basically gone up throughout the year. You know. Yeah. There's Been some up and downs, but mostly throughout the year. So at any point this year that you sold stocks and bought bonds, you've come out behind for it. Your portfolio is now smaller, yes, your risk is a little bit lower as well, but your portfolio is smaller than if you had waited until the date I'm recording this podcast, which is late October, and rebalanced it all now than if you had done it at any point earlier in the year. And that's why frequent rebalancing can hurt you, is because those stocks still had some more time to run or more time to drop or whatever the case might be. But you don't need to worry about this too much, right? I mean, for the most part, I don't rebalance my portfolio. I just direct new money where it needs to go. Okay, so for example, I smacked my head a few months ago, you might have heard about it, and I didn't touch my portfolio for months afterward, right? And so just this week, as I'm recording this, again, this is late October, just this week, I went in, I had some money to invest from the last couple of months, and I looked, well, what's behind in my portfolio? Well, guess what's behind after 2022? Bonds are behind. You know, my real estate's done okay. Stocks have done great, especially US Stocks. And so my new money needed to go toward bonds to bring the portfolio back into balance. So every bit of my investment for October and really for September as well went toward bonds. And that's okay. You know, it doesn't have to be perfectly in balance. If you're a percentage up or percentage down, that's okay. There's. You don't get any magic rewards for being perfectly balanced. And besides, even if you did perfectly balance your portfolio, two minutes later, it's out of balance again, right? The next day it's out of balance again, the next week it's out of balance again. You don't have to be perfectly balanced. It really doesn't matter if you have a 75% stock allocation or a 70% stock allocation. So how much can it possibly matter that you're out of balance by 5%? It doesn't matter that much. Now, you don't want to ignore this and end up having your portfolio go from 60, 40 to 90, 10, you know, never rebalancing and always just contributing in those same percentages. But you don't have to spend a lot of time worrying about rebalancing. You've figured out the two reasonable ways to rebalance. One is on a time interval. This is how I do my parents portfolio is rebalanced once a year and the other way to do it is on when it goes up and down by a certain amount. If an asset class goes up by 25% relative or 5% absolute, that's a trigger to rebalance and you rebalance the whole portfolio. Also a reasonable way to do it, but you do have to pay more attention, particularly in down markets that might be triggered. And maybe that's not great behaviorally to be paying more attention in a down market. It might lead you to do something dumb. And so maybe that's not a good thing. So I hope I've talked you out of tinkering too much. You really don't have to tinker with your portfolio to be successful. Katie and I have reached all of our financial goals and how much tinkering have I done in the last three months? None. I've done no tinkering after three months. I kind of added up what we had, updated the spreadsheet and made one purchase. That's all the tinkering I've done in the last three months and that works just fine. We've reached all our financial goals. We're plenty wealthy. You don't have to mess with your money all the time in order to be successful. In fact, you are probably better off if you do not mess with your money all of the time because you're probably hurting yourself. Now usually that takes the form of buying individual stocks or messing around with options or something that causes you to lose money. But in your case it's taking the form just rebalancing too frequently and that is hurting your returns. You should stop doing it and find another hobby. I don't mean that in any sort of a mean way, but I wanted to be direct so you got the picture of this hobby and what it's costing you in order to do this hobby. Because it is costing you something to rebalance every day or every week or whatever that you wouldn't be paying if you were spending less time messing around with it. As I mentioned at the top of the podcast, SOFI is helping medical professionals like U.S. bank, borrow and invest to achieve financial wellness. Whether you're a resident or close to retirement, SOFI offers medical professionals exclusive rates and services to help you get your money right. Visit their dedicated page to see all that SOFI has to offer@whitecoatinvestor.com SoFi one more time. That's www.whitecodeinvestor.com SoFi loans originated by SoFi Bank NA NMLS 696891 advisory services by SoFi Wealth, LLC. The brokerage product is offered by SoFi Securities, LLC, member FINRA SIPC. Vesting comes with risk, including risk of loss. Additional terms and conditions may apply. All right, don't forget about the paid surveys I told you about. Whitecoatinvestor.com paidsurveys Check those out. They may work for you, they may not. But it doesn't hurt you to see. Thanks for those of you leaving us a five star review and telling your friends about the podcast, a recent review said Empowering Physicians the White Coat Investor podcast, hosted by Dr. Dali, stands out as a beacon of financial education for physicians, offering invaluable insights that has been as influential to my life as my actual medical education. With effortlessly delivered content and a lineup of knowledgeable guest speakers, the podcasts are not only informative, but remarkably easy to listen to and enjoyable on my commute. Since tuning in as a fellow in 2019, I've witnessed remarkable growth in our net worth, surpassing 2 million in less than five years, a feat I attribute to the wisdom gleaned from WCI. Despite having delved in Dr. Daly's books, blog posts and earlier podcasts, the newly released material continues to provide fresh perspectives and actionable advice, making it an indispensable resource for physicians navigating the world of personal finance. I feel like I need to put that into my resume or something. That was awesome. Thank you so much Blim c for that five star review. And we do appreciate you guys putting those in because they help us spread the word about the podcast. The more five star reviews you get, the more people hear about the podcast, the more people fix their finances, the more people are able to concentrate on what really matters in life. And that's an awesome thing. So keep your head up, shoulders back. You've got this. We're here to help. Thank you so much for what you do and thanks for being part of the White Coat Investor community. See you next time.

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.