Investing Questions - WCI Podcast #433

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 433 investing questions. Today's episode is brought to us by SoFi, the folks who help you get your money right. Paying off student debt quickly and getting your finances back on track isn't easy, but that's where SoFi can help. They have exclusive low rates designed to help medical residents refinance student loans. And that could end up saving you thousands of dollars, helping you get out of student debt sooner. SoFi also offers the ability to lower your payments to just $100 a month while you're still in residency. And if you're already out of residency, SoFi's got you covered there too. For more information, go to sofi.com whitecoatinvestor so SoFi student loans are originated by SoFi Bank NA member FDIC. Additional terms and conditions apply. NMLS 696891 all right, welcome back to the podcast. It's summer. That means we're all trying to take time off around here at White Coat Investor. It's amazing to look at the weeks and see how many of our staff are gone in any given week. That means when we're together, we wedge everything in and try to get the work done. Unfortunately, that's the way emergency medicine works too. And I've apparently taken too much time off in this month. And so here I find myself this week working seven days straight. Now, it's not unusual for docs. I know docs do that all the time, but for me it's a little unusual. I only work six shifts a month and I've got five of them this week, you know, between shifts for July at the end of July and shifts for August at the beginning of August. So you can tell I'm recording this on the last day of July. And then of course, the other two days in the week are chock full of WCI stuff. So I'm feeling a little crispy right now. Not going to lie, but I'm going to spend all next week backpacking, so should be okay. Looking forward to going to the Uintah Mountains with some young men from our church group. So it should be a lot of fun. All right, let's get into your questions today. We've got a lot of great questions to talk about today. The first one comes in from somebody who sent me an Email Said, I have a suggestion for a blog post. And I said, sounds better to cover on the podcast. Said, a rundown on the financial details in a stock quote. I agree with your preachings against picking and owning individual stocks. However, chump's going to chump. And one of those chumps is my wife, who recently enthusiastically brought me the quote on her latest stock interest. The reason she was so excited was that the price per share was five bucks, which she considers a steal. I tried to explain that the price per share is meaningless without considering the underlying value per share, but she wasn't having it. Just like with free handbags, she believes that the price is the value. That got me thinking that a rundown on the stock fund, etf, et cetera, quote items, especially the significance of price per share, may be beneficial. Okay, well, let's talk about this. First of all, the reason there are publicly owned companies is that once people owned a company and decided they didn't want to own it anymore, they would rather have cash than own the company, so they sold it. And sometimes you feel like you can get a better price by selling it to everybody than by selling it to just one person or one company. And especially if it's a particularly valuable company, you can't find any one person to buy it. You have to go sell it to everybody. And that's called going public, right? That's when a stock becomes a stock, when it gets on the stock market, right. It goes from being a public company to a, or a private company to being a publicly traded company. And in order to do that, you have to try to figure out about what the company's worth. And then once it starts trading on the stock market, everybody, the market gets to decide what the company's worth. And that changes by the second during the day. That's why the price of your stock goes up by 1% or down by 7% in a single day, because the market changes their opinion as things go along. The market is all of us weighing in on what the opinion is. So the way you determine the value of a publicly traded company, though, is you count up the number of shares and you multiply that number of shares by the price per share, right? So that's not that hard to do. Basically, that information is available for any publicly traded traded company, right? So if we put in Tesla stock into Google, what pops up is Tesla Inc. It says it's traded on the nasdaq, gives you the ticker TSLA and tells you what the market cap of the company is. And according to this, it is $967 billion. $967 billion is a market capitalization. That's how much the company is worth. The value of the company at this second is $967 billion, almost a trillion dollars. That makes it a big company. This is a large cap company, right? There are mid cap companies and there are small cap companies, but when you're worth a trillion dollars, you're considered a large cap company. Okay? But if you look at the information available on that, you can see all kinds of things. The most interesting thing that we look at most often is probably the, the stupid chart that pops up. And you can change that chart. It'll show you how the price has varied over the last day. As I record this, it looks like Tesla's down today. It's gone down from 9am it was 320 bucks a share and now it's 308 bucks a share. If we lengthen that out and look at the year to date number, we see that Tesla was not an awesome thing to own this year.

Right?

It peaked in January at $428 a share and again today is $308 a share. So it's down like over 25%, 26, 27% this year. Now you understand why I don't talk about politics so much on this podcast, right? When the CEO of Tesla gets involved in politics, his company becomes worth a lot less. Lesson learned there, I suppose. This also tells you the high and low prices for this stock during the day. You know, it's been anywhere from $306 a share to $321 a share. It will tell you the price to earnings ratio, the PE ratio, basically how much you're paying per dollar of earnings. And it's pretty ridiculous For Tesla, according to this, it's $179 for a dollar of earnings. The PE ratio is 179. Pretty impressive that people would be willing to pay that much for this company. Basically what that says when you're willing to pay that much for a dollar of earnings, you're saying, I think the earnings are going to grow and I think they're going to grow faster than the typical company. That's why you're willing to pay 40 or 50 or 100 or 200 times earnings, because you think the earnings are going to grow. Okay? So that tells you lots of things about it. But as the emailer notes, the price of the stock doesn't matter, right? It doesn't matter if there are 10 million shares of the stock and it's worth 100 bucks a share. Or if there are 5 million shares of the stock and it'm worth $200 a share, it doesn't matter, the company's worth the same. So a stock that is $5 is not cheaper than a stock that is $10.

Right.

It doesn't matter if you buy two shares of the $5 one or one share of the $10 one. Right? Same, same. The way we look at what's cheap are valuation type things like a price to earnings ratio, a PE ratio or a price to book ratio.

Right.

These sorts of things are how you tell which stocks are cheaper, which stocks are more expensive. And sometimes it's okay to buy a more expensive stock, sometimes it's worth more. But you don't judge that by the share price, you judge that by the P E ratio. The share price is irrelevant. I mean, I guess if you're so poor that you can only buy one share of stock and Tesla's $308 and you don't have $308, so you gotta buy something else. Well, I guess that's a concern. But for most of us you can buy any stock you want. That's not gonna be a problem. You're gonna be buying multiple shares of those stocks if you're buying stocks. So the share price is really pretty much irrelevant. So don't get too hung up on that. All right, if we put in a mutual fund or an etf, let's put in vti.

Right.

This is the Vanguard Total Stock Market Index Fund ETF share class. This is a big piece of our portfolio. About 25% of our portfolio is invested in this or something very similar to it that we tax loss harvest to. You can see that the share price is $310, about the same as the price of Tesla stocks. So it asks if that is worth more or less. Now this is interesting. I look at the market cap on this and it says 254 billion. I'm not sure that's right. Maybe that's right just for the ETF share class. But if I go to Vanguard's site, I'm pretty sure there's a lot more money in the total stock market index fund than just a quarter trillion dollars. Let's see what the actual website says here. Portfolio composition, number of stocks, median market cap of those stocks, the earnings growth rate, and maybe that's what they're reporting. Maybe what this fund is reporting is the median market cap for those rather than how much is actually in the fund. As the fund's net assets as of as of the end of June was $1.9 trillion. So that's not what the ticker is reporting when you put that into Google, must be the median market cap that it's recording. So the median market cap of the stocks in the fund or the average market cap, I'm not sure it's even the median. So lots of interesting information there. But mainly when you're looking at these things online to click on this stuff, you're just looking for a quick read on what is done this year or today or this month or whatever, rather than looking for detailed information. If you want detailed information, I think one of the best places to go is the Morningstar website, right? And so all the time I'll type in VTI and Morningstar. If you wanted to learn about Tesla stock, you'd put in Tesla and Morningstar and that'll give you all kinds of fun, detailed information there. It tells you the previous close price, what it closed at yesterday when the market closed. It's all tells you the 52 week range of what it's traded between. Apparently it's been as low as $182 a share and as high as $488 a share over the last year. It tells you the bid and the ask price, right, because this is a market people are asking, you know, the bid price is what people are offering to buy your shares. The ask price is what people are asking if you want to buy shares. And there's a slight difference between them. With a very liquid security, like Tesla stock or like VTI etf, those prices are very close together. But the difference between them is what the market maker gets paid. Right, because somebody's got to hold onto that thing to take it from the buyer and give it to the seller, or take it from the seller and give it to the buyer. And that's what they make is the difference between the bid and the ask. And right now that's 4 cents on a share of Tesla. But that really adds up if you're doing it by the millions and millions of shares of stock that are exchanged every day. Okay, for Tesla, it says here there's 3.2 billion shares outstanding. The market cap is just under a trillion. It tells you how many shares trade every day. 85 million. That's a lot of shares it's trading around, you know, so of the 323 billion, 85 million of them trade every day. This says the price to earnings is 154 price per sales ratio is 12. So it gives you all kinds of information about the stock. And if you do the same thing, if you put in BTI Morningstar, it'll give you all kinds of information about funds and about ETFs. And you can click on a different tab and look at the performance. You can see what's in the portfolio and really figure out what's in there. It'll tell you where the stocks are. Of course, with BTI, they're all in the U.S. it'll tell you how many there are holdings in the fund. 32% of the fund is in the top 10 holdings. Their turnover is 2% per year, which is what you'd expect when they just buy and hold everything. You wouldn't expect a lot of turnover there. The biggest stock right now is Microsoft. Actually, Microsoft is the biggest stock in the stock market at 6%, 6.19%. Nvidia is next at 6.13%. Apple is next at 5.13%. And apparently 32% of the US stock market is in the top 10 holdings. That's historically relatively high, right? It's pretty concentrated at the top. That's because large growth has outperformed small value stocks dramatically over the last 15 years. And in fact, the gap in valuations between those two types of stocks has not been as large as it is now. I don't know if it has ever been as large as it is now. That doesn't tell you that small value is going to outperform anytime soon. You got to think the pendulum's probably going to swing back at some point. Didn't this year the international. The US Pendulum swung back this year, but the small value to large growth one did not. All right, I think that's enough talk about that subject. But yeah, the stock price doesn't matter. That's not what makes something cheap. It's not a good deal because it's five bucks. And another stock might be 80 bucks. That really doesn't matter. The stock price really doesn't matter at all. In fact, when it becomes inconvenient, they just split the stock.

Right?

And so instead of having whatever, 10 million shares at $500, they've now got 20 million shares at $250. And everyone rejoices and bids up the stock because it's split. It's irrelevant. It doesn't matter at all. Okay, Joe wants to talk about tracking the returns on his portfolio. Let's take a listen.

Hey, Jim, I have a question for you about return tracking and specifically what return you use for your comparators in order to provide a benchmark for your stock portfolio. I do keep an individual stock portfolio as a small portion of my allocation and I track these dollar weighted returns which have actually been quite good in the range of 24 to 25% since 2012. However, I acknowledge that as stocks get what I feel over valued, I tend to move out of individual stocks in favor of broadly diversified ETFs to try to minimize my individual stock risk as values change. So I have been out of the market in terms of individual stocks during some larger downturns, for example during COVID and during 2022. As such, I'm trying to decide how to best compare my individual stock returns in a dollar weighted approach, but I find that it's actually quite chall to do a true dollar weighted adjustment based on when my money flows in and out of individual stocks. I do use BTI as my comparator as I'm trying to base myself against a large cap index but not sure whether I should be using a dollar weight or a time weighted tracking return.

Thanks. Okay, let's talk about stock picking. Joe Long term white coat investors know I'm not a huge fan of stock picking or timing the market, both of which you're doing. You tell me you've been doing this for a long time though. 12, 12 years? Something like that? More. I don't remember what year you just said it was that you started, but it's been a long time. And you're telling me you're making 24 or 25%? I assume that's true. You can actually accurately calculate a return. I'm not 100% sure of that. Cause that's what your question is, is how to actually do this. But if it's true, if you're really making 24 or 25% a year because you're particularly talented and skilled at timing the market and picking stocks, I'm not sure you should just be managing your own money, Joe. You know, there are a lot of people out there trying to do this and not having much success at it. They're certainly not whooping the market by 10 or 15% a year. So if you can truly do this, if you're truly one of those very talented people out there, you should be managing billions of dollars, not your own measly $100,000 or $2,000,000 or however much money you have. So keep that in mind if you want to be a stock picker. Track your returns. Track them rigorously. And if it Turns out you're really good at this. Maybe you missed your calling. Maybe you shouldn't be in medicine or law or whatever has caused you to listen to the White Coat Investor podcast. Maybe you should be out there managing money. It is no small feat to have those sorts of returns long term. Okay, so let's talk a little bit about how to track your returns. And I find the easiest, most accurate way to do this. Maybe it's not the easiest, but it is most accurate is to use a spreadsheet. If you use a spreadsheet, whether it's Microsoft Excel or Google Sheets, you use a function called xirr. It gives you the internal rate of return of the investment. This is a dollar weighted return, it's not a time weighted return. And Morningstar will put out these studies every now and then saying that investors in general underperform their funds. They give you the funds time weighted return. That's what funds report. And they give you the investor's dollar weighted return because that's the return that investors get. And because investors chase performance, the dollar weighted return tends to lag the time weighted return by several percentage points. You also see that because the market generally goes up over time, and investors are of course putting money in as time goes along. So if some of your money went in in April and some of it went in in October, and some went in in November this year to that investment, of course you're going to underperform it if it went up over the whole year.

Right?

Because the time weighted return assumes you had the same amount of money in there the whole year and you actually didn't. So if you're tracking your own returns, I think you ought to use the dollar weighted return. And that's what XIRR gives you. So you can practice this. And there's a blog post on the website about it. If you Google XIRR or calculate your return on the White Coat Investor website, it will walk you through this process and show you how to do it. But basically there's one column of dates and you have to use the date function, right? You can't just type in the date. You got to use the date function in the spreadsheet. And in the other column is your cash flows. Okay? If you're putting money into the portfolio, it's negative. Take money out of the portfolio, it's positive. And then you have your starting values, a negative number at the top, your ending values, a positive number for whatever it's worth right now at the bottom, and it gives you the return that's an annualized return. So if you're doing this for a period of time, less than a year, it's going to annualize it out. So if you made 8% this year and you're only halfway through the year, it's going to tell you 16%. And over a mini year period, it's going to annualize it as well. So if you tell them it's an eight year period and it gives you a number that's going to be a return per year that you're getting, that's what the IRR is, is it's an annualized number, which is the one that matters. So that's the way you track your return. Now if you're trying to figure out how you're doing with your stock portfolio, with your stock picking prowess, all you have to keep track of is when the money goes into the account and when money comes out of the account. You don't have to track every individual stock that you're picking and buying and selling and day trading or whatever. All you gotta do is when you take money out of the account, so when it sits in cash, well, it's still inside the account, right? So you don't have to take that out of the account if you're going to measure the return of that account. So that's the way I would do it if I were you. And if it turns out you're really as talented as you are, you've got to ask yourself, are you lucky or are you good? And if you have a conviction that you're good, you ought to go start raising capital, start investing money for more than just yourself and start running a hedge fund or whatever. Because I know a lot of people that would love to have 25% a year returns. You can own the entire world in like one generation or two generations if you can get 25% returns a year. They're pretty awesome. Okay, our quote of the day today comes from Abraham Lincoln who said, you cannot escape the responsibility of tomorrow by evading it today. I think there's a lot of wisdom there. Okay, Ricardo has got a question about bonds. Let's take a listen to your question, Ricardo.

Hey Jim, it's Ricardo in South Florida. I have a question about investing in bonds. I am in agreement with the three fund portfolio investment philosophy. With that in mind, I already have VTI and VXUS in my investment portfolio and, and I've never actually had bonds before, so I want to introduce them. I was wondering how I should hold primary care internal medicine doctor. I have a small amount of student loans about 30,000 at 2.75% and a mortgage about 200,000 for my home at 2.75%. Also, I don't have a lot of space in my tax protected account because I've been doing the backdoor Roth IRAs and I don't have a traditional Iraq. My question is, since I need to invest in taxable accounts in my brokerage account, if Your recommendations do 50% in tax protected bonds and 50% in inflation protected bonds, the question is then, which bond, ETF or mutual fund should I choose for my taxable brokerage account at Vanguard? Like I said, I do live in Florida, so I don't have state taxes, but I do want to avoid federal income taxes. Thanks for everything you do, and I.

Really appreciate your help. All right, there's a lot in that question. Ricardo, you stuffed a lot into 90 seconds, however long your recording was. Let's talk about the three fund portfolio for a minute.

Okay?

This was made famous by my friend Taylor Larimore. He published a book, I think it's called the Boglehead's Guide to the three Fund Portfolio. And I don't know that the Bogleheads ever really sponsored or voted to authorize this book being published. Taylor just published it. And Taylor likes his three fund portfolio. But the truth is, I don't know that there's any defined three fund portfolio other than what he said it was in his book. I mean, this is a Taylor thing, not even necessarily a Bogleheads thing, but it's become very popular over time. And per Taylor, the fund is a total international stock market index, a total stock market index, US Stocks, and the total bond market index.

Right?

So it's U.S. bonds, U.S. stocks, and international stocks. That's the three fund portfolio. And there's lots of Bogleheads that like this. It's relatively easy to implement, right, because there's only three investments, three asset classes. And so it's, it's pretty straightforward to do. And it's probably good enough. You know, the truth about portfolios is you just need good enough. You get a portfolio that's good enough, you fund it adequately and you stick with it long term, it'll probably do you just fine. There are some awesome things about the portfolio. First of all, you can buy these investments at just about any type of brokerage. And most 401 s will have something pretty darn similar to these funds. And so it's relatively easy to implement in all of your accounts, even if you want to implement it in your HSA and your 529, your utmost. You can do that, right? Because these funds tend to be very, very widely available. They can be very cheap. If you're buying them at Schwab and Vanguard and Ishares and Fidelity, you can get these funds very, very cheap. Basically free. You can buy all the stocks in the world and all the bonds in the US for less than 10 basis points, which is essentially free. So it's free, it's very broadly diversified and Taylor likes it and he's 100 years old, 101, 102, whatever he is this year, so why not?

Right?

But I wouldn't feel like you have to to invest in this portfolio. There are lots of reasonable portfolios. All you have to do is pick reasonable, fund it adequately and stick with it. So those are my thoughts on the three fund portfolio. This dogmatic approach to it that you see sometimes, particularly on the Bogleheads forum. I'm not a huge fan of. In fact, I once wrote one of my most popular blog posts called 150 portfolios better than yours. I think I've got 200 portfolios on it now. But the point was that any of these are okay. So don't get too fixated on the three fund portfolio or any other portfolio really. Okay, so assuming you still want the three fund portfolio after that diatribe, the question is where you should put it. Okay, first of all, we gotta address something else. The other thing you mentioned was my recommendation of half your bonds in in tax protected bonds and half in inflation indexed bonds. Number one, I don't have a recommendation about bonds. I don't have a WCI approved or recommended portfolio. Pick something reasonable, stick with it. My portfolio, half the bonds are nominal and half of em are inflation indexed. And I think that's a reasonable thing to do. But there's a big wide range of what reasonable is when it comes to bonds in your portfolio. And all you gotta do is get in that range, fund it adequately and stick with it. All right, so you want to put your bonds, it sounds like intaxable and that's fine. At these interest rates we have these days and the higher interest rates, it often makes sense to have your bonds in a tax protected account because they're not very tax efficient investments. Right. The entire return is essentially paid out every year and is taxed at ordinary income tax rates. So it's not very tax efficient. So a lot of times unless interest rates are really low, people try to have it inside tax protected accounts. So typically when people are Having to put something into a taxable portfolio, they're moving the most tax efficient thing first, which is often something like the Total Stock Market Index Fund. If I had to choose between the Total Stock Market Index Fund, the Total International Stock Market Index Fund and the Total Bond Index Fund, and I had to move one of them to my taxable account, the first one I'd move would be the Total Stock Market Index Fund because I think it's the most tax efficient of those three funds. Not nearly all the return is paid out. The yield right now on that is like 1.2%. So if this thing's making 10% a year on average, long term, it's only paying out like one tenth of that, a little more than one tenth of that in income a year. So most of the return doesn't get taxed every year. And what is paid out is almost all qualified. I was just looking it up this morning for a blog post. I was doing 97% of the dividends out of the Total Stock Market Index last year that I received were qualified dividends. So it's a very, very tax efficient investment. It's not the most tax efficient investment, but it's very, very tax efficient. So if you can, most of the time, people try to keep their bonds in their 401 or something and put their stocks, particularly US stocks these days, in their taxable account. But if you have to put bonds in taxable, and our taxable account has gotten so large relative to our tax protected accounts that we have to invest in bonds and taxable if we want to have bonds. And so we do. The bonds we have in our taxable account, for the most part, especially on the nominal side, are municipal bonds. And that's because we're in a high tax bracket. We're in the top tax bracket. And so if you're in a high tax bracket, you will probably find that your after tax return from municipal bonds is higher than your after tax return from a regular bond fund like Total Bond Market Fund, the one in the three fund portfolio. So keep that in mind.

Right.

If you're really going to put them in taxable, maybe your three fund portfolio is the Total Stock Market Index Fund, the Total International Stock Market Index Fund, and the Municipal Bond Index Fund at Vanguard. I think it's available in an ETF as well, if you want that version of it. If you want to have some inflation index bonds in there as well. Well, now you're talking about a four fund portfolio, but you could put a bond fund in there that owns tips, treasury inflation protected securities into your, into your taxable account. We do have to do that as well. Like I said, we have a bigger asset location problem than most people do. Certainly tips are one of the last things I would move out of tax protected accounts. They can be kind of annoying for various reasons. They're a little bit complex as far as how they pay out the return. And particularly if you're buying individual tips, you get phantom income, right? You got to pay taxes on it, but you didn't actually receive the income. So. So it's definitely better to have in a tax protected account than most things that you can put into a tax protected account of some type. So I hope that's helpful. But if you're putting bonds in a taxable account and you're listening to the White Coat Investor podcast, there's a good chance those bonds should be municipal bonds. Municipal bonds, the interest they pay out is federal income tax free. If they are state specific bonds to your state, they might also be state tax free. Obviously in Ricardo's case, he's in Florida, so he doesn't have state tax. So he could just use a general municipal bond fund like the excellent ones that offered by Vanguard that we use. But that's how I would implement a three fund portfolio. If I had to put the bonds in a taxable account and I were in a high income tax bracket, I'd use municipal bonds. Hope that's helpful. All right. If you need some help in getting educated, right, you need to become more financially literate. You need some help putting your plan together, but you don't want to pay thousands for a financial advisor. We have a course for that. If you want to get into real estate investing, we have a course for that. If you're just trying to maintain your financial knowledge and do your continuing financial education for the year, we have a course for that.

Right?

We've got all these online courses. We have versions for students, versions for residents, versions for attendings, versions that offer CME, and they're all available. If you go to whitecoatinvestor.com, you'll see the link for courses and you can check out all of our courses. Well, we have a sale right now. This is for podcast listeners. If you use code podcast20 between now and August 29, you get 20% off all white Coat Investor online courses. There's no risk to you, right? We've still got the 100%, no questions asked money back guarantee for a week. As long as you've watched less than 25% of the course. So you can just check it out if you want to and get your money totally back. We give money back all the time. It's not very many people. It's like 3% of the courses we sell or something. Most people are very happy with what they get, but we do honor that. So there's no risk to you. Use podcast 20 from now until August 29th and get an additional 20% off. That makes them a fantastic value. They're already good value at full price, but this is particularly good value through August 29th. Okay. We've talked about bonds, we've talked a little bit about tracking returns. Let's talk about gold. Everyone likes to talk about gold, especially when gold has done well more recently. And then of course, you don't hear about it for a decade because that's the way gold is.

Right?

It has good returns for a year or two and then nothing for 15 years and then good returns for a year or two. That's kind of the way gold's been historically. But let's. Let's listen to the question and see if we can answer it.

Hi, Dr. Dali. I'm a radiologist in the Southeast and I have a question about gold. I don't invest in it, but I do see it as an asset class. And I hear people going to it as a fight to safety, buying bullion from Costco and things like that. But I'm skeptical that in the times that you would really need gold that you could get your value for it that you put in. Even though it's increased in value over time. It seems like the times that people are buying it for would be times that were dures disasters and times when these things would be illiquid and you could run the risk of then losing your gains or a lot of your investment having to sell at a relative loss when you really desperately need the money. So I'm curious about the sale component of investing in gold. Thanks.

Okay. Those who know about my portfolio know I don't own gold. I don't own silver. I don't own platinum. I don't own precious metals ETFs. I really don't invest in this asset class at all. I've got some gold on my finger. Katie's got a little bit of platinum on her finger. Although when I got her a 25th anniversary ring, we decided to go with white gold rather than platinum, mostly due to my experience of cutting rings off people in the emergency department. It's way easier to cut through gold than any of these other Fancy metals, by the way. If I got to go through like three blades in a half hour of trying to get your ring off, you picked the wrong precious metal. But precious metals as an investment I'm not a big fan of. And the reason why is because they are a speculative investment. Now, by speculative I don't mean it's risky or it's stupid or something like that. When I say speculative, I mean that it doesn't produce anything. Bonds produce interest. You put your money in your savings account, it pays interest. If you buy a stock, you get the earnings of the stock. If you buy real estate, you earn rents, right? These are productive assets. Gold is not a productive asset. It is a speculative asset. Other speculative assets include empty land. They include bitcoin and other sorts of crypto assets. Anything commodities, anything that's not producing something is a speculative asset. Just as a general rule, I don't invest in those, so I don't invest in gold. So now I have to speculate on why some people do, right? Some people see that gold went up and they want to buy it, right? There's a lot of people out there that's seriously the way they invest. They own Bitcoin because bitcoin went up, not because they bothered learning about any sort of blockchain technology or they were into it, or they have a deep felt conviction on the long term use of Bitcoin as a currency or anything like that, right? They're like, bitcoin, go up, must buy bitcoin. Same thing with gold. That's why people buy it. My parents, many of you know, I helped take over their portfolio a little over 20 years ago. And they're maybe not the most informed investors. Luckily they haven't had to be for the last 20 years. But at one point when I was a child, I remember there was a bucket of silver coins in my closet. They've subsequently liquidated that. Somebody told them silver was a great investment and silver was going through the roof. And so they bought a bucket of them and for some reason hid them in my closet. So I don't know how much a bucket of silver coins was worth back then. But this was probably the 80s, so it was probably worth something pretty good. I never was smart enough to grab all the silver and run, but that's how people invest in this stuff. So I don't know what they're thinking. I mean, think about the last hundred years. We've had lots of bad economic times happen in the last hundred years, right? We went through a pandemic when you couldn't even get toilet paper, right? Interest rates went up 4 or 5% in a single year in 2022. In 2008, the world's financial markets were going to crash or real estate went in a hole that it didn't recover from for a decade, right? We look at 2000, right? The dot com crash. We look at the 1970s with stagflation. We look at a day in 1987 when the markets dropped 22% in a single day. We've had World War I, World War II and the Korean War and the Vietnam War and a couple of wars in the Gulf, right? And we spent 20 years in Afghanistan, had the Great Depression, right? We've had multiple depression like events in the 1800s, right? All these things that have happened. Now, if we think back to all of those, in which of those times did you take a hunk of gold bullion down to the store and buy your groceries and buy your gasoline and exchange it for something you needed? None of them, right? So this idea that this flight to safety, this asset you can have when times are really bad, is a little bit hokey, right? I mean, if you really end up in the zombie apocalypse, nobody's going to want your stupid gold. They want bullets, they want canned goods. I mean, have you guys watched the Walking Dead? Nobody's looking for gold in the Walking Dead, right? They're looking for someplace safe. They're looking for some weapons, they're looking for some food, they're looking for some gasoline, those sorts of things. They're not looking for gold. So I don't know what your plan is to spend this in a terrible economic downturn. Are you going to slice little bits off it like a little loaf of bread and weigh them on a scale and use that to buy things? What's your plan really, when it comes to gold, it probably doesn't make any sense to use it in that sort of a thing. Now, I know people escape Nazi Germany with some gold in their pockets or some jewelry in their pockets or diamonds or something like that. But the truth is, if that's what you need to do, if you need to get value across an international border without getting caught, I think you're much better off with a crypto asset. This is one of the few really great use cases for bitcoin. I probably wouldn't use gold for that. So if that's what you're buying gold for, I'd probably think about bitcoin instead. So why do people buy gold? Well, they buy gold because gold went Up.

All right.

And gold's gone up now for the first time in a long time. Just looking at the historical price of gold, if you pull up a chart on Google, I see. Okay, so this is pretty exciting here. I see in 2015, it was like a little over $1,000 an ounce, and now it is $3,400 an ounce. So it's worth three times as much as it was 10 years ago. This is why people are interested in gold. But if you actually go back to some sort of historical numbers, you'll see probably a different scenario. Okay, here's gold price over the last hundred years. It was super high in the 1970s, right? $2,400 an ounce in like 78 or something like that. And then it plummeted to $400 an ounce during the tech run up the late 1990s.

Right.

That's kind of what gold does. And now it's back up to 3500 bucks an ounce or something. But basically, if you look at gold, the price of gold over the last 800 years or so, it basically keeps up with inflation over the long term, but with dramatically more volatility. Eight hundred years ago, an ounce of gold bought a nice man's suit, and today an ounce of gold buys a nice man's suit.

Right?

It's just, it keeps up with inflation, and that's about it. So that's what I would expect out of gold. I would expect to do nothing for. For many years, maybe decades, and then have a spectacular two or three or four years and that to all average out to more or less inflation in the long run. So I don't make recommendations on what to have in your portfolio. If you want gold in there, keep it to less than 10% of the portfolio. Right? A single digit kind of number. It's fine if you want to stick with it for the long run. You say, I'm going to put 5% in gold. I think that's fine. There will be times when it does well, like the last decade, especially the last few years. There'll be times when it does poorly, like the 1990s. But if you're willing to stick with it through thick and thin, you keep it to a small percentage of your portfolio. I think it's fine to have it in your portfolio. I'm not going to put it in mine. Not only does it not produce anything, but it costs something to maintain it. You got to pay to store it. You got to pay to protect it and insure it.

I don't know.

It's just not a very attractive asset class to me. But if you want it, I think it's fine. I'm going to tell you the same thing about it. I'm going to tell you about Bitcoin.

Right?

Single digit percentage of your portfolio and if it does really well over a few years, don't let it start dominating the portfolio.

Right.

If it's crept up to 20% of your portfolio, you need to sell some of it and diversify. All right, let's talk about something else. No one wants to talk about, you know, boring old stock index funds. Everyone wants to talk about something else. Even though, you know, 85% of my portfolio is in boring old stock index funds and hopefully a very large percentage of yours is in boring old stock stock index funds. But it's hard to fill 5230 to 60 minute long podcasts a year talking only about boring old index funds. I don't know what else to tell you about them. Go buy a bunch of index funds. They're boring, but they really work. If you hold onto them long term and you're very well diversified, it's basically free to buy all the most profitable corporations in the history of the world. But apparently now we need to talk about private equity. Hello, Jim, this is Ash from Virginia. I was speaking with my financial advisor recently and he recommended that I invest in private equity as a way to diversify and reduce market correlation. Otherwise, I am heavily invested in index funds, Vanguard index funds, and I was wondering if you thought this was a good idea, neutral or a bad idea. Thank you so much. The problem I have with private equity is that the term is so broad it means almost nothing. I mean, all private means is that it's not traded on the stock market. So private equity is all the businesses in the world that are not traded on the stock market. That includes the self employed person in, you know, some developing country in Africa and a sheep herd. Private equity, right? He raises the sheep, he sells the sheep for profit, he gets some milk from the sheep, whatever, right? Private equity, the white coat investor. Private equity, right. It's privately owned, it's not owned by the stock market, it's not owned publicly. So it's private equity. A lot of real estate is private equity. Real estate, if you're investing on the equity side, not the debt side, is private equity real estate. And obviously I own some of that. Some of our advertisers on this podcast offer private equity real estate investments. So when we talk about private equity, it's a little hard to know exactly what people are talking about, but it's this cool catchphrase that everybody thinks sounds really smart. And so everyone says, I should invest in private equity. Do you have any private equity investments? And guess what? If you ask for it and it can be sold and a profit can be made on it, somebody will offer you that to invest in. Whether you should invest in it or not is a completely different story. There's lots of benefits to being in the public markets, right? You get very liquid investment. It's very transparent. It's regulated. You know, the price changes minute by minute throughout the trading days. You're always getting current pricing. There's lots of benefits of being in the public markets. There are also benefits to be in the private market. Imagine if we had to figure out what white coat investor was worth every day, and that affected how we ran the company. You don't need those sorts of pressures. And lots of other people have decided, I don't need those sorts of pressures in my business either. So I'm going to stay private. I mean, even public corporations sometimes go private. They basically get bought out and somebody takes them private. They're no longer traded on the stock market. So lots of ways that you can invest in private equity, but there's lots of funds out there that call themselves private private equity funds. And they're doing all kinds of different things, right? Sometimes they use a whole bunch of leverage and they're buying something and trying to. This is what happens with physician groups and hospitals. They try to pull as much profit out of it as they can and then resell it in three or four or five years for a higher profit. And obviously, you know how that affects how that business runs, right? You've seen it happen in your hospitals, you've seen it happen in your physician groups. Lots of things implode. It can be pretty bad when something's backed by private equity. Those of you who have been sending emails to me about this hospital corporation that's gone bankrupt, it owned my hospital just a year or two ago, and it wasn't good. While the CEO and other staff were enriching themselves off the money in the company and running it into the ground, we couldn't get somebody to come fix the CT scan. They wouldn't come out because they hadn't been paid in six months when the CT scan broke. So we were literally putting people in an ambulance to send them to another campus or a hospital, get a CT scan. Meanwhile, that campus was sending people to our campus in order to get ultrasounds. And we were going to a third campus to get MRIs. I mean, it was ridiculous, right? So if you run businesses primarily for profit, they usually don't last very long. You got to put the mission before profit. I mean, no margin, no mission. But you got to put the mission before profit or the company's just not going to be around very long. And that's what a lot of private equity type investments have been accused of. So keep that in mind if you decide you want to support that sort of model by doing that. Okay. Now there is a big trend toward this though. In fact, Vanguard just announced a partnership and I was hoping not to talk about this until the fall when it's really a little bit more sorted out exactly what they're doing. But they've launched a partnership, I think with BlackRock, to have some sort of private public fund they can offer to their advised clients and even their non advised clients with this idea that adding some private equity to your portfolio can juice your returns. Well, maybe it can, maybe it can't. Time will tell. I don't have plans right now to add a private equity fund to my portfolio. I certainly have plenty of my net worth invested in private equity already with the white coat investor. And I've got a good chunk of my real estate on the private side as well. So here's my cautions for private investments. One, you often need to be an accredited investor to buy them and the rules for that. The legal rule is you got to make $200,000 plus a year for each of the last two years or you got to have $1 million in investable assets. That is an inadequate rule in my opinion. If you're going to invest outside the publicly traded markets, I think you need to be a real accredited investor. And I define that number one as you can evaluate the investment without the assistance of an advisor, accountant or attorney. And you can lose your entire investment without really affecting your financial life in any significant way. So if you meet those two criteria, I think it's fine to wade into the private markets and buy some investments. You still need to follow the good principles of diversification and portfolio construction. You want high returning assets with low correlation with each other. You're trying to build a portfolio here, not just build a collection of investments. So keep that in mind. But I think it's okay to add some private investments to your portfolio. Keep in mind the liquidity issues in the private markets. Often you can't get your money back for years. So if you needed a whole bunch of money this year, you're not going to be able to get it. So only some of your portfolio is appropriate to be in illiquid investments. So keep that in mind. But I don't know that you're going to juice your returns in the private equity markets. Maybe you'll have higher returns, maybe you'll have higher risk adjusted returns, maybe they'll have a low correlation with your publicly traded investments. But it feels fattish to me. It feels like a trend. So let's watch it. There's no rush to invest in anything. Let's see how this Vanguard partnership goes. There's a bunch of other ones coming out this fall as well. Let's watch them for a year or two, see what they do and decide, hey, is this something I want to add a slice of to my portfolio or not? Keep in mind this is a game with no called strikes. You don't have to swing at any given investment. You can just let them keep on coming by. And you don't have to invest in everything to be successful. You don't have to have gold and Bitcoin and private real estate and private equity and all this stuff, small value stocks and Hong Kong stocks. You don't have to have all this stuff to be successful. You need something like three to 10 asset classes in your portfolio. You want each asset class to be broadly diversified, like what you'd get in an index fund. And then you need to fund it adequately and stick with it in the long term. That's what leads you to investing success. That's what leads you to completing, reaching your financial goals. That's the goal. Investing is a one person game. It's you against your goals. It's not you trying to beat the market. It's not you trying to beat anybody else. You know, balance your FOMO against your fear of loss and don't go chasing the latest shiny thing. That's a sure pathway to investment failure. So let's keep an eye out on private equity. I'll be writing more about it, talking more about it this fall. It's definitely out there. It's probably going to show up in some 401ks and it's going to show up at your favorite brokerages. But every investment is individual and has to be evaluated on its own merits. It's unlikely there's ever going to be an index fund for private equity investments. So all of them have to be looked at individually if you want to invest in them. All right, thanks everybody out there for what you do. It is not easy work. As I mentioned, I got five shifts this week I've done three. I got two more in the next two days. And it's good to work like a real doc this week and remind myself of my roots and where I come from and take care of people. There's a lot of people out there who are much less fortunate than we are, who deserve good medical care, and they're looking for some relief and comfortable in a terrible time of their lives. And it's a pleasure and honor to be able to help them do that. So thanks for those of you who have chosen to do this with your life. And I know some days are rougher than others. And if today is one of those days and nobody told you thanks all day. Let me be the first. Okay, we got to talk about another issue here. People are hounding me with emails about this issue. I have written the blog post. It's going to run between the time I'm recording this and when you hear this. This is an issue about a letter Vanguard is sending out. So let's hear the question to start with. And a bunch of you I know have gotten this letter.

Hi Jim, this is Marcy from the Midwest. Quick question. Got a letter from Vanguard saying that they are no longer doing Spec ID as the preferred cost basis method for their holdings and now they're going to an automated either first in, first out, a minimum tax or a highest in first out option when selecting for cost basis. They say that it's to help with automation of certain lots. We use the Spec ID to help with tack box harvesting. Do you have an opinion on how this affects us or which one we should choose? Thank you so much.

Okay, first of all, go back and read the blog post. It's scheduled to run on August 2nd, so that should be before you ever hear this podcast. But the letter they're sending you says this says Dear Investor, whatever your name is, we notice you've selected specific identification as your preferred cost basis method for certain holdings in your account. While you'll still be able to use Spec ID for individual transactions. While you'll still be able to use Spec ID for individual transactions. Did you hear that? Nothing else matters in this letter. You'll still be able to use Spec ID for your individual transactions. I use specific identification.

Right.

Because I do the same thing you do. I'm tax loss harvesting and I want to harvest the losses.

Right.

All they're asking here you to do is is they're asking you to pick an automated method of cost basis. So in the event that you had some sort of automated thing Set up. For instance, you had set it up such that it automatically sends you $400 a month out of your brokerage account so you can live on it. Well, it needs to know, well, what are we supposed to do?

Right?

Are we supposed to do first in, first out? Are we supposed to do Mintex? Are we supposed to do highest in, first out?

Right.

That's all they're asking. But hopefully you're not selling any of your taxable holdings that way. You're specifically identifying which tax lots you want to sell from. And so long as you do that, this question doesn't matter at all. It doesn't matter what you pick. But if for whatever reason it happened automatically, you probably want it to do what they call min tax or minimum tax, because that's what you do most of the time when you're trying to sell your shares is you want the one that's going to cost you the least in tax.

Right?

So choose Mintax and recognize that when you go in there to tax loss harvest your taxable account, you're still going to be able to do specific identification. Okay, go check out that blog post if you want to hear about all the other methods of cost basis methods. I got all the ones in there from Fidelity and there's way more at Fidelity than there is at Vanguard. All the ones in there from Schwab, they got all these cool ones, low cost short term and high cost, long term and tax sensitive short term and tax lot optimizer. There's all these other methods of cost basis, you know, selection out there. But you know, just set it as Mintax and recognize you can still do specific identification when you actually go in there to sell shares. Hopefully that's helpful. All right, I think we've got another question here from Ricardo. Maybe it's the same Ricardo as the other question, but let's take a listen.

Hey Jim, this is Ricardo again. I had a question regarding tax loss harvesting. So I do own my own internal medicine primary care practice and I've had it for the last 16 years. So I anticipate eventually to sell it and at that point make a capital gains and be responsible for that tax. So one strategy I wanted to use is to have tax loss harvesting and use those losses to offset that capital gains. When I do sell my practice. My question is how to exactly do this. And I know you did an excellent post detailing in detail through Vanguard how to do the tax loss harvesting. But on an emotional basis, when I do see a loss, let's say there's $50,000 loss in my portfolio. I get nervous because I've always heard don't sell low and don't sell at loss. But that's exactly what we're doing when we tax loss harvesting. Now, I understand you have to buy another stock which is similar but not identical. But emotionally I just have a hard time selling when I'm at a loss. So just please reassure me that this is the right process, that you do sell a loss, but then you buy another stock which is similar but not identical. And if I don't feel comfortable doing this, do you think that's something for tax loss harvesting? Is that something that's worthwhile getting one of the recommended financial advisors on your website? Thanks again and really, really appreciate everything you do for us.

Okay, good question. First, let's talk about the emotional aspect here, right? These are losses. It hurts to sell low. You don't want to buy high and sell low. That's a recipe for investment disaster and financial catastrophe. But that's not what you're doing when you're tax loss harvesting. You are selling low and buying low. You are exchanging. You're really not changing your portfolio at all. And I hope you're not investing in individual stocks because it's really hard to tax loss harvest, because you know what? Tesla is not the same as Microsoft, right? You cannot get something very similar when you're tax loss harvesting individual stocks. It's very hard. Maybe some there's something similar, but for most of them, there's nothing that's really very similar. That's not the case when you're using ETFs or mutual funds, right? You can sell the Vanguard Total Stock Market Index Fund and you can buy the iShares Total Stock Market Index Fund 18 seconds later. And you've sold low and bought low. And you basically have the same portfolio. But you know what? When you get your 1099 div at the end of the year, you're going to have that $50,000 tax loss and you can save those up, right? You can only use $3,000 a year against your ordinary income. You can use an unlimited amount against tax gains, but hopefully you're not generating too many of those throughout your career. And then hopefully you've got hundreds of thousands of dollars or millions of dollars of these tax losses saved up for the end of your career when you sell your practice. By the way, great job establishing a practice and building some value there that you'll be able to sell later. But this would be great if you could line up half a million dollars of tax losses throughout your career. And then you sell this practice for $750,000. That's $500,000 of that gain that you don't have to pay taxes on.

Right.

That might save you $100,000 in taxes.

Right.

It can be a lot of money. And so that's the idea behind tax loss harvesting. I tend to do mine manually.

Right.

I think maybe someday I'll sell the white coat investors. So tax losses would be pretty useful to me. So I keep acquiring them, even though I have far more than I'll ever need at $3,000 a year. And I really don't expect to ever, you know, get any, you know, realize any capital gains in my taxable ETF portfolio. You know, we tend to flush them out doing charitable giving. And so our basis really isn't even all that low. But, you know, we keep acquiring these tax losses just in case we sell our house or we sell our business or whatever. So we're doing the same thing you are. Now, there are companies that try to get you more tax losses out there, right. They maybe have a special algorithm where they're trying to do this with various ETFs, or they're doing direct indexing. And if their fees are very, very low, it's possible that the tax losses will be more valuable than what you're paying in those fees. But you got to be careful, right? If you're paying 0.7% or 0.8% a year just for tax losses, I'm not sure you're going to. You're not going to have the value there that you're looking for. And certainly if you're going to a full service advisor that's charging you 1% a year on a multimillion dollar portfolio, I'm not sure the value's there either, especially compared to what you can do yourself. This isn't that complicated. It sounds like you're managing your portfolio yourself. This is not a big ad to somebody who can handle the rest of their portfolio chores. But if you need some help, it doesn't hurt to go use one of these financial advisors that kind of specializes in validators that helps you teach you some things for a year or two, and then you can go out on your own. It's not like you have to use the advisor for the rest of your life just because you needed some help learning how to do some of these things. So a lot of those people on our recommended list do specialize in helping validators to become do it yourselfers. But the value of tax losses depends on your financial life. You sound like you are going to have a big taxable game at some point in your life, so you have a little more value to a tax loss than other people do. I think it's well worth learning how to do this yourself, and it's probably worth considering getting somebody to help you do it professionally. I think we covered on this podcast a few months ago Direct indexing. You could convince me that paying 10 basis points a year to do direct indexing might be worth it for you given your situation. But I don't know that everybody needs to do that sort of a thing. So really you gotta step back and ask yourself how much are additional tax losses worth to me? Because just about every white coat investor with a taxable account can get enough of them pretty darn easily to have $3,000 a year to use against their ordinary income. Okay, as I mentioned at the beginning of the podcast, SoFi could help medical residents like you save thousands of dollars with exclusive rates and flexible terms for refinancing your student loans. Visit sofi.comwhitecoatinvestor to see all the promotions and offers they've got waiting for you. One more time. That's sofi.com whitecoatinvestor Sofi student loans are originated by Sofi Bank NA member FDIC. Additional terms and conditions apply. NMLS 696891 don't forget about our podcast sales. 20% off all courses from now through August 29th. Use podcast 20. You can get. You know, fire your financial advisor. You can get our continuing financial education. You can get no Hype real estate all 20% off. Thanks for leaving us a five star review. A recent one came in from JJ who said exceptional podcast wealth and knowledge and provides us with exceptional guidances with what I call no bias. Your podcast made a huge impact on my financial life. It is needed for many high income professionals. I highly recommend it. Five stars. Thanks so much for that review. Keep your head up, shoulders back. You've got this and we can help. We'll see you next time on the White Coat Investor Podcast.

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