WCI #149: Should I Time the Market?

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. Here's your host, Dr. Jim Dali. This is White Coat Investor podcast 149. Should I time the Market? Getting quality disability and life insurance should be the first financial chore for a doctor to complete. Most docs don't have the ideal policy for their gender, specialty, state or health status and one in seven doctors get disabled at some point during their career. Because these policies can only be purchased through brokers, we put together a list of vetted agents who are experienced with working with the specific needs of medical professionals and who have your best interest at heart. If you have questions about insurance and what kind of policies would be the best fit for you, check out our insurance recommended list@whitecoatinvestor.com insurance and feel the peace of mind that comes with knowing you have the optimal policy in place. You can do this and the White Coat Investor can help. Our quote of the day today comes from Phil DeMuth, Ph.D. who said if you manage your own money, you are potentially vulnerable to every crackpot investing idea that comes along. It only takes one and that is the truth. And in fact, the day you are listening to this podcast, some white Coat investors are listening to phil down at WCICON20 as this goes live. We are down there having a great time with 800 of our best friends. Hopefully everything's going great. Obviously we're recording this in advance, but if you're down there, that's great. We're having a fun time with you. I'm sure if you're not, hopefully you can make it next time. We're talking about moving those to once a year going forward. Be a little bit of a rush to get the next one ready, but certainly people are enjoying them and I think they're doing a lot of good. Speaking of people who are doing a lot of good, thank you for what you do in your practice. Sometimes medicine is a difficult job. It is always a job that can be heartbreaking. And we see a lot of sick and injured people and don't necessarily get paid as much as people that have put in just as much time and effort in us in different fields. I saw a study recently that compared a tech background to a management background, to a finance background, to a law background into a medicine background. And you know, after 10 years in the field and or still in education, obviously medicine was coming out dead last in that comparison. In the long run, I think they don't end up completely dead last, but certainly still in the bottom half of the pile. If you had put as much money as you put into medicine into something else, and as much time and effort and skill and intelligence as you have, chances are you would be making more money. And so thanks for sacrificing some of that in order to do some good for our society. All right, if you have not been onto our social platforms, I would encourage you to check them out. We have three forums, three places you can discuss with other white coat investors, white whatever your financial concerns may be, whether you're asking questions or answering other people's questions. If you like the Reddit format, we have a subreddit r whitecoatinvestor. If you like a forum, we have a white coat investor forum. If you go to whitecoatinvestor.com forum, it'll take you right to our forum there. Totally anonymous. If you just like Facebook groups, we've got a very large Facebook group. It's about 40,000 people, and you can sign up for that at facebook.com whitecoatinvestors and so be sure to check those out if you're interested in interacting with other white coat investors and getting your questions answered. Let's take a question off the speak pipe. This one comes from Pam and is the question for which I have titled this episode.

Hi Dr. Dali, thank you for everything you do. Your blog and podcast have been instrumental to me in regards to helping with my financial literacy and I really thank you for it. I had a question in regards to my 401k. It's doing really well this year and that is due to the current stock market trend. However, there's been some guesses that the stock market might take a downturn in the future, possibly a few weeks, months, or maybe even a year or two from now. Would you recommend doing something like switching from 100% stocks, which is currently what I have in my 401k, to 100% bonds or a higher percentage of bonds? I am still about 20 years away from the traditional retirement. My plan would be to switch over to 100% bonds in order to ensure safety and ride out market downturn, and then switch backs to stocks once the market starts trending upward again. What do you think about that plan? Thanks so much.

Okay, so Pam, like a lot of investors, is worried about the stock market, worried about it going down and asking should I switch from 100% stocks to 100% bonds or at least A higher percentage of bonds and then switch back to stocks when the market's going to go back up. You know, this is basically asking, should I time the market? And the reason you should not time the market is that it is incredibly difficult to do well over the long term. Plus it introduces significant transaction and in a taxable account, tax cost to the equation. So not only do you have to be able to time the market well enough to beat the market, but you also have to do it well enough to overcome the cost of doing so. And the long run, it turns out that's very, very difficult to do. And so I would not advise trying it. You know what's interesting though is I've noticed a trend that beginning investors, they have trouble staying the course in market downturns, meaning the market tanks, the stock market falls 20, 30, 40% and they bail out at the bottom and end up buying high and selling low. But I've noticed a similar problem among what I call intermediate investors. People who have learned a thing or two about investing and instead of becoming fearful at market bottoms, they now become fearful at market tops. And so they want to sell when the market is at new highs. What they don't realize is that the market is usually at new highs because it is usually going up. And so any concerns you have now about the market being at a high, I assure you that people have had for pretty much the last 10 years. And yet going to bonds at any point in that time period would have been the wrong move. Now, one of these days it will have been the right move just before a big bear market happens again. But the truth is that's so difficult to tell in advance that it's really not worth trying to. You are much better off setting a static asset allocation of a reasonable mix of stocks, bonds and or real estate and rebalancing back to it each year. That way you hold your risk constant. And when the inevitable downturn comes, because it's going to come, you can simply rebalance back to your percentages. And what that does is it forces you to sell high and buy low because you're selling what did well in the recent past and buying what did poorly in the recent past to get back to your planned percentages, your planned asset allocation. And that is the recommendation I have for you, Pam, with regards to this question of whether you should try to time the market. Don't do it. Just get a good long term plan in place. Because here's the way to think about it, right? If you look back at market history, you will see that on average we see a market correction, a drop of 10% or more in the stock market about once a year on average. So if your Investing career is 60 years, 30 years while you're working, 30 years in retirement, you're going to see about 60, 10% drops in the market. So this is not something that's unusual or something that's rare. This is something you should be planning for. This just happens. This is what stocks do. And you should bake that into your plan that you're not going to sell when they go down. If anything, you're going to buy more. Likewise with a bear market. A bear market is often defined as a 20% plus drop in stocks. And how often does that happen? Well, on average, it happens about every three years. And so how many of those are you going to go through in a 60 year investing career? You're going to go through about 20 of them. It should not be unusual. You should not feel like something weird is going on. When the stock market drops. It just does this from time to time. It did this in 2000, it did this in 2008, it did this in 2011, it even did this in December of 2018. You might not have remembered it because it only lasted a couple of weeks. But these stock market drops do happen from time to time. They're not a reason to panic and they're not really a great opportunity to try to time the market because they are so hard to forecast when they're gonna happen, how severe they're going to be or how long they're going to last. You're far better off just having a know nothing static portfolio that you rebalance periodically and take advantage of. Every asset class having its day in the sun. All right, are you interested in telemedicine? We have a telemedicine course on offer through one of our partners. You can find that@whitecoatinvestor.com telemedicine. You can see all of our online courses at whitecoatinvestor.com online courses. Our next email comes from an optometrist in California. And this came in a few weeks ago via email. He says, I'm currently employed, but I'm changing my structure this year to become an S corp. I had a unique question I'd like to get your thoughts on. After I graduated, I was fortunate enough to get my parents to take over my student loans. They originally paid $145,000 and I pay them back every month, $1,500 interest free. Awesome deal. I know at the present time, I still owe about $100,000 to them as an S corp. I was wondering if it would be advantageous for me, without being worse for them, if I found a way to technically hire them as a W2 employee to pay them back. I'd love to hear your thoughts on it. I love hearing these schemes because I'm amazed at all the different ways doctors can come up with schemes to somehow save money or save interest or save taxes or whatever. The short answer on this one is no, this is a bad idea. Here's the way to think about it. First of all, it's illegal to technically hire somebody. You either hire somebody and they do real work for you, and you fill out, what is it, an i9, i4, whatever it is, the form that tells them that they're not an illegal immigrant. You get to check their ID. You have them fill out a W4. You do payroll, you send them a W2 and a W3 at the end of the year. You either do all that and they really have a job and do real work, or you don't. There's none of this technical hire crap. You don't technically hire your parents. You don't technically hire your kids. You don't technically hire your spouse. You cannot just make stuff up and start moving around money on your spreadsheet without actually having somebody doing a real job that you're paying them a reasonable amount of money to do. So that's the first thought on this. Here's the second thought, right? Your parents have done you this huge favor. They have taken over, you know, your loan, so you have 0% loans instead of 7% loans. That was really nice of them. Now, technically, they have to charge you a market interest rate to loan you money. But if the way these usually work is they forgive the interest to you as a gift each year, and that's okay. That's legit with the irs. You're still supposed to have a promissory note written up. But for the most part, people do this all the time, and that's okay. But it's interesting here that you want them to do real work to earn their own money back when they loaned it to you interest free. I mean, do you hate these people or what? That's the way it sounds like is that you're really trying to really hose them, because that's what's happening. And then of course, there's also the fact that this is a family loan. And in a lot of ways, the worst loan in the world is the one to the person who sits across the table from you at Thanksgiving. In some ways, the meal tastes differently when you owe someone at the table money. So I think those are loans that are worth prioritizing despite their low interest rate. I would pay them off relatively early and I doubt you'll regret it, even with that obviously fantastic interest rate. Now here's another reason why it's a bad idea, right? Here's another reason. So let's say you hire them instead. They're doing real work for you, right? They're having to earn their own money back. But here's the worst part about it right now. You've got to pay payroll taxes, Social Security and Medicare tax on these loan repayments you're giving them. So not only do they end up paying more in taxes, but they have to work for their money. It's just a bad idea all around. This is not a good idea. Do you need a checking account that actually pays interest? Check out our partner@whitecoatinvestor.com sofimoney and you can actually make money in a checking account, which most of our checking accounts are not paying us any significant amount of interest. Our next question comes off the speak pipe. My wife and I are both physicians. We have an idea and we want to monetize it. The product is a bundle of objects that we would like to sell to people. We have no experience with entrepreneurship or starting a business, and we have led very traditional paths to our current W2 employed clinical positions. As the first step, I googled how to start a business. As expected, I quickly became overwhelmed with the number of resources available. I had difficulty deciphering what was good advice and what was bogus. In addition, my wife has a junior faculty appointment at a large academic institution as a clinical educator and receives a portion of her income through the university medical school. While we will not be using any university resources, we are planning to use our medical knowledge and expertise to develop, promote, and market the product. We do not want the university claiming any part of the intellectual property. Could you provide some advice on where we should start, perhaps in the form of a top five list of things to do first? Also, are there any books or educational resources you recommend in this situation? Thanks again for all that you do. All right, so how do you start a business selling a bundle of goods and how is that going to affect an academic contract? Well, lots to talk about on this topic. First, let's go through the top five things to do and maybe talk about some educational resources. The first thing is to write a business Plan, all right. Planning, planning, planning, planning. It really matters. It's required if you need to borrow money or if you want to get any sort of investors. But it's a good idea for everybody, even if you're funding everything yourself or just bootstrapping it. What is the business? How will it make money? Who will we sell to? What will our expenses be? What is the end goal? You need to plan all that out in advance. The less you plan, the less likely you are to have success. Step two, decide on a corporate structure. It's easiest to do things as a sole proprietorship, in this case in your name rather than your wife's name, to minimize the risk of any sort of intellectual property issues with your wife's employer. And then I would go read her contract so you know exactly what it says and doesn't say about outside work and intellectual property. If there's any liability involved in the business, I would form an llc, particularly a multi member llc, you know, maybe between you and your spouse, assuming you can iron out any intellectual property issues. It's honestly pretty cheap and easy. Now in California it's kind of expensive. I think it's like 800 bucks a year for an LLC. In Utah, it's very cheap. I think it's 70 bucks to set up and 20 bucks a year. It really is very, very inexpensive to form that LLC structure. If you have employees, you're going to need to follow all applicable law with regards to them. But a sole proprietorship is awfully easy tax wise. All your expenses and all your income goes on a schedule C and you basically pay taxes only on the profits. All right, Step three, file any required paperwork. That probably means getting an EIN Employer Identification Number from the irs, registering with your state, and maybe even getting a city business license. A lot of businesses are accepted, but if you're selling out of your home or having meetings in your home, you're probably going to need to have a city business license as well. Step four, figure out a marketing plan. Lots of people come up with awesome products and that doesn't do anybody any good if nobody knows about it. If you don't have any way to market things, you're just going to be hosed. Step one for that is to get a website. You know, do you do business with anybody that doesn't have a website? It doesn't seem weird when they don't have a website or if their website looks like it was built in the 1990s. A website's pretty cheap and easy to do. You can usually figure it out how to do it yourself or hire it out pretty cheaply. So get a website up and then have a marketing plan above and beyond the website. I mean, people are going to judge you based on the quality and presence of a website, so you might as well make it look good. And then step five is higher. Help is needed. You know, one of the first things people often need is an accountant. Then they may need an attorney, they may need a payroll service, they may eventually need some employees. So I'd put that in as step five. If you need a resource, nolo.com has lots of great material. It's in the library, it's on their website. But honestly, pretty much every entrepreneur learns this all the same way, the same hard way, by just doing it one step at a time. You know, once you've set up payroll, it doesn't seem that complicated. But the first time you do it, it seems incredibly complicated. Don't worry too much about screwing something up. Most mistakes can be fixed without too much hassle. One of the exceptions with that is with the irs. Well, I find they're actually fairly lenient with individuals and your tax return mistakes, they are not nearly as lenient with a business. They really expect you to know your stuff. So if you're filing a corporate tax return, that sort of thing, you know, make sure you dot your I's and cross your t's. But yeah, I definitely would go over my contract, maybe go over it with an attorney to make sure that whatever you do with the business, you're not going to have to give some of that to the university. But otherwise, you know, businesses get started every day in this country or obviously lots of small businesses fail. And so make sure your Runway is long enough that you can actually get the plane off the ground before you run out of cash. If you're cash flowing it from your earnings as a physician, that's one way to make for a very long Runway. If you can bootstrap the business, that makes for a very long Runway. But when you're taking on investor money or when you're borrowing money, that Runway gets shorter and shorter. So be careful with those sources of funds. All right, our next speak pipe question comes from Casey. Before we get into that, if you need a self directed IRA or solo 401k, check out rocketdollar@whitecoatinvestor.com Rocketdollar Now Casey's question.

Hi Jim, my name is Casey and I'm a periodontist in the Air Force. I was wondering if you could give your thoughts on the idea of a.

Bond tent in which the allocation of.

Bonds is increased prior to retirement and then steadily decreased. Thank you.

Okay. A bond tent. If you don't know what a bond tent is, this is an idea that's become popularized most recently by some studies done by the retirement researchers like Wade Pfau, Michael Kitchies, these folks who are pushing for a higher stock to bond ratio later in retirement. The idea being that inflation becomes more of a risk and you need your assets to keep up with inflation late in retirement. So what that means is that instead of doing what everyone was doing beforehand, which was just decreasing your stock to bond ratio throughout your career and throughout your retirement, at a certain point, you kind of rack the risk back up, you know, maybe five or ten years into retirement, so you're taking on more risk. So that period of time around the retirement date, maybe five years before and five years after, is when your sequence of returns risk is higher. You know, that risk, that even though you have adequate average returns throughout retirement to support your withdrawals, your crummy returns come first. That's a serious risk. And so for those five years before retirement and those five years after retirement, you have the least amount of volatility in your portfolio, the lowest stock to bond ratio of your entire life. And they call that a bond tent. And the idea behind that is, well, if sequence of returns risk shows up, if you retire right into 2008 or right into 2000 or right into the stagflation of the 70s, those sorts of time periods that you are protected from that volatility of your portfolio and that you can manage your sequence of returns risk, the idea of a bond tent, I think there's a lot of wisdom there. Certainly I don't think you should be, you know, really ratcheting up the risk as you come into retirement, that's probably not a great idea. Whether you want to ratchet it up later in retirement, I'll leave up to you. Honestly, you know, a lot of people get really fixated on these safe withdrawal rate studies. And the truth of the matter is, what real live people do is they start out withdrawing something around 4% of their portfolio, and then they adjust as they go. If sequence of returns are bad in the beginning of retirement, you tighten your belt a little bit, you spend a little bit less money. If returns are good, well, shoot, you're going to make it. You know, if you don't have a nasty bear market in the first five or 10 years of your retirement, you're probably going to be just Fine. And you can spend not only 4% without having to worry, but maybe 5 or 6 or even 7%. And so keep that in mind that adjusting as you go is the way to go in retirement. All right, our next question is also coming off the speak pipe.

I'm a fourth year medical student who recently got engaged to another fourth year medical student. We're both going into primary care specialties in a high cost of living area. The debt to income ratio for each of us individually is about 1.3 to 1. Though most of my loans are family loans, while my partner's loans are all federal, I have three main concerns. Number one, which income based repayment plan should be used during residency? How might this change while we are single versus when we are married? Number two, my partner would be much more likely to go for public service loan forgiveness than me given our differing federal loan burdens. But we want to leave the option open for both of us. Assuming we both want to work for 501s, is it wise for both one or neither of us to go for public service loan forgiveness? Number three, we do plan to pay for advice about this at some point before residency starts. Since it seems pretty complicated, what other things should we ask about to prepare us for success with our student loan management? Thank you for the excellent financial education work you've done so far.

Okay, we got a couple of fourth year medical students marrying each other. She has mostly family loans. What IDR should we use and does that change once we get married? Well, it really depends. There are lots of ways to do this. Obviously if she is on family loans, then no IDR plan is going to work there. Right? Those are only for federal loans. You are on federal loans. And so the IDR comes down to what your plans are. If you want to keep public service loan forgiveness on the table, then you're going to want to be paying the minimum that you can in an IDR program. And that means the Pay pay as you earn program or the Repay revised pay as you earn program are going to be your best bets to keep those payments. General rule repay is better because you get your interest subsidized, so your effective interest rate is a little bit lower than it otherwise would be. The exception to that is when you have two earners in the family and you're trying to keep that, you know, taxable income as low as you can. And so a trick some people use in that situation is that they stay in pay and file married filing separately because you basically can't do married filing separately or at least it does you no good if you're in repay. And so when one of you is going for public service loan forgiveness and you're trying to keep the other's income out of the equation, sometimes you do pay plus married filing separately. But if you're both going to work for 501C3s, I don't see any reason why you both would go for public service loan forgiveness. Her loans are mostly family loans anyway, so there's not a lot of benefit there. But if you want to, I guess you can, you can just go into repay for both of you and work toward public service loan forgiveness. But the questions to ask when you seek advice and we have a great place that you can seek advice if you go into the recommended tab on the whitecoatinvestor.com site, you can go down to Recommended Student Loan Advisors. But the main questions to ask are which IDR plan should we be in and that might change year to year. Which retirement accounts should we use? Roth or Tax Deferred and how should we file your taxes? And then of course, when and if plans change, should we refinance or should we stick with the IDR program? Those are the main questions to get answered in that consultation. And the more complicated your situation, the more likely you are to benefit from advice. Particularly when you have two people earning and one or more of you are going for public service loan forgiveness. It's almost surely worth paying a few hundred dollars and getting some top quality student loan advice from those folks. All right, let's talk about mega backdoor Roth IRAs. Here's a speak pipe question from Sammy Dear Dr. Dali, thank you for everything you do. I have a question regarding savings accounts. My employer currently has a 401k and I'm verifying whether or not they allow for after tax contributions and in service distributions. And I'm hoping to contribute the additional 38,000 to a mega backdoor Roth IRA.

The question is my employer is also looking to start a 403 and a 457. How will the activation of those two accounts affect my ability to contribute to a mega backdoor Roth IRA?

Further, I have 1099 income as I.

Do some locum tenens and consulting work.

On the side and my 1099 income is roughly 15 to $20,000 a year. I do have an individual 401k that I started for this year.

How can I optimize my savings into.

My individual 401k with all these other factors from my W2 employment?

Again, thank you very much. I've learned so much from you and.

Your podcast and your books, and I.

Recommend you highly to all my colleagues and residents. Thank you.

Okay, so Sami's got an employer with a 401s adding a 403 and a 457. How's that going to affect my ability to use a mega backdoor Roth ira? Well, I'm not entirely certain what's going on here, whether we are adding a 403 and a 457 on top of a 401k. I have actually heard of a few employers that offer both a 401 and a 403, which is really unusual. Typically, however, people have one or the other. Of course, the 457 contribution limit is totally separate from the 401403 contribution limit. However, unless the 403 also has a mega backdoor Roth IRA option. And they don't call it that. What they call it is basically two features, one of which is it allows after tax, not Roth, but after tax contributions, and it allows in service withdrawals or in plan Roth conversions. If it has both of those factors, then it's a make a backdoor Roth allowing 401 or 403. So it really just comes down to whether the new plan will still allow that thing or not. Sammy also says I have a 1099 income too. How can I optimize my savings into my individual 401 with all these other options with my W2 income? Well, bear in mind that due to a weird rule with 403s, the 403 contribution does count toward your 57,000 limit with your individual 401, despite the fact that it's a totally separate employer. So the way to optimize those savings, for the most part, what most people do is they use their employee contribution, that $19,500 a year, in their employer's 401k, and that allows them to get the match from the employer. And then they just use employer contributions in their individual 401k, which is basically 20% of your net income there. Or if you're an S Corp, 25% of your net salary. It really works out to be about the same number, just whether you include the contribution itself into the denominator or not. And so the way to optimize your savings is to max them all out. You know, the 457 limit is totally separate. The 403 and the individual 401k, of course, share a limit, essentially due to that weird 403 rule with the old 401k, it would have been two totally separate $57,000 limits between the employee and employer contributions. All right, next question off the speak pipe. Let's take a listen.

This question is about disability insurance.

If someone has a personal and work disability policy with own specialty coverage adding up to your current salary, would they both pay out? For instance, say they're both for $5,000.

A month and you make $10,000 a month.

Would you get the sum $10,000 if a disability occurred?

Or would only one of them pay.

Out because the maximum amount for each is $5,000? If they both pay out, I don't see any benefit from increasing the personal one. Am I missing something? Okay, if you have both group disability insurance and individual disability insurance, they will both generally pay out. But you have to read the fine print, particularly with group disability insurance policies. Sometimes they are written such that you know, you only get the amount from the policy above and beyond what other disability policies are paying you. So the devil's really in the details here. With individual policies that you buy from a good independent insurance agent like those we recommend, and from the top notch big five or six companies, this is not an issue. Even though you're getting money from another disability insurance policy, you're still going to get that full payout. It's the group policies you got to be really careful about. And if you need some help with that or if you just still need disability insurance, call up one of our recommended agents. You can Also check out whitecoatinvestor.com DrDisability all right, let's take another question from Guess who's Back. It's Tim in San Francisco who's been on the podcast before. Let's take a listen to his question.

Hi Jim, this is Tim in San Francisco. I am convinced that it is not possible to get a useful amount of certainty about the behavior of stock indexes over periods of three years on your recommendation. I've been listening to Dave Ramsey though, and when Mr. Ramsey provides people advice about whether to buy a home or not, he says to look at how long houses have been on the market and their average appreciation rate over the last, I don't know, three to five years. Use that as a way to predict the future appreciation of houses of that type in a certain area. So my question is, is real estate predictable? Can you time the real estate market? Thanks.

Okay, two questions here. Let's take the second one. First, is Dave Ramsey right, that you can predict future real estate appreciation by using appreciation in the last three to five Years? Absolutely not. There is no correlation between appreciation in the last few years and future appreciation. That said, all real estate is local and location. Location and location are the top three rules in real estate. Some locations are obviously better than others. Some places are not going to get better. They have problems. And those problems are not going to be solved in the next five years. And you can assume that if returns have been crummy there in the past, they're probably going to continue to be crummy. But it really comes from getting more information about the area than just knowing what the appreciation was the last few years. But if somebody had followed that rule, I mean, imagine being in Phoenix or Las Vegas in 2003-2006, and you assume because you had awesome appreciation during those years that it's going to be great in the next few years, and then you lose 75 or 80% of the value of your property. I mean, obviously that rule of thumb is no bueno, so. No. The second question, however, is more complex. Can you time the real estate market? Well, the thing about real estate is it's much less liquid, and there's a lot of people that are buying it for purposes that have nothing to do with investment. And so there are some factors that probably make it, due to its illiquidity, due to its lower efficiency, and due to the fact that there's a lot of people in the market who are not professional investors that can make it kind of weird and probably do make it a little bit easier to time the market. For instance, when I was buying a townhome back in 2006, we knew the market was pretty high. We knew there was a very good chance that the market could go down. And as a result of that, we bought a place that was much less expensive than we could afford because we thought there was a pretty good chance we could lose value on it. And we wanted to make sure if it did drop in value, that we didn't lose that much money. Now, obviously, that was a good decision to make, especially since we couldn't even sell the place four years later. But I think it is a little bit easier to time the real estate market than it is to time the stock market. That said, it's not an easy task by any means. However, with real estate, if you are willing to hold it long term, they say time heals all wounds. And as debt is paid down on the property, as long as it's cash flowing, you're not having to feed the beast, it generally will come back and will appreciate, you know, if you can hold it for 10 or 15 or 20 years, even if you don't buy it at a great time, you're still probably going to make out okay. But honestly, that's the same for the stock market. It's no different. Time heals all wounds. So for the long term investor, the right time to invest is yesterday and the second best time is probably today. And time in the market matters a lot more than timing the market. But if I had to guess which one was easier to time, I would definitely say the real estate market is all right. We've got a special guest on here. We have Johanna Fox Turner, CPA, CFP, RLP. She's the founder of two companies, Fox & Co. CPAs and Fox & Co. Wealth Management. Both are flat fee companies that we've worked with as partners for years. Here at the White Coat Investor, she helps people with their year round planning, with their investment management and with their tax services and actually is getting quite used to working with white coat investors. 90% of their business is virtual and all of it you're working with the fiduciary. So she's spent 36 years advising businesses and high net worth clients on wealth protection, financial planning, tax strategies, estate planning, business operations and succession planning. She's located in Kentucky, but as I mentioned, she'll work with you all over the country. You can get more information from her by emailing infooxwealthmanagement mgmt is management.com or calling 270-247-055. Also just going to their website, foxwealthmanagement.com is also a great way to get more information about the company. Joanna, welcome to the White Coat Investor Podcast. Hey Jim, so tell us why you decided to become a financial advisor all those years ago.

Well, this could be a very long story, but I won't go through all of it in the early 2000s. Of course I've had my CPA firm a lot longer than I have the financial planning firm, but I just got fed up with the advice that our CPA clients were getting and it's just typical for a CPA client to ask their CPA who should I go to for investment management. And I didn't like what they were coming back with. So I just thought I think I'll try this myself. And I was totally green, did not know what I was talking about and I didn't even know what financial planning was. So fortunately I'm a quick learner and once I completed my cfp was able to learn a lot more about financial planning itself and realized that we wanted to be a fiduciary flat fee firm.

Awesome. So what would you say is most unique about your company compared to your colleagues and peers and competitors?

One thing would be that none of us are married to doctors, none of us are the children of doctors, none of us have doctor or doctors kids. And some people might think this is a disadvantage, but for us it means that we have had to learn everything about doctors on the ground starting from zero. And it's been a really good experience for us.

And what's the fee structure for your advisory company and why did you choose that one?

Well, we went flat fee almost 20 years ago in the CPA firm and our clients really seemed to like that because it gave them full access to us year round and I never had to worry about getting an extra bill. So when we started with the financial planning and investment management, I must say we began as aum. That's all we knew. And then I got to know your website and your forum and realized that probably wasn't the way to go. So we restructured to be flat fee here and was in a hit.

Awesome. So let's get into some questions from readers here. We're going to play our first one here. Let's go ahead and play that now.

Hi Dr. Dali, thanks for all you do. I've been following White Coat investor since about 2013 or 14 while in Med school and have benefited a lot from your advice. My question is a general one about socially responsible investing and if you have any advice on how to go about this for people who are interested, is there a resource available for good information on how to vet companies, mutual funds, index funds, etc. More specific to me My husband and I are Muslim and both physicians. He is a resident and I am a first year attending. And while we are interested in investing, we want to be cognizant of where our money goes. There are specific rules on interest accumulation, amount of debt, a company holds, dealings or involvement with, gambling or alcohol, and all sorts that determine its suitability. For the Muslim investor, do you have any advice for people like us who have more specific guidelines on the types of investments we can or want to make?

All right, so sounds like they're mostly asking for a good resource to vet socially responsible funds. You want to take a stab at that one? Joanna?

Yes, I don't think I'm going to give a very satisfactory answer to the first part because I personally don't believe that activism and investing are a very good combination. So every once In a while, we will have a client that asks about socially responsible funds and I will just tell them to Google because we have tried to do this on our own in the past and it always seems like something objectionable creeps into the fund. And so what I recommend is that they donate time and money to those efforts and then try to find funds that are least objectionable. But invest for growth in the future. Now the second part, the Sharia compliant investments. Long, long ago, when we were choosing funds actively, I found Saturna funds. And that's a family of funds that a huge part of it. The Amana mutual funds are Sharia compliant. When we first started using these funds for clients, I did not know anything about them being Sharia compliant. And then that was kind of an added bonus later. But it's a really good, fun company, so I'd suggest trying them first.

I've heard of another fun company and I don't know it very well. I think it's called Azad Funds, which also offers Sharia compliant mutual funds.

Yeah, I know there are a few out there. We just had really good fortune with Amana funds, so a good place to start.

Yeah, I kind of feel the same way you do about socially responsible investing and its newest version, ESG Investing. It seemed like the old SRI funds always seemed to underperform. It's kind of the classic active management thing. So it was always, well, how much of your return are you willing to give up in order to be socially responsible? And do you even agree with what the fund manager thinks is socially responsible? Because a lot of it just kind of gets into politics. You end up with a fund that's pro gun or a fund that's anti gun, or a fund that's pro military or a fund that's, that's anti military or whatever, you know, and maybe you're into brewing your own beer and the fund's anti alcohol, you know, but the newest ones this esg, you know, where they throw in the governance factor at the end, the returns don't seem to be bad. In fact, if anything, they seem to be just as good, maybe even slightly better, which has caused me to spend a little bit more time looking at them. I'm not sure I have a great recommendation for where to send somebody because. Because it still feels all like active management to me. But they're starting to come out with some ETFs and some indexes of ESG factors at least. I feel like if people are really into this, they're not totally doing their portfolio a disservice anymore, but I'm not sure I've got great recommendations for where to go. I think iShares has an ETF out that's based on some ESG stuff. At least it's low cost and broadly diversified. I can't say whether it's. It agrees with what your definition of ESG or SRI is, but at least it's an option. All right, let's go on to the next question. Let's listen to this one. Hi Dr. Dali.

My wife is an emergency room physician and in a pre partnership track she's about a year and a half in and at year two they have the opportunity to buy into the practice. My understanding is that the buy in will be close to $700,000 and she would then receive closer to 100% of her productivity instead of, I think she's at 80 currently. This seems pretty high from my perspective for a buy in. The only thing they do, they won't finance it either, but they will co sign the loan for the 700,000, which doesn't really do much for me. So it'll probably still be 5,6% interest rate loan on $700,000. Wondered if you had any thoughts on kind of comparable ER buy ins. Appreciate your input.

Okay, this one's an emergency doc. Big buy in. Big buy in. I was kind of surprised to hear about that. What would you tell this doc if he came into your office asking about this or she? I should say it's a she.

I would first ask if she went into this with her eyes open, did she know that big buy in was going to be there and did she know what the expectation was to go from 80, 100% of productivity? I've never heard of a buy in like this in an emergency group. So typically when we see a buy in and group, it's a group that has a lot of equipment or a lot of capital and they're getting something in exchange. It's not just buying in for goodwill in an emergency room. I don't really understand the concept of a lot of goodwill with an ER group. So I would say think pretty hard about this and they won't finance a loan, they will co sign it. But another question I would ask is what do you get out of it? Say you decide to leave the group in a few years. It's just not working out well for you. You really want to have it documented in your purchase agreement that you get your 700,000 back or if you don't, that they have a firm calculation of what you can get back or say you pass away, what does your spouse inherit? Do they get that investment back? So that's the other component I think is are you just throwing 700,000 down a hole just for the benefit of getting 20% productivity or are you investing like you would say a mutual fund or a stock and it's expect it to grow or at least you can get your money back?

Yeah, I mean, I kind of wanted you to say it first, but this is insanity. This is insanity. To pay $700,000 for an emergency medicine buy in. It's just crazy. The typical buy in for an emergency physician group is a sweat equity buy in. You work for less money for one to three years. That's a typical buy in. The longest one I know of was five years. And you got paid a little bit more each each year for those five years. But that was like the best group in the country. Right. You just made bank like crazy after that. And so people were willing to do a five year sweat equity buy in. I've never even heard of a financial buy in into an emergency medicine group anyway. But 700,000 just seems egregious. I mean, unless you're getting a piece of property with it, I cannot imagine what that is. Buying, for example, my buyout is basically receivables at the time I leave is all it is. You know, I only expect to walk away with, you know, 30, 40, 50,000, something like that. There's not hundreds of thousands of dollars slopping around in an emergency medicine group like that. So I have no idea why the buy in would be so big. And that would be my first question is what am I actually buying into? And it sounds like what you're doing is just, you know, buying your job and giving those who had it before you a big bunch of cash is what it sounds like to me. So I'm not sure I would become a partner in this group to start with just because if that's the way they treat their new hires, well, that's the way you're going to have to turn around and treat your new hires, which isn't going to feel very good. But aside from that, there's a massive risk in emergency medicine and any similar groups of the contract just going away. Right. I mean, a contract management group could come in and swipe this up and then what do you get for your 700,000? Nothing. You know, if there's nothing, there's no equipment, there's no property, there's. I don't know, it just Seems like a massive risk to me. I'm not sure I'd join the group at all. And I'd certainly try to negotiate that price way down to what would be the equivalent of, you know, sweat equity. You know, if I had to think about what the equivalent buy in would be for sweat equity for our group over a couple of years, maybe it would be. Maybe it'd be a couple hundred thousand dollars worth of sweat equity, but certainly not 700,000. That just seems like a massive difference. I don't know. I got that question and I thought maybe this doc had fallen in with somebody trying to take advantage of her.

You don't think.

I don't know what to make of them of co signing the loan? I mean, does that mean you can walk away and they're stuck with it? I mean, what does that mean exactly to have them co sign the loan for something they're selling to you? I don't know. I thought that was pretty odd to too, but maybe I just don't have all the details on it. All right, so our next question. This one came in by email and I'll read. This one says, I'm a fellow graduating this June. I have a little dilemma with my estimated tax payments for 2020. I do a little moonlighting on the side and last year performed a big Roth conversion so my AGI is a little over 150,000. I filled out my 2019 taxes with TurboTax and the software wants me to make $6,000 estimated tax payments each quarter so I can stay in the safe harbor. Unfortunately, I don't think I can make these payments because I won't be moonlighting that much this year and I spent most of my cash paying the taxes on last year's rollover. The 90% safe harbor rule based on my 2020 taxes may not help either since I will be working my first attending job starting in July and will have higher tax liability for 2020 compared to 2019. What do you think is my best way to approach this? I'll be paid as a partner for my attending job and I'll probably own my partnership interest at AS an S Corp. Could I just not make any estimated tax payments at all and just make large withholding tax elections when I'm attending later in the year? Or is there still a penalty associated with paying most of my taxes in the last half of the year? That sounds like it's right up your ballpark. Joanna, what would you tell this doc?

I would say first of all, just because the software says you need to do it doesn't mean that you need to do it because you have to have a little human intuition and input into calculating what you need to make for estimates. That said, there's nothing wrong with using the task software and coming up with that answer, as long as you understand that it's not exactly correct. And it sounds like the person who emailed you has a pretty good handle on the safe harbor rules. So in this case, yes, I would say, first of all, you're going to be able to annualize because it's not going to have a lot of income in the beginning of the year. So those estimates probably won't be due, especially with that huge Roth conversion. Secondly, yes, he or she can pay in taxes through withholding at the end of the year. I'm just going to say when they become an employee as an S corporation. But my third point would be, are you sure you want to be an S corporation, to be part of this partnership? And I think that might take a little more thought and consideration. Now, if they are an S corporation, yes, they can withhold taxes. And if they withhold their any taxes they owe on the last paycheck of the year, it's going to be treated as spread equally throughout the year. But if they aren't an S corporation, then they can make estimated payments at the end of the year when they're making all that income.

Excellent answer. I'm not sure I can add anything much to that. I think it's difficult for people with changing income to figure out how to do their estimated tax payments because the tech software does assume that basically next year is going to be exactly the same as this year. There's lots of ways into the safe harbor. I think the key is just choose the easiest one for you. In my case, especially the last few years as my income has been rising, the easiest one is 110% of last year's taxes. Now, I know I'm going to have a big tax bill due in April, but that's okay. I stayed in the safe harbor. I won't owe any penalties or interest. I'll just have to pay that big tax bill due in April. So I save up toward that. But if somebody has falling income, it's probably easiest for them to pay 100% of taxes due than it is 110% of last year's taxes. That, of course requires you to actually know what your taxes are going to be that year. Of course. But what do you think about that? I don't want to call it a Loophole. But this idea that you can just withhold all your money in December and basically avoid making estimated tax payments, well.

It is a loophole. But another thing you have to consider is that if you are withholding everything, you have to have a paycheck and you are going to have Medicare taxes already going to max out Social Security almost certainly, but you are going to have those Medicare taxes. Whereas if you make estimated payments just through your distributions in the S Corp, we are still assuming this is an S Corp, of course, then you're not going to have that Medicare tax penalty associated. And people really seem to be afraid of tax penalties. And I don't always understand it. I think it's that fear of the boogeyman, the irs, quite frankly. A lot of times you're going to get a penalty that's going to be a lot less than it would have cost you to pay the Medicare taxes or to borrow from Peter to pay Paul and get that money in on time just because you're afraid of what the IRS might penalize you.

Yeah, that's a good point. The other thing I think people don't get is yes, the paperwork's easier if all your quarterly estimated are exactly the same amount of money. And that's what I try to do each year. But they do allow you to pay as you owe the money as the money comes due. Meaning if you make all your money in the last half of the year, your estimated tax payments can be much higher in the last half of the year. And that's okay. You won't owe any penalty for that. And there's a. I can't remember what the tax form is. You probably have it on the tip of your tongue of what the tax form is you fill out to show what your income was in each quarter and how much tax is due in that quarter and determine whether you owe a penalty that year or not.

Yeah, it's the 1040es form.

Yep, that's it exactly. And a lot of people just don't realize that that's okay to do, you know, and of course that the opposite is not okay, that you can't make all your money in the beginning of the year and pay all your taxes at the end unless it's withheld from paychecks.

Could I make one more small point?

Absolutely.

So for our clients, if they happen to end up with a penalty and it's less than $100, we just erase it. So if you're doing your return yourself and you end up with a penalty of $51. I would just override it to zero. We have never had the IRS come back on us or our clients saying, hey, you didn't pay this small penalty.

Interesting.

In some states the same you won't have to pay the penalty.

Interesting. They just don't seem to care about a two figure penalty.

Huh. So far.

Interesting. So thank you so much for coming on the podcast. For those who want to learn more about Johanna, obviously you can do that@foxwealthmanagement.com but she is also one of our moderators on the White Coat Investor forum. So come by the forum and you can talk to Joanna and ask her questions. And I don't know that she has lots of time during tax season to answer your questions, but she seems to be on there quite frequently. Anyway, unfortunately you're not going to get to meet her at the White Coat Investor Conference. She's just too busy this spring to make it. We were going to have her on a panel there of financial advisors, but unfortunately she's not going to make it. And I'm sure it'll still be a great panel. We got a lot of great people on it. But we're going to miss you at the conference. Joanna, thank you and thanks for coming on the podcast today.

I appreciate it.

Okay, let's take a question from the speak pipe. Hey, Dr. Dali, this is Zach in Chicago.

I had a question regarding health savings accounts.

I know you've talked a lot in the past about the benefits of using an hsa. My question is more about what kind of system you're using to keep track of your family's medical expenses over the years. If, for example, 20 years from now.

You have to prove that your reimbursements were qualified medical expenses that weren't covered by another source, how do you plan on doing this?

Are you scanning invoices or explanations of benefits every year?

Are you waiting until retirement to start withdrawing funds?

Do you think reimbursing yourself a large.

Amount in the future would increase the chance of an audit? And would this affect how much you're withdrawing at any one time?

I've been maxing out my HSA since.

Getting out of fellowship and I know.

That it's likely my employer and my.

Health insurer will change over the years.

Just trying to get the right system.

In place now and hopefully save myself some headaches down the road.

Thanks for everything you do. Okay, so basically here they're asking what system do you use to keep track of your family's medical expenses for HSA purposes? Well, you caught Me with my pants down here. I don't have a great system. I have a folder and I've been throwing receipts in the folder. And every year I try to get myself to go through that folder, scan in receipts, keep a running total of the amount that we could take out of our HSA today tax free. But I honestly haven't done it. It's still sitting in a folder. So I guess that's my system. My system is throwing the receipts in a folder. And I'm not even sure we're really good right now at throwing the receipts in there. Katie's tracking the spending right now. For the last six plus months or so she's been doing that. So I'm not even sure we're getting all the receipts in there right now. But I'll bet out of our $100,000 HSA we probably got $20,000 worth of receipts, money we could take out totally tax free right now. So I think it is worth keeping track of that stuff. I think there are some good systems, I think there are some good automated systems systems coming online with some of these companies. I think Fidelity, who we have an HSA with, may even have a system where you can scan your receipts in and keep track of them as you go along. But I know a lot of these companies are putting in technological solutions like that for you. But the bottom line is if you're going to use this strategy where you hold on to your HSA money for years and years and years to keep it growing tax free and then plan to pull the money out using old receipts, you need a system to keep track of the old receipts. And you probably ought to have a system better than our system. The easier way to do it is just spend from it as you go and whatever you don't spend in any given year, leave in there to invest. They're both perfectly fine strategies if you're a let's keep it simple kind of person. Just spend from it as you go along. The key, of course, is you want to spend that money on health care at some point, whether you do it now or later. You know, it's better to spend it later. But far better to spend it on healthcare now than to spend it on a sailboat later. So this is not money that you want to leave to your heirs. This is money that you want to spend on health care during your lifetime. All right, our next speed pipe question comes from Bob. Hi, Jim, this is Bob from Pennsylvania. Just want to thank you for all.

Your hard work and things you've done.

At the White Coat Investor, period. My question is a brief one in that I have a fair amount of assets through Vanguard, the lion's share of which is in it taxable count. And recently the advisor that I'm working with there instructed me that they were going to be changing over from traditional index funds to exchange traded funds. And I just wanted your thoughts on the pros and cons of that for both me as an investor and also.

For Vanguard as a corporation.

Again, thank you for all you do, and thanks for taking my question. Okay. Lots of people get confused about ETFs versus traditional mutual funds. For Bob, he's got most of his assets in a taxable account at Vanguard, and they want to change them over from index funds to ETFs. Fine, it's the same fund. It doesn't really matter. If they want to do that, that's great in a taxable account. As a general rule, outside of Vanguard, ETFs are slightly more tax efficient than traditional index mutual funds. And the reason why is because basically they can shed off their appreciated shares to these people who put the ETF shares together. And so that makes them a little bit more tax efficient at Vanguard because they are both share classes of the same mutual fund. Both share classes are essentially equally tax efficient. You know, the ETFs, of course you can trade during the day. The traditional mutual funds are handy for those of us who don't want to be on during the day making trades. There's not really any huge pros and cons here. I'm not sure why Vanguard's making the big push for it, but. But either way is probably fine. Listen, are you sick of stealing stuff from the hospital to make up your suture kit at home? You don't have to do that anymore. There is a doc who's put together suture kits for you and will sell them to you at a discount of the price. You could buy them from the people selling the individual parts. You can get more details on that@whitecoatinvestor.com Suture all right, our next question comes via email. Do you happen to know if there's any insurance that can be purchased to cover the difference in loss of income while on deployment? Nope. Sorry. This is one of the sacrifices you make when you choose to serve our country. You know all those people who say, thanks for your service? This is the kind of stuff they're talking about. Because when you get deployed, whether you're a reservist or you're a guardsman or even if you're active duty and just can no longer moonlight, you do make less money. There are a few things to help you when you get deployed. A lot less of your money is taxable, so that helps. You can put some money into the tsp. Tax exempt money can go into the tsp. You can also use the Savings Deposit program, which gives you a guaranteed 10% return on up to $10,000. So there's a lot of cool things about being deployed, even get a little extra paycheck if you're going into a war zone. But for most doctors, your pay probably goes down when you get deployed, at least if you're moonlighting. And I thank you for your service, but there's not really any insurance you can buy against that. But if there were deployment insurance, I think that'd be great. One thing I suppose you can buy if you own a practice and you got a bunch of, you know, employees that are depending on you, maybe you can get some business interruption insurance. But I would bet if you dig deep into those contracts that a deployment is going to be excluded from that, or that they won't sell a policy to somebody who potentially could be deployed. But I guess that might be one possibility. I wouldn't count on it though. Well, I hope you enjoyed that episode. We enjoyed making it. I like answering your questions. If you'd like your question answered on the White Coat Investor podcast, just leave it on our speak pipe@whitecoatinvestor.com speakpipe getting quality disability and life insurance should be the first financial chore for a doctor to complete. Most docs don't have the ideal policy for their gender, specialty, state or health status, and one in seven doctors get disabled at some point during their career. Because these policies can only be purchased through brokers, we put together a list of vetted agents who are experienced with working with the specific needs of medical professionals and who have your best interest at heart. If you have questions about insurance and what kind of policies would be the best fit for you, check out our insurance recommended list@whitecoatinvestor.com insurance and feel the peace of mind that comes with knowing you have the optimal policy in place. You can do this and the White Coat Investor can help. Come visit us on our forums, the White Coat Investor Forum on the main White Coat Investor site, the White Coat Investors Facebook Group or the White Coat Investors Subreddit. We'd love to chat with you, answer your questions, and heaven knows that there are plenty of other White Coat Investors out there that need your help answering their questions, especially in the Facebook group. Thank you for leaving us a five star review. Thanks for telling your friends about the podcast. It really does help to spread the word, spread this important message to your colleagues and peers. Keep your head up, your shoulders back. You've got this and we can help. We'll see you next time on the White Coat Investor Podcast.

My dad, your host, Dr. Dahl, is a practicing emergency physician, blogger, author and podcaster. He is not a licensed accountant, attorney or financial advisor. So this podcast is for your entertainment and information only and should not be considered official personalized financial advice.