WCI #192: Is Your Financial Plan Reasonable?

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 number 192. Is your financial plan reasonable? Welcome back to the podcast. I hope you're as excited as I am. We're recording this on December 15th. It's not going to run until January 7th, but this is December 15th. I'm supposed to get a vaccine this week. I'm super excited about it. Either this Friday or the following Monday. I'm supposed to be vaccinated against Covid. So I'm pretty excited about that and I'm sure a lot of you are too. Hopefully this is the beginning of the end. Thanks for those of you who have been serving alongside me on the front lines of this pandemic. And shoot, keep yourself safe these last few days and weeks and maybe we can look forward to a time very soon when we won't be bringing this home to our families from the hospital. I estimate that 80% of doctors need, want and should use a financial advisor and or an investment manager. Some investment gurus, such as Dr. William Bernstein, think my estimate is way too low. At any rate, if you want to use an advisor temporarily or for your entire life, there is no reason to feel guilty about it. Just make sure you are getting good advice at a fair price. If you need help updating your financial plan or just getting one in place, check out our list of recommended financial advisors@whitecoatinvestor.com financial advisors. You can do this and the White Coat Investor can help. All right, we're going to talk a little bit today about financial plans and how you can know if your financial plan is reasonable. So let's get into this a little bit. The first question you should ask yourself, and we're going to go through 10 of these, is can you stick with it? The most important part of a financial plan, assuming it's reasonable, of course, is not what the plan actually is, it's whether you can stick with it. And in this respect, you need to match the plan to you. If you don't tolerate lots of volatility, you don't want an investment plan that requires you to do so. If you can't predict the future, you don't want an investment plan that requires you to be able to do so. But most importantly, you just got to be able to stay the course with this investment plan, because you're going to need to stick with this thing for 20, 30, 40, 50 years, something like that. So you need to make sure you can. Question number two, are you taking enough risk? Let me give you an example of what I consider an unreasonable portfolio because it's not taking enough risk. If you put a quarter of your portfolio into gold, a quarter into whole life insurance, a quarter into bonds and a quarter into certificates of deposit is diversified, sure, but nothing there is expected to have much of a return. You'll be lucky to keep up with inflation, much less beat it. And so it's just not taken on enough risk. You need your portfolio to do some of the heavy lifting of getting you to your financial goals. And if you don't take enough risk, it won't be doing it. In fact, if you run the numbers, you'll discover that if you want to just invest in safe assets like the ones I mentioned, you have to save 50% of your gross income for retirement. And I'm not willing to do that. I suspect you aren't willing to do that. And so that means you got to take on some risk with your investment portfolio. All right. The third question you should ask yourself when trying to determine if your portfolio is reasonable is are you taking on too much risk? What do I mean by that? Well, consider a portfolio like this. Let's say you put a quarter of it into Apple stock, you put a quarter of it into a single municipal bond, maybe you put 25% into Ethereum, the cryptocurrency. And maybe you put 25% into your brother in law's business. Right. Believe it or not, there's actually lots of people out there who own portfolios like this. But it's not a great portfolio. It's taken on way too much risk, much of which is not actually compensated. I mean, obviously if Apple goes kaput, that's a lot of your money that could disappear with that. And the other investments are all very, you know, high risk, undiversified investments. And so a portfolio full of those is not a great idea. You know, similarly, if you're using up too much, using too much leverage, you know, if you're just leveraged up to your teeth in a bunch of investment properties, that's just taking on too much risk and it's likely to blow up on you. I think it was Benjamin Graham that said keep your stock to bond ratio between 75:25 and 25:75. And I think there's some benefit to that. All right, question number four. Is your portfolio overly complex? Now, occasionally I see these portfolios with 20 different asset classes in them. You got eight types of bonds, you got stocks from every country all in their own little fund, or you own 150 individual stocks. You know, those sorts of portfolios, they're just overly complex and you don't need it to be that complex. And in fact, it's probably hurting your cause. If it's that complex, you're bringing on a bunch of difficulties with rebalancing the portfolio. And so you just don't, you're paying a whole bunch more in commissions and fees. And so it just ends up, you know, wasting a lot of time generating too much in fees and, and confusing the heck out of you. Yeah, you know, I can understand why some financial advisors, financial advisors in quotes, of course, that do this. And the reason why is they want to make investing look complicated to you so you don't try to do it on your own and fire them. But I see very little reason for anybody to have more than 10 asset classes in a portfolio. Okay, question number five to ask yourself, is your portfolio overly concentrated? And as an example of a portfolio that I would say is overly concentrated, consider a portfolio that's 20% TIPS, 20% total bond market, 10% total stock market, 10% total international stock market, and 40% small value stocks. Well, remember, the small value stocks make up about 2 to 3% of the overall stock market. So if you're putting 40% of your portfolio into something only makes up 2% of the market, that's probably too big of a bet. It's overly concentrated. It's the same problem if you're trying to invest in one or two or three individual stocks. Sure, you might hit a home run, but you're making an awfully big bet on those companies. Okay, question number six to ask yourself, are you going to get killed on taxes? Okay, if all your money is in a taxable investing account, then you surely need to pay attention to tax efficiency. When it comes to the asset classes you choose to include in your portfolio. You're obviously not going to have a bunch of, you know, TIPS and REITs and junk bonds and hard money loans and these sorts of highly tax inefficient asset classes in your portfolio because you're just going to get murdered, absolutely murdered on the tax bill for it. So you can do what you can with asset location, but you need to at least pay a little bit of attention to that when choosing your asset allocation. Question number seven, are you leaving free or nearly free? Money on the table. And there's lots of examples of this in life. One, for example, is your 401k match, right? That's like part of your salary. If you choose to invest in something that can't be invested in your 401k, then you're probably leaving money on the table and that's a mistake. Another way is if you have a couple of asset classes with similar returns but uncorrelated returns, you know, like stocks and real estate. You decide I'm just going to do real estate or I'm just going to do stocks. That's probably a mistake because you're leaving money on the table, money that comes from a rebalancing bonus from those two uncorrelated but similarly returning assets. Number eight, can you get similar performance at lower expense? And a lot of people are using actively managed mutual funds, for instance, that perform at best about like an index fund. Just not a great way to assemble a portfolio. For example, there is AN S&P 500 Index Fund with an expense ratio of 2.41%. Or you can go to Vanguard or Fidelity or schwab and pay 0 to 5 basis points rather than 241 basis points. All right, question number nine to ask yourself. Does the portfolio pass the eyeball test? By that I mean you should ask yourself three questions. One, would you put your parents money into this asset allocation? Two, would any reasonable person argue vehemently against it? And three, if your best friend came to you with this portfolio, would you try to talk him out of it? And if you can't answer all those, you know, in the right way, then you ought to ask yourself, well, maybe I shouldn't be owning this portfolio. What makes me so special that I think I am? A portfolio that's not appropriate for anybody else I know is appropriate for me. All right, and last question, and maybe the most important one. If you fund this proposed asset allocation, this proposed investment plan adequately, will it be successful in reaching your investment goals? And if the answer is no, then the plan is not adequate or you need to save more money. One or the other. All right, I hope that's helpful to you. If you're having trouble coming up with an investment plan, there's really three ways that you can do it. You can do it the long, slow but cheap way. I did it. You can spend hours on Internet forums, reading blogs, listening to podcasts, reading books, and just really geek out on this stuff and make it kind of a hobby. If you do that, you will learn enough that you can write your own investment plan, a plan that you can follow that will be successful and you should have the discipline to to follow it and be successful with it. If that's too much work, and it is for many, so you shouldn't feel guilty if it's too much work, I put together a shortcut. We call it fire your financial advisor. It's an online course and it's designed to take you in about eight hours from being financially illiterate to being financially literate with a written investing plan. That's the product you walk out of the course with. And it comes with a, you know, 100% money back guarantee for a week. It's a great course. We have lots of great feedback on it and you ought to check that out. The third option requires even less work on your part, but is going to require more money. That's to hire a financial advisor. We keep a list of recommended financial advisors on the website. These are people that are fee only fiduciary advisors that we feel offer good advice and at a fair price and they can help you write up your financial plan. You can take it from there on your own if you want, or you can have them help you to implement it and manage it going forward. But however you do it, you need to get a financial plan in place. All right, let's take some questions from you off the speak pipe. Our first one, let's take a listen.

Hi Dr. Dali. I've been a longtime listener. I think you're the absolute grooviest. I wanted your opinion regarding my written financial plan. I listened to the recent podcast regarding the question with 100% stock portfolio when you have a long investment horizon. I've become very debt averse as I've gotten older and have chosen to do 100% stock with my investment. But for the portion which theoretically would be in a fixed asset allocation, have instead used that to make extra payments on debt. With my mortgage and student loans, I figure that this is a known return. Do you think this is a reasonable plan? Thanks again for all you do.

Thanks Anna, for that great question. That is a great plan. That's a very reasonable plan. If you can tolerate the fluctuations of your equities such that you don't sell low and square off stocks forever, then this plan is fine. Because remember that what debt is, it's a negative bond on your balance sheet. It's exactly the same thing if you pay down debt versus you invest in bonds. In fact, for a lot of people because they have such high interest debt, you know, you might have student loans of 6.8% or 8% or higher, maybe credit cards at 15%, who knows, right? That's exactly the same as getting a 15% guaranteed return or an 8% or a 6.8% guaranteed return. And obviously you can't get that out of bonds these days. You know, you go buy high quality bonds, Treasuries or corporates or municipal bonds or whatever, you'll be doing well to make 2 or 3% as far as that goes. And so, yeah, this is a great plan, especially if you have high interest debt. In fact, if that interest is high enough, you may even want to pay that off before you even invest in equities. But yeah, that's a reasonable thing to do. At a certain point, Anna, though, you're debt averse. You're going to have all this debt paid off, may even have your mortgage paid off. And at that point you got to ask yourself, do I still want to be 100% stocks? And you may want to start adding bonds at that point to the portfolio, but I'll leave that up to you. All right, let's take our next question. This one comes in from an attorney.

Hi there. I am a longtime listener, first time communicator, and I'm an attorney. I've been practicing for 10 years. I'm a partner at my law firm. There's only three of us. I own a third of the firm. I am a pretty high income earner. This past year, just me alone, I made about $1.2 million. With that money, I paid off my law school debt and my husband, who is an orthopedic resident in Los Angeles. I also paid off his medical school debt. We now have fairly healthy six figures in the bank before taxes, which all of that money we've calculated and will allocate. But now we're trying to decide what to do with the remaining money that we have. Do we begin investing? Do we save for a home? I've looked at the disadvantages of getting a physic position mortgage for when he becomes an attending, would much rather go with a conventional loan with a healthy down payment if possible. But we're really just beginning our investment and retirement savings journey and are just looking for some sage wisdom about what makes the most sense. Generally speaking, now that we have some freed up income, now that our student debt is completely eliminated, which was about a half a million dollars. So if you can provide any advice or guidance, that would be very helpful. Thanks.

Great job, Hillary. You paid off not only your student Loans, but you paid off an orthopedist student loans. $500,000. That's awesome. Congratulations on your success. That's really good. So now what? Well, now you're in the place where most new attending physician graduates are. You come out of residency, you have all these great uses for money, but you only have limited funds. Well, at least you've already eliminated one of those great uses for money. Right? You've already paid off the student loans, so that's great. Other things that people focus on as they're coming out of training, they focus on building a reasonable emergency fund of three to six months of expenses. They focus on maxing out retirement accounts, maybe even doing some Roth conversions if they're not yet at their peak earnings level. You know, if you had some tax deferred money from a prior career or from your time in residency or something like that, you might also consider saving up a down payment. In your case, you really want to do a conventional mortgage, so you're going to need to save up a 20% down payment. And if you're looking at a, you know, $500,000 or $1 million house that might be, you know, $100,000 or $200,000, you need to save up. So that might take most of your current savings. And then, of course, the greatest financial task of our lives is to save up enough money for retirement so that we can live off of it for 20 or 30, 40 years in retirement. Jonathan Clements refers to that as the greatest financial task of our lives. And I think that's true. No time like the present to get started, you know, especially because you cannot get back retirement account space. You know, whether it's an HSA, whether it's a backdoor Roth IRA for each of you, whether it's his, you know, 403B at the residency program, whether it's something offered through your law firm, whatever's available to you. You know, you want to start saving for retirement, so try to max as many of those out. But if you're on track to have your down payment money by when you need it, and if you are maxing out all your retirement accounts and you're spending as much money as you want to spend and you want to invest more, well, you just do it in a taxable account. Or if you're not quite saving as much as you need to inside your retirement accounts for retirement, then you got to do some of that inside a taxable account. But there's no limit on a taxable account. You can always invest more money. There's nothing that keeps you from doing it. But those are sort of the ways I would think about it. I would prioritize the down payment over whatever time period you need to have it by. You know, if you want to have it in a year and you're halfway there, well, that's probably going to be a major chunk of your savings this year. If you don't need it for five years, then, you know, it might not be that big of a chunk of your savings this year. And then the rest, I'd start saving for retirement. Unless you have other financial goals. You know, maybe you want, you got kids, you want to need to get 529 started with, or maybe you want to save up for a Tesla or something, or whatever, you know, whatever your financial goals are. But you have to balance those goals one against another and weigh them out. And that's really what the budgeting and the saving process is all about, is weighing your values and making sure your money is going where you want it to go and that it's going to what you care about most. All right, our quote of the day today comes from King Solomon who said a good name is rather to be chosen than great riches and loving favor, rather than silver and gold. So you'll find that one in the Bible. All right, speaking of gold, let's take a question about gold off the speak pipe.

Hello Dr. Dalli. I'm a huge fan of your blog and podcasts. You have been influential to me and I thank you very much for your work. My question is about gold. My husband decided during this pandemic that he was going to invest 30,000 of his retirement portfolio in gold stocks and actual physical gold with a split of 75, 25 respectively. His 401k and Roth IRA accounts are only about 65,000. He basically placed almost 50% of his retirement money in gold. I however, invested only 15,000 of my retirement portfolio of 450,000. So combined we have about 9% of our entire retirement portfolio in precious metals, primarily gold. My husband thinks that this is a good hedge against inflation. The rest are in aggressive growth assets, stocks, mid cap, small cap and international markets. We are in our early to mid-40s and have two small children. I'm an internist and I make close to 275k a year and my husband makes about 80,000 a year. As a non physician medical professional, I function currently as the sole breadwinner of this family because my husband still has school loans that I want him to pay down aggressively. Thanks to you and your suggestions. I also support my extended family who lives in a third world country. So what is your opinion regarding precious metals and investing in gold stocks and physical gold with our retirement money? Thank you very much.

All right, lots of questions there. I think the first comment I want to make is that it's not his money and her money, your money, et cetera. It's all one pot of money you guys should manage together. So I like the way you totaled it up for me and told me 9% of your portfolio is in gold. Because obviously, from what I said earlier in the podcast, I think 50% of your portfolio in gold is crazy, right? That's way too big of a bet on something like that. 9% not so crazy when I put 9% in there? Probably not, you know, but I think anything under 5 to 10% is probably reasonable and could be justified as a reasonable asset class in your asset allocation. So I can't criticize that. You guys are making great money. You're making, shoot, $350,000 or so. You know, it doesn't really matter if you got 5 or 10% of your portfolio in gold, even if gold does poorly, as long as you're saving adequately. And it sounds like you are based on how much money you have now. So I think you guys are doing pretty great. If gold is an important part of your investment portfolio and you're holding it at 9%, I think that's okay. What do I think about gold? I think the most important thing is that you limit your investment in gold. Sometimes people get really crazy about gold or bitcoin or silver or commodities or whatever, and. And they put way too much of their portfolio in it. If you want to have it as a hedge, in the event that stocks and bonds do poorly and gold does well for some reason, then it's reasonable to do that with a small percentage of your portfolio. But I think you ought to limit it. The problem comes in when people, when an asset is doing really, really well, like bitcoin has been most recently, and it's going through the roof and you get really excited about it. You put a whole bunch of money in and you put 25% of your portfolio in it, and then all of a sudden it's 35% of your portfolio. And now you got this huge, huge bet on something that's primarily speculative. I mean, frankly, gold is primarily speculative. I don't put speculative assets in my portfolio at all. The only gold I own is on my finger. And so if you want to know what I think about gold. You can just look at my portfolio and see what's in it. But is it unreasonable for somebody who likes gold, who likes the investment characteristics of gold to put a little bit in there? No, that's not unreasonable. It's okay to do if that's what you want to do. But keep in mind what you should expect from gold over the long run. I expect gold to keep up with inflation. That's it. I don't expect it to beat inflation. I don't expect it to underperform inflation. If you go back 800 years, you'll see that an ounce of gold bought a nice man's suit today. An ounce of gold buys a nice man's suit. And that's basically what you should expect out of gold in the long term. In the short term, it's incredibly volatile. You know, if you look at the market report I put in my newsletter every month, you'll see that it goes up by 5 or 10 or 15% a month and then it comes down the next month. It's not quite as volatile as silver and neither one of them are as volatile as cryptocurrencies, but compared to stocks and bonds are pretty impressively volatile. And so you got to deal with a lot of volatility to get inflation matching returns over the long run. If you are going to go for gold or you are going to include in your portfolio, you got to stay the course for a long time because the benefits of gold tend to only show up about once every 20 years or so. And then gold goes hog wild and you're really glad you own it in your portfolio. And then you got another 19 years where you're like, ah, should I really still keep gold? So you got to be committed to it. You got to have it in your portfolio long term. Set a percentage, a single digit percentage for it in your portfolio. Rebalance once a year and go with it, but don't let it be, you know, 50% of your portfolio. That's way too much. All right, so let's take a question now. This one is about commodities.

Hi, Dr. Dali. I have a question about commodities. So the general sense that I've gotten from people like yourself, Paul Mehrman Bernstein, has been that commodities are too volatile and don't have a good enough return to really consider them as a significant portion of your portfolio. And that perhaps at most, you know, you could put a couple of percent in precious metals as a hedge against inflation. And because, you know, Bernstein mentions that you will end up buying low and selling high More as you rebalance because it's so volatile. But it's pretty much limited to that from my understanding. However, I'm reading a book called Asset Allocation by Roger Gibson, and he actually talks about using it perhaps a bit more because of its typically negative correlation with US Stocks and that that can, as a part of an integrated portfol, end up giving you better returns with less volatility. For example, he has a model of portfolios between one and four asset classes, the asset classes being US Stocks, non US Stocks, real estate and commodities in equal allocations. And interestingly, the four with the best Sharpe ratios are the three and four asset class portfolios that include commodities, even though commodities themselves have the most volatility and the smallest return. So my question here is why haven't I really heard anyone else talk too much about commodities in the circle of people that I respect on the matter of investing such as yourself is, you know, Mr. Gibson's data simply too limited. His data is from 1972 to 2011. So I don't know if maybe there's just not enough historical perspectives or is there some other reason that I'm missing as to why you wouldn't put a, you know, perhaps more than just a couple percent of your portfolio into commodities. Anything that you could tell me would be greatly appreciated. And if you would recommend potentially putting a portion into commodities, if you could say kind of what constraints on the percentage of allocation of your equity portfolio you would put into that, I would greatly appreciate it. Thank you.

All right, so this is a good question. There are books and authors out there that talk about including commodities in a portfolio, and this is perhaps why asset allocation is so personal, right? You go out and read some books, you read some blog posts, you figure out what you agree with, what you don't agree with, and you pick something reasonable and you stick with it for the long term. Right? So if it feels to you that having a few percent of your portfolio in commodities is reasonable to you, if you're convinced by the arguments of Roger Gibson and asset allocation that this is a wise thing to do with your portfolio, then that's okay with me. Put a little bit of money into commodities, rebalance it each year, and eventually commodities will do really well. They'll do better than stocks and bonds and gold and real estate and whatever for a year or two, and then they'll go back to underperforming. You know, it's a little bit like gold that way. Yes. It's a way you can hedge your portfolio. Do I own Commodities? No, I don't own commodities in my portfolio. I don't find the case for them particularly strong. You know, Larry Swedro was one who really pushed for commodities, in this case collateralized commodity futures as part of a portfolio for years and years and years. And it really didn't turn out to do very well at all. So why are you not hearing about commodities right now? Well, chances are you're not hearing about it because they haven't done well in quite a while. And even smart people that talk about, you know, investing on forums and who get on blogs and stuff, they chase performance as well. And so when something hasn't done well in a long time, do they talk about it? No. So commodities haven't done well for a long time. Nobody's talking about them. Bitcoin's done really well recently. So everybody's talking about bitcoin. But you know what, when bitcoin does poorly, everybody stops talking about bitcoin and starts talking about commodities. And so you gotta be careful not to performance chase. You gotta pick a percentage that you can stick with for the long term. In my case for commodities, that's 0%. Okay? In your case it might be 5%, and that's fine. But whatever you can stick with long term, you rebalance it once a year and eventually when that asset class is in favor, it will provide the benefit to the overall portfolio that you're hoping for. But a little bit like precious metals, I expect commodities to mostly over the long term keep up with inflation, but with pretty significant volatility that you got to put up with. You know, I track a commodities index on my monthly market report in the newsletter. If you subscribe to the newsletter, and you should, it's totally free, right? It's got lots of good stuff in there, including this monthly market report. But I've always been impressed with how volatile commodities are and how poor the returns can be for quite lengthy periods of time. And it's just not an asset class I find particularly attractive. Number two, every asset class you add makes your portfolio more complex, right? I've already got eight in my portfolio. You, how many asset classes do you want in your portfolio? And if you only want five or six, are you really going to burn one of those on commodities? I probably wouldn't. So what percentage is reasonable? Again, I'd say a single digit percentage, you know, but the way I kind of feel about it is if I'm not willing to put at least 5% of something into a portfolio, it probably doesn't belong in there at all. Right. If you don't believe strongly enough in gold or Bitcoin or commodities or whatever, but 5% of your portfolio into it, you know, what are you doing? You're just playing with it. Putting 0.5% into your portfolio statistically is not going to move anything. There's no point. You're just introducing unnecessary complexity and giving yourself a lot of work to do that you otherwise would not have to do. So those are my thoughts on it. I hope that's helpful to you. I think it's important as you decide on your asset allocation that you make sure it's something reasonable. And if you have some of these speculative investments that are hedging investments, you know, don't have too many of them, number one, don't put too many too much of your portfolio into them, number two, but you know, at least put enough into it that it's going to do something. If you believe in it and you really are going to put it in there, you know, I'd say 5% is the amount to put in and go from there. All right, thanks to those of you who've been leaving us five star reviews. We really appreciate it. We had a recent one from Founders Ball who said the best, absolutely the best physician finance podcast out there has transformed my approach to finances and by extension in my life, a five stars. Thank you for that. We appreciate those five star reviews. They do help spread the word on the podcast. I estimate that 80% of doctors need, want and should use a financial advisor and or an investment manager. Some investment gurus, such as Dr. William Bernstein, think my estimate is way too low. At any rate, if you want to use an advisor temporarily or for your entire life, there's no reason to feel guilty about it. Just make sure you are getting good advice at a fair price. If you need help updating your financial plan or just getting one in place, check out our list of recommended financial advisors@whitecoatinvestor.com financial-advisors. You can do this and the white coat investor can help. All right. If you need help with designing your financial plan, coming up with an asset allocation, I would encourage you to check out a couple of resources. One, my post on the blog called 150 Portfolios Better Than Yours. It actually now lists 200 portfolios and you need to pick a reasonable one and stick with it or design your own. If you need help designing your own, take a look at our fire your financial advisor course. We think it's the best course out there like this. We consider it to be sold at the resident price, quite frankly. And it's dramatically cheaper than hiring a financial planner to help you come up with a plan on your own. So check that out as well. All right, I think it's time to wrap this up. 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 consider considered official personalized financial advice.