WCI #195: Investing Lessons from Christine Benz of Morningstar

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 195 investing lessons from Christine Benz. Let's see, we're recording this on the 21st of January. It's going to run next week on the 28th of January. So pretty short interval here which is good. Helps us keep stuff current for you. Did you know that the White Coat Investor not only has a podcast and a blog, but several books that will help you on your way to financial independence? These books cover topics such as asset protection and minimizing your taxes to keep more of your hard earned money. They discuss plans for insurance, housing spending, student loan elimination, investing and estate planning. You can learn how to become a millionaire within five to 10 years of leaving residency and how to invest in a sensible, low cost and effective manner with or without the assistance of a financial advisor. There's even a book geared directly toward medical and dental students so you can start optimizing your finances early in your professional journey. Find the book that is right for you at the WCI store, at shop.whitecoatinvestor.com or on Amazon. You can do this and the White Coat Investor can help. All right. Our quote of the day today comes from Rick Ferri. He said, I find that newly enlightened self managed investors can spend a considerable amount of time and energy trying to figure out a perfect portfolio by seeking a perfect asset allocation, perfect products, perfect tax efficiency and a perfect maintenance methodology. Don't bother. I think there's a lot of truth to that in investing. Good enough is good enough. All you need is a reasonable plan that's funded and adequately. Thanks so much for what you do out there. This is not an easy time to be a doc, to be a high income professional of any kind. The economy has taken some pretty serious hits even among the relatively stable profession of medicine and it's been a rough go for a lot of people, especially as they've dealt with illnesses on their own, illnesses and deaths of colleagues and partners. And hopefully we're getting close to the light at the end of the tunnel here. A couple of things I want you to know about. We have WCICOM coming up first week of March. You can still register for that. Information is available on the website. We also have from one of our partner websites, the Physician Philosopher, a coaching service. If you are interested in a coaching service. This is physician life coaching. Help you be a more effective partner, more effective parent, a more effective physician, a more effective business owner. Maybe even manage your finances a little bit better. You can hire this coaching service. It's called the Alpha Coaching Service. It involves 12 weekly group coaching sessions and up to eight one on one coaching sessions with an Alpha coach. There are also some video lessons and a book and some text support sessions and a community of like minded physicians. They give a 14 day money back, no questions asked guarantee. You can sign up for the wait list now. If you sign up onto the waitlist between now and February 12th, you can buy it on the 12th for a $500 discount. So if you're interested in that service, check it out. Whitecoatinvestor.com coaching all right, let's get into our interview. We have a very special guest today. Christine Benz is the director of Personal Finance at Morningstar. She's a senior columnist there. She's on the board of directors of the John C. Bockel Financial Literacy Center. She's the author or co author of five books, including 30 Minute Money Solutions, which we'll be giving away at WCICON this year. And she's also going to be one of our keynote speakers at that conference. So without further ado, let's get her on the podcast. All right, Christine, thanks so much for coming on the podcast.

Well, Jim, it's my pleasure. Thank you so much for having me.

Let's start with talking a little bit about your upbringing and your education and perhaps how they affected your views on money.

Yeah. My educational background has nothing to do with what I do today, except perhaps that I, I focused a lot on writing and communication. I was a political science and Russian language major as an undergrad and was editor of my high school paper. So writing had always been a big part of what I do and communicating. But really, it wasn't until I joined Morningstar that I began to be more interested in investing. My dad had been an investor and he was actually the one who kind of nudged me in the direction of applying to Morningstar. He had been a stunning stock investor earlier in his investing career, but then kind of in the late 80s, early 90s, became more interested in just using mutual funds. And he really liked that Morningstar was attempting to shed some transparency around what funds look like, what they're doing. And so he was an early adopter of Morningstar's work. So through talk to my dad, I became interested in Morningstar and its mission and kind of Started in our copy editing group, editing the analyst reports, the fund analyst reports. And Morningstar is really great in terms of training everyone, regardless of what your role is in the company in investing matters. So I was getting some training and I was going through the reading list that we had, so reading Jack Bogle's books, reading Random Walk Down Wall street, and so really beginning to kind of steep myself in investing matters and just began to realize that I wanted to do the analyst job, applied for the analyst job and did that job happily for many years and eventually headed up our US Fund analyst team. And then along the way became more interested in broader issues of financial planning and personal finance. And Morningstar was kind enough to kind of let me morph my career in that direction, I would say. Just in terms of my upbringing, one thing I think about with respect to money is just that thankfully, blessedly, I grew up in a really placid home from the standpoint of financial matters. My dad had a small business, but just in general, there was no money turmoil in my house, in my family, there was always the expectation that we could all go to college and that my parents would pay for it. And my parents were very much compatible financially. And I realize in hindsight what a gift that is because we know how aligned our financial well being is with our overall well being and with our health. And so I really think about that as I approach my work today, that sort of alignment of financial wellness and just overall wellness. And it's really important to me to be able to work in that space because I think I experienced firsthand through my upbringing just sort of what a solid found that puts under your feet.

Now you're the director of personal finance at Morningstar. What does that mean? What do you do? What is your day to day life like?

Well, I do a lot of different things at Morningstar, but one thing I think about is taking a lot of the great bottom up work that our analyst teams are doing and making it usable. So in my work I do, I put together model portfolios and I also just write about the implementation of various investment approaches. My personal approach pretty minimalist when it comes to investing matters. So I talk a lot about things that you can do to improve your plan. I talk about tax management, I talk about trying to make your portfolio as streamlined and efficient as it possibly can be. So there are lots of different facets to my work. I write usually a couple of articles a week from morningstar.com about some of the matters that I just referenced. I usually shoot videos as well. With some of our thought leaders, both internally and externally. And my colleague Jeff Patak and I also work on a podcast which you were kind enough to be on, Jim, called the Long View. So I have a few different things that I do, and I guess a sort of general overarching theme to my work is that I try to make our bottom up work usable and helpful.

Awesome. Well, thank you for doing that. Now, Morningstar is by far the best place to get information about all the mutual funds out there. What are you most proud of that Morningstar does or has done in the past?

A few things, I guess. One thing I would say is that I think we're great at visually depicting data. So the style box I still think of as one of our best innovations where it depicts how a mutual fund lands in terms of its market capitalization, whether it's small, medium, or large, but also how it lands on that value to growth spectrum. And we know that diversifying within that style box or making sure that you have adequate exposure to all of those investment sizes and styles is an important component of investor success. So I think of that as just a great visualization tool that we came up with. Another sort of innovation that I would say I'm proud of, and one that we were working on when I was head of our US Fund research group, was this idea of attempting to to depict the role of investor behavior in their take home results. So we know that historically investors have bought funds late, so they kind of look at past performance and then they buy them and then sometimes they capitulate at the worst conceivable time. So we created this data point called investor return that essentially tried to show how those timing decisions can affect an investor's return. So to use a simple example, say a fund has like a 10% annualized return over the past decade. Well, when we look at investor returns, we know that because investors might have been late to the party and they might have capitulated when the fund was in a trough. We know that they didn't get that whole 10%. They might have gotten like 7% or their return might even be negative on a take home basis. So I have been excited about us exploring that dimension because it's sort of an expense ratio that we don't really talk about these timing decisions that investors can make. So I think that that was an important innovation and I love that we can look at that on an aggregate basis to kind of get our arms around how investors are doing. And the good news is when we look at this more recently, we see a pretty pleasing picture. So we see that investors, for whatever reason, over the past decade don't seem to have done as much of this performance chasing. We've seen many investors rotating into international stocks, even though we've had much better performance from the US Equity market. So it's maybe a short term horizon. But I think that part of that may be because more of those flows are being driven by professional investors of some kind, whether through a target date fund that's just kind of doing that rebalancing for you or through financial advisors. But overall, we see a healthy trend from that standpoint. But it's something that we'll continue to monitor.

Or maybe investors are finally getting smarter. It could be maybe they're not having those problems anymore.

Right. They're choosing cheaper funds, which is definitely a plus. So expense ratios seem to be top of mind for investors. So maybe they are getting smarter and maybe we hope some of the work that, that we're both doing is sinking in.

Yeah. You know, it's interesting. You don't realize how valuable it is to have a resource like Morningstar until you look at a market that doesn't have one. For example, there are a lot of private real estate funds out there available to accredited investors. And there is no resource like Morningstar where you can go look them up and compare them and look at past performance and audited returns and all this stuff in one place. It's really, if you're interested in that sort of a investment, you're really just mucking around trying to find things by word of mouth and Internet searches. And it really puts into perspective what mutual funds must have been like before Morningstar came along. It must have been very difficult to figure out which mutual funds had done well and all the statistics on them. So it's a wonderful company that's done great things.

I think that's absolutely true. Thank you. Yeah. Fund fees were incredibly high, too, when there was no light being shed on what investors were paying for this stuff. So due to a number of factors, I would say Morningstar 1, Jack Bogle, certainly banging the drum on the fund fee front. A number of factors have contributed to investors being more cognizant of the things that really make or break their returns.

Now, we've talked about a lot of the great things that Morningstar has done. Let's talk about something they've received at least some criticism on, which is their star rating system. They use a one to five star rating system to rate mutual funds. The system's changed somewhat over the years. But I recall a number of years ago a study came out that showed the expense ratio of the mutual fund was a better predictor of future returns than the star system actually was. And there was a lot of discussion on the Internet and blogs and so far about that. I'm curious, what were the internal discussions at Morningstar like after that study came out?

Well, you know, we've always monitored the star rating. And one thing we've always taken care to do is to talk about the limitations of the star rating, frankly. So it's designed to be kind of a quick snapshot of how a fund has balanced risk and return relative to its peers. So it's backward looking. And we've always said that it's just maybe a quick way to winnow down the universe, the overwhelming universe of mutual funds and ETFs to a more manageable group. And actually the star rating I think is fairly decent from that standpoint. Expense ratios are decent too. So if you just need a quick first cut, I think either would serve you reasonably well. One thing we see is when we look at the star ratings performance and whether it's predictive, one thing we see is that the five star and four star funds do tend to both survive, so they last. They don't get killed off by the fund company sponsor, so they survive. And they also do tend to outperform the lower rated funds. So we think it does okay as a first cut. We think investors could reasonably use it. But if investors want to start with fund fees and call it a day, I think that's a fine way to go about it too. But you do need to do some additional due diligence. There's probably not one single measure that you could use. But as a first cut, I would say either one is probably fine. Maybe the two used together would be fine as well. And one point I would make, Jim, is that the star rating does embed fund fees as well because it is net of fees, the rating. So it's factoring in the role of fund fees as well.

I think the data is really good actually that the one star funds tend to stay one star funds. Is that what your data's shown as well? That really, especially on that end of the spectrum, it's actually quite predictive. If it's a one star fund, it's probably not going to become a barn burner anytime soon.

That's right. That's what our data suggests. Our data also suggests that that one star bin, and maybe the two star bin as well, they tend to be costlier than the higher rated funds. So there's an alignment there as well. And the one and two star funds do get tend to get killed off by their sponsors more readily than the higher rated funds. And we think that that's something worth paying attention to because the fund industry actually has this pretty terrible record of starting funds and then deciding, eh, it didn't gain much in assets or whatever it is, we're going to kill it off or we're going to merge it into something else that's not a great outcome for investors. So we think surviving and outperforming, those are two things that you want to be looking for.

Now Morningstar has been around for a long time. It was founded in 84, so it's been around for 36 years. And somewhere along that way, the data in favor of index funds over actively managed funds became somewhat overwhelming. How has Morningstar dealt with that issue over the years?

Well, the good news is we're agnostic about it, that we, you know, we're not selling this stuff, so we don't really care. If the data over long time periods prove that index funds outperform, great. So we continue to monitor it. My colleague Ben Johnson, who heads up our passive funds research globally, he and the team put out what's called the active passive barometer twice a year. And basically that measures how active funds have done relative to passively managed funds and ETFs. And what they found, Jim, is exactly as you've said, that active funds do not make a great case for themselves in aggregate. I think something like 25, 26% of active funds have outperformed over time as of the most recent data run. So that's not a great track record. But, but we do find that it does vary a bit by category. So as you would expect, as people who are generally conversant in investment matters would know, large cap equity is the place to go passive, that active management has a very poor shot at outperforming the market benchmarks funds. On the other hand, there are some other categories where active management looks relatively better. So foreign stocks, taxable bond, real estate, mutual funds, those would all be categories where active funds have historically made a somewhat better case for themselves. And I think we're very much aligned with Jack Bogle's cost matters hypothesis where if you look at the subset of active funds with very low costs and Vanguard's active funds would certainly be among them now you start cooking with gas in terms of a group of funds that actually have a shot at outperforming the index tracking funds. But the key is that if you are investing in active funds at all, you need to keep your fees really low. But I do think that indexing for investors who want to create a really minimalist hands off portfolio, indexing is probably the way to go. In fact, I often think about that's one thing that maybe Jack Bogle doesn't get enough credit for, is that in broad market index tracking funds, he created a product where if I run into an investor who asks me to make a recommendation and I say, well, just buy a total market index fund or put together a portfolio of total market index funds and I never see them again for another 25 or 30 years, I can rest assured that if they followed that advice, they probably will have a pretty decent outcome. And so I think that that's another big advantage of index tracking products.

Now, speaking of Jack Bogle, Morningstar used to host the Vanguard Die Hards forum until the Bogleheads kind of left en masse back in 2007. Did anybody at Morningstar feel like that was a big loss?

Well, I think we did because those Bogleheads were among the savviest participants in our discussion forum on Morningstar.com, so from my standpoint, that was a big loss. And I know it was very much something we talked about internally. The Bogleheads had an appetite for more moderation than we were giving them on the discuss forums on morningstar.com and you know, frankly, and I think they would concede this, they were more in favor of sort of enforcing purity of thought among the people who are participating on the boards. And they wanted us to be policing the boards. You know, if someone got on there saying that they were putting together a portfolio of, of active funds or individual stocks, they wanted us to kind of get them off of the Bogleheads Vanguard diehards section of morningstar.com so I think that ultimately where bogleheads.org ended up was a great outcome for them. And they've certainly put together one of the best wiki sites out there. The Discuss forum is terrific. So I think it's, it's been a win for Bogleheads who want to hang out with a like minded community. And I love that community. I'm part of it. I'm part of the Bogle center board and really supportive of the work that they're doing there.

Now let's turn the page a little bit and talk about kind of a unique issue in the finance industry. You know, finance makes medicine look downright Egalitarian. When we come to how many men are in it and how many women are in it, that is not the case. When you go to a financial conference, it's almost all guys, right? But do you find in your work that women are more willing to listen to you than they are some of your male colleagues? And what do you see as some of the keys to educating women investors about personal finance and investing?

It's a good question, Jim. I would say, just because, you know of the phenomenon that you identified, there are way more men doing this for their households. Certainly more financial professionals are men than women. So just by happenstance, I've had more opportunities to talk to men about these matters, and I find them pretty receptive overall to what I talk about. But I do enjoy talking to groups of women. I think when we look at women's investment behavior, and I monitor this closely or I've tried to get a read on what the data say, we see a few different things. We see that women, yes, do tend to invest more conservatively than their male counterparts. One interesting dimension to that, though, is when you control for income, you actually don't see that much diversity. So if you look at how investors who have the same asset level or income level invest, we see that men and women tend to invest pretty similarly. I think because women have lower incomes than men on average, they might tend to invest a little bit more conservatively because they just have this sense, well, I might have some emerging emergency soon. I need to preserve what I have. So that's something that I keep an eye on. I think another interesting finding from the data about how women tend to invest is that women, and you might not be surprised to hear this, women are a little more comfortable asking for directions, more likely to rely on professional advice, professionally managed solutions within, say, the 401k plan, if there's a target date plan on offer or a managed account, women are more likely to go for that than men. And I think that does sync up with that general sense that perhaps, and of course these are huge generalizations, but perhaps some women are more comfortable admitting what they don't know. So I think that to the extent that you can give women solutions that they can implement, they seem really receptive to that. And then another factor that's top of mind when I think about women versus men is just the, the extra longevity that women have relative to men, where on average we live a couple of years longer than our male counterparts. And to me, that really underscores the need for women to take an appropriate level of risk in their portfolio. So I talk a lot about that. To the extent that I do presentations in front of women's groups, I talk a lot about making sure that you have enough equity exposure. You're not forsaking your long term portfolio sustainability for sort of near term comfort level. So I think that that's an important dimension as well. It also underscores the virtue of making smart decisions with non portfolio assets like Social Security, making sure that you're being smart in your claiming decisions. So this is just kind of a grab bag of things that I think about with respect to women and investing.

You know, it's interesting. The data is very clear. Women are better investors than men. I mean, they have better investing behavior, basically. They don't shoot themselves in the foot nearly as often.

They're more patient.

Yeah, they're clearly more patient. The question I always wonder, is it because they know more about investing or is it simply because they're more humble and acknowledge what they don't know? You know, they don't know any less or any more than the men do. They're just much more comfortable realizing that and acting accordingly. Whereas the guys think they know for sure that Tesla's going to skyrocket.

Right, right. And there's been some research about just the orientation about male versus female investors that male investors tend to be more concerned with kind of optimizing like getting a better return than something, getting a better return than a market benchmark, for example. Women tend to be more focused on their goals. Like, okay, if I determine that I need to save X amount for college, if I hit that goal, well, I'm done. Right. I'm not going to try to gun for additional returns. Men, and again, generalizations. But men might be inclined to be a little bit more competitive and try to eke out that extra return even when the goal is already within sight.

Which is usually a bad thing for an investor.

It can be. It can mean taking extra risk that you didn't need to take. Right.

Because in reality it's a one person game. I mean, it's you against your goals.

Exactly.

It doesn't really matter if you beat the market and it really doesn't matter if you beat anybody else. It's all about beating your own goals.

Right.

All right, let's talk about kind of some current investing issues. What are your thoughts on the current large growth stock boom that's been going on for the last few years? Last year, I can't remember what the number was, but it was 30%. Something different. Between the performance of large growth stocks and small value stocks, what are your thoughts on that phenomenon and what if anything, should investors do about it?

Well, it's a good point Jim, because it really has hastened over the past couple of years where we have seen strong performance from large growth stocks, mid cap growth stocks as well. So sort of, if you, if you know the Morningstar style box, kind of that upper right hand side of our style box has been rocking the house and then that lower left style box, the small value stocks and value stocks overall have dramatically underperformed. So for investors who have been kind of hands off with their portfolios, which my hope is that they have been, if they have different constituent holdings in their portfolios, they may want to do a little bit of rebalancing from what has outperformed the growth oriented stocks and funds and tip a little bit more into things that haven't performed as well. If you have some sort of a market tracking index as your core equity holding, you don't need to get in there and monkey around. But this is mainly important for people who have constituent funds that are contributing to their U.S. equity exposure. So I think it's concerning when we look at an unrebalanced portfolio. If you were like 50% growth, 50% value back in 2010, by the end of 2020 you would have been like 62% growth, 32% value. So just being hands off would give you more in growth stocks. So address that if you have constituent holdings that are contributing to your US market exposure. And by all means don't performance chase. I think that there's a lot of that going on as well, especially maybe among newer, more inexperienced investors where they're glomming on to some of those companies that have just performed incredibly well, whether Tesla or Microsoft or Apple or Amazon or whatever it might be. So just be careful about the performance chasing. I think it's really going on quite a bit.

The Robin Hooders.

Yes, exactly.

Speaking of performance chasing, there is another issue out there that I've noticed. In particular, I think it's correlated with the large growth issue and I think we saw this back in the late 90s as well, is people are far more interested in individual stocks the last couple of years than they really have been at any time since the dot com bubble and bust. Why do you think that is happening and is there any case now for individual stock picking in your view, or should most investors still be using mutual funds?

Yeah, I've been puzzling over this Jim, because I was an analyst Back in the late 90s and it feels for all the world very similar to me right now. And I had regrets from that period. I think I was still getting my sea legs as an analyst. I was not really comfortable sticking my neck out there and saying I think we've got an overvalued market. I think there's a lot of speculative behavior. Well, 20 years later I am more comfortable saying that it scares me. And I think that investors are performance chasing. They're assuming that history will repeat. Pete and the other thing is, you know, we've got, especially right now, we've got a very sort of sexy group of companies that have been pacing the market. So companies that we know and use and you know, Tesla, who doesn't think that those are beautiful cars with sort of a beautiful story behind them. So I think that there's sort of that aspect of it fueling the frenzy as well, as well as the fact that we've seen trading costs all but go away for individual stock investors. So I think that those are the key things and I guess I would add in the fact that some people have more time on their hands than they did pre pandemic and they may have a little more money.

They closed all the sports betting too, right.

More discretionary funds. So I think all of those things are fueling the interest in individual stocks. Apps like Robinhood that Gamify investing in individual stocks may be contributing as well. Whether investors need individual stocks, I would argue not. In fact, we've just spent some time talking about the failure of active managers. So these are highly paid, highly trained professional investors. We know that as a group they don't especially make a great case for themselves relative to passive products. Why would we believe that individual investors may be able to do that? I mean, they may have a few things on their side. Mainly we know that having to invest a large asset base would tend to drag on performance a little bit, but with much less education, many fewer resources. I really think the odds are stacked against individual investors dabbling in individual stocks. And the other thing I would say is that it's been my observation that investors often sort of have a me too equity portfolio where maybe they have mutual funds in their portfolio and maybe that's, that's the bulk of the portfolio. But then they tack on some individual stock holdings. Well, oftentimes those are really duplicative of what's in the other main portfolio. So they may be in fact increasing the risk by investing in that additional basket of individual stocks. So I don't think Most investors need to get into it, I would say, to the extent that people are really interested in participating in the market. And it may be a way to teach kids about investing in the market. Think of it as kind of a mad money portfolio and really put some constraints about. Around how much you have in that portfolio. Try to keep the exposure down to like, 5% of your total, total assets. Put some guardrails around it.

Now, speaking of frenzy, let's talk about cryptocurrency. I think Bitcoin's up 400% or something over the last year. You know, it changes by the day. By the time this runs, that statistic will no longer be accurate.

Right.

Should it have a place in the portfolio? For a typical investor, this seems like.

A topic of active debate. My gosh. It seems like there is a real frenzy in this area. I think it's probably too. I know this is a lame answer, but I think it's too early to say. I think the main problem with bitcoin, from my standpoint, is similar to the issue with gold, where it's really hard to derive an intrinsic value for what it should be worth. So, you know, with a. With a company, for example, we can do some discounted cash flow analysis and kind of get our arms around, well, what is a fair price to pay for this thing today? The problem with Bitcoin is that I think there are inherent limitations to actually drawing a bead on what that product should be worth. And so I would say that for most investors, it's not something that they would probably want to mess around with. I think there are simpler, more vanilla ways to diversify a portfolio. Just using, like, if you have stocks in your portfolio, using treasury bonds, for example, holding some cash. I would tend to urge investors to be a little bit more vanilla because I think that there obviously is a lot we don't know about Bitcoin. And seems to me a fair amount of risk embedded in the investment today.

Which seems to show up in its volatility.

Absolutely.

Which is incredible on both sides. You know, you can really tell. Nobody knows what something's worth when the price changes, you know, 20% in a day.

That's right.

Clearly, nobody knows exactly what it's worth. And maybe it's worth a lot more than the market thinks. Maybe it's worth a lot less. But it seems very difficult to determine that in any reasonable way in advance. All right, well, yesterday was the inauguration. It's a new year, new Congress, new president. Should people change anything about their investing plan in response probably not.

I would say to the extent that people haven't done kind of that rebalancing that I suggested, where they're looking at their portfolio's actual exposures and comparing that to whatever targets they have, I think that work is still important, but it really has nothing to do with the election. But I would say there are a couple of things to keep an eye on with the changeover in the presidential administration as well as in the Congress. And one is what might go on in taxes. I think that there is a broadening consensus that we may see higher corporate tax rates over the next year or two. So I would watch that space. But from an individual standpoint, I think you also, especially for higher income folks, want to keep your eye on what goes on in the estate tax space where it looks like low hanging fruit, if you ask me. From the standpoint of something that maybe Congress can come together on where we've got this very high estate tax exclusion today. So this is the amount that you could pass away with and have it escape estate tax. So it's well over 10 million today per individual, which means that for a married couple you could die with 20 million or I think it's closer to like 25 million and have all of those funds escape, escape estate tax I would expect to see, I maybe expect is too strong a word, but I would not be surprised to see some action to bring that number down where that exclusion goes lower. And so that makes some of those basic estate planning things all the more important. Another issue related to estate tax is this, this idea of whether the step up in basis that you enjoy when you, you don't enjoy it, but your heirs enjoy it when you pass away, where essentially the value of the asset is what it was on the day of your death, that's the heirs will pay taxes in the future based on that as their cost basis. So there's been some discussion of actually doing away with that step up in cost basis. I happen to believe that one's less likely simply because that begins to touch a lot more families, a lot more households. And I think it's also just an accounting nightmare that.

Right. It's just be a policy nightmare.

Right. People might not have good track records or good records of what their cost basis was. So I would say that one is less likely. But the estate tax exclusion, I would not be at all surprised to see that come down. And then another point I would make, Jim, more broadly is just secularly tax rates are low relative to what they've been historically and So I think especially for younger investors, that really embellishes the case if you're making new contributions to tax sheltered accounts to potentially look at Roth contributions versus traditional tax deferred contributions. So you'll pay taxes for before the money goes into the account. But the big virtue is that when you pull the money out in retirement, those funds will be tax free. You'd rather arguably pay taxes at the lower rate. And so that argues for maybe making Roth contributions. Also considering conversions of traditional IRA and 401 assets to Roth to be able to take those tax free withdrawals in retirement. And for now, also, the retirement big benefit of Roth accounts, or one of them, is that you don't have required minimum distributions. So that makes it easier to pass those funds on to children, grandchildren.

And a couple of your points play well together. For example, there's a lot of talk out there about cutting the estate tax exemption in half. But one way that you can have money escape that is simply by doing Roth conversions. Because now, as far as the estate tax man's concerned, you have less money, even though it's really the same amount of money after tax. And so Roth conversions can play a part in that.

That's right. And this is a spot to get some help from a tax advisor. I think sometimes people look at their whole tax deferred account and think, okay, I'm going to convert this all in a year, or something like that. Generally, you don't want to do that. You want to do it in a series of conversions over a series of years to help spread out the tax burden associated with those conversions. So if you're not super comfy with tax matters, get some advice because you could inadvertently trigger some sort of a big tax bill that you didn't intend.

For sure. All right, presumably the pandemic is going to end at some point this year. What lessons should investors take from their experience in 2020 and 2021?

A few things. I've been thinking a lot about this, Jim. One is, and I've written about this, we have seen this pandemic be a financial catastrophe for many people. And one of the issues is that I believe many households don't have enough emergency reserves. And so I think that it really gets back to taking a hard look at your own situation. So there are these rules of thumb about how much cash we should have on hand to cover ourselves in case of some unexpected job loss or big healthcare bill or whatever it might be. But I really think that some customization is worth thinking about. So, you know if you are a high income professional, of course, healthcare is a little bit different in that it tends to be more stable than other parts of our economy. But if you're a high income individual, to me that argues for having a bigger cushion. Oftentimes higher individuals have more specialized career paths. It's more difficult to replace those jobs if they lose them. If you're the sole earner in your family, you definitely want to think about having a larger emergency cushion. Older workers, we know that older workers tend to take longer to replace their jobs than do younger workers. And that might get back to the higher income, that might get back to the specialization that we talked about. But all of those things argue for having more like a year's worth of liquid reserves. So I think giving some thought to that, if you've been lucky through this period, if you've maintained your job, I think it's still worth remembering the importance of liquid reserves. And also thinking back to that period in the first quarter where I'm sure you remember, Jim, everything went down and there was this mad scramble for cash investments. So I think we saw during that period the value of having cash. On the other hand, you don't want to overdo cash either because yields are so low today. So it's a balancing act. But definitely for older, higher income, more specialized career paths, a bigger cushion I think is advantageous. So that's one thing, I guess another thing that I've been encouraging people to think about is since so many activities have been constrained through this period, take an audit of what you miss, what you don't miss that much, and see, see if you can't carry some of those patterns forward into the future or use them to maybe change your behaviors when we emerge from this. And you know, I recognize that there might be some false signals coming out of this period. I think one thing my husband and I have been talking about, we've always been really good travelers. We always feel like, why would we ever go to the same place twice? Because we love to travel. And we've been thinking more recently though, like, gosh, we wish we had a second home somewhere. And so we've been just sort of thinking about that, but recognizing that when this is over, we won't really want that second home. It'll be just sort of this thing that we both suspect, knowing how we are, that we'll go down there and work all the time on fixing up the place and it will not be that fun for us. So I think that you also want to resist the urge of over changing your life in the future based on some of your thoughts today. Because I think there might be some false signals for some of us where we think this thing that we really might want to do might not carry forward. And that worries me a little bit with respect to people doing a lot of relocation during this period. I just wonder, like, how do you really want to be making these big life changes in the midst of something that we hope will be somewhat ephemeral?

Now, you mentioned about the emergency fund issue, and you recently wrote that amassing an adequate emergency fund isn't just a problem for lower income households. A A Pew Research survey found that a fourth of higher income folks lack three months worth of liquid reserves. Why is it that high earners don't have emergency funds? Why don't they have more cash?

This surprised me, Jim, because you do tend to think of this as the province of lower income investors. Lower income people. A lot of things, some of which you and I have talked about. You talked about it on the podcast. Sort of this hedonic treadmill effect where we tend to grow into whatever income we have. You know, suddenly once your income enlarges, suddenly you've got someone cleaning your house, you've got someone walking your dog and mowing your lawn and you just sort of see those bills tend to encroach on your income and you know, they just become sort of a way of life. So I think that's part of it. I think there's also just like a lot of humility around having savings or that it's humbling to forsake some of these outward shows of wealth in favor of saving for the long term. And I think it's just really difficult for people where, you know, we live in a society where people think they can size you up pretty quickly based on what type of house you live in or what kind of car you're driving. For me, I don't drive much and so I've always had like a hand me down car from my husband. So right now I've got a 2012 Honda. And yeah, I have to say that it goes through my head, do some of my neighbors wonder, well, how good is she at that job if she's driving a 2012 Honda Accord? We keep our car scrupulously clean and nice, but still it's an 8 year old gray car. So I think you do have to accept a little bit of sort of that humbleness as you go about your financial affairs. You have to recognize that you're not always going to have the best stuff. But I have to say that, you know, as you know, as many of your listeners know, nothing is better than that peace of mind that you have by knowing that you're financially well. So I think that those are a couple of the things that contribute to making it just really hard for people to save.

Speaking of the listeners, most of them are doctors. And doctors have this reputation for being terrible with money. Why do you think that is? And what can these folks do to ensure success?

Well, first I want to ask you, Jim, do you think that that's true? Do you think that doctors, by and large are terrible with money?

I think it probably is true.

Okay.

Relative to their income? You know, I think the data is pretty clear from, you know, millionaire Next door kind of studies that given our income, we accumulate wealth at far too low of a rate on average. Now, I don't know if that's necessarily true for the people listening to this podcast. They tend to be a little more interested in finance than the average doctor. But yeah, I think the criticism probably is valid.

If that's true, I would guess that there are probably a couple of reasons for it. One is that they're busy and it can be hard to do a good job of not just managing your investment portfolio, but you've got other tentacles of your financial life to keep tabs on. So I think that that may be one factor. And then when we look at the behavioral factors that tend to work against people as investors, one of the biggies we know is overconfidence, where you tend to have more confidence in your investment decisions than perhaps you should. I wouldn't be surprised with doctors being a highly trained, highly educated, highly successful group of people overall, that that's in the mix as well, where they tend to think, well, I'm good at this one thing, and so I'm probably going to be pretty good at this other thing too. And that perhaps some people don't approach the endeavor with an appropriate amount of humility. I would see those as maybe two things that are in the mix.

All right, so what can people look forward to hearing from you at the Physician Wellness and Financial Literacy Conference?

I think for one thing, I'm really excited about being there, but I'm going to be talking a little bit about some of the key lessons over my now, gosh, almost 30 year old career at Morningstar. So I'll be talking about some of the things that I work on regularly, the importance of having a sane blueprint for your financial plan. Talk about some of the things I'VE been doing in the retirement decumulation space, which on a day to day basis has been a big area for me because I happen to think that it's devilishly complicated for people to think to figure out how to decumulate their portfolios in retirement. So I'll be touching on some of the work that I've been doing there and then I'll also talk about some of the other areas that I work on. One that I have been focused on or been thinking a lot about is the long term care space and how to manage long term care as an aspect of your financial plan. So kind of jumping around a little bit, but definitely excited to be there and definitely excited to share some of my work.

Awesome. Well, we're certainly looking forward to seeing you there. You're doing something unique. This will be our third conference and you were the first speaker we've had that chose to donate your speaking fee. Who did you decide to donate it to and why?

Well, thanks, Jim. And thanks for making that generous donation on my behalf. Really. I chose two groups. One is the Bogle center, the John C. Bogle center for Financial Literacy Center. And that's a group that I've been aligned with. I had the great privilege of knowing Jack Bogle throughout my career and actually sitting down with him and interviewing him once a year at the annual Bogleheads Conference. And I just love what the Bogleheads are doing to help educate investors, help get them off on the right foot in terms of choosing low cost investment products. And we put on a speaker series. Typically we appreciate put on an annual conference which is on hold due to the pandemic. But we've been contributing and participating and fostering those events. So that was one group. And the other is a group of financial educators. It's called wise W I S E. It's based in New York City. And this is a group that I've been contributing my time to. WISE has a financial literacy curriculum that it uses in different settings. The particular, particular group that I've been working with provides financial education to women who are survivors of domestic abuse. And so we've been working with these small groups of women who are living in shelters, typically with their children, so babysitting is provided for them while they improve their financial literacy skills. And one thing we know about domestic abuse is that there is a strong aspect of sort of being financially captive, that women often stay in these relationships because they don't have the financial wherewithal to strike out on their own. And as I alluded to before. There's also a strong connection between financial wellness and feeling financially comfortable and overall wellness. So I love that group and I'm so grateful to you and to your organization for having made those, those contributions on my behalf.

Well, we're pleased to do that. We should probably wrap up here pretty soon. You've got the ear of 30 or 40,000 high income professionals, mostly doctors by the time this podcast has made its rounds. What have we not talked about that they should know?

A couple of things, Jim, this is a really good question. One I would say is get advice if you need it. We talked about how medical professionals are often so busy. But I would also say be really scrupulous about the structure of that advice engagement and what you're paying for that advice. Because I think one thing we know from studying fund fees is that these percentage figures where you see like a fund expense ratio expressed as a percentage of assets, they can seem really small and unimportant in absolute terms. So you can see I often hear from consumers, well, what difference does it make if I pay 1.5% for a fund versus 0.15% for a fund? Well, as you and I know, that's a huge difference, even though they all seem like really innocuous little percentages. And the same absolutely goes for financial advice. So if you are using the services of a financial advisor, really take some time to think about what your dollars and cents costs will be and it may turn out that it's absolutely worth it for you to get advice. But you may want to use a different type of advice than perhaps you initially thought. So the traditional arrangement for financial advice is like 1%. If you have a million dollar portfolio and you would pay the advisor on an ongoing basis that percentage of your portfolio. Well, do the math. Even if a good quality hourly advisor is going to charge you like 5, $400 an hour and you need to spend 20 hours with him or her, that may still be more cost effective for you than using that assets under management model. Now if you need that soup to nuts ongoing hand holding, maybe that assets under management model is the right one for you. But I would say don't sleep on what you're paying for advice would be one key thing that that I would impart. Get advice but also be scrupulous in what you're paying. Tax management I also think is one area where individual investors, especially higher income investors, can really move the needle with their take home results. And so we talked about some of the things to consider but just really make sure that you are being thoughtful about what types of assets you're putting where if you have taxable assets and I would argue that most of us should have non tax sheltered assets as well as taxable assets, be really thoughtful about what you put in those accounts so you can minimize those taxes you pay on a year to year basis. So those are a couple of the key things.

Thank you for sharing those. So if people want to hear more from you, they want to read more of your work, where should they go?

They should go to morningstar.com, where I'm kind of a too ubiquitous fixture, where I write articles and do videos. I'm on Twitter. I really enjoy engaging with people on Twitter so I'm ristinebenz there but those are the key places. And then our podcast is called the Lawn View and it's on all the usual podcast players.

Awesome. Well, we're looking forward to seeing you in person at the White Coat Investor Conference, the Physician Wellness and Financial Literacy Conference in about a month and appreciate you coming on. Christine Benz, Director of Personal Finance at Morningstar, thank you so much.

Thank you so much Jim. It's been my pleasure. You make it easy.

That's always great to have somebody like that on and I'm really looking forward to seeing her here in a few weeks and having just a great conference. It's going to be awesome. There's only going to be about a dozen of us in the room. We're actually doing COVID testing for everybody as they walk in and of course masking up if you're not on the camera. So hopefully it'll be a nice, safe conference and just produce something awesome for you guys. If you're Interested in that whitecoatinvestor.com conference, you can register right up to the day of the conference and it's going to be a great time. Did you know that the White Coat Investor not only has a podcast and a blog, but several books that will help you on your way to financial independence? These books cover topics such as asset protection and minimizing your taxes to keep more of your hard earned money. They discuss plans for insurance, housing spending, student loan elimination, investing and estate planning. You can learn how to become a millionaire within five to 10 years of leaving residency and how to invest in a sensible, low cost and effective manner with or without the assistance of a financial advisor. There's even a book geared directly toward medical and dental students so you can start optimizing your finances early in your professional journey. Find the book that is right for you at the WCI store, at shop.whitecoatinvestor.com or on Amazon. You can do this and the White Coat Investor can help. All right, I told you about the conference. Remember that wait list? If you're interested in the coaching service at Alpha coaching, that URL is whitecoatinvestor.com coaching. To get the $500 discount, you got to buy it off the waitlist. You got to get on that wait list before 12 February thanks to those of you who have told others about our podcast and especially those who have left us a five star review. Our most recent one came from radwife1 who said thank you. I'm the wife of a doctor and I've read listen to your book multiple times. My husband discovered the WCI at the end of fellowshipping and has been extremely helpful to us as we moved on to real life. He reads your blog daily and we both listen to your podcast. We only wish we found you sooner. Your post, podcast and book have given us the courage and confidence to get things done on our own. It's been a huge benefit and blessing. Thank you for that five star review. All right, we'll see you next week. Head up, shoulders back. You've got this and we can help. Stay safe out there.

My dad, your host, Dr. Daly, 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.