WCI #198: Where to Save $100K for Private Real Estate

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 198. Where to save $100,000 to invest in real estate. We're recording this on January 28th. I think it's going to run on February 18th. And it's been quite a January. Lots of interesting stuff happening markets and certainly lots of interesting stuff happening in all of our personal and professional lives.

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Thanks so much for what you do. I was looking at the coronavirus numbers yesterday and we're down about 50% from the peak a few weeks ago. I'm pretty excited about that. I don't know that deaths and hospitalizations have necessarily turned down, but hopefully by the time you're listening to this in a few weeks that will be the case. But I'm hoping that we're into the later innings here of the pandemic. So congratulations to those of you who have kept your yourself safe and thank you for what you've done for your patience in this time period. It's more challenging for all of us whether we're on the front lines or not. I want to make sure you know about two things we're doing that are pretty new and cool, right? We've got the White Coat Investor Conference. It's coming up in just a couple more weeks, March 4th through 6th. This is a live conference. It's virtual, yes, because of the pandemic, but it is live. This is not just an online course. So if you want to sign up for that, you need to do it by the fourth when the conference starts. And you can do that at whitecoatinvestor.com/conference. It's going to be awesome. We've got some great people coming out. We've got Christine Benz, we've got Mike Piper, we've got Alan Roth. We've got like 50 plus hours of content in this. It's going to be the biggest conference we've ever done. There are some really great advantages to doing it virtually and we're taking advantage of all of those. Next year we'll probably go back to in person conferences, but this is your chance to get a whole lot more value out of the conference for a lower price than what the conference normally costs. Also, as I'm recording this, I'm actually in the midst of recording a bunch of new videos for Fire your Financial Advisor. We are upgrading the course this year. It's been three years since we came out with Fire your financial advisor. Remember, this is the online course that helps you write your own financial plan, takes you from zero to hero, and really spoon feeds all the information that you could get from reading books and blogs and spending time on forums and gets it to you in just a little over an eight hour course. But we've added some other people into the course that have spoken at our conferences in the past. People like Mike Piper and Bill Bernstein and Jonathan Clements are now part of the Fire your Financial Advisor course. We actually have two Fire your financial advisor courses now. There is one option without CME and you can pay a little bit more and get the option with cme. So we haven't offered CME for fire your financial Advisor before, but now we can offer that. So you can use your CME funds to pay for that or you can write it off as a business expense and I hope that provides additional value to you with that course. You can learn more about about that@whitecoatinvestor.com FYFA all right, I also wanna make sure you know about our new podcast. You've probably heard one or will soon hear one because they're coming out on the same podcast feed that you normally get your podcasts on. Whether you get em from Apple podcasts or wherever, we are running these on Monday. And they're short podcasts. They're basically just a quick interview with one of our listeners about something they've accomplished recently. We're calling it Milestones to millionaire. And it might be somebody that's become a millionaire. It might be somebody that's hit financial financial independence. It might be somebody that's gotten back to broke. Maybe somebody that's paid off their student loans or their mortgage. Maybe someone who's received public service loan forgiveness. But if you have accomplished something, we want to congratulate you on that and use your story to inspire other listeners to do the same. So if you're interested in that, you can contact us and we will get you on that podcast. As a guest. Otherwise, just enjoy those podcasts. They're coming out Mondays. You can sign up for this@whitecoatinvestor.com Milestones. All right, let's take some listener questions. Our first one comes from Michael wants to talk about smart financial habits for medical students.

Hi, Dr. Dali. My name is Michael and I'm a senior beginning my last semester of undergrad. I got my first acceptance to an allopathic med school in November. So now that I know I'm in regards to what happens with my remaining med schools, I want to focus on building smart financial habits now so that I know what I'm doing in the future. So my question is, what advice do you have? I'm planning on making a monthly budget and putting some cash into a savings account each month and as well as an investment account for the future. I released you read your book and I've started tuning into your podcast. So I want to thank you for all the information, advice. It has really helped me focus on bettering myself and my future.

Congratulations, Michael, on getting into medical school. It is not a small feat that you've done, in fact, in the entire pipeline. Getting into college, getting into medical school, getting into residency, getting into fellowship, getting the job you want. I think getting into medical school is actually the most competitive, most difficult step. So congratulations on that. And congratulations also for thinking about your finances in advance. Far too many of us when we went into medical school gave no thought whatsoever to finances, and that has led a lot of doctors to have some serious financial difficulties down the road. So congratulations on that. One of the more important things to do during medical school is to educate yourself about your finances. You want to know how the financial world works, about how the business of medicine works, about how personal finance and investing works. And the earlier you learn those lessons and become financially literate, the better off you're going to be. To that end, we started giving away the White Coat Investors Guide for Students this year to all the first year medical and dental students in the United States. And we've got a whole bunch of class champions are going to be passing those out to you if you're a medical student in the first year class or a dental student coming up. So we're going to get those distributed as fast as we can. We obviously have to make sure people really are who they say they are and get those books shipped out, but we're pretty excited about that. To try to boost not only your financial literacy, Michael, but all of your peers as well. Other things you should concentrate on during Medical school, you're talking about saving money and you're talking about investing money. Now, maybe that's the case for some medical students. I guess about 27% of medical students graduate without any student loan debt at all. But for most medical students, it's really not about saving or investing during medical school. It's about minimizing how much you borrow. So rather than putting money in savings or trying to invest money, I would encourage you not to borrow money. Borrow as little as you can during medical school. Consider everything you don't borrow to be an investment. That's literally compounding at 6 or 7%, because that's what medical school interest rates tend to be. So concentrate on that. And the way you do that is generally on just reducing how much you're spending. Think about all the stuff you buy during medical school. By the time you paid for it, it might cost you three times as much as what you think the sticker price is. So try to concentrate on living frugally. It's good to live on a budget, even though it can be challenging to live on a budget as a medical student. But mostly the goal is not to rack up a whole bunch of extra debt as you go along. The other big question, the big financial question that occurs during medical school is actually your choice of specialty. And I wouldn't make this choice primarily based on financial considerations. In fact, the most important financial consideration when it comes to choosing a specialty is what specialty are you going to be happy practicing for the next 20 or 30 years? Because you're far better off being a pediatrician for 30 years than you are being a spine surgeon for eight, if you burn out after eight years in practice. And so you really want to find something where not only you can make your mark on the world because life isn't all about money, but also something you will be happy practicing for a long time. But if there are two specialties that you love equally and one of them has a much better lifestyle and pays much better, keep in mind that 10 years out of your training, you are going to care a whole lot more about your lifestyle and a whole lot more about how much money you make than you do as an MS.3. And that's just the way we work as people. And so recognize that it's okay to put a little bit of weight onto lifestyle and financial considerations, even if it shouldn't be the most important aspect of choosing a specialty. That's a good way, actually to get miserable if all you focus on is how much a specialty makes. But those are the main smart financial habits you should have as a medical student. As you get into your fourth year, there's a lot of things you can do to reduce the cost of medical school or residency applications and interviews. So look into that sort of information. It's all in the book if you want to take a look at it. All right, let's do our quote of the day. This one comes from our favorite physician investing Guru William Bernstein, M.D. he said the purpose of investing is not to simply optimize returns and make yourself rich. The purpose is to not die poor. And I agree with that. Investing is a one person game. It's you against your goals. You don't have to beat the market and you certainly don't have to beat anybody else. What's interesting is once you give up on on trying to beat everybody else, you usually end up investing much better and you end up beating them anyway. All right, we're going to take a few calls today from Tim in San Francisco who loves calling in the White Coat Investor show and we love hearing from him. But his first question is about margin debt.

Hi Jim, it's Tim in San Francisco. My question is what happens to margin debt when you die? Does the debt get paid off from appreciated shares in a brokerage account in the estate or is there a step up in basis on death such that long term capital gains don't have to be realized to pay off that margin debt? Or does the margin debt not have to be paid off at death and can be passed on to heirs? Thanks so much.

That's a great question, Tim, and I think it's one that is well worth asking. You see, a lot of people when they get close to death, decide that they would rather pay interest than pay the taxes due by selling low basis shares and living off the proceeds. And that can be a totally reasonable decision, especially if you get a low interest rate on your margin loan. But you're asking a very interesting question which is does the state have to pay taxes on those assets if they're used to pay off the margin loan? And as I think about it, I think the answer is yes, that the estate does. Certainly the debt is not passed on to the heirs. That has to be all settled by the estate and that can be paid from something besides the securities. If you have cash somewhere else, you can use that or your executor really can use that to pay off your debts. And then securities don't have to be liquidated by the estate. But I believe if they are liquidated by the estate then they are subject to income tax in that final year and your final income tax that is paid because the step up in basis is for your heirs, not for your estate. And so ideally you can pay that margin debt from somewhere else. If you end up having to liquidate those assets in order to pay it well, you know, you didn't save yourself nearly as much tax as you thought you were going to and you ended up paying some extra interest. Doesn't mean it still doesn't work out well by delaying when those shares were sold. But maybe not quite as well as you thought it was going to be if you can't cover the debt from other sources of cash. Great question, Tim. All right, let's take our next one. This one comes from an anonymous caller and it's actually the one that we named the podcast episode after.

Hi, my name is Travis from the Midwest. Question regarding saving up for syndication deals. We recently invested in our first indication and would like to do more in the future. However, with minimums in the 50 to $100,000 range, this is something we would need to save up for and then of course wait for the right deal. Any advice on where to save for this? It seems like a lot of money to be stored in high interest Savings accounts at 0.5% or so. We also needed to be liquorable and likely would use it over a year or so. Is it better to consider things like crowdfunding or acre trader as they typically have lower minimums? Appreciate your input in everything you do. Thank you.

Okay, maybe that question wasn't so anonymous after all. That comes from Travis. That's a great question, Travis, and one that I think a lot of white coat investors wrestle with. I mean, it's really a dilemma. I think the better real estate investments, at least the passive ones, are the private real estate funds, and they generally do have higher minimum investments. Fifty thousand, a hundred thousand, sometimes a lot, 250,000 or a million dollars. And obviously, if you have to spend years and years and years saving up for that sort of a thing, you want to get a decent return on that savings in the meantime. But you also that probably tells you something about whether you ought to be investing into those assets. If it takes you three years to save up 100,000 dol to put into a private real estate fund, maybe that's not the way you should be investing in real estate. So that's something to keep in mind now. So now you have two alternatives. One, you simply invest in publicly traded real estate, something like the vanguard real estate investment Trust index fund. That was my only real estate investment for years and years and years and years. There's no way I'd come up with $100,000 in any sort of a short term term way to buy into a private real estate fund. And now I have some more money and I have some more income and I'm able to do that. But I fully recognize that there are many white coat investors that can't do that. So maybe they just stick with publicly traded real estate. Maybe they look at some of these options that have lower investment minimums. You know, things like the crowdfunded companies. A lot of times you can get into a syndication for just five or ten thousand dollars with them. There are also some private REITs, companies like Realty Mogul and Fundrise that you can get into their REITs, which is a diversified real estate investment that's basically a bunch of crowdfunded investments put into one little REIT. And you can get into that for like $10,000 or $20,000. There are also access funds that for a price and additional layer being removed from management will get you into a private real estate fund. It's still something like a $25,000 minimum, but it's easier to come up with than $100,000. So those are kind of your options. And if your decision is that you want to invest in private real estate funds like the one we're going to talk about here in a minute, you probably need a reasonable plan to get there relatively quickly. If this takes you three years to save up the money, you probably shouldn't be investing in something with $100,000 minimum. You're just not at that level of wealth yet. Not to mention it'll be difficult to diversify it because you know, I mean, you'll only have one fund at that point. And so it's not necessarily a great idea for you. I would wait until you're making more money and if you never make more money, go ahead and skip it. There are no cold strikes in investing. It's okay not to invest in something, but if you can save up for in a relatively short period of time, the only question is how should you get a decent return on your money? And I think there's two options. The one I usually prefer is to just leave it in cash. And you know, if you're, it's only going to be 1, 2, 3, 4, 5 months, something like that, no big deal to have it in cash. Now you want to earn some money on your cash. Right now I'm putting My short term savings in Ally Bank, I think it's paying 0.6%. Now, 0.6% is not awesome, but you may have noticed that interest rates are really low right now, and that's about as good as it gets. I think Vanguard Money market funds are paying basically zero percent right now, so not a lot of great options there for cash. So the other option you can do is you can invest it into publicly traded real estate. You can put it into the Vanguard REIT index fund, for instance. Now, this is far more volatile than cash. And so there's no promise that that money is going to be available in three or six months or whenever you're going to do this real estate investment to go into the real estate. But theoretically, if real estate's doing really well, that fund will do well. If real estate is doing poorly, that fund will do poorly. And so theoretically, you're already invested in real estate. You're just moving up from one real estate investment to another. And so I think those are the two schools of thought you can use to save up that $100,000 or whatever you need to get into a private real estate fund, if that's the way you want to go with your investments. Speaking of private real estate funds, I wanted to bring on a guest here. And this is a sponsor, right? We've got lots of sponsors here at the White Coat Investor. We're running a for profit business, remember, but this is a sponsor. It's also somebody who manages some money for me personally. The company is called DLP Capital Partners. Dream Live Prosper is what it stands for. And I'm going to bring on their CEO, their president and CEO, who is Don Wenner. He's a relatively young guy. I think he's 36 this year, but has accomplished a great deal. 15,000 real estate transactions for $3 billion worth of assets. I think they've currently got something like $900 million in assets under management. That's probably an old figure. It's probably a little bit more than that at this point. But they run several real estate funds. I'm going to let him tell you about in a short segment. We're going to do with them. I think this is about 10 minutes and let's bring them on to the podcast now. Okay. Don, welcome to the White Coat Investor podcast.

Awesome. Thank you for having me.

Jim, I just wanted to talk to.

You for a few minutes about some of your investment options as well as real estate investing in general.

Why do you think it makes sense.

To add real estate to Your portfolio?

Yeah, I think it's an interesting question. And I was talking to a gentleman who works in the wealth management industry yesterday actually, and we had an interesting conversation. How in the world of wealth management they call real estate an alternative investment. And my whole point to him was real estate is not alternative. Real estate is the staple investment. And the most wealthy families in America and around the world have built a large amount of their wealth from real estate. For many wealthy families, majority wealthy families, I know real estate is the number one allocation bucket over public securities, over bonds, over any other asset class for a lot of really good reasons, from the tax advantage nature, the limited amount of volatility if invested in the right asset classes to the ability to generate consistent cash flow can be a great asset class for anybody to look at for exposure.

Now, your company DLP Capital basically runs some private real estate funds. They're not publicly traded, they're private funds. What do you see as the benefit of using that method to invest over other methods of investing in real estate?

Exactly right. We run private REITs, private investment funds. You're not going to find them through the public markets. And I say there's a couple of significant benefits. Number one, when you're working with a private fund manager, if you're working with a strong fund manager, we have the ability to buy assets at better pricing simply than large Wall street institutions do. We are more nimble, more in touch with the markets, the buyers, the sellers, the brokers within the markets we're buying. And in turn we're able to buy better because we're directly integrated company doing our property management and construction management and all of the components of executing on our investment strategy, we're able to execute on driving value, keep our costs lower. And then I think along the same lines, a pretty important point is when you buy a publicly traded REIT, there's somewhere in the neighborhood of 10% to 12% of your investment that goes out to commissions and fees. So if you think about that, how can you generate as strong of returns when 10 to 12% of your principal is being paid out in commissions and fees? It's hard to make up for that. Even putting aside the fact that I just mentioned we're buying in a better basis and be able to execute better. We don't have any commissions or fees that go out and that makes a tremendous difference. When you don't have that front end load of expenses that are paid out to those who are selling the product makes a big difference in the overall returns. But at the end of the day. I think what's really critical is whether you make an investment that's public or private, you're really investing in the management team and the manager and their ability to execute on that investment strategy. And I'm confident we and a number of other private fund managers are the best at executing on their investment strategies above and beyond the large Wall street institutions.

Let's talk for a minute about the investments that you have available. You have basically three investments open right now. Can you give us the basics on all three of those?

Absolutely. So here at dlp, we invest in workforce housing, and we have a focus on investing in workforce housing that is affordable for the local workforce. And that's our big focus. And we believe and consider our funds to be impact funds. And then we make a tremendous impact on this crisis here in America as we see it. But we invest in that strategy, this workforce housing asset class, basically in two ways. We do so as a lender, lending money to other real estate operators, and we do so as a equity investor, as an operator, investing equity and owning and managing the workforce housing communities that we buy. So we have different investment funds that focus on either us being a lender or us being the owner and operator. So we have the DLP Housing Fund, which is a $1 billion Evergreen Private REIT that goes out and acquires rental communities, mainly multifamily communities. Average rent of 8, $900 a month, generally 200 to 1,000 unit. Communities that we go in, we improve through better management, through physical improvements to the asset, and through creating a better community, better experience for our residents. And in that fund, we target a 12% return net to investors. We pay out monthly distributions of basically a half a percent dividend monthly, or in other words, 6% annual. That distribution is actually paid out before we even earn a management fee. And that investment is very, very, very tax efficient. And the other side of our business, where we're a lender, we have two funds available. We have one, which is called the DLP lending fund, which is a $500 million Evergreen Private REIT. Its security, its assets are loans backed by real estate, first position mortgages backed by real estate. And that fund, we've been running it for over six years now. We've generated double digit returns to investors every single month since the fund has been opened. Average return over the past six years has actually been over 13%, but we've hit over 11% annual returns every single month with two distributions paid out every month. And with the fund being very liquid, you can redeem out of the fund at any time with just 90 day notice. And then we have another fund that you can invest in, our lending side. If you say, hey, this is great, but I want to get a fixed return on my investment, I want to be in the absolute lowest risk profile of anything DLP offers and I'd like to get a fixed return on my investment. You can invest in our DLP Positive Note Fund, where you're actually lending money to the fund and you're going to get a 5 to a 10% fixed return on your money based on how much money you invest and how long you choose to commit your investment. Anywhere from 90 days up to five years.

Now, you've talked about the target returns for each of these funds as well as past returns. What would you say would be a reasonable expectation for returns from each of the three investments for somebody going forward from here? What should an investor expect? Expect what range of returns?

So in both the DLP Lending Fund and the DLP Housing fund, which are both funds, where you'd be investing as a limited partner, as a passive limited partner within these funds. In short, what I would tell you to expect is double digit annual returns with monthly distributions. So both funds have historically exceeded their return targets. The housing fund has a 12% annual return target and a lending fund as a 10% target. But for really simple terms, expect double digit returns with monthly distributions. And then our Positive Note Fund, it's actually a fixed return. So you'll know exactly what your return is going to be when you make your investment, ranging from 5% to 10%, depending on if you invest the smallest scale of 100,000 up to a larger amount and depending on if you commit just for 90 days or commit as long as five years, there's a scale of 5 to 10% fixed returns that you'll lock in at. All of these funds provide great flexibility. Actually, you can take monthly distributions and all the returns I'm talking about are assuming you're taking monthly distributions, or you can let the returns compound and grow and then you'll actually get a compounded return, which would be an even higher yield.

Now you do something unique, which has really impressed me actually, after having talked to a lot of people that run funds like you, do you actually pay out your preferred returns to the investors before taking any fees whatsoever? Now why did you choose to run your company that way?

So, you know, when we started, you know, many years ago now, I was in my 20s and we were young, fund manager, had no long track record. We could show and we were determined that even though we were going out as this young fund manager saying, hey, we're going to hit these really great returns and we're really confident our ability to do so, we had a mindset from the very beginning that we're running this business, we're growing our investment management business for the long term. This isn't something we're doing for five years or 10 years or 20 years. You know, I'm planning to run these funds and grow this business for decades ahead. And as we set out on this path of taking on the responsibility, taking on our core value of stewardship here and taking on other people's capital, we knew that and we were confident. The way we invest and the way we execute our investments, we've been confident from the very beginning we could generate above market level returns and generate really what some people can be life changing kind of consistent returns. But from the very beginning we've had our principles and our focus has been first and foremost on no losses to investors ever. We've known that's been the most critical component of our long term success and really for the success of our investors is not having the volatility of losses. So we set out with a focus first and foremost of no losses to investors ever. And then our second focus or principle of how we invest is consistent monthly returns. And so we focus on generating as high returns as we can without taking on risk of principal loss or without taking on risk of volatility of not being able to hit consistent monthly returns that investors can count on. So with that being our principles, our mindset, and putting investors first, making sure they're never in a position where they're jeopardizing losing money or in a position where they're not risking not getting the consistent returns they've grown to expect, we decided early on to kind of put our money where our mouth was and do something that I don't know of any other fund manager who does this. I'm not saying there aren't any, which is that we set up our funds that are preferred returns, which depending on the fundrange, from 6 to 10% preferred returns are paid out before we earn any fees. So most funds the manager gets a 2% management fee and then investors get a return after that we set up our funds that investors get their 6 to 10% preferred return and then we get our 1 to 1 and a half percent management fee and then after that we get to share in the profits above that preferred return. So we're proud to say after eight funds we've run over the past decade or so, many, many, many months of distributions across all these funds, we've never had a single month where we've missed our preferred return to investors. So we've been able to make sure investors achieve that targeted monthly return every single month in all of our funds.

Don Wenner, CEO of DLP Capital, thank you so much for coming on the White Coat Investor podcast.

Hey, thank you so much for having me.

All right. I wanted to bring Don on the podcast not only because he's a sponsor of the White Coat Investor, right? They pay us money for us to advertise for him, in case that's not abundantly clear, but also because he manages money for me. I have money invested in that lending fund. I've had some money invested in it through a third party access fund for the last couple of years, and then I recently invested some money directly with him simply because I was able to, number one. And number two, you save the additional layer of fees that you pay the access fund when you do that. And I was glad to do that. I anticipate investing some more money there in the future and may even get involved into their housing fund, which is the equity fund. But they've got three great options there. They've got the housing fund, they've got the lending fund, and they've got these notes which are basically a fixed return, anywhere between 5% and 10%, basically backed in the same way that the lending fund is backed. Now. I like the lending fund because I figure if I'm going to lend money backed by real estate, I want to get the, you know, 10, 11, 12% returns rather than the 5 to 10% returns. But that's just me. What have they done for you? Well, these guys normally have minimum investments of 250 to $500,000, which is a stretch for most white coat investors. It's really difficult not only to come up with that sort of cash, but to diversify your portfolio when that's the minimum investment. So what they have done for us is they've come on board and sponsored us, is that they have lowered the minimum investment. For anybody that says they heard about them from the White Coat investor or anybody that goes to them through our links, they've lowered that minimum investment to $100,000. $100,000 is still a ton of money, don't get me wrong. But it's an amount that many White Coat investors at least can, can reasonably come up with in a short period of time and reasonably diversify the rest of their portfolio with, particularly later in their career. So if you're interested in real estate investing, if you like the concept of investing passively in private real estate funds, I think Don and his crew do a really nice job doing it. I feel like they really put investors first. I cannot guarantee you're not going to lose money in this investment. What I can guarantee is that if you lose money, I will also be losing money alongside of you, and so will Don. The management team also invest about 5% of the proceeds of the fund. That's their money in there. So they're investing alongside you. I'm investing alongside you. If you're interested in this sort of an investment, go ahead and check that out. You can find that@whitecoatinvestor.com DLP and I'll be talking about that, I'm sure, in the future. If you are subscribed to our Real Estate Opportunities newsletter, you've already heard about dlp. If you want to hear about the next ones that come up, come along. I'm not putting all of them on the podcast. That's the newsletter you need to be signed up to if you're interested in this sort of an investment. If you're not interested, that's fine. These are totally optional now, even though Don sees it as the mainstay of your portfolio. You can retire just fine and reach financial independence and live happily ever after without ever investing in anything but boring old, low cost, broadly diversified stock and bond index funds. But if you're interested in this sort of investment, that's one to take a look at. All right, let's take another question. Let's take this question from Tim again, Tim in San Francisco about estate planning and a widow filing. As married man, I don't know what's happened in your life, Tim, but I worry a little bit about you with these questions you're asking. With all these people dying in your questions, I hope everything's okay. And these are all hypothetical.

Hi Jim, this is Tim in San Francisco. I've been thinking about estate planning and I was thinking about the horrible scenario in which I might die and leave my wife and two kids alone. Specifically, I was thinking that the worst part of this would clearly be that my wife would have to pay more in taxes because she would no longer be to be able to file jointly with me. Do you know if there are any structured systems in which people who find themselves as single earners can find a way to be married, but for legal purposes, but somehow protect themselves from all the liability of being married, but be able to file jointly and therefore get tax benefits. Thanks.

No, Tim, you cannot say you're married when you're no longer married and when your spouse has died, you are no longer married. Now they give you a little bit of leeway. The year your spouse dies, you still get a file as married, but after that you're filing as singly. I don't know of any way around that. The only other thing I could suggest is if you have a lot of assets and you think your taxes are really going to be terrible, once you go from being married to being single, you can pass a bunch of your assets to your kids at the time of death of the first spouse. Rather than having the remaining spouse inherit those assets, it can go directly to the kids. So, you know, that can give you some estate tax planning options. It can also potentially reduce some of the income tax you pay. If you have less in assets, you're going to pay less in income tax from the income produced by those assets. Obviously you're also going to have less income to live on. So that might not necessarily be a good thing, but it is an option. But as far as some scenario where you can continue filing married just because your spouse has died, nope. I don't know anything like that. That would work. All right, thanks to those of you who have been leaving us a five star review. Don't turn the podcast off. We're not done with the podcast. I thought I'd move this up in the podcast, but I appreciate those of you who are telling your friends about the podcast and leaving us reviews. Our most recent one came from Dr. B. Stuart who says not an MD but great info on the show. I'm a private practice physical therapist, client clinic director and partner. I appreciate all the financial advice. I've paid off my student loans and I'm working toward building a reasonable FI number. Thanks for what you do. Five stars. Thank you very much for the great five star review that does help us spread the word about the podcast. All right, Tim, we're going to take your last question here too.

Hi Jim, this is Tim in San Francisco. I wanted to thank you for turning me on to the books of William Bernstein. I think those books are amazing. My favorite book of his is Deep Risk which I felt was really mind blowing. Of the risks that he discuss discusses. I feel I'm prepared for inflation because I have a good amount of stocks in our portfolio deflation because we have a good proportion of foreign stocks in our portfolio confiscation. I don't think we can do that much about. But I'm curious about devastation. It seems like a lot of people are thinking about it this year. Gun sales are way up. I'm curious how you think about devastation and whether you have any prepper fantasies that you've indulged. Thanks.

For those of you who don't know, Tim is referring to a book called Deep Risk by William Bernstein. It is part of a series of four books. They're relatively small books, little more than pamphlets really, that talk about topics appropriate for investing adults. He views his full length books as for any investor you know, including investing children, if you will, people who don't know anything about investing. But these books assume you have a knowledge of the basics of investing before you pick them up. One of them is skating where the puck is or where the puck's going to be or don't skate where the puck was or whatever it is. Perhaps the best one in there is Deep Risk. And he basically differentiates between shallow risk, which is volatility, and four deep risks, which are the real true long term risks to your portfolio. And these risks include inflation, deflation, confiscation and devastation. The most common one of those and the one which your portfolio definitely needs to be built to withstand is inflation. Inflation happens all the time in many different societies. And we're not Talking about the 2 or 3% inflation we're dealing with dealing with here in the United States. I'm talking about hyperinflation and you know, long periods of excessive inflation like they had in the 1970s in the US and the way you deal with that is from investments that outpace inflation such as stocks and real estate, as well as things like commodities and precious metals that generally keep up with inflation. And in your bond portfolio, having some of your bonds be indexed to inflation like tips, treasury inflation protected securities. That's the way you deal with inflation. Deflation is best dealt with with bonds. When interest rates fall due to deflation and the economy cratering. Things like treasury bonds, especially long term treasury bonds, do very well. And so that's probably the best asset to deal with deflation. Those who owned long term treasury bonds in the Great Depression actually did pretty well with them and were some of the few that had the cash available to buy stocks and real estate at a massive discount. Really interesting book about that period of time is a journal of an attorney that lived through the Great Depression and talked about the prices of stocks and the prices of the real estate around him and how much he wished he had some money. So he could buy some of them at what was obviously a massive, massive discount. The third of those deep risks is confiscation. Essentially what happened in Russia in 1918 when the government just kind of takes your stuff, takes your companies, takes your money, takes whatever. And this does happen from time to time. I think it was Malta a few years ago where they just seized bank assets to pay off government debts. So this sort of thing can happen. Now. How do you deal with that? Well, keeping some assets out of the country can help at least protect it from your country's government. Having some assets that the government can't find might help. You know, this is why a lot of people buy stuff like cryptocurrency. You know, they keep it on a little thumb drive that they can keep hidden from the government. The government doesn't know they have it. Now the government asks on your tax forms if you bought or sold cryptocurrency this year. But I'm not, you know, I'm sure there's a lot of people that aren't completely honest about that question. But that brings us to the question that you're asking about, Tim, Devastation. What should you do about it? Well, there's not a lot you can do about your company getting creamed, right? We're talking about devastation. We're talking about Germany in World War II. We're talking about, here is Mishima at the end of World War II. We're talking about those sorts of devastation kind of scenarios. And it's very difficult to maintain your assets in those sorts of situations. Now if it's local or regional, maybe having your money invested in, you know, U.S. and foreign stocks and bonds can protect it from that sort of a devastation. But obviously if it's a countrywide or worldwide devastation, that's not going to help very much. Much. You can, of course, prepare yourself for, for that sort of a post apocalyptic world by having some things that can be sold and, or used in that sort of a scenario. But that's kind of where we get into the prepper stuff, right? And, and you can certainly get carried away with prepping, but I don't think it's a bad idea. Except I have some, what I call camping gear around, stuff that you can use to bug out, stuff that you can use to live outside of your home, stuff that you can, you can use in the event that something happens to your electricity and your water and your air conditioning and that sort of stuff. I use it camping anyway. So it's no big deal for me to have that sort of Stuff. Keeping some gasoline around is not a bad idea. Storing some water and some food. You know, some people store three months of food in their house. Other people store a year or more of food. Now, if you want something that you can sell in that sort of a post apocalyptic scenario, you got to think about the things that people are really desperate to buy in that sort of a situation. We're talking about tobacco, we're talking about alcohol, we're talking about ammunition. If you're looking for something to use in some sort of a weird barter economy, you're probably not going to be slicing off slivers of gold bars to do that. And maybe you want to keep some of that stuff that would be a little more useful in a bartering kind of situation. But here we are going down a pretty weird little pathway that can really get to extremes in a hurry. So there's not a great way to protect yourself from devastation. Tim. But those are some of my thoughts on it. All right, our next question is not from Tim. This one's from Kevin. Let's take a listen.

Hello, Dr. Dali. My name is Kevin. I am a 45 year old nurse anesthetist and very appreciative of everything that you're doing in finances for the medical community. I do have a question regarding index funds. I had purchased a Fidelity extended market fund as opposed to some of their other index funds that charge small expense ratios. And looking at the performance compared to their normal fund, there is a wide discrepancy. Maybe you can clue me in on the reasoning. The Xero fund made 16.59% last year, 2020. Their regular expense ratio fund was 32.16%. The only thing I can see is the extended market zero fund did not have Tesla stock in it. I want to see if there's something else that you can see why there would be such a wide discrepancy. And it makes no sense apparently to buy the zero fund when you're going to lose half your money on return. Just looking to see what you think about it.

Thank you. That's a great question. For those who don't know what he's talking about. Fidelity actually has kind of two sets of index funds. A couple of years ago they came out with these new zero index funds. I think there's three or four of them, but basically, yeah, there's four of them. Basically they decided they were going to take this race to the bottom as far as expense ratios go to the maximum. Right. Vanguard's been lowering their expense ratios over years and Fidelity and Schwab's and iShares have been trying to keep up with them and they often kind of make them a lost leader even and charge 1 basis point less than Vanguard does. For instance, for those who think one basis point of expense ratio matters, which it doesn't, of course, but they basically took it to an extreme and started not charging an expense ratio at all on these four new funds they came up with. But when they came up with those, they didn't lower the expense ratio on the index funds they already had. They started new funds. And they are a zero large cap index fund, a zero total market index fund, a zero extended market index fund, and a zero international index fund. Now, they already had index funds that basically followed similar segments of the market, but these were new ones that they added in. And I think it's worthwhile talking about that concept for a minute. I wrote a post at the time, this was back in 2018, I titled it Don't Obsess About Expense Ratios. And what I meant by that is that once you get down below about 10 basis points, the expense ratio is not the most important aspect of choosing a fund. When you're looking at index funds, you care about a couple of things. The first one is what index does it follow? And the second one is how well does it follow that index? And the expense ratio plays into the second part of that, but it has nothing to do with the first part, which is what index does the fund follow? What is it trying to track? And you have, obviously you want them to be good at running an index fund. That's one of the reasons why I wouldn't necessarily bail out of Vanguard to Schwab or Fidelity, because I think Vanguard's better at indexing than those other companies are. Even in the expense ratio is a basis point or two higher. In general, if you look at the long term performance, it's equal to or better than what you'll get at Fidelity and Schwab. And I think that's just because Vanguard's better at indexing, number one. And number two, when they loan out their shares to short sellers, you know, like people that want to short sell Gamestop and American Airlines and BlackBerry and those kinds of stocks, they get income from lending those out. And Vanguard passes more of that income along to you than Fidelity does. So that's part of the reason that Vanguard does such a good job following the indices. But the first part of that is what, what index does it follow? And the answer to your question of why one of these Funds did so much better than the other fund comes down to the index it is following. Both of them did a fine job of following the index they were trying to follow. But despite both of them being extended market index funds, meaning the entire US market minus the stocks in the S&P 500, they follow different indices. The first one, the one that charges an expense ratio, is fsmax. Fsmax. This is the Fidelity Extended Market Index fund. And if you look at its Morningstar X ray box, which I've talked about a lot on the blog, I don't know how much I've talked about it on the podcast, but if you go to Morningstar and look up a fund and look in its portfolio, it'll show you an X ray box which tells you where the fund sits on the scale between large cap and small cap and on the scale between value and growth. And you can see if you look at that fund that the center of this fund is basically in the mid cap growth segment. Now if you look up the same information on the Fidelity Zero Extended Market Index fund, you will see that it centers in the upper right hand corner of the small cap blend segment of the market. Clearly, these two funds hold different stocks. It's not just Tesla, it's a bunch of different stocks. The one that charges an expense ratio is Growth year and larger on average than the one that doesn't charge an expense ratio which is smaller and more value. So you shouldn't be surprised in a year in which large and growth stocks perform very well, like 2020, that the fund that is larger and growthier is going to have better returns. And that's exactly what happened last year. Large growth outperformed the fund that was larger and growth year had higher returns. And indeed it did. You know, the first thing I checked when you, when you left this question was I made sure you were actually accurate and you were accurate. It turns out that the performance on each of these funds, I think it was on the one that charges an expense ratio, FSMAX, I think it was 35% in 2020. So it was a really good year for him. 32.16%. Sorry. And on the zero extended market fund it was not that. It was actually 16.59%. So significantly less. Why was it less? Not nearly as much large growth in it turned out owning Tesla in 2020 was really good for your mutual fund.

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