WCI #215: Calculating ROI, Dollar Cost Averaging vs. Lump Sum, UTMA Accounts & TIPS

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.

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Their money since 2011. Here is your host, Dr. Jim Dahli. This is White Coat Investor podcast 215 how to calculate Return on Investment if you're finding our podcast informative and helpful, we would encourage you to sign up for our monthly newsletter. It is totally free and includes useful action information not available on the regular blog posts or this podcast. It's almost like being in a secret club. The kind of club that can boost your knowledge and enhance your wealth at the same time with no strings attached. Sign up today@whitecoatinvestor.com Newsletter. You can do this and the White Coat Investor can help. All right, let's do our quote of the day. This one comes from Graham and Dodd. The investor should not be a sole consultant unless he has training and experience sufficient to qualify him to advise others professionally. I think there's a lot of truth to that. The truth is, by the time you know enough to pick up an investment consultant, you probably know enough to do it yourself. Though unfortunately it's such a difficult process sometimes to choose an advisor. Thanks for what you do. Life can be difficult in the high paid professions. Whether you are a doctor, a lawyer, a dentist or a professional bike rider, your life is likely difficult and that's why you get paid so much to do it. So thanks for thanks for going through that and all the sacrifices you've made. You can do this and WCI can help. We want you to be successful. So we're going to give anyone who refinances more than $100,000 in student loans through the WCI links at whitecoatinvestor.com student-loan refinancing free access to the White Coat Investors flagship course. Fire your financial advisor. Not only will you continue to get the amazing cash rebates that we have negotiated, but now you will also get another $799 in value. Join more than 5,000 other professionals who have created their own financial plan with the help of the White Coat Investor. Offers valid for loan applications submitted after May 1, 2021 and the course must be claimed within 90 days of loan disbursement. To claim your free course enrollment, visit whitecoatinvestor.com refi bonus all right, today we are going to do questions. Your questions. This podcast is all about you and what you want to talk about. So if you want to leave us A question here at the White Coat Investor. All you have to do is go to the speak pipe. Whitecoatinvestor.com Speakpipe is a site where you can record up to a minute and a half. Question. Don't feel like you got to use the whole minute and a half, but we'll get you on the podcast, get your questions answered. Our first one comes in from an anonymous listener. Let's take a listen.

Hi Jim, I wanted to get your take on something. Oftentimes you'll hear talking heads in the finance world dogmatically say that you should never take on debt to buy a depreciating asset. And usually this is in reference to financing a car purchase. Now, I agree that debt can be dangerous if it influences you into buying a car that you otherwise can't afford. However, once I've decided to buy a particular car at a particular price, I see no problem with using financing as a thought exercise. Imagine I'm simultaneously buying a $50,000 car and a $50,000 house. And imagine that the bank will 100% finance both purchases, each with a 2% interest rate. Well, in this scenario, it makes absolutely no difference whether I take out the loan on the car or the loan on the house, even though technically the car is a depreciating asset while the house is an appreciating asset. So what do you think, Jim? When people say that you should never take out loans to buy a depreciating asset, is that just a dogmatic and lazy expression that ignores math, or is there some fundamental consideration that I'm missing? Thanks a lot.

All right, good question. Well, yeah, I think there's a couple of things you're missing. The first one is mortgages are often tax deductible. Car loans pretty much never tax deductible unless they're owned by a business. So a 2% house loan is generally a little bit more attractive than a 2% car loan, aside from the fact that it's longer term as well, most of the time. But putting that aside, the main thing you're not looking at is behavior. You are making an assumption that lots of people make that this is just all about the math. And in my experience, it's rarely about the math. It's probably 80% behavioral and 20% math. And so while it makes sense to borrow money at 2% and earn money at 8%, in reality, what I think people do when they borrow money is they spend more money. You know, when you are not pulling out the green stuff, when you are not writing the check, when you are not doing the wire, when you are not watching your bank account balance drop by 60 grand. When you buy a $60,000 car, it is less psychologically painful to buy it, and so you are likely to buy more frequently. You are likely to spend more money. I think that is a truism for the vast majority of people. Maybe you're some sort of cold calculating Homo economicus that this does not affect, but the truth is the vast majority of people are affected by it. And so I think you spend more when you spend borrowed money. The other thing you may not be considering is the cash flow aspect. You know, you still have to make the payments, and that is money that could be used for something else. And frequently, once people are debt free, is used to work less. I know I felt much more comfortable dropping down on shifts when I didn't have to make a mortgage payment. Now I had another source of income with wci, but psychologically, I think there's a real benefit there. So is it documentary dogmatic to say never take out a loan? I suppose it is, but, you know, there's some wisdom there as well. I have never had a car payment. Now, my parents gave me a loan for the first car they gave me. They gave me the car and told me I had to pay them back when I got into residency. So I owed them $3,000 for that. But that was the only car loan I ever had. And I paid them back with like my second paycheck in residency. And so, you know, I'm not a big fan of borrowing money for cars. I think it's kind of silly actually, as a doc to borrow money for a car. Most docs are getting paid 15, 20, $40,000 a month, and you can get reliable transportation for $5,000. So if you can't save up a week's worth of income relatively quickly in just a couple of months on a doctor's salary, you probably have a spending problem and need to fix that first. Now, granted, most dogs don't want to drive a $5,000 car. I don't have a problem with that. Go get a $10,000 car, a $20,000 car. Go get yourself $120,000 Tesla X, whatever you want to drive. But I want it to be something you can afford. And the way I can tell if I can afford something is whether I have that much money in the bank. I have that much money in the bank, I can afford it. It's very clear. No one can argue I couldn't afford that car. And so if you can reach all of your financial goals and still drive whatever you want, then I encourage you to drive whatever you want. I don't care if it's an F250, I don't care if it's a Tesla, I don't care if it's a Spider. Whatever you want to drive, knock yourself out if you can afford it without setting yourself back and owning your financial goals. But if you don't have much money, if you have a negative net worth, if you'd like to build some wealth, if you're in your live like a resident years, shoot, go get yourself a five or $10,000 car. They are surprisingly reliable. You know, you think it's a piece of junk. It's not. If you've never driven a car in that price range, you'd be surprised how many years you can drive it for. You know, this car I bought Whitney about a year ago is a $5,000 car. It's a 10 year old Honda Civic, very reliable brand with 120,000 miles on it. You talk to Civic owners how long their car goes. That car is only halfway through its life. It'll probably go another 10 years. I expect to teach my next two kids how to drive a stick in that car. It's a reliable car and of course we've had no issues whatsoever with it in the last year. And so if you need a reliable car and don't have much money, yes, you can borrow a little bit to pay for that car. But when I'm talking about a car loan, I'm talking about a $5,000 car loan. If you, if you got a $30,000 car loan, what that tells me is you're probably not that good at managing money, because most of the people who do that aren't that good at managing money. Despite the mathematical argument that if I can borrow at 2% and earn at 6%, I'm going to come out ahead. Now, I can't argue against that math, but I think you're a pretty rare person if you're actually doing it. In general, what I think you probably do is you go next and instead of, you know, maybe you borrow for your vacation, or maybe you borrow for another car, maybe you borrow for your spouse's car, maybe you borrow more for your house than you otherwise would. And so I think you get into this habit of borrowing, especially after you've lived for four years in medical or dental school on borrowed money. You just become immune to it. And it really does retard your wealth progression. It holds you back. And I think that's the case for the vast majority of people. You know, honestly, when I run into people who are millionaires, I interview them on the Milestones to Millionaire podcast and I ask them, well, what role did debt play in this? Very few of them say it had any sort of significant role at all. The vast majority of people, the same desire that drives them to save money also drives them to pay down their debts. I think it's very rare for somebody that is really into borrowing money to really build a lot of wealth. And so good luck going down that pathway. It's your money and your decision. But in general, I don't regret becoming debt free. It's been three or four years now since we paid off all their debts and, you know, our net worth has done nothing but climb dramatically in that time period. And so I have no regrets whatsoever about living that way. And I plan to keep living that way. You know, we even cash flowed our big home renovation. And so, you know, I'm a big fan of debt free living. It certainly has helped me to be happier in my life. But if you want to take out a car loan at 2%, it's your life. You can do whatever you want. All right, let's take our next question. This one comes from Bethany, and let's take a listen.

Hi, this is Bethany from Florida. Thank you for all that you've done to help us become informed investors. I was wondering. Last year I invested in a real estate fund and I'm trying to understand how to compare returns from that fund to my stock and bond returns. It's projected to be a five to seven year investment, so I assume the early returns will be low and then increase as properties are sold. But how do you calculate returns on your real estate investments? And can you only fairly assess their performance after the fund has closed? Thank you.

All right, great question, Bethany. Remember that closing the fund is usually at the beginning of its five to seven year life, liquidation's at the end. So you really can't compare the return at closing because you're just starting with the investment at closing. So keep that in mind. But the question is, how do you calculate return? Well, the way I calculate return is to calculate a dollar weighted return. And I do that with a calculation called xirr. And you can do that in any financial calculator or any spreadsheet. If you go to Excel or Google Sheets, it has this function as part of the spreadsheet. And that's where I calculate my return. All you have to know to calculate your return is the inputs, meaning the money you put into the investment, any money that you put in later, or any money that you took out of the investment, like a dividend or interest it paid or whatever return of principal, and the dates of those cash flows. Once you know all that, you can calculate an annualized return. You can make a few other adjustments to the sheet in order to get a return for a given year. You can change the dates, et cetera. I have a tutorial on that on the website. If you just go to whitecoininvestor.com and search XIRR, it'll pop right up. There's a little sample spreadsheet there and they'll walk you right through the process. So that's what I use to calculate my return. What I've noticed, however, is that many of these real estate investments give you a return that isn't quite accurate. And it's almost always better than what I calculated to be on xirr. And that might be just because I only calculate the money as it leaves my bank account and comes back to my bank account. They might be using other dates to calculate it to make it look a little bit better, you know, like the dates they got the money. But that really doesn't matter to me. All I care about is my return in and out of my account. And so I think that's the best way to do it. So I'd encourage you to learn to use that. But your broader question, you're trying to compare, you know, this real estate fund to your stock and bond return. Well, in 2020, your stocks did awesome, so did your bonds, right? So I'm pretty sure your real estate looked really bad. It looked particularly bad because most of these properties in a private syndication or a private fund are not revalued every day like the stock market is. They're probably not even revalued every year. And so you really don't know what that property or that investment is worth. For example, I've had a syndication now for three or four years. I think it was a $100,000 investment. And if you go onto their website, it still tells you it's worth $100,000. It certainly is not worth $100,000. Might be worth less, might be worth more, but it's not an even 100,000. I can guarantee you that. And so really you can't tell what your return is until the investment has gone round trip. Right? And a five to seven year equity real estate investment, you're stuck anyway. So who really cares what the return is. It's not like you're getting out early or something, but you really can't fairly calculate it until the end. For example, I have a real estate fund. For the first year, you put money in with capital calls. Actually, it was about two years. I think we were putting money in with capital calls. Shortly after those capital calls ended, we started getting principal back. So I think the fund has sold two or three properties already, and I've gotten the principal back from those properties. And so if I go on the website, this one actually does relatively frequently mark things to market. And so I've still got more than my initial investment in there, but I've gotten some of my principal back, and then I've gotten some income distributions as well. And so it's a little bit unfair to compare that to the return of something that's mark to market every day. Now I can do it. I plug the numbers into xirr and I can tell exactly what my return has been. In fact, if I pull that up here, that is an interesting fund to look at. Just because we're in the middle of it, I've started getting some of my principal back and so on and so forth. And so let's pull that one up and let's see what my return actually is on this investment as of today. Anyway, thumb across my investment spreadsheet with a bunch of XIR calculations for each investment. It tells me that my return on this particular investment is an annualized return of 9.21%. And that's over a period of four years so far. But this investment, like yours, has another three or four years to run. And in the end, wouldn't surprise me a bit if that return is significantly higher than that. I actually expect it to be higher than that, perhaps in the 15% range. And, you know, that's partly a result of the fact that leverage is being used in the investment and part of the fact that I'm probably being paid a premium for being willing to be a liquid for so many years. But that's kind of where we're at right now. If I would have looked at that a couple of years ago, it might have said 2%. And so obviously that would have looked really bad. Some of my other investments, like here's one that is only 3.16%, and that's because the value of the property hasn't been changed. So that's just the income that's come from it, about a 3% income that's come off that particular syndication. And so what I generally see when I look at my spreadsheet, when I look at my equity real estate investments, whether they're syndications or private funds, is generally relatively low returns. And then all of a sudden once it goes round trip, the return gets dramatically higher. For example, there was one down the street from me for a while. See if I can find it here in my spreadsheet. And it was an equity investment, I think it was, might have been preferred equity, but basically there it is right there. I think it was giving me returns of 4% or so. And then when it finally went round trip, it was 13.66%. And so I wouldn't necessarily feel too badly that your returns are low. That's generally the case in the beginning with these longer term real estate investments. Obviously, if you know it's not performing according to the pro forma, that's really what you can compare it to. That was their projections. You can look at those and see how they're doing on those. It'll give you a hint of whether you're on track to meet the projected returns or not. And that's probably more interesting and more useful to you is simply comparing the distributions and value as it's updated to the pro forma than actually calculating your return and comparing it to, you know, stocks and bonds or even publicly traded REITs. Hope that's helpful to you, Bethany. Okay, let's take our next question from Emma.

Hi Dr. Dali. I was recently accepted into medical school for the upcoming year and I am preparing my finances for this undertaking. I took two years off from school to work before attending medical school and I've managed to save approximately $26,000 in cash, along with some savings bonds that are still reaching maturity. I am thankfully going to medical school in Texas, which means I will be able to cover my additional expenses and tuition for the first year with my MO with most of my savings. But I was wondering how best to handle money that has been held in a UTMA account. My wonderful parents have always advocated frugality and savings and put a sum into a UTMA account that has approximately $24,000 in unrealized long term capital gains. I want to use this money for school and am trying to pay the least amount of taxes on it if possible. My income for this year is likely to be in the $25,000 range. My question is, if I withdraw a portion of the money this year and stay under the income limit of $40,000, will I have to pay capital gains tax on the amount withdrawn? If this Is true. And I don't have to pay capital gains under an annual income of $4,000. My plan is to withdraw a portion this year and cash out the remainder of the account next year. Thank you for all you do. I've been listening to your podcast for years and appreciate all your advice.

I'm not sure there was a question in there, just indication of how awesome you are and how awesome your plan is. I think your plan is great. I love that you're thinking about the capital gains because you, at least by the year after you enroll in medical school, will presumably have an income of $0, at least earned income. And so it's going to be really easy to sell those shares even with a capital gain of $24,000 bucks and not pay any taxes on it. So it's pretty awesome. You're basically in the 0% long term capital gain bracket now, obviously make sure all those gains are long term. Right? But yeah, zero percent. It's great. What wonderful parents you have that were willing to do that for you. Obviously if they have some 529 money for you too, that would be a great thing to use. As a general rule, I like to see you using your cash first before you start borrowing money in medical school. If you don't take any loans out until your third or fourth year, well, it's that much longer before the interest starts adding up. You know, I make an exception. If you've got that money in retirement accounts. If you have, you know, an old 401k or something from your working years, maybe I wouldn't cash that out. What I would do with that though, and again, pay attention to, you know, income brackets while you're doing it. But what I would do with that is I would try to convert it to a Roth account during medical school, during those years when you don't have any earned income. And so I think that's also a great option. But sounds like you've got a great plan to me. Maybe you don't want to cash those out this year because you got half a year of earned income. Maybe you cash them out next year. And if that means you got to borrow a little bit of Money as an MS.1, I think that's fine to avoid that taxation. If you don't have to borrow any because you've got the cash to cover that even better. And maybe you do in Texas. Probably the cheapest medical schools in the country are in Texas. But I think your plan is solid. I think you have some really nice parents and I wish you the best of luck. Congratulations on getting into medical school. Let's take our next question here.

Hello, Dr. Dali, it's Marie. Would you have any insight on owning apartments, condominiums, or land in a foreign country? So I gave my sister in The Philippines a 20% down payment on a condominium for her and my parents to live on. So the condo is probably worth around US$88,000 based on today's exchange rate. So I recently took on dual citizenship. I now can theoretically be placed on the title to own this with my sister once they've paid off the mortgage. So it's their primary residence. They and we are not making money on this. And, and as mentioned, monthly mortgage is still due on it. So I just wanted to get your take on this. Thank you.

All right, Marie, that's really nice of you to put that down. You didn't mention if that was a loan or if you're considering yourself an owner of this property or whether that was a gift to your parents or siblings. Things get really complicated when you're moving money between family members, particularly when one family member has a much higher income than other family members. I have at times given money to family members, but I make it very clear when I give it to them that it is a gift and I have no expectations whatsoever that money coming back. I have no control whatsoever over how they spend it and that it's now their responsibility to be good stewards of that money. I don't tend to get into investments with them. I don't tend to wrap myself into ongoing costs associated with them. I would be a little bit hesitant, in fact, if I were in this situation, to have my name on the title of a property in another country. This is probably not an awesome investment for you anyway. I would not view this as an investment. I would view it as a consumption item. Right. It's not producing any income whatsoever for you. It has actually required expenses every month as that mortgage has to be paid and this thing's going to have to be kept up and so on and so forth. So I would not really look at this as part of your investment portfolio. In fact, I would reconsider. You know, it sounds to me like you've made it as some sort of a loan or co investment or something. I would maybe reconsider that. Assuming you're like the vast majority of my audience and you're a high income professional with presumably two or three or $400,000 a year in income, I'm pretty sure your family is not making that in the Philippines. And I might just reconsider this as a gift and maybe just step away from the whole thing and let them manage it going forward. But that's up to you. That really comes down to the agreement you made with your family members and so on and so forth. As a general rule, buying investment property in another country is not something I would do, but I also don't have dual citizenship. So if this is someplace you imagine yourself, you know, retiring or spending a great deal of time there, maybe it's not as big of a deal to you. But I don't even like owning an investment property in another state. If I can't drive past it and look at it and, you know, do minor repairs or whatever on it, I don't really want to own it at all. In fact, I don't like landlording, period. So most of my investments are now fairly passive as far as real estate goes. But if you're into landlord and you're into landlord and on the other side of the planet, well, I don't know that's necessarily a bad thing, but I don't think it's a game I would get into. The other issue, of course is any income you do get from that you're going to owe US taxes on. And so you're going to have to look at the tax treaties between the US and Philippines and see how that stuff is all treated. And there are attorneys and accountants that specialize in relationships between the US and countries where people frequently go to. You know, if you go to the U.S. canada border, U.S. mexico border, in those border towns you can often find attorneys and accountants that kind of specialize in cross border financial stuff like this. I don't know where exactly you'd go to find a US Filipino specialist, but I'll bet you could find one if you're really interested in. Personally, I'd kind of step back a little bit from this and just look at it as you helped out your family members and that's great. It's a wonderful thing to do. It's wonderful to be in a position that you can do that. But maybe I wouldn't get all too tied into the finances by doing something like getting my name on the mortgage or getting my name on the title. Good luck with that, Marie. Thanks for your question. Let's take our next one here. This one comes from Matt.

Hi, Jim, this is Matt. I'm a retired academic. I have all of my portfolio in a 403 with TIA CREF. I'm currently about 55% equities 45% bonds, and of that bonds, I'm about half tips, about half. Just a regular bond index fund. I'm wondering at this point if is there any reason I shouldn't go 100% tips? Bond yields are so low right now and there is inflation that's maybe on the horizon. What's the downside of a bond portfolio? That's all tips. Thanks very much for your help.

All right, great question, Matt. This is really a diversification question. TIPS do not act the same as nominal bonds in various economic scenarios. There are some scenarios where nominal bonds do better and some scenarios where TIPS do better. I'm a big TIPS fan. Half of my bond allocation is in TIPS and has been for years and years and years. But there are times when that is not the right move. It's impossible to tell in advance whether it's the right move or not. But there are times that it is not. And so I would maintain both types of bonds and at least some quantity. And in order to have diversification. Future inflation is just as hard to predict as future interest rates, future asset class returns. And my crystal ball is cloudy. If there is unexpected inflation and it goes through the roof, then you'll be really glad you owned a whole bunch of tips. If there is not, maybe you'll regret owning a whole bunch of tips. Remember also though, that TIPS yields are also very low right now. It's not like there's some free lunch there where you can just jump into TIPS and make all kinds more money than you can in nominal bonds. And nominal bonds tend to price in expected inflation. So the only protection you're getting from the TIPS is unexpected inflation. So if inflation is expected to be high, then bond yields should be higher whether they're nominal or inflation linked bonds. So I hope that's helpful to you. I know TIPS and I bonds and commodities and anything else that seems to have some sort of inflation protection factor is really all the rage right now. But the truth is this little bump in inflation we've had this spring might be the beginning of a trend. It might be a one off and we're back to 1 or 2% inflation by the fall. It's really hard to tell at this point. So I would hedge your bets and diversify your portfolio and stick with your written plan. I hope that's helpful. All right, our next question comes from Billy.

Hi, this is Billy. My wife is finishing up her residency here in the next two months and will be getting a fairly large income over the last five years during residency. I'VE been the breadwinner and been the one that contributed to retirement plans. Starting in August, my wife will start her job as an orthopedic surgeon and have a pension plan as well as the opportunity to contribute to non qualified accounts. Our goal is to be financially independent by the age of 50. We're almost paid off on her student loans. I have no student loans. We're going to get a sizable chunk of equity from selling our home where we're at currently. We plan to pay off the remainder of her student loans and continue with our current vehicles with no payments. Based on your experience, what would be some of the best tools for a high income earner to invest into? Currently, we have signed up for a Vanguard account and a Wells Fargo account and plan to invest in mutual funds and index funds. Would love to hear any additional insight.

All right, Billy and Emily, great job so far. You guys are doing awesome. You finished an orthopedic surgery residency, right? One of the highest paid fields, at least on average in all of medicine. You're almost done with student loans by the time you come out of residency. Billy's been putting away money for retirement already now for years. You guys are an enviable position. You're way ahead of your peers, way ahead of where I was coming out of residency. And I don't suspect you're going to have any difficulty at all in reaching financial independence by age 50. But what you don't have is a plan. You need a written plan that's going to get you there. How much money you need to save each year, what investment accounts you're going to use, what investments inside those accounts you're going to use to fulfill your desired asset allocation. I mean, you need a plan. And so there's basically three ways to get a plan. One is to write your own. Some people are really hobbyists. They're into this stuff. They listen to podcasts they listen to, they read blogs, they spend hours a day on financial Internet forums, they love to read finance books and they can sit down and they're honestly qualified to write their own financial plan. And certainly they're in the investing component of their financial plan, which is one of the easier parts. Other people need a little more help. For those people, I have written a course or put together a course called fire your financial advisor. There's a second version of it that actually comes with continuing medical education credit. And maybe you can use your wife's, you know, CME fund to pay for that if you like. But this course is designed to take you from having no financial plan, which appears to be where you're at right now, to having your own written financial plan and understanding it and being financially literate and knowing about investment accounts and knowing about investments to put inside those accounts. The third option is, takes perhaps the least amount of work, but is the most expensive. And that's to go hire a financial advisor. There are financial planners who will help you put together a plan, whether you continue to use their services to implement the plan and to maintain the plan. They may just write the plan for you if that's all you want. And we keep a list of those under recommended financial Advisors at the White Coat Investor website. So I would recommend you do one of those three things in order to get a financial plan in place. But if you are like most doctors, your plan is probably going to look something like saving 20 to 30 to 40% of your gross income for retirement. And that's divided into whatever available retirement accounts you might have. Maybe at your work you have a 401, maybe at her work she has access to a 403 and a 457. And then you can each also do a backdoor Roth IRA. So that's about $6,000. That's $6,000 a year this year for each of you. And if your only health insurance plan is a high deductible health plan, you can also use a health savings account, which is like a triple tax free account. It's basically a stealth ira. And you can use that, but above and beyond that. And you'll probably be above and beyond that, I suspect, given your income. Everything has to be invested in just a regular old taxable account. And you can open one of those at Vanguard or Wells Fargo or Fidelity or Schwab. I'm a little partial to Vanguard. I like Vanguard. They're mutually owned. Costs tend to be low. Sometimes people complain about the service a little bit because the costs are so low and they grow so fast that maybe their phone reps aren't as well trained as they should be, so on and so forth. But I don't know that I would necessarily let anybody I actually liked go anywhere near Wells Fargo, given the track record of that particular bank. And so I might encourage you to think more on the lines of Vanguard or Fidelity or Schwab or even E Trade or a TD Ameritrade, those sorts of companies, than a Wells Fargo bank. But in general you'll use those retirement accounts. You'll invest the rest in taxable, whether those are very tax efficient mutual funds. In that taxable account or whether those are, you know, investments in investment real estate, whether directly, if you're into being a landlord, or indirectly via private syndications or funds. But that's a typical portfolio for a doctor. But you want the plan written out, and then you choose investments to fulfill the plan, rather than just a hodgepodge of picking investments that you think are good. And that's what a lot of people end up doing. And so they end up with this Alphabet soup of investments and nothing really fits together, or they think they're diversified and they really just own a bunch of the same stuff. But what you really need at this point is a plan. The good news, you're starting from a fantastic place. You're way ahead of the vast majority of doctors financially, and I think your goals are probably very realistic. But you need a plan that takes you from where you are now to your goals of what you want to accomplish. And so I'd recommend you get that in place as soon as possible. All right, our next question comes from Nick. Let's take a listen to nick's question.

Hi, Dr. Dali. My name is Nick. I'm a physician in the Midwest. My wife and I were doing some estate planning, and I was talking to the attorney about asset protection, and I was pleased to hear her say the same thing which I've heard on your podcast, which is that there's really not a lot of great benefit to doing any kind of fancy asset protection strategies, and certainly not unless you've got a giant, you know, $10 million plus portfolio or something like that. She said, essentially, having good malpractice insurance is the best thing you can do. My question then is, is there any reason, is it better to increase your malpractice coverage? I've got a standard 1 million, 3 million policy. If I switch to a 2 million, 5 million or something bigger, is that better coverage, or is that just making me a bigger target for a potential suit? Haven't been able to really get any good data on that, so I wanted to see your thoughts. Thanks.

Great question, Nick. The reason you can't find that data is it doesn't exist. And if anybody has it, it's probably the malpractice insurance companies, and they're not sharing it. Trust me, I've looked hard for that data. Here's my thoughts on the topic. You want enough malpractice coverage that it pays for a few things. Number one, it needs to pay for a robust defense. A lot of the times you get a lawsuit and it's Garbage. You know, it's still going to drag you through the mud for six months or five years or whatever, but it's garbage. There's no merit to it. And you want to have the resources available to defend yourself against that garbage. And a malpractice policy does that. It doesn't just pay for settlements. And for any, you know, judgments that are made against you, it also pays for your defense. So you want a big enough policy that's going to cover that. The second thing you generally want is you want the person that you hurt that you have to settle with or that gets a judgment against you. You want them and their attorney to walk away with a big chunk of money. Okay, and why do you want them to have a big chunk of money? So they're happy with that chunk of money rather than wanting to come after your money. Because when you are in a malpractice lawsuit that looks like you're going to settle or perhaps lose, remember whose money you're playing with. You are playing with the insurance company's money, right? In a lot of ways, you are just the defense witness for the insurance company. It's not your money you're losing. And the vast majority of lawsuits are settled or paid out at policy limits or less. Actually, the vast majority are dismissed. But of the ones that actually have a payout, very few of them are done for above policy limits. But you know what, if you come in there with a $250,000 policy and they look at that and go, what's that going to pay for? And the attorney goes, I'm not doing all this work for my cut of a third of a quarter million dollars. And all of a sudden you pissed them off. Now they all want to go after your personal assets. In addition, Even it's just 100,000 or $200,000 of your personal assets, you've changed the game. And so I don't think you want to get into that business. You know, some people try going bare on their insurance. This was really popular about 20 years ago. I don't think that's a very good idea. I don't think these little tiny policies are a good idea. I think once you get into the seven figure range, you know, most people that get handed a million dollars are going to feel pretty good about that. Maybe not if you run over some CEO or damage some, you know, NFL player's knee or something in a botched surgery, maybe they're not so happy with a million dollars. But the vast majority of people, a million dollars is still A lot of money. And so I think when you're into that range, then you can satisfy that need for. For both the attorney and the client to get a lot, you know, and have it feel like a lot. And I'm not sure that you get anything extra there by going from a $1 million, $3 million policy to a $2 million. Usually it's $2 million, $6 million policy, but maybe you have looked at One that was $2 million, $5 million. I don't know. Remember, that first number is per incident, per patient, and the second one is per year is what those 1 million, 3 million meet. And so I think the third guideline is to carry what everybody else is covering. You don't want to is carrying. You don't necessarily want to stand out in this regard. I am in Utah, an emergency physician. Everybody here carries 1 million, 3 million. And so I carry 1 million, 3 million, you know, and that's not some big secret, right? It's going to be the first thing that comes out in a malpractice lawsuit discovery process. They're going to find out my policy pays 1 million, 3 million. It's not some big secret that I can't announce on a podcast, right? Plus, it's what everybody else has. So that's what I carry. So I don't stand out. Not only do I not look like the guy who doesn't want to take care of somebody if I screw up, but nor do I look like the super deep pockets person. I don't know how big of a fear that is about the deep pockets being an issue. I think by the time somebody's decided to sue you after that is usually when they do discovery and find out how much malpractice coverage you have. So I don't think you're necessarily attracting lawsuits that way. It wouldn't surprise me, however, that once you're in it, if they find out you have a $2 million, $6 million policy, that they only want to settle for $2 million instead of $1 million, that wouldn't surprise me a bit. I also asked this question to a malpractice provider. The attorneys for the company that provided a malpractice. It was two or three carriers ago, but they laughed and said, yeah, we'll sell you a $2 million, $6 million policy if you want it, but it's very hard for us to in good faith recommend it to you. They thought it was kind of a waste of money. And so take from that what you will. You know, we had an asset protection expert on here a few podcasts ago, and he didn't think it was a bad idea at all to have a bigger malpractice policy. And so you'll have to decide on your own what that's worth. Why not get a quote and see what you think? But I'll bet if you're like most stocks, you'll choose to just use what other people are using. Now, don't forget with asset protection that there are a few other things you can do that are too cheap, easy and effective besides just buying malpractice coverage. For instance, not all of your risk is related to your work. You have personal liability sometimes too. So make sure you boost up your homeowners and your auto liability coverage and stack an umbrella policy on top of it. Something big, million, 2 million, 5 million, something like that. Luckily, those are pretty cheap. For just a few hundred dollars a year, you can get a pretty big policy with personal liability coverage. Also, max out your retirement accounts in every state. Retirement accounts get significant asset protection. So in the crazy occurrence, which is what all this asset protection planning is about, is this crazy above policy limits judgment, you at least get to keep the money in retirement accounts. If you're in attendance by the entirety state and you're married, you can title both your home as well as, you know, your investment accounts and bank accounts, sometimes as tenants, by the entirety, and then they have to actually sue both of you in order to get access to that. So those are cheap, easy ways to provide significant asset protection without doing expensive, convoluted overseas trusts or anything like that. And I suspect there's probably more bang for your buck there than buying a little bit larger malpractice coverage. But why not get a quote? Why not ask your insurance company what it would be to increase it, but expect it to be a significant expense? It might even cost you twice as much to have twice as much coverage. All right, let's take our next question. This one's from Sam.

Hey, Jim, this is Sam from California. We appreciate everything that you do and really, you made an indelible mark in my wife and our financial education and so we thank you. Our question pertains to dollar cost averaging versus lump sum. Every year in January and February, we try to max out our 401HSA as well as backdoor Roth in January. Now, throughout the year, we do dollar cost averaging in our taxable account with set amount of savings last year. As we all know, the money that we placed in in January lost significant amount in March and throughout the year probably gained about 15%, whereas the dollar cost averaging taxable accounts have gained significantly more. We didn't make the changes this year, but we were thinking about the next year about what we ought to do. Whether you recommend continuing the lump sum every January versus dollar cost averaging. Pretty much everything, including our retirement accounts. Once again, thank you so much and we look forward to hearing from you.

Okay, Sam, good question. I think it's important in any discussion of this topic to really define what we're talking about. And the problem is the vast majority of people out there are using the term dollar cost averaging wrong. They are not talking about dollar cost averaging. They are talking about periodic investing. And as are you in this particular question. Let me explain the difference. You cannot lump sum an investment if you do not have a lump sum. Likewise, you cannot dollar cost average an investment unless you have a lump sum. If you don't have the money, you cannot lump sum and you cannot dollar cost average. All you can do is periodically invest when you get the money you invest. I hope that makes sense. So somebody who makes $15,000 a month invests $5,000 a month. Every month they invest $5,000. That's periodic investing. Okay? And when the market goes down, they benefit from that. They can buy more shares because the price is lower. When the market goes up, they buy fewer shares. So on average, the cost of their shares is lower than it would be if they bought it all at the median price. However, that's what most of us do because that's just how we make our money. We make our money periodically, so we invest periodically. We get to take advantage of that over the years. Sometimes we have a year that's like the coronavirus pandemic. And sometimes we have a year that's like 2008. And sometimes we have a year that's like 2000 or 2002, and we get really good prices on our investments. Other years maybe you don't get as good of a price, but over the long run, it kind of evens out and works out fine. Okay, now imagine that you received an inheritance. Now, let's say you got a million dollar inheritance from your rich uncle. And now you got to decide what to do with it. Do you put all the money in right now? Do you put some of the money in once a quarter for the next year? Do you put some of the money in every six months for the next six years? What do you do? Well, if you look at the data on that, most of the time you come out ahead by putting all that money in at the very beginning. The reason why is because the markets generally go up. So in general over time, if you spread those investments out over 18 months or over six years, most of those future investments are going to be at a higher price. And so that's unfortunate, right? You should have invested it all at once. Of course, every now and then, one out of every three years or so, the market goes down and then you're kicking yourself, you're all, oh, why didn't I dollar cost average this in? Well, the truth is, the right move academically, a priori is to just lump sum it. And so that's why I wrote a post once on the blog that's called Dollar Cost Averaging is for Wimps, because basically most of the time you'll be better off lump summing that money. But you're not in a position to lump sum the money because you don't have all the money at the beginning of the year. And so you are in a position to periodically invest. And I like what you're doing in that. You put the money into the tax protected accounts first because most of the time your investments are going to go up throughout the year. And so you've had the money in the tax protected accounts the longest. Your Roth IRAs and your HSA and your 401K. I do the same thing. You do. I put it in at the beginning of the year. Now I continue to invest throughout the year. That money tends to go into lower priority investments, mostly my taxable investing account. And so I'm getting the benefits of periodically investing because I'm investing throughout the year, even when things go down. But I'm also most of the time coming out ahead because I'm putting money into the tax protected accounts first. So I wouldn't necessarily complicate your life by trying to spread it out in every account throughout the year. That's especially a hassle if you're doing backdoor Roth IRAs and trying to do it in there. I would simply do what you're doing and then rest assured that you did get a good price on a lot of the investments you have. It just happened to be the ones this year that were in the taxable account. No big deal though. I think your plan is good. I wouldn't necessarily change it, but I think that's a different way to think about dollar cost averaging. Maybe a little bit deeper than most people actually think about it. All right, let's take our next question. This one comes from Jennifer.

Hi, Dr. Dawley, this is Jennifer and I'm a 48 year old general dentist. My husband and I have a high school student who will be attending College in about two years. Our net worth is approximately $5 million, which does not include our son's 529 plan, UTMA or Roth IRA accounts. I realize we will not qualify for financial aid. He has approximately $270,000 in his 529 plans, $40,000 in an UTMA account and $40,000 in a Roth IRA. With the impacts of the Secure act, is it a sound idea to not utilize these accounts to pay for college and allow these accounts to mature? Thanks for all you do.

All right, well, first of all, congratulations on your success. You're 48 years old. You're worth 5 million bucks. You got $270,000 in a 529. You're doing pretty awesome. So let's acknowledge that up front. Second, I'm not sure I understand your question and why you think the Secure act itself would affect how you should pay for college. The Secure act did a number of things. This was passed at the end of 2019. It made it easier to set up safe harbor retirement plans for small business owners. It made it so part time workers could participate in an employer retirement plan. It pushed back the RMD age from 70 and a half to 72, changed the stretch IRA from indefinite to 10 years and allowed 401 s to offer annuities. But I'm lost on the connection of why you think that is relevant to how you're going to pay for your son's college. How would I pay for it? Well, 529s are designed for paying for college. That's what they're for. That's why you put the money in there. It comes out tax free. All the earnings are tax free, penalty free when used for college. So you got a huge 529. I'd use the 529 to pay for college. If you run through that, you know, then your son's left trying to decide what to do with his other money. He can take out student loans, he can raid his UTMA account, he can rate his Roth IRA account. I would probably raid the UTMA first. And at that point, you know, if he's going to be a dentist or something is actually going to go through all that money, then maybe at that point take out a few loans. I probably would not raid the retirement money. I think that's just so valuable that I probably wouldn't touch that. But there's a good chance like the caller we had earlier in this podcast that he'll be able to take that UTMA money out at 0% as well might be just as good as that 529 money, other than it hasn't been growing tax protected given that he's probably in a low tax bracket while he's in school, but that's how I'd pay for it. I suspect he may get all the way through college and maybe even significant amount of grad school without even exhausting that 529. It's a pretty good, pretty large 529 you've managed to accumulate there. So congratulations on that. Remember, there's a couple other things you can use to pay for his schooling if you like, right? Your cash flow, right? You didn't get to $5 million without making good money, so you've got a significant amount of money coming in. You've been used to saving and investing it. You can take some of that money that you've been saving and investing and actually cash flow some of his schooling. So that's an option. The other thing you can do is you can raid your own savings. You probably have a significant taxable investing account. If you got to $5 million by 48, you've probably got a taxable investing account that you can raid without having to pay any penalties. And you can use that to pay for some of the schooling if you like as well. So you got all kinds of options. Great job on setting your life up such that you have those options, but I hope that's helpful as you decide how exactly to pay for school. But I agree with you, he's not getting any financial aid. If you're finding our podcast informative and helpful, we would encourage you to sign up for our monthly newsletter. It is totally free and includes useful, actionable information not available on the regular blog posts or this podcast. It's almost like being in a secret club. The kind of club that can boost your knowledge and enhance your wealth at the same time, with no strings attached. Sign up today@whitecoatinvestor.com Newsletter. You can do this and the White Coat Investor can help. Remember also, if you need to refinance student loans, you know we're in that time period here in the next few months when even federal student loans are going to start charging interest again and requiring payments. But if you refinance at least $100,000 in your student loans through a White Coat Investor link, we will give you fire your financial advisor a $799 value totally free in addition to hundreds of dollars cash back from the lender. Way better deal than you will get if you go directly to the lender. So join more than 5,000 other professionals who've created their own financial plan with the help of the White Coat Investor that offers valid for loan applications submitted from May 1, 2021 through October 31, 2021. And then you just need to claim your free course within 90 days of your loan disbursement. Thanks. For those of you who've left us a five star review and told your friends about the podcast, our most recent one comes in from Mikey who said, listen to these podcasts if you want to take care of your finances and stress less about your financial future. A must for all White Coats. Thank you Mikey for that five star review. Keep your head up, shoulders back. You've got this and we can help. We'll see you next time on the White Coat Investor Podcast.

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