WCI #224: Q&A- Actively Managed Funds, Savings Rates, Social Index Funds and Home Prices

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 is your host, Dr. Jim Dali.

This is White Coat Investor podcast 224 actively managed funds, savings rates, social index funds, home prices and more. I estimate that 80% of doctors need, want and should use a financial advisor and or an investment manager. Some investment gurus such as Dr. William Bernstein think my estimate is way too low. At any rate, if you want to use an advisor temporarily or for your entire life, there's no reason to feel guilty about it. Just make sure you are getting good advice at a fair price. If you need help updating your financial plan or just getting one in place, check out our list of recommended financial advisors@whitecoatinvestor.com financial advisors. You can do this and the White Coat Investor can help. Hey, welcome back to the podcast. I hope you've been having a great summer. I know we've been having a great summer. I think we've been on a trip every other week all summer. Our most recent one, we just came back yesterday from Desolation Canyon. It doesn't sound very attractive when I put it that way, but this is the Green River. We followed the great explorer Powell's track down the Green river and it was an interesting experience. It was nice that the water levels were low and that there were no mosquitoes and we actually didn't have any upstream wind, which makes for a very nice rafting trip if you've ever rode a river. But unfortunately with the water being as low as it is out here in the west, it was quite an experience at slow motion rock dodging. And sometimes it was not a question of whether or not your raft was going to hit the rock, it was which part of the raft you wanted to hit the rock. But a good time was had by all. No boats were damaged significantly. I didn't have to pull out the first aid kit at all and we all had a good time. I hope you've also been enjoying your summer and been able to get out and do something fun. Whether it's close to home or as some people are starting to travel now, maybe further from home. I want you to know about something that's coming up here and you got to pay attention to this if you want to go. We are having WCICON 22. This is the Physician Wellness and Financial Literacy Conference. This will be our fourth one, the first one was in Park City in 2018. The second one was in Las Vegas in 2020. Last year we did, or rather earlier this year, we did a virtual one that we based out of Salt Lake City. And this one is going to be in Phoenix next February. It's going to be on February 9th through 12th, 2022. It's going to be at the JW Marriott. This is in the northeastern part of Phoenix, up kind of north of Scottsdale. It's a beautiful property. I got to walk it. Last year, my D was down in the area for a soccer tournament, and she was actually the hero of the soccer tournament. It was really great. She got to kick the winning goal in the shootout. And that doesn't happen to you very often in your life. But right across from there was where this hotel is. And it's a beautiful facility. It's going to be a little bit different, I think a different feel than we had in Park City when we had a ski conference because the weather's going to be dramatically nicer. So those of you who didn't want to go to Park City because it was way too cold and you don't ski, this might be the conference for you. They've got a spa there. They've got 17 pickleball courts, they've got championship golf, they've got five pools and a lazy river, some beautiful luxury rooms. And I think our conference is probably going to fill pretty much the entire resort, the entire hotel, and so it's going to be great. What you need to know, however, and why I'm mentioning this today is because we have registration for this, and registration is going to be on September 14th at 7pm and the reason I give you the exact time is because these tend to fill pretty quickly. Our first one in park city filled in six days. That was 300 people. Two years later, we had 800 slots in Las Vegas and it was a third full in seven minutes, and the entire thing was full 23 hours later. The white coat investor community has only continued to grow since that time, and it wouldn't surprise me if this one fills even faster. So it is highly likely that if you don't register on September 14, you may not be coming to this conference at all. And so I want you to mark the date, put a reminder in your phone so you can register, and we'd love to see you there in person. There will be a virtual component for this conference, but I think in person is where it's at, if you can do it. And so I want you to be aware of registration for that. Obviously you'll be able to register for the virtual component right up until the conference starts. And even while it's going probably. But the in person conference is probably going to be full. We're going to add a few more seats to it. We're going to have about 1,000 people there, but you know, that's it. We're not going to be able to put in 2000. If 2000 people want to come, there just isn't space for it there. So we'll be talking more in coming weeks about who some of the speakers are going to be as well as what some of the events are going to be. For example, we're going to have this pretty cool breakout afternoon for partners of physicians that I think physicians and their partners will come to. And it's going to be a wonderful segment of the conference that we haven't done before. But this is going to be great. So 7pm Mountain time is the time to put in your phone on September 14, 2021 in order to register for WC Icon 22, which is again February 9th through 12th, 2022 in Phoenix. Looking forward to a wonderful February in Phoenix down there. All right, let's get into some of your questions. We're gonna do a whole bunch of your questions today. I'm gonna do most of them myself. I've also got Ben Utley coming on the podcast later. He's gonna help answer a few of the questions with me as well. But our first one comes from longtime listener and not first time caller, Tim in San Francisco.

Hi Jim, this is Tim in San Francisco. I should say also that on your recommendation, we started a Utah 529 but realized we couldn't get a tax break in California. So my family and I will be moving to Utah so we can get the tax break on that Utah 529. So we're excited about that. My question today is should we be concerned that US Homes may decline in price over the long run? The reason I ask is because it seems like prices should be determined by supply and demand. Supply can increase, but the US Population growth curve is flattening out and maybe population will fall. So could demand fall and prices fall? I think maybe in Japan, houses depreciate, not appreciate. This is particularly concerning because there's a lot of effort to try to get more people into housing, especially people with low net worth as a mechanism to build wealth. I know that housing hasn't been a major generator of wealth through appreciation. I think it's like 1% real over the long run. Of course, there are implicit rents, but should we be concerned maybe of a secular change in housing appreciation behavior? Thank you.

Good question, Tim. My crystal ball is cloudy. I don't know what US Housing prices are going to do in the long term. Could they decline? I guess seems pretty unlikely to me, but anything could happen. All I know is I just came back from my trip and I got my property tax bill for the year or estimate for next year, whatever it is, and it just went up 60% because they think my home is dramatically more valuable than it used to be. You know, and it probably is based on what housing prices are selling for around here, you know, even without the renovation we've done, because I'm not sure the tax authorities know about the renovation yet. You know, our house has more than doubled in value since 2010. You know, Utah's certainly, you know, on the edge of the market changes we've seen in the last few years as lots and lots of people have moved here for a little mini tech boom. And of course, the space is constrained between the mountains here in Utah. And so I wish you luck. Of course, you're moving from San Francisco, so maybe houses will seem so cheap that you'll say, oh, it's only $100,000. I'll take two. I don't know. But here's the deal. We don't really know what's going to happen with houses in the long run. If you knew, of course, you could capitalize on that, but you don't know. And so what is the right move to hedge that bet? Well, the right move is if you're going to be in it for a long time. A house is generally a good investment, even if it doesn't appreciate, because remember what your return comes from with a house, right? You are saving rent. And, you know, I suppose if the price of houses fell, the price of rent would also go down. But at the same time, you've basically locked in that rent with your house when you buy it. And so that's the dividend that your house pays. I don't think it's, you know, the greatest return in the world that you'll ever have, but it certainly provide a solid return for a portion of your money. And it also makes sure you know there's a roof over the head of your loved ones at least once it's paid off, no matter what happens to you in your financial life. So once your professional and personal life are stable, I think it's time to buy. It is not necessarily Obviously, there's going to be better times and worse times to buy, but you really can't time that to your life because the cycle is so long, you know, I mean, for example, obviously housing prices have gone up dramatically in the last few years. What you don't know, however, if you decide you're gonna wait to buy until housing prices crash again is you don't know if they'll even crash down to the level they're at today. You just don't know. And so I think it's better not to try to time it, wait until it's the right time in your life to buy. And remember that in general, in real estate, time heals all wounds. If you're gonna be in there for 15 or 20 years, you're probably not going to have to worry about actually having a positive return on your investment. Hope that's helpful, Tim, and welcome to Utah. All right, let's take our next question, also from Tim. This one's on actively managed mutual funds, something we're going to be talking about throughout the podcast.

Hi, Jim, this is Tim in San Francisco, soon to be Salt Lake City. I wanted to ask a good old fashioned mutual fund question. So the argument against active mutual funds is that there are just too many sharks, too many active managers out there all competing to beat the market. And so collectively, they can't really do it. But what if the share of investors, the share of active participants in the market who are retail investors and quote unquote, dumb money who could potentially make bad decisions over the long term increases to the point where now maybe they outnumber or outweigh active managers? I hear maybe this is going on in China, in the U.S. clearly, there's been a big surge in quote, unquote, retail investors. So is there any theoretical reason to think that in a situation where there just happens to be a large proportion of retail investors engaged in the market that it may pay alpha or dividends or whatever to invest in actively managed mutual funds?

Thanks, that's a good question. Yes, theoretically that could happen, but there's no sign of it happening. In fact, just the opposite has been happening over the last 50 years. The percentage of investors that are private mom and pop investors has been falling and falling and falling and falling and falling for decades. It used to be they made up the majority of trades in the market, and now it's a tiny minority of trades in the market and a tiny minority of assets held. Most of them are held by pensions, by university endowments, by mutual funds, et cetera. And so when you go into the markets, for the most part you are not trading with another private investor, you are trading with an institutional investor. That's who's on the other side of your trade. And so keep that in mind. You know, the fewer times you go in there, probably the better off you're going to be. And so sure, theoretically that could happen, that trend could reverse, but I wouldn't count on it. I don't see any reason why it would reverse at all. Now. Maybe it would happen for an individual stock. Maybe Tesla is more commonly owned by private investors or something. Maybe cryptocurrencies are like that. That wouldn't surprise me at all. But for the most part, that's not the way the markets are and that's not the way the markets have been trending now for a long, long time. So I would not expect that to be a reason to go for actively managed mutual funds. The truth is that about 10 to 20% of actively managed mutual funds, at least before taxes, are going to beat their respective index fund, even in the long run, even in 20 or 30 years. The problem is identifying that 10 or 20% a priority. And it is so hard to do that it's probably not worth doing. The right answer is simply get the easy guaranteed market matching return of an index fund. And especially for those of us with high incomes, that's enough. You don't have to beat the market to become financially independent. You don't have to pick the winning stocks, you don't have to pick the winning active mutual fund managers. All you have to do is earn a decent income, save a significant portion of it and put it into a reasonable investment for 10 to 20 years. That's it. If you will do that, you will be a multimillionaire and you will be have a very secure retirement. And you can spend your time focusing on things that you would rather focus on than your money. It's a wonderful thing to be able to go away for a week to Desolation Canyon, have no cell coverage whatsoever, not care one bit what the market does while I'm gone, and know that that is going to have no impact whatsoever on my financial life. The fact that I'm out of contact for a week, and that's what index fund investing, a passive strategy, a static asset allocation of mutual funds allows you to do. You can basically just forget about your investments for months at a time. There's some value in that. All right, Speaking of value, there's a lot of value in what each of you do each day Your profession is not easy, otherwise you would not be paid so much to do it. And I know all of us feel a little bit underpaid these days, but the truth is that even poorly paid physicians are still in the top 5% of Americans and the top 1% worldwide. So we're making good incomes. But the reason is because we have difficult work and some of us are still battling the COVID pandemic, you know, as we have this delta variant associated spike, and the rest of us are a little bit back to normal, maybe, but normal wasn't even easy. And so thanks for what you do, no matter what you do. Okay. All right. Here's an interesting question from Ben. This one's a little bit more personal about me, but let's take a listen to it.

Hey, Dr. Dali, this is Ben from California. You often mention that the only reason you started the White Coat Investor was because you were sick of being ripped off by unscrupulous financial professionals. If you'd only interacted with the good ones, do you think you ever would have educated yourself and taken control over your finances like you have now?

Good question, Ben. No, no, I wouldn't have started the White Coat Investor. If that financial advisor I had gone to as an intern had actually treated me right, chances are I'd still be working with that financial advisor. I probably would have never gotten into reading a bunch of financial books. And I probably, you know, there would be no white coat investor. So that was definitely the cause of me feeling a need to go out and become financially literate. I realized at that point, looking back at all of the interactions I had had. You know, I'd been ripped off by a realtor. I'd been ripped off by a lender twice. I'd been ripped off by an appraiser, I'd been ripped off by a recruiter. I'd been ripped off by an insurance agent who's actually a very good friend of mine and was an intern at, you know, the most commonly sold whole life insurance policy provider out there for physicians. And they talked me into a policy as a medical student, a whole life policy. Of all the silly things you could buy as a medical student. And then of course, I went to a financial advisor on the recommendation of a co resident, said, hey, this guy's treated me good. I went in there and of course they sell you disability insurance for a commission. And that was probably the best thing that advisor did for me, then sold me a term life policy. That was really a completely inappropriate term life policy. I think it was a five year level term. Who sells an intern a five year term policy? I needed 20 or 30 years, not five years. And then of course he starts selling me actively managed mutual funds and bought a few, put them in a Roth ira, and later that year was on a road trip. Actually, it was my annual vacation. I think we got two weeks twice a year is what we got during residency. And so I stopped in a bookstore while I was on this road trip and I was walking through it and Eric Tyson's Mutual Funds for Dummies was sitting on the shelf and I said, well, I own some mutual funds, I should learn more about them. So I read the book and I learned that there are A shares and B shares and C shares. And I wasn't really sure what shares I owned. And Tyson also mentioned there were no load funds. And I'm like, oh, I think that's what I have. I think I have no load funds because I'm paying this advisor a fee. Well, it turned out that this was not a fee only advisor, it was a fee based advisor. It charges you fees and commissions. And so when I went home and looked up all those mutual funds on the newfangled Internet, I realized that I did not have no load mutual fund shares. I had C shares, which are, you know, basically a load that's added onto the expense ratio each year. It's an ongoing load rather than a front load or a backload with A shares and B shares, a C share is an ongoing load. And that's what I owned. And it made me mad. I was mad that I was paying somebody a fee and being charged commissions. And if I knew how the industry worked, I would have realized that's what was going on. And that's what he was talking about when he said, we charge you more to implement your plan as opposed to just giving you the plan. But in the end, I realized that if I didn't start learning more about this stuff, I was just going to be taken advantage of over and over and over again. So I enjoyed that book and decided I should read some more financial books. Luckily, I lived across the street from a little store called Bookman's in Tucson, Arizona, and this is a used bookstore. And I went over there to their financial section and they had tons of books of varying ages, some of them pretty old. And I just started reading them and I read a lot of terrible financial books with terrible financial advice. There are really a lot of bad books out there, it turns out. But after a while I realized, hey, there's a few Good books. And you know what? The good books are all saying the same thing. As the years went on, I became more and more financially literate, started interacting on forums on the Internet and reading blogs and those sorts of things, and realized after a few more years that I was doing a lot more helping than I was learning. And I got sick of typing the same thing over and over again into the Internet. So I started the White coat investor in 2011. I was kind of on a kick that I wanted to have some passive income too. So I started as a business from the beginning. It certainly eventually brought income. Didn't really in the first few years, but eventually did that. Income has been anything but passive, however. But it's been a wonderful journey. It's been wonderful to meet and help so many of you. And you know, maybe we ought to go back and thank that advisor in Tucson, Arizona for causing the White Coat Investor to eventually be born. All right, our quote of the day today comes from Paul Samuelson. He said investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas. All right, our next question is anonymous listener. Let's take a listen to it. It's about savings rates.

Hi Jim. I want to better understand why you recommend saving 20% of gross income for a goal for retirement savings. Specifically, I want to understand where this 20% number is derived from. And I also want to understand why you base it off gross income rather than net income.

All right, savings rates. Okay. What is your savings rate? Your savings rate is how much money you put away primarily toward retirement is usually the way we think of it, divided by your gross income. That's your savings rate. And I recommend that an attending physician have a savings rate of about 20%. That is not some hard and fast rule. It's just a rule of thumb. And the point of the rule is to get you thinking about what your savings rate is. The point is that a 5% savings rate is not enough. Now, it's entirely possible that a 17% savings rate is plenty for you. If you start early, you have a full career, that might be plenty. You know, you'll listen to people like Dave Ramsey say 15% for retirement. And that probably is fine for average Joe. And the reason why is because much more of average Joe's retirement income comes from Social Security than it will for a high paid professional like a physician, which is my primary audience. And so it's just not enough for you to save 15%. You need 20% to get to about the same place as far as maintaining your lifestyle in retirement. Now where does that come from? That comes from just running the numbers. If you sit down and go, well, how much do I need to save in order to more or less keep the same lifestyle in retirement that I had before retirement, you, you will find that your answer is going to fall somewhere around 20% if you use a reasonable rate of return on your assumptions. If you use a relatively, you know, full career, you know, let's say 30 years or so from the time you come out of training till the time you retire, then that's what it's going to work out to be. That's where 20% comes from. Now obviously, if you can make 20% returns on your money consistently year over year over year, you don't have to save 20%. Likewise, if you're going to invest for 50 years before you retire, you probably don't have to save 20%. And so it's all about putting in the variables into the equation. But in general, most people who do this are going to land about in that neighborhood between 15 and 25% is what it takes. Now, if you want to retire early, you probably need to save more than 20%, 30, even 40, even 50%. For those who are really into fire, if you want to punch out in 10 or 15 years, you got to have those really high savings rates in order to do it. Unless you're going to have some sort of successful entrepreneurial side gig or use a lot of leverage, those sorts of ways in which you might be able to speed it up a little bit. But for the most part, the way to get there reliably is just have a really high savings rate. The more you save, the less you spend, the less you need in order to maintain that lifestyle. And that's the way the math works out. Now why do I use gross instead of net? You could use net as well. If you want to use net, that's fine with me. Just realize that it's not still 20% of net. It's now going to be more like, I don't know, 30% of net or whatever works out to depending on your tax rate. And so that's just the way it works. But I found it easier just use gross income because it's really easy to look up your gross income even without knowing what you're paying in taxes. You. And so that's why I use gross income. But if I was using net income, the number would be higher than 20%. So it's really kind of the Bad news of physician retirement that it takes a lot of money to retire. And the reason why is that in general, it's safe to spend something like 4% a year of your retirement nest egg and expect your money to last reliably throughout a 30 year retirement. And if you reverse engineer that math, you see that you got to take what you spend, subtract out any guaranteed income sources such as Social Security or a pension, and multiply that by 25 and that's how much you need to retire. And that's a pretty big number for most of us. Most of us, that's a seven figure number. And you know, whether it's 2 million or whether it's 6 million, that takes a lot of savings to get there. And so the only way you're going to get there is by saving a whole bunch of your earnings. And how much of that, how much of those earnings do you really need to be saving? Something like 20%. Hope that's helpful and answers your question. All right, we're going to bring on a guest here. Let's get him on the line. All right, our special guest today is financial advisor Ben Utley, cfp. Ben is the founder of Physician Family Financial Advisors Incorporated. This is a multi specialty team of fiduciary financial advisors for physicians who is serving 175 doctors from coast to coast. They're flat fee advisors based out of Eugene, Oregon. Welcome to the podcast, Ben.

Thanks for having me.

Tell us why you became a financial planner.

Basically, I wanted to help people. So years and years ago I was a chemist. That was my original training and it wasn't close enough to people and I thought I was giving myself cancer. So I was in a lab with a guy who was an investor and so we got to talk about investing and one day I found myself in the library reading the Value Line and the morning Morningstar. And I checked out all the Kiplingers and all the Money magazines and that was fascinating. And so I got my master's degree Instead of my PhD, bailed out, volunteered at consumer Credit Counseling Service and enjoyed that. Met somebody who worked at Wadell and Reed, went there, was exposed to the sales culture, found that really icky, decided I could run my own shop. And that's when it started. I just started working with folks. Initially I specialized in a couple different areas. I tried some of those and I was referred by one of my original clients to a physician who's just lovely. She's still with me today, almost 25 years later, and just fell in love. I Mean, I like what physicians do, enjoy the healthcare space, and my science background comes into the. Into the field there. So I served her well. She married a guy who is also a surgeon. I had to destroy my practice and rebuild it to make both of them happy. He referred me to somebody who was in his practice, who was married to somebody in another practice who knew somebody in that practice. It just kind of kept going and going until I looked back through about 10 generations of word of mouth all the way back to that car dealer who I originally hooked cold calling on a Sunday. And so we got to a point where we had a number of physicians where it was about 50%. I renamed the practice with search terms Physician Financial Advisors. I knew that family was important, so I threw that in there. And today we're 175 physicians strong in about 30 states. There's five people on our team, including myself, and it's all docs, with exception of three or four people who have been with me since way before I rebranded.

Now, that's a really high percentage even for a practice that specializes in doctors, to have that many of the clients be doctors. What other aspects of your practice are unique?

I think that the way that we bill is very unique. It is a flat fee subscription model. It's not based on how much money you have, it's not based on how much money you earn. It's not based on how many doctors there are in the household. It is simply the client has a relationship with myself and the team through the firm. And we bill in proportion to the value that we believe that we can bring. And we kind of average that across all clients. So it's the same level monthly fee. And those fees are present on the homepage of our website in 36 point font.

36 point fund to make sure nobody misses it.

Nobody misses it. Yeah. I don't want anybody to call us and say, like, oh, what do you charge? It's on the homepage. It's fully disclosed, so there's no conflicts of interest.

You know, it's almost a truism in financial advice that if you can't find the fee structure on the website, it's either a bad fee structure or you're paying too much.

That's true.

All right, well, we want to get into some questions from the listeners, and I thought we'd keep you on, and let's talk about a few of them. Our first one is on a popular subject, Bitcoin. This one comes from Sam the intern. Let's take a listen to it.

Hey, Dr. Dalle. This is Sam, the intern. I have a quick theoretical question for you about Bitcoin. I personally haven't really drunk the Kool Aid of this being a good asset class to invest in, but a friend pointed out an interesting mathematical curiosity to me. It seems to me that if you were to take advantage of its hypervolatility, you could rebalance your portfolio by selling when it's high, buying when it's low, and overall increasing your net return not based on the asset class itself appreciating in value, but based on its ability to be volatile and to utilize that in the other aspects of a portfolio. How do you feel about that? Is that just trying to overly complicate things or is that a decent strategy to manipulate the volatility of this asset class? Thanks for all you do.

Okay, there's an interesting question, Ben. Why don't you take a stab at that and then I'll give my thoughts on it.

Well, philosophically, I believe that invested money is like soap. The less you touch it, the more you keep. And I'm thinking of a strategy that rebalances based on the monthly, daily, weekly, hourly price movements of something as volatile as Bitcoin. That's kind of a strategy. It's going to be really hard to keep your hands off the money. I find that the more often you touch it, the more mistakes you make, the more transaction costs, the more taxes you pay. It's very much not a passive approach. I also see if we looked at this in terms of modern portfolio theory, where you hold a. A basket of assets that have inverse or negative or no correlations. That's the theory. But I don't want to own an asset class that has a zero expected return. And it's hard to say that Bitcoin has a zero expected return. But for me, an investment is something that has the inherent ability to accrue value, like in terms of rent streams or dividends or interest without respect to the owner's involvement. So I don't see Bitcoin as an investment. I see it more like a gold coin or like a US Currency. It's a store of value, for sure, but for me, it's not an investment. And as a result, I wouldn't put it in my portfolio or recommend it.

Yeah, even as a store of value, it's pretty volatile. Yeah, it's interesting. Underlying this question is something that I think we ought to point out as perhaps fallacy, which is the idea that you know when it's high and you know when it's low. And I don't think you know that for any asset class, particularly bitcoin, for example, if your plan is to trade this, you know, selling it when it's 30,000 or selling it when it's 60,000 and buying it when it's 30,000 and then it goes to 15,000. Well, what do you do now? Right, you just bought it at 30,000 and now it's 15,000. And so I think there's a bit of assumption there that you're going to be able to predict the future as far as its price movements when you implement a plan like this. I'm not a big fan of time in the market, whether it's stocks or bonds or. Or bitcoin. And, and this strategy obviously requires that. Now, obviously, if you could do that, you could buy low and sell high. Yeah, you're going to make a killing on something this volatile because you could do it so often. But I'm just. I reject the hypothesis that you can actually do it. I don't think you can. And I agree with you. I think it's more an instrument of speculation than it is a real investment.

Yeah, not for me. I'm the rock solid financial security guide. I don't like to play with these things. I mean, my hat is off to those who have managed to do this well, and I am really interested in blockchain technology, but I think this is just the nascent thing in blockchain technology. I doubt that this is its highest and best use. I know that that's coming. And so, yeah, it's going to be like the Internet. But I don't see bitcoin. I don't see crypto as an. An investment unto itself. I mean, don't buy the gold, buy the picks and shovels.

Yeah, it's interesting. The last article I read about it this morning, it had gone apparently in 24 hours from $29,000 a bitcoin to $39,000 of bitcoin based on the fact that Amazon dropped a job listing looking for a cryptocurrency expert. And it's just amazing that something can change by 33% because one company hired one person and that is just way too volatile for me to put serious money into. Yeah. All right, let's take our next question. This one's from Paul. It's about passive and actively managed bond funds.

Hello, Dr. Dali. You have been a very positive influence on my financial health and I thank you. The case for passive over active management of the stock portion of a portfolio is Very strong and has been discussed many times. My question is passive versus active management of one's bond allocation. Bonds are a different animal than stocks and I am interested in your thoughts on this. Is comparing active management of a stock fund and a bond fund and apples and oranges type of thing. Specifically, I have been looking at PIMCO's Bond ETF versus Vanguard's BND ETF. Bonds expense ratio of 0.55% is significantly higher than BND's ER of.035%. However, I'm interested if you think having the active expertise of bonds managers might be worth the added expense. Thank you.

All right, Paul, that's a great question. Ben, you want to talk about your thoughts on actively managed bond funds.

My take on bonds in general is that they're kind of the anchor to windward for an all stock portfolio. They're the thing that gives you a buffer. And we want that buffer to be relatively secure, we want it to be relatively stable and we want it to be there when we need it. So in terms of active versus passive, I don't know that that's really the question that I'd be asking. It's more like is it going to be there or is it not going to be there? And here's an example. Back in 2008, the Oregon College Savings Plan had an Oppenheimer bond fund and it actively managed and they made the wrong bet and it blew up. And that fund irrevocably lost a whole bunch of money. And that happened at a time when you want that bonds to be there to buffer the stock market corrections that we had. So for me, it's not really whether active or passive is better in terms of long run results. It's more like the operator error. It's the risk that you get that this manager will make an irrecoverable mistake. And I feel like that that irrecoverable mistake happens in large quantity and it's somewhat likely. So as a result, that outweighs any marginal return that you would get above and beyond traditional bond funds. Now, in this particular case, comparing the Pimco bond fund to a Vanguard etf, you really are comparing apples and oranges. I mean, if you look at the top 10 holdings of this particular bond fund, you see in there that have a preferred stock. So it's not true bond exposure. Pimco is known to use leverage and derivatives, which is kind of part of their strategy. I'm not faulting that, but I'm saying that's very different than what you're going to get in a, in a Vanguard bond Total Bond market Index. Apples and oranges. And I wouldn't expect similar performance out of them. So I couldn't even begin to compare them. Regardless of the huge difference in the operating expense ratio.

Yeah, you've got to look under the hood. That's the most important thing with an investment is what are you actually investing in. And if you're buying preferred stocks and you think they're bonds, well, preferred stocks do not perform the same as bonds for sure. The other thing you got to keep in mind is your expenses matter a lot more with a bond fund because the yields, especially these days, are not very high. You know, 50 basis points is a big chunk of your return to pay to an active manager. But I agree with you. The big issue I have with active management is the manager risk. You know, yes, you've got in the long run, you know, you got this 10% chance of beating the index, but that's just not worth the 90 chance of underperforming the index in my book. And then you got to watch the manager. And when the fund manager retires and they get a new one now you got to watch that one and decide if you want to stick with that one. I'd rather just set it and forget it. So I'm a big fan of passive management, both on the bond and the stock side.

The math that makes index funds work also makes bond funds work. It also makes emerging markets work. It's the same math. You know, collectively all the managers are going to own all the market and so they're going to get the average, less the cost of their management. So I mean generally active management is just, it's a losing proposition. It looks great in the short run, but in the long run it just doesn't never look as good as index.

Absolutely, I agree. All right, let's go on to our next question. This one comes from Mo D. He's asking about social index funds and investing in them. Let's take a listen.

Hi Jim, this is Mo. Thank you for all you do and the amount of research you do on our questions. I have a question around social index fund investing. I've been looking at the various Vanguard funds around this. And first, starting with the VF TNX index fund for Socially conscious investing, this is a fund that's been around since 2003. It has a five million dollar minimum investment. So none of us are going to be investing in it. But it seems to have strong returns over the last two decades. In fact, When I look, I think it might actually be beating the total Stock Market index fund as well. And so I know I can't invest in this one, but I look at the one I could invest in, the Vanguard vftax social index fund, and that one's only been around two years or so. So would appreciate your opinion on how those two social index funds are different or how they're investing differently from each other versus similarly know obviously that crystal balls are going to be cloudy no matter what fund it is. But as long as the evidence is not pointing that these are so, so much worse, I think a number of docs and other folks might be interested in this route of investing ongoing. Thanks so much.

All right, good question. One, I'm getting more and more frequently whether you call them social indexes or whether you call them ESG funds I think is the most common term these days. There's a lot of interest people have in promoting good governance and social equity and, and helping the environment while they invest. What are your thoughts on these funds and maybe those Vanguard offerings in particular?

Ben Well, I like the idea of investing things that you feel good about because money should feel good when you're doing it right. In this particular case, I think the reason there's been outperformance in the last 10 years is when you take the things that are socially icky, like oil companies out of the index, then it's more concentrated in the things that have won in the last 10 years. So technology has been really hot in the last couple years and over the last 10 years oil has performed poorly. And so if you drop that out of the total index to get this social index, then you're going to have a greater concentration of the things that have been working in the last 10 years. I don't think it has anything to do with the fact that this is a social fund and it's a, a good fund or a bad fund. I think it has everything to do with the sector exposure. Another thought is let's say that maybe you're in your 401k and you don't have access to the social index, but you want to do something good, you're more or less forced to invest in just a straight up index. But in terms of really making a difference in the world that we live in, whether or not you own oil is not going to make a huge difference because those companies are going to be in existence. They're going to trade on the exchanges. Whether you like it or not, they're out there. Your, your investment in a fund is not going to change that because these, these securities already exist. What will change is if you become actively involved in a charitable organization where you go and you use your own hands or use your own money, maybe take the money that you make in the index, you know, maximize the amount of money that you're going to make, and then go donate that to charity or, you know, donate time to charity, get actively involved. You'll make a far bigger difference there than you will by messing around with, you know, which share class you have and whether or not they're. They're socially performance.

Yeah, I'm not a huge fan of social investing, and it's not that I don't like the environment. I don't like, you know, bad governance or social causes. Part of the issue with these funds is it's hard to find one that lines up with your thoughts on all of these hot political topics. You know, you might not care about oil, but you care about guns. Or you might not care about guns. You might be the biggest NRA supporter in the country, but you really want to see, you know, corporate managers held to their tasks, and it's really hard to find a fund that actually lines up with your beliefs. I think that's challenge number one if you want to do this. And challenge number two, I think, is what you mentioned, that, you know, it doesn't make that big of a difference. And I think you're far better off earning money as best you can. You know, perhaps not, you know, starting your own company that you know, you're against, but certainly investing broadly in the US market and, and then using your money to donate to the charities that you support. That's what Katie and I do. We don't try to, you know, have fancy social index funds. We just have boring old total stock market funds. And then we donate to charity, both with our time and our money. So I'm not a big fan of social index fund investing. The good news is I think the data a number of years ago was that they substantially underperformed. More recently, it looks a little better. I agree. The reason for that is that they're heavier on tech stocks than they are on more value companies, which have underperformed over the last decade. But maybe they're getting better at actually providing reasonable returns. I think the governance factor in particular is promising in that regard.

I wouldn't expect that outperformance to keep going. I mean, it's one thing to go and talk to your congressperson in person and talk with them about how you feel about these positions and issues and to be actively involved. It's another thing to not use a straw, you know, because it's made out of plastic. I mean, really, I mean, I think it's okay to invest socially, but don't use it as a cop out. You know, use it as, as a, as something that's added on top of the other activities that you're. You're pursuing to actually make a change rather than just feel like you're making a change.

Well said. All right, well, Ben, thank you so much for coming on the podcast. For those who are interested in learning more about Ben, maybe hiring him to help you with your finances, you can find that firm@physicianfamily.com it's very easy. They got their fees right on the website. They got their people right on the website. There's a big button in the upper right hand corner. Get started. And, and they can get you hooked up there. That's PhysicianFamily.com Ben Utley, CFP. Thanks for coming on here.

Hey, just want to say we also have a podcast, Physician Family Financial Advisors Podcast. So if, if you're a physician and with kids, maybe you're a physician mom or a doctor dad, give us a listen. We're everywhere you can find podcasts.

Awesome. Thanks for sharing that.

My pleasure.

All right, that was great talking to Ben. He's one of the good guys out there for sure. He's on our list of recommended financial advisors. If you can, you can find that list under our recommended tab at the White Coat Investor, along with a lot of other professional financial service industry folks. You know, whether you need someone to refinance student loans or help you with your insurance or help you with a realtor or student loan advice or whatever, we've got a list of people there that you can trust. So be sure to check out those recommendations. I estimate that 80% of doctors need, want, and should use a financial advisor and or an investment manager. Some investment gurus, such as Dr. William Bernstein, think my estimate is way too low. At any rate, if you want to use an advisor temporarily or for your entire life, there is no reason to feel guilty about it. Just make sure you are getting good advice at a fair price. If you need help updating your financial plan or just getting one in place, check out our list of recommended financial advisors@whitecoatinvestor.com financial advisors. You can do this and the White Coat Investor can help. Don't Forget, conference registration. September 14, 7:00pm Mountain Time is when it opens up. It will not surprise me if it's full within a few hours. So if you want to come to the conference, be sure to get on and register there. Thanks. For those of you who've been leaving us a five star review and telling your friends about the podcast, our most recent review comes from Eric Schaub, who says essential listening for everyone. I recommend this podcast to every medical trainee who works with me, which is daily at an academic center. The discussions are very relevant to White Coats, but honestly, just about everyone else. Isn't that the truth? It's all really the same for all of us. Probably only 5% of it is really physician specific. Keep your head up, your shoulders back. You've got this and we can help. We'll see you next time on the White Coat Investor Podcast.

My dad, your host, Dr. Dahl, is a practicing emergency physician, blogger, author and podcaster.

He is not a licensed accountant, attorney or financial advisor. So this podcast is for your entertainment and information only and should not be considered official personalized financial advice.