WCI #256: Common Sense Investing with Rick Van Ness

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.

This is White Coat Investor podcast number 256 Common Sense Investing with Rick Van Ness. If you're finding our podcasts 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 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. Our quote of the day today comes from nonagenarian Taylor Larimore who says when experts disagree, often it is because it doesn't matter much. I was actually able to participate in Taylor's birthday party. It was an online zoom birthday party a few weeks ago. Always great to hear from him. It's always great to hear from you. I like hearing about your challenges, your successes. I like hearing about the struggles you've had and I know they're real. A lot of you out there are having a rough time and if no one said thanks for what you do, let me be the first today. You spend a long time learning your trade and people that you are serving are not always appreciative. So I want you to know that people do appreciate you, even if they don't let you know that in the moment. I don't think I've talked on the podcast for quite a while about our flagship course, Fire your Financial Advisor. Now my financial advisor advertisers don't like that title much, but the truth is that this course will help you to interact with the financial services industry if that is what you desire. It will also teach you how to write your own financial plan and follow it and maintain it and use it to become financially successful. So whatever you your approach, this course can be helpful to you. It's going to teach you the financial literacy that you never learned in medical school or residency and help you write your own financial plan. The course is dramatically cheaper than hiring a professional financial planner to draw up your plan and takes much less time than trying to find all this information online and in your library. It's basically no risk to you. It comes with a one week, no questions asked, 100% money back guarantee as long as you've taken less than 25% of the course. We also have an option that you can use with your CME fund to buy. It's basically the course plus eight hours of wellness content that makes it eligible to be purchased with your CME money. So you can check that stuff out whitecoatinvestor.com FYFA and take that course if you haven't yet taken it. I know our survey this year showed that something like 50% of white coat investors still don't have a written financial plan. We're going to be talking about that with Rick Van Ness during our interview coming up. But if you need help drafting it up, if you don't feel capable of writing it yourself, we're going to fire your financial advisor will actually help you to do that. All right, let's get Rick on the line here and I want to introduce him to you and talk about some of the work that he's been doing. All right, with me today is Rick Van Ness, prominent boglehead, published author, and somebody that has really made it second encore career, if you will, to teach the world financial literacy in any way he can. Welcome to the White Coat Investor Podcast, Rick.

Thank you. Glad to be here.

So let's start at the beginning here. Tell us a little bit about your upbringing and how it shaped your views on money.

Wow. Well, that's pretty average. Maybe not very interesting. I sold seeds and did other jobs as a teenager because my view of money was just to buy things. So there wasn't an interest in anything more complicated than that. My dad did work for a company that had employee stock purchase program, so I was able to watch him keep track of his cost basis. And I learned about what stocks are ownership. And I had a board game called Stocks and Bonds. So I knew that bonds were loaning money, but pretty average. Just an interest in buying things.

Yeah, but maybe a little more than a lot of people have. You actually had parents who owned stocks? I'm not sure a lot of people grew up even with that much of an upbringing that was reflective of any sort of financial literacy education. Okay, so you left home. Tell us about your education and your career.

Right. By the way, talking about finances in my family was not a taboo topic and I'm glad for that. It's just that we weren't a very sophisticated family and didn't really have much wisdom there. I chose to go to a specific college and the way that I got in was by applying to electrical engineering program. So I got my degree in electrical engineering, which led to a job at Hewlett Packard. And it was a wonderful job for 27 years. And then I got laid off. And my learning from that is you never know when you're going to retire. So before age 50, I was laid off. But by the way, another thing or another reason why Hewlett Packard was such a great company to work for was during those years they paid for me to get my MBA at New York University. So I'd work during the day and take the train to Wall street and got an MBA in finance paid for by my company. So that's pretty terrific. I can't thank them enough for that. We got downsized around 2001 and so I went through a number of jobs looking for something else that would resonate as a career. And nothing really did. Nothing was as good, nothing interested me as much. And I wasn't really needing to save more money for my retirement. Although I had to pay for my kids college education, I chose to pay for my kids college education. And when my daughter was in college, she came home and said something that took me by surprise at how interested she was. She had this economics professor that had brown bag lunches where they would talk about economics topics, you know, just in fact they named the series, it was called Backpack to Briefcase. And it was surprised me that she was interested in that. And I thought to myself I could do that. And so I did. I started teaching Brown Beige lunch seminars at Seattle University and the University of Washington. And that was good fun. But my audience was a dozen or two dozen brown bag lunchers at a time. And that was about the time that YouTube started taking off and started to get pretty good and interesting. And I thought I could reach a lot more people doing that. So I started making videos. And that was kind of fun for me also because it just touched on a lot of areas that were fun for me. And back then, do you remember the only way to get on the Internet was through your computer, not your phone. It changed later and back then YouTube allowed me to have an interactive session so I could make games out of ask kind of tricky questions and the listener would reply by touching the screen and I would jump to a certain place and explain why that was the right or wrong answer. And we could have more fun with it on a pretty dry topic, learning about personal finance and investing. So that's kind of how I got started there.

But so I mean that was more of a passion project. You were interested in finance long before you were laid off though. How did you get interested in finance? Where'd that come from? Was it the mba? Was it something else?

You know, finance is a pretty big word, and my interest was really making money so I could spend, spend money. It wasn't the intricacies.

Even well into your career, huh?

Even well into my career, I found it very practical to buy Victorian homes and refurbish them and make them income properties. So that required a little bit of knowledge about capital gains and how the tax system works. And I'm just a curious person. And that led from one thing to another. And I wound up with a degree in finance, which I didn't particularly use per se, until I started explaining some of the basics of personal finance to this Brown Bag Lunch seminar, which is how I discovered the Bogleheads and John Bogle. And that was really rather interesting to me. One of my first projects was to take the tens of thousands of Bogleheads that would meet and didn't have a coherent explanation for what they were all about. So I tried to help out with a video series called the 10. What was it called? It was basically about the bulkhead investment philosophy, but I saw it as the 10 rules of common Sense Investing.

Well, we're going to spend some time talking about common sense investing here. It's interesting that you describe it that way, and I'm curious why that is. And if it is common sense, why does it seem to be so rare for people to do what you suggest they do?

A lot of that is true. It does seem to me to be common sense. Once it's explained to you, I see it as common sense, but you're also right that it's very uncommon. And the reason why I chose that name, by the way, was a reference to. John Bogle has a book called the Little Book of Common Sense Invest. And so it's really a nod to him.

And not to mention his other book. Right, Common Sense on mutual funds.

Exactly. So that's really a nod to John Bogle as much as anything because he's such a colorful writer. See, just a word on him. He was able to put a complex topic into some kind of a comment, like an earthy comment like, don't look for the needle in the haystack, just buy the haystack. Or he would switch around. You get what you pay for in investing. You get what you don't pay for. And so these are just kind of colloquial sayings that are helpful to introduce complicated topics and they simplify it down to the essence of why it is common sense.

I think now your 10 common sense rules, sometimes referred to as the Boglehead investing philosophy, is actually going to serve as the curriculum at Bogleheads University. I was asked to be in charge of that for this Bogleheads meeting this fall. It's going to be a three hour session with multiple faculty members, kind of the first afternoon of the conference, even before the opening reception. So let's talk about each of those 10 things today and, you know, maybe introduce them to our audience that sometimes surprisingly, you know, if these are the common sense rules of investing, surprisingly, a lot of people don't know. And the first one is to develop a workable plan. And I preach on this all the time. Get a written investing plan. Get a written investing plan in your words. Why is it so important to have a written investing plan?

Can I insert something before we talk about that?

Sure.

I think there's a zero before this. Rule number one, there's a prerequisite that the Boggleheads don't talk about because they all meet the prerequisite. And maybe your audience all meet the prerequisite anyway. But the prerequisite is spend less than you earn or live below your means. Right. And that's just really important. The way that it manifests is in bad debt. People that don't live below their means get over their head in debt. And originally my very, very, very first video was on the doubling of a penny for a month. Do you know what the answer is?

What do you mean if you double it every month for so long?

If you double a penny for a month, you get $10 million. So it's kind of a demonstration of exponential compound growth. But the reason why that's related is that debt, bad debt, can be very high interest. So today, if you look at your credit card, you'll see that you can take an advanced loan out for 24%. Right. Or you might get a deal that a worker comes by your house and he'll swap out your Windows for a 0% loan, which if you read about it, it's 18% interest beginning immediately and would be due if you don't pay it off within a couple years. So there is this rule number one that kind of qualifies you to the next 10. And that's living below your means.

Yeah, it's hard to invest if you haven't saved anything, that's for sure. So, financial plan, why is it so important?

Why is it so important? I think what's important is that you have a plan and that you know your plan. And one way of knowing Your plan is to reduce it down to something that you can see on maybe one page and look at often and frequently. Now, for me, writing it down is a process that gets there. It's an iterative process. There's something magical that happens when you try to put your ideas into words and it's not quite there. And you iterate, and you iterate and something moves from one part of your brain to the other. Even if you could say it out loud with your spouse, talking somehow puts it in different parts of our brains and we tend to remember it. And if it's not part of your life, it's just another paper in your pile. But if you can make a plan that's part of your life, that's magical because you can uncover what's really important to you. We forget about what's really important to us if we focus on just a few rocks. But there's a lot of medium sized and small rocks that are important to us. And if we can write those down, we can remember them. And that's why it's magical.

Yeah. The thing I like about when you have to write it down is it shows you where the holes in your knowledge are. All of a sudden you're like, I have no idea what to put here. I better go learn some more and do a little more research.

Exactly. But that's the reason people put it off is because they feel like they're never ready. There's never enough information. There's too many unknowns. Their futures are unknowns. My dad's favorite saying was, I'll make a plan when you tell me how long I'm going to live. Well, that's a good reason to never make a plan. But that's actually a great reason to make a plan, which we could talk about. But it also gets in your subconscious if you can be thinking about what's really important to you. Because it's true that you often hear what you aim for. Right. So if you can remember these are important to me, you can make a lot of your dreams come true.

All right, let's move on to rule number two, which is start saving early. You know, sometimes called, you know, save automatically, pay yourself first, whatever. But this audience is a little unique in that way. Doctors tend to miss out on saving in their 20s because they don't earn in their 20s. You know, they're not even close to living within their means. They're generally stacking on the debt in their 20s. And luckily, they later tend to have higher incomes and could potentially save more at that point, what advice do you have for the young doctor who feels they don't have any spare change to invest given their huge student loan burden? And then what advice do you have for an older doctor that maybe has a tiny nest egg and is now kind of panicking and wondering if it's too late? I mean, they know the rule is start saving early, but how would you actually apply that to a typical doctor financial path?

The classical way of explaining this topic is to show two individuals. One individual saves for their first 10 years of their life, puts away, and then for some reason gets pulled away, has to take care of a child or somebody, it never saves again. And classically they compare that person with somebody like your audience that has to start saving later in life and save more aggressively but never catches up. And they use that to explain the, again the miracle of compound interest. And that's something that I got away from because those demonstrations typically never saves again. Numbers and I kind of favor two more behavioral types of explaining this topic of starting to save early. One comes from Andrew Tobias, and his idea was he took the Benjamin Franklin rule about penny saved is a penny earned, and he twisted it to a penny saved is two pennies earned because they didn't have income tax then and now you could easily have a 50% income tax if you were a high income earner with state and local taxes and Social Security and you add them all up. And so behaviorally you could ask yourself, would you rather earn $1,000 and net 5, $500 or just save $500? Or the other way of explaining this, it's kind of behavioral, is comes from Vicki Robbins, and she looks at the idea of a real hourly wage by looking at your uncompensated work expenses and your uncompensated work time. So if you add up all the expenses that you do to because, because you're a doctor that you aren't compensated for and you know, transportation costs and all, you can subtract those expenses from your income. But you add up all the time that you, that you invest that you're not compensated for, maybe educational or commuting costs. So it compresses the hourly wage to something much smaller. And then you can make real decisions about do I want to spend $100 on this or work so many additional hours. So I try to explain it in those, in those terms you asked about what advice would I have for young doctors. And I guess my advice is make yourself a plan. Make sure that you're going to stick with your Career and get those loans paid off and have a plan for paying off those loans, either incrementally or through a loan forgiveness plan. But have that kind of plan in mind and then overtly start saving early for all those reasons.

How about for the doc who feels like, man, it's too late. Why bother now? I'm already 55. I'm already 60. I'm already 65. Is it just too late for me? I know I'm supposed to start saving early, so compound interest will work, but now it's now I'm toward the end of the career. Is it too late? What do you tell that doc?

Well, the answer is no, of course. It's never too late. You got to start with where you are. And the first step would be to figure out what you need. This doctor should figure out what he really needs to retire. For one thing, he's probably got all those years worth of Social Security. That's going to be his floor, right? Social Security is a fantastic floor for everyone with a good long working history because it's an annuity that's as good as long as you live. So it's fantastic for that. And you can start saving aggressively through the tax advantage programs. So never give up, just start hacking away at it. But the advice would be, for people that are starting late, don't use that as an excuse for taking more risk than you're able to take. That's not an excuse. Never start taking more investment risks than is appropriate.

This is a great segue. This is rule number three is choose appropriate risk.

Right? So appropriate risk. What's appropriate risk that's matching your investment risk with your need horizon. So your goals, all your goals have needs and each of them have individual horizons. So the older doctor that has a daughter's wedding coming up this year or next shouldn't put that money in the stock market. That money should be accessible and safe. Whereas the first five years of his retirement might have a different risk, would have a different risk than years 20 through 25. But making a plan is a way of identifying those needs and then matching the investment risk individually with those needs.

People are often saying asset allocation is the most important thing. It's your most important decision. Your ratio of stocks to bonds, et cetera. Does it really matter as much as people think? Does it really matter if you're 80% stocks or 65% stocks? At what point is it good enough? It's close enough?

Well, yes, it really does matter. But you can't know. You can't know the future. So it's something that you could only know in hindsight. And so people like to say that good enough is. It's like somebody compared it to grenades and horseshoes. Getting good enough in this context is probably, I don't know, within 10 or 20% because you just can't know the future. In hindsight, you would know what you should have done, but nobody knows that.

Well, speaking of protecting us from what we don't know, step number four or rule number four is to diversify, which I think hopefully everybody listening to this podcast has heard of this rule before. But what are some of the biggest issues you've seen in investors from a lack of diversification?

Yeah, this is widely misunderstood, this particular topic. So first of all, when we say diversify, we're talking about equities. In fact, the prior portion is where we were talking about. Risk is really the portion of equities and the portion of bonds. That's the easy way to control our investment risk. And so there's no advantage if the portion of bonds is high quality bonds, which I am in the school of Larry Sweedrow who says they should only be high quality bonds. Don't take risk there because your risk is better compensated on the equity side of your portfolio. So there's no advantage of, of diversifying your government backed, even your CDs, your government backed bond type investments. So we're talking about equities here, diversify equities. And there's three different layers that I'll talk about. And if you only believe this top layer, you're still fine. But the top layer would be the old saying, don't put all your eggs in one basket. Okay, so this would be to look at your, say your mutual fund with 1,000 companies in it and say, well, one of them could fail and doesn't really destroy you. Right. So it's that not putting all your eggs in one basket. That's true. And that's the simplest way of what we're talking about here. Something more insightful is that individual stocks carry uncompensated risk. Individual stocks carry uncompensated risk. Now what that means is, well, you could own like down the street from me here is Boeing and Boeing has company specific risks. So for instance, they could go on, the employees could go on strike. That's going to affect the value of that stock. And then there's industry, as they call it, systematic risk that affects all industries. Company specific risks can be diversified away. If somebody has owns all of the aerospace industry, they wouldn't own that risk in our portfolio. So they wouldn't pay for that risk. So it becomes uncompensated risk. And an example of a systemic risk might be something like aviation fuel. It's going to just affect all of that industry, or even something broader, geopolitical, would affect all industries in general. But that's the second level here, which is individual stocks carry uncompensated risk. But the most magical way of looking at diversifying stocks is the more modern portfolio theory, the Bill Sharpe and Harry Markowitz and efficient frontiers topic. And this topic is it's magical in the sense that if you look at rate of return versus volatility, you could look at any three companies, any four companies and say, if you like, separate them into a shape of a square or something, the northwest corner is going to be the highest rate of return for the lowest risk. And an individual might say, well, why would I own the southeast corner, the lowest return and the most volatile stock? And the answer is because a combination of them does better than all of them, any of them individually. And this is the magical insight in the efficient portfolio type work is that there actually is an ideal portfolio, an ideal portfolio that maximizes return for risk. And that's what their terminology, the academic terminology, is that it's the tangential market portfolio, which in real life, which for all our viewers boils down to owning all the equities in the world in proportion to their capitalization, which is the total market. Which is another way of saying John Bogle would say something so complicated by saying, buy the whole haystack. The whole haystack is the market portfolio or the tangency portfolio. And it has that magical attribute of being the highest rate of return for risk. You can get greater rate of returns but for more risk. So that's what we're talking about when we're talking about diversifying, is really mixing that with the appropriate portion of bonds to suit your needs. Yeah.

And that covers Rule 4, which is diversify, as well as Rule 6, use index funds when possible. Let's step back for a minute to Rule 5, though, which is never try to time the mark. And we've all heard this, we've all heard you shouldn't try to time the market. And yet it is so tempting. Why is it so tempting to try to time the market?

You are so right. I don't know the answer to that. It's one of our human foibles, I.

Guess, something an investor certainly has to learn to overcome though, because if you actually keep track of your returns, you quickly learn that you're no better than anybody else at timing the market. And if you are, you should be managing a whole lot more than your money.

It just proven over and over and over again that nobody can predict the market.

Not in any sort of meaningful way. Long term, not consistently. All right, rule number seven is keep costs low. And we're typically talking about investment related costs. You know, fees, whether it's financial advisor fees or expense ratios in a mutual fund, 12 B1 fees, whatever. But how can one watch costs without becoming miserly? Number one or two, starting to perseverate on amounts of fees that really don't matter. A few basis points difference in an expense ratio or returns, et cetera. How do you find that balance between watching costs without being penny wise and pound foolish?

I guess I'm not sure I see it that way. I don't see the relationship between watching costs and spending. For me it's a matter of do I want to. There's a great graph on the Bogoheads wiki that shows paying a typical 2% expense ratio. What is the cost of that to you? And it turned it translates to a couple hundred thousand dollars, which translates to like 5 or 10 extra years of retirement. So there's that real cost. But does it take extra work to save that cost? I guess I think of it in terms of whose college education do I want to pay for? Do I want to save to pay for my kids college education or my broker's kid's college education or do I want to take my wife on a safari or send my broker's on a safari? I don't see the miserly part of it because you can be not miserly.

I think for sure when you're talking about relatively big numbers in investing, 2%'s a big number. And I use this example all the time. If you take a doc saving $50,000 a year for 30 years, if they're paying 2% in investment costs, the difference after 30 years is $2 million. It's the difference between having a 6 million portfolio and a 4 million portfolio. So you're absolutely right that costs matter and compounded costs become very large over time. But what happens is people learn that lesson and they start applying it to things that are very small. For example, I have people that ask me should I use a Fidelity Zero index fund instead of the Vanguard Total Stock Market fund? And we're talking about the Vanguard fund which has an expense ratio of 0.033 basis points. And this Fidelity fund that has a ratio of zero basis points. And they think, oh, I should switch to the Fidelity. And they don't realize that at that sort of level of cost, there are other things that matter more, like how well they're tracking the index, how tax efficient the fund can be. The fact that the Vanguard fund has the ETF share class, for instance, and where your money is so you're not having to run all over the place to buy funds at many different brokerage houses start to matter much more than those expense ratios. I think that's what I was getting at. When it comes to being miserly and letting the expense tail wag the investment.

Dog, if you will, it can become a bad habit. But I think for me, the solution to that bad habit goes back to planning, because you can see I'm currently a big proponent of planning. And the idea of planning in this context is identifying those things that are most important to you. And if you can identify those things that are most important to you, then you're less tempted to. You get in the habit of saving, and then you never spend. That's not the idea of it. The idea of saving is so that you can spend smoothly throughout your entire life. So that includes this concept of retirement, which is a third of your life. You've got to work for half or two thirds of your life to pay for your retirement, but you've also got all these other goals that you can unearth by a good planning process. And once you've unearthed them and keep them visible. I enjoy musical theater. You know, is it worth 100 or $200 a ticket to go to me, for me, it is. You know, everyone has different answers to what's important to them, but it's easier to spend money on things that you've already thought through. Yeah, these are important to me. And drinking at the bar is not, you know, or, you know, there's lots of ways to spend money that really, if you don't think they're important to you, get them out of your life, but add more of those things that are important to you. It might be family time. It might be a family vacation once a year. And you might choose to pay for it as a way of getting your family together because it's something you value. You only get to that by thinking through what's really valuable to me, which I think a plan should do. A plan is bigger than planning for your retirement?

Yeah, for sure. Now, one of the biggest costs is taxes, and rule number eight is to minimize taxes. And this is probably even more Important for a high earner like a doc like those that tend to listen to this podcast. What do you think's the biggest tax cost that investors run into?

Oh, I don't know that one. It could be losing out on the opportunity to defer taxes. What's your answer to that one?

I don't know. It may be the. You know, I think one of the problems is when you're not doing the other things that you're you get recommended to do like buying and holding or not trying to time the market or using an actively managed fund. Right. Your investments become much less tax efficient. Now that doesn't matter in your Roth IRA so much. It doesn't matter so much in your 401. The lower performance matters from them doing that. But the tax cost doesn't matter. When you're investing in a taxable account, as many of our listeners do, for at least a portion of their of their portfolio, that starts mattering a lot. And I think there are a lot of Vanguard investors who got a big surprise at the end of last year. Those who had been investing in a target retirement fund inside a taxable account. And all of a sudden, due to some changes Vanguard made with share classes of the fund, they had something like an 18% distribution, a taxable distribution of capital gains out of what they thought was a relatively tax efficient fund of index funds. And so I suspect it's just not being tax efficient as the invest is probably the biggest tax cost. But you're right, it might be related to not using tax protected accounts that are available to them. I'm continually amazed how many doctors don't understand how many tax protected accounts they have available to them, whether that's a backdoor Roth IRA or an hsa. Or maybe they're not even using all of the employer provided accounts they're given.

Exactly. And also being aware of the tax consequences of selling one asset versus another, say in their taxable account or the opportunities to donate appreciated assets. Being tax aware can affect your decisions, should affect your decisions. All right.

Rule number nine is to keep it simple. And you know, it's been said to invest your time actively and your money passively. And I think there's a lot of wisdom there. But at a certain point you gotta ask yourself how much higher of a return is worth additional complexity in my portfolio, for example, you mentioned earlier that at some point in your life at least you had some rental properties that you were dealing with significant additional complexity and work there compared to a portfolio of index funds. How do you make that decision of when it's worth adding complexity in hope of a higher return.

Yeah, that would be a real individual question. Because adding complexity by taking on income properties, I got away from that because in that case the complexity was the non financial part of being a landlord. Get me out of that space. I guess I view it as having a limited number of heartbeats. And how do I want to spend my time? If I really got satisfaction from trying to optimize my portfolio, I could play games in my taxable account by staggering asset purchases such that one of them might be more eligible for tax loss harvesting or games like that. I just don't have time and interest in doing that. But other people might and that's fine with them. I don't begrudge people that take it on as a game. I know people in investor clubs that have social fun choosing stocks to purchase individually. And earlier in this discussion I harped on uncompensated risk for doing that. But they want to do it and they're okay with that. Fine.

All right, the Last of these 10 tips, these 10 rules, these principles is to stay the course. Most people fail to even get the market return because they're continually chasing performance or tinkering with their portfolios. Right now as we record this, it's March 8th, the market's down on the year for various reasons, whether that's inflation related or the war in Ukraine or whatever it might be. And there are some people that are maybe struggling with staying the course. Do you have any tips for those who are losing sleep in this latest market correction?

My knee jerk reaction is to say you've got too many equities. If you're losing slight because of what's happening this year, which is pretty mild, you could be suffering from the common greed of wanting to take advantage of the 10 year ramp up in stock prices and got got in over your head. You should never be taking investment risks beyond what you're capable of holding. And if you're losing sleep, that's a huge sign. I don't even watch it anymore. I have no value in watching the stock market because I won't be making any transactions in the next couple of years.

Rick, your other book is titled why bother with Bonds and it makes the case for bonds. What do you see as the case for bonds these days when interest rates are 2% and inflation is 7%?

The case for bonds is not different. You don't invest in bonds for rate of return. If you want a higher expected rate of return, you look into equities if you want safety, the role for bonds in your portfolio is for safety. It's for ballast, it's for stability, it's for your near term liabilities where you don't have room for risk, it's for being able to sleep at night, it's for your personal comfort level for investment risk. Now normally what you just described is not normal. Normally the interest rate on bond, or if you look at the bond yield curve, that includes inflation. And you just described a scenario, thus scenario, the short term scenario of 7% inflation and whatever you said, 2% bond interest rates. So that's an anomaly. A nominal bond return includes market's expectation for inflation. And if you want protection for unexpected inflation, that's where TIPS and I bonds provide value. So the combination is a popular approach or strategy for, for achieving that combination of half or more TIPS and Treasury securities, which by the way could be bank CDs or anything government insured like that is very safe.

Yeah, it has been an interesting anomaly to watch the last few months, maybe the last few years. And you would think in a functioning market that bond interest rates would be inflation plus. And maybe the market's not functioning because the Fed is artificially holding rates down and has been now for some time, which leaves the individual investor to wonder, how should I react to this? And a lot of them start chasing yield. They start looking for things that pay more despite the fact they're significantly more risky. What advice do you have for someone tempted to do that?

Well, let me repeat myself and then mention a new point, but Larry Sweetbrough's opinion is that if you go after yield, in other words, you go after high yield bonds or junk bonds, those are highly correlated with the market. So if the market was to crash, so would your returns there. And so he advises against that. He advises towards staying at the highest level of quality in bonds, even if that allows you to take more risk on the stock side and have a bigger portion of equities in your portfolio. But the second piece of advice is to look at I bonds. Now if you looked up I bonds today, you would see that there's 0% real interest rate. And so your whole audience is going to go 0% interest rate. Why would I ever care about that? And because it's got two pieces. It's got that fixed interest rate piece, which today is 0%. And it's for the life of the I bond, when you buy an I bond plus the second piece, which is plus the current rate of inflation. So in your particular example, we've got a current period with a very high yield on it for an I bond. But that's the combination that makes sense. Now. Why doesn't the market take advantage of I bonds? Because it's really an opportunity that's only available to individual investors. And even to a small degree, you're limited personally to, what is it, $10,000 per individual. So that's $20,000 per couple. Plus you can add more on if you put your tax refund in that format. So it's pretty small dollars in that sense, and it does go in your taxable account, but it's perfect for situations like today.

You know, sometimes as I talk to people about investing, there's people that maybe aren't believers in the Bogleheads philosophy. And sometimes I worry that schools of thought in investing become a little bit religious, with people feeling like they have to convert others to their way of thinking. You know, whether that be the Bogleheads philosophy, how can I convince my dad this is the way to invest? Or whether it's the latest, you know, crypto fad? You know, some people in the crypto community, particularly on Twitter, it's almost a religion for them. It's an entire way of viewing the world. How can we get along with others that have a different investing religion, if you will?

Right. It's sort of like, do you believe in science or do you believe in alternatives? And my science is things like modern portfolio theory, which isn't quite a science, I know, but others like to believe that they can invest in individual companies because there's some joy in it, there's some understanding in it. It's the company they work for. It's a company that maybe they consume their products. They like that company. You know, who am I to say, fine, fine. If they want to invest in individual securities, I think we can get. We do. I got plenty of friends. Most of my friends either have actively managed funds or individual stocks. And I guess the part that breaks my heart a little bit is if they think that that's the only alternative. So people that are okay with their returns because they earn 7% and never realize that the market returns 10%, I sort of feel like they've lost some opportunity, but they're okay, so I'm okay.

All right, tell us about your latest project.

FinancingLife.org yeah, FinancingLife.org is actually my website. So it's a not for profit educational website where I put videos and some courses and it's mostly free content. I'm working on a current course which I Have a small fee associate to cover my costs. But it's just an educational website. I'm currently very fascinated by the idea of planning and do it yourself investment plans. So if your audience is interested in that as a topic, head for my site. I'll put on the homepage some links to materials that further your do it yourself planners, your do it yourself investment plans.

All right, let's do a hypothetical. Okay, let's say you were made the retirement czar. You could change anything about the retirement system in our country. What would you change?

For most of my life I thought the way it is is the way it is and there's not other ways possible. And then recently I picked up a book and it was eye opening to me. The book is called Rescuing Retirement. Actually I've got it. Rescuing Retirement by Teresa Ghilarducci. And she and her co author described the problems with our retirement system and propose a solution. And I just thought it was so eye opening. The solution that they pose is instead of these defined contribution plans which have a lot of problems, they're just problematic and they definitely favor the risk. Because all this discussion we've been talking about deferring your taxes and getting deductions for those tax advantage programs. Plus the big problem with the 401k type solutions is that they don't guarantee you a secure retirement for life. Instead you have to play the game of probability that you probably are okay for life. And since in this arena there's no investment pooling, you know, for like your fire insurance, you all pull your assets together and you don't individually have to save enough to pay for your house if it burns down. So that's the advantage of insurance in this arena. We individually have to save enough for longevity. So the idea of pooling that risk of longevity, it gets solved by solutions like annuities. Okay, so Social Security is the beautiful baseline solution to that, but it's not a solution for your retirement. It's basically a solution to keep people out of poverty during retirement. The proposal that they make is that everybody have a portable account that stays with them. Their employers contributed into it. The same way that they might have a matching fund with a 401k and you contribute a small amount into it, but it's a portable account that's yours. And if you die, it goes to your heirs and is managed centrally so you get to choose your manager. But basically they will invest in the stock market for high returns, low cost. It could be done with a non profit, it could be done by the Government. But the idea is capturing the market returns at low cost, high returns until you retire, and then converting that to an annuity. So there you've got your mandatory contributions, which we don't have now. That's one of the problems. Right. A lot of people don't save. But this is a mandatory small contribution. So it's affordable and small, and it achieves that by efficiencies. Invest it in the stock market until you retire. Whenever you retire, it's always your money. Your account stays with you, and then it gets annuitized so that you have that security for as long as you live. And, boy, I just think that that deserves discussion, and I don't hear anybody discussing it.

Yeah. You know, another change I'd love to see is just get rid of the Alphabet soup of retirement accounts.

Oh, my God. Yeah.

The fact that this is tied to your employer at all is just. Is just crazy, you know, and it's just unfortunate that depending on who you work for, you have different options to save for retirement. You know, you might have terrible plan options and terrible fees and. Or no plan at all just because you chose one employer over another. It's just a crazy hodgepodge system.

Taxes and investment, retirement planning, those are both way too complicated.

Yeah, I agree. All right, we're running short on time, but you've got the year of 30 to 40,000 listeners to this podcast. Mostly docs, but as we learned in our recent survey, certainly not all docs. What have we not yet talked about that you think they should know?

I think we've covered everything I wanted to talk about. But if they are interested in my favorite topic these days of planning and do it yourself planning instead of hiring help. Because nobody's going to know more about what you want than you. You know, what's important to you. Then I'll put some resources on my website, which is financinglife.org all right, well.

We appreciate you doing that. We appreciate you coming on the podcast and sharing some of your wisdom and. And being able to go back and cover these common sense topics that maybe we don't talk about enough on here. So thank you, Rick. This has been rick van Ness, financinglife.org, you can learn more about him. You can pick up his books, both the common sense one I mentioned earlier, as well as why bother with bonds that are reviewed before on the blog. And again, thank you, Rick, for your time.

Thank you, Joe.

Hope you enjoyed that interview. It's important to remember those basic principles behind investing. Investing really doesn't have to be complicated. We get into the weeds all the time here about retirement accounts, about real estate, about taxes, whatever. But at the end of the day, if you get the basics right, you know, it's kind of the pareto principle, right? 20% of the effort gives you 80% of the results. And just make sure you're getting that 20% right with the principles we talked about today. If you're finding our podcasts 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 make sure if you need a financial plan and you need more help, if you don't feel like you can write it up yourself. If you don't feel like you have the financial literacy or sophistication, or you just need somebody to help provide a framework, that's what our fire your financial advisor course is for. Find out more information whitecoatinvestor.com FYFA check it out at no risk. Thanks. For those of you leaving us a five star review and telling your friends about the podcast, Our most recent five star review is titled Love the Addition of Dr. Spath. It's great to hear a new voice and perspective and have enjoyed the evolution of the podcast. Thanks so much for great advice. Hope this just stays on for good. Thanks for that great review. We appreciate that. 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.

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