WCI #274: Setting Up Your Portfolio 101

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This is White Coat Investor podcast number 274 setting up your portfolio 101. As a White coat you have valuable knowledge. Various companies want that knowledge and they're willing to pay you for it. That's why we put together a list of recommendations for companies that pay you to take surveys. If you're looking for a profitable side gig for not too much effort, getting paid for surveys could be the perfect solution for you. You can make extra money, start a Solo 401 and use your medical knowledge to impact new products. One of the WCI columnists makes an extra $30,000 a year just doing these surveys. Sign up today and use a fraction of your downtime to make extra cash. Go to whitecoatinvestor.com mdsurveys you can do this and the White Coat Investor can help. Welcome back to the podcast. I think this drops on August 4th. I'm recording it a month before that, July 6th because I have a lot of fun stuff I'm going to do between now and then. Looking forward to a float with the young men in my neighborhood and going down the Green River. We're going to do Desolation and Gray Canyons. We're going to do a family reunion in Colorado with lots of fun activities. I think we're going to do some rafting there as well on on the Arkansas. And as this drops, I think I'm going to be on the main Salmon river up in Idaho. So lots of fun rafting coming up in the next month, but hope you're also having a great summer. For those of you who are on your way into work or on your way home after a hard shift, thanks for what you do. This is not easy work. That's why they pay you so well to do it. That's why it takes so long to learn it. But a lot of times it can be thankless work. So if nobody else has said thanks today, let me be the first. Hey, in case you're not aware, PIMDCON 22 is going to be this fall. Now if you don't know what this is, this is the Financial Freedom Through Real Estate Conference. There is a virtual option, but the in person option is way better because I'm going to be there. This is September 23rd through 25th in California. It's in LA. It's very convenient to the airport and it's going to be fairly personal. It's probably not going to be that many people, you know, 100, 200, 300 people that sort of a size. And so you can really get to know the speakers and the other people there. It's a three day conference. This is put on by peter kim@ passiveincomemd.com so if you're interested in checking this out, go to whitecoderinvestor.com WCICON or not WCICON PIMDCON22 and you can check that out. I think Peter's going to stop by the podcast later on and we'll talk a little bit more about that as well as real estate investing in general. But that's the whole focus of that conference. All right, let's talk a little bit about setting up your portfolio. You know, this is one of those things. It's been so long since I did it, sometimes I forget that this is difficult, maybe a little bit of an anxiety provoking experience to set up your portfolio. The first time Katie and I did this back in 2004. So it's been a long time and we're basically using the same portfolio. We've made a couple of minor changes over the years. There's been blog posts that went out when we did, but for the most part we're following the same plan we have for the last almost 20 years. So it's wonderful to get this sort of thing set up to have a written investing policy statement, a written financial plan, if you will. And if you need a lot of help with this, I recommend you check out our fire your financial advisor course. You can find that under our courses@whitecoatinvestor.com Whitecoatinvestor.com FYFA it'll take you directly there. This is an evergreen course you can take whenever it's convenient to you. That will help you to do this process. But the basic process is not that complicated. Okay, what do you do? First, you set your goals. Without any goals, investing doesn't make sense, right? Everyone always wants to choose investments first. But unless you know what you're investing for, it's very difficult to choose investments. So that's step one is to set your goals. Second, you develop an asset allocation. An asset allocation is your mix of investments. How much are you going to have in stocks? How much are you going to have in bonds? How much are you going to have having real estate? Anything else you want to invest in, precious metals or crypto or whatever else. How much are you going to put in that. And then within each of those categories, you may divide it into further sub asset classes. You might invest within real estate, maybe publicly traded REITs, maybe debt funds, maybe direct rental properties within stocks, maybe how much goes in international, how much goes in small stocks, how much goes in value stocks, et cetera. And you write this down, the percentages you want, because the idea is that in any given year, one of these asset classes is gonna do better than all the other ones, and one of them's gonna do the worst. And so at the end of the year, what you do is you rebalance back to the original percentages. And what that forces you to do is to sell high and buy low. You're constantly doing that as you go through your investing career. And that's a formula for success. It doesn't require you to know the future. You have the same risk each year as far as your mix of investments go. And so you basically set it. You pick the investments and you rebalance as you go. Okay, so then the tricky part for a lot of people, although I think this is actually the easiest part, once you have that asset allocation, is to implement it right? And all this means, for me, for example, our asset allocation has a 25% allocation to the overall US stock market. That's a quarter of our retirement money. Quarter of our portfolio goes into U.S. stocks, essentially. And what do we use for that? Well, it's really pretty easy. We use the Vanguard Total Stock Market fund. And so 25% of our money goes right into that fund and essentially buys the 5,000 stocks that are publicly traded in the United States. But it's super easy because we just have one fund that meets that entire asset allocation. Now, in other asset classes, you may find that you can't do that. For example, if you have 25% of your portfolio in real estate, you might not want all 25% in one property. You know, even if it's the property down the street and you can watch it really closely, you may want a little more diversification than that. So in some asset classes, you got to have more than one holding. But for many of them, especially when it's easy to get a very diversified holding like an index fund, we just have one holding for it. For example, we dedicate 15% of our portfolio to small value stocks. And what do we use for that? We use the Vanguard Small Value Index Fund. One holding. Very simple. But in other asset classes, we can't keep it that simple. For example, we have 10% of our portfolio in nominal Bonds, regular old bonds. And for a long time, I had all of those in the TSP. This is the Thrift Savings Plan. It's a 401 for federal employees. And it all went into the G Fund there. Well, eventually I filled my entire TSP with the G Fund, and I still need more money in bonds, so I had to do something else. And so mostly what we do is a muni bond fund at Vanguard in our taxable account in addition to that G Fund. That's how we get our nominal bond allocation. So sometimes the implementation can be a little bit complicated. Other times it's very, very, very simple. And it's really the easiest part of the whole process. So you've set your goals. You. You've decided on an asset allocation, and you have implemented that asset allocation. The final step is just to maintain the plan, meaning you direct new investments into the plan. You no longer have to ask yourself, hey, I got $100,000. What should I do with it? It just goes in the plan like everything else. Just like the $5,000 you invest this month from your regular monthly earnings, it just goes into the plan. You rebalance once a year or once every couple years or whatever your plan says you should do. And so it's not that complicated to sort out. So one of the difficult things for people is figuring out, okay, well, what should my mix of investments be? How much should I put in stocks? And I could give you percentages. I could say, you need to put this much in here and this much in here and this much in here. And lots of investment gurus out there do that. But the truth is that they don't know. I don't know what's going to do best going forward. I don't know what the optimal mix of investments is. My goal is to pick something reasonable, something that will do well no matter what future markets bring. So you probably ought to have some money in stocks. You probably ought to have some money in bonds. You might want some money in real estate. Most people have at least some money in real estate. The majority of your money probably ought to be into relatively risky assets. And I'm not talking about shorting Bitcoin. I'm talking about stocks and real estate, risky assets, not CDs, not bonds, et cetera. And a minority for most of us during our earning careers in bonds or other less risky assets. So that's kind of the general philosophy behind doing this. If you want more information, you can also look at a blog post I have called how to Build an Investment Portfolio. And it'll take you through that step by step as well. But the bottom line is you're are looking to put together a number of asset classes into a portfolio somewhere between 3 and 10. Beyond 10, you're just playing with your money. Less than 3, you probably aren't as diversified as you should be. And then you rebalance it once a year. So I can't give you specific percentage instructions because the truth is I don't know. I don't know what's going to do the best. If I knew that, I'd just tell you to put all your money in that. But pick something reasonable. Diversify between asset classes, diversify within the asset classes and then stick with your plan. That's the hardest part, right? Because you realize how easy it is to change your plan. But what happens when we change it? We're almost always performance chasing that almost always results in lower returns. So I hope that's helpful to you. If you need more help with that, I recommend that fire your financial advisor course. Whitecodeinvestor.com FY all right, let's take a question. This one is off of email and it's related to setting up your portfolio. Our overall asset allocation of the retirement and brokerage accounts is about 65% stocks, all index funds and 35% bonds. I'm trying to decide how to consider the passive real estate investments in the allocation. And I'm thinking they're more like bonds. Do you agree? They're all fairly stable, pay between 4 and 12% and aren't correlated with the public markets. If you agree, should I therefore lower my bond allocation in my retirement accounts? I know this is a first world problem, but just wanted to hear your thoughts. Lastly, I like the passive real estate as it supplements my decreasing clinical income. But I plan to phase them out at some point to do Roth conversions in the 65 to 72 age range. No, real estate is not bonds. They don't act like it. They're far riskier. If you haven't lost significant money on a passive real estate deal, you should consider yourself lucky. Okay, I give real estate its own separate allocation. In our portfolio we're 60% stocks, 20% bonds and 20% real estate. So where would I put passive real estate investments? I'd put them in that 20% real estate. If you want real estate investments, you need an allocation in your portfolio to real estate. If you want 10% or 20% or 50%, that's probably all fine, but don't kid yourself about what these are. They're not bonds. You know, a related question I get a lot is, can I use dividend stocks instead of bonds? No. Dividend stocks do not act like bonds. They go up and down dramatically with the market. When times are really tough in a big economic downturn, many of those dividend stocks cut their dividends. They are not bonds. So don't pretend they're bonds. If your allocation, if your investing plan calls for bonds, buy bonds. Okay, I know bonds aren't super popular this year because they're losing money as interest rates go up. But that means future expected returns are now higher on that asset class. But if your plan is to hold bonds, you should buy bonds, not pretend something else is bonds, because something else is not bonds. Unless we're talking about CDs, maybe, et cetera. But if I had to choose, if you forced me to choose whether real estate is more like stocks or more like bonds, I'd say it's more like stocks. Because you're an equity owner of the asset class, you don't really have your return capped in any way like you do with a fixed income investment, and you could potentially lose all your money. All right, I've got a special guest on the podcast now, Dr. Peter Kim, creator of Passive Income MD and the conference I mentioned earlier, Financial freedom through Real Estate. Welcome to the White Coat Investor Podcast.

Hey, thanks for having me, Jim.

It's always great to have you here. I'm looking forward to coming out to the conference again. This is one of the best parts of coming to PIMDCON 22, as they get to meet you, they get to meet me. We're going to have a lot of fun there. My talk's going to be on taxes with real estate and how real estate can provide some pretty awesome tax benefits and how you can maximize those. Do you have plans yet for what you're going to be speaking about? Peter?

Yeah, I'm going to be talking about different topics about kind of like what's happening in the market today and how people can really take advantage of what's happening now. I see this as a time of opportunity. I know a lot of people are starting to freak out, but I think a lot of us who are in the market who have been investing over the last eight, 10 years have kind of been praying for a time like this to happen where opportunities start to open back up. People who are ready to invest, have the education under their belt, know what they're doing. This is when, like, generational wealth and really huge transfer of wealth happens. And I think people are really excited about this time.

Yeah, I wrote a post similar on a similar theme about this one was more stock focused but about how in down market stocks return to their rightful owners. And you know, there's some truth about to that. When you have the capital and you have the ability and the time and the patience in a market downturn, that's where you make a lot of money. All right, well, I thought we'd talk a little bit today. Let's talk about pro formas. Right. Anytime you look at a syndication, which is a passive real estate investment, usually where something like 100 investors come together and buy a property to invest together. But before you buy into that, you look at the pro forma, the sponsor or operator, the general partner running the deal, puts together a pro forma of what they expect over the next three to seven to 10 years, however long this partnership is going to be together. And they put together this pro forma. But you want to do your due diligence when you look at these investments. You don't want to just throw your money willy nilly after anybody who asks for it. And you want to look at that pro forma. But I've found over the years that there's lots of different ways you can kind of trick investors so that your pro forma is spitting out a particularly high return that never seems to materialize down the road. What's your experience been with the pro forma, Peter?

I mean, they always say on the pro forma they cannot guarantee returns. I think the one thing they can guarantee is that the end product or the end result will not be what the pro forma says now. So the question is, where are you going to land on which side of that pro forma? There's so many pieces to it. There's obviously the internal rate of return, that projection that everyone uses to kind of decide whether they want to invest in investment or not. But the one thing you will learn, and I've looked at now thousands of these pro formas, it's that it's all made up. It's all completely made up, meaning that these are all projections of what will happen in year, you know, month six, year one, year two, year three. And if anything that, you know, you've talked about and we've all learned is that it's impossible to predict what the market will look like, what the economic, you know, whether there'll be economic turmoil, whether there'll be wars, what will happen in the economy, whether there'll be a recession. It's impossible to know what will happen in a year, two or three years. And so the pro forma is a best guess. It's their best guess to figure out, hey, what is this thing going to look like? And try to make it attractive enough for you as the investor to want to jump in and give your hard earned money to them. And so I've learned over time that since this thing is whole, you know, it's just made up, it's like I've learned what are the levers that they're pulling to make some of these numbers. And I think that's really key to understand, like what are the levers they're pulling and if they pull it one way, pull a little less, pull it the other way, like how does it actually tweak the numbers and how does that affect what you have in terms of expectations? So do you mind if I just share a couple of these things?

Yeah, let's go, let's go over them.

Okay.

Going to get into the weeds here on these pro formas for those who are interested in passive real estate investments, right?

I mean, at the end of the day, like what people care about, they look at all these numbers and projections, they look at rent increases and things like that. At the end of the day they want to know what's going to get spit out. At the end of the day, they invest their 50, 100, $200,000, whatever it is, what are they going to expect to get at the end of the day? And the Performa tries to map that out, tries to give you some projections. And if you look at a Performa, usually there's two main components. There's the income and then there's the expenses. And both of those things they put together to help you figure out how much is this building going to make. And then when you know this building, how much income is this thing going to make? And then when the market, you know, when they go to exit the property, what is the market going to look like when it's there? And they take those two numbers, they take the overall net income and they take whatever the market conditions are, which is another way of saying cap rate. Might have heard that's kind of like the demand, I'd say, for that type of property and income. If they take those two numbers, they can basically figure out what the purchase price at that time is going to be. So once they start tweaking that net operating income, if they can figure out ways to tweak that, or they can figure out ways to tweak that cap rate, then you Get a really different number at the end of the day. And so just to kind of tell you not to go too deep into the weeds, how can you manipulate your net income? Well, your net income, just so people know it's income minus expenses. So if they assume the rent goes up pretty high, then they're probably going to make more income. Right. If they have a more conservative rental increase in terms of the price, then maybe that income doesn't go as much, you know, the expenses. If they think they can, like, honestly reduce and cut expenses by significant amount, and they put that in the pro forma, guess what? Their net income at the end of the day is going to be higher, which means that the purchase price or the sale price at the end of the day is going to be higher. So they can start tweaking these numbers. And so it's important for somebody who's looking at these pro formas to look at what are they tweaking. And are these numbers consistent with what's been done in the past? Maybe consistent with what they've done in that certain area? Are they just playing the numbers a little bit to kind of make it look nicer to look rosier, to come up with a bigger net income at the end of the day so that that sale price looked better? That's one thing to look at. And then the other thing to look at, like I said, is the other kind of factor is something called the cap rate. And I'm sure you've talked about this a lot. I've talked a lot about this on my blog and podcast. But, you know, without going into it too much detail, a Capri is almost just a way of saying, like, how, like, what's the temperature of the market at that time? What is the demand for that type of product, whether it's a, you know, apartment building at that amount of income. And so it's a way to gauge, like, how in demand it is. And so capre works funny in a funny way. Like, it drops if the demand is higher and then kind of goes higher if the demand is low. Lower. Okay. And so the thing to realize is that that cap rate, again, they're guessing at what that number will be at the end of the day, whether it's in three or five years, whenever the property is going to be sold. But what happens is that obviously, if that cap rate is more in demand, if it's lower, then people are going to be willing to pay more for this thing. And so just by tweaking that number alone, that can really affect the sales price. So look for all those little levers that they're pulling. Those are just a couple, just so that you can figure out how are they coming up with their number and their sale price, and does it make sense? Are they being conservative? Are they kind of being aggressive with some of those? Are they doing it just to try to put out a nice kind of flashy number that might have you, you know, make it easier for you to open up your wallet and invest with them?

Yeah. So if they're projecting you're going to get a 20% return, but you find out the way they're getting to that 20% is by selling at a dramatically lower cap rate than what they're buying at. You know, they basically juice the return, you know, and the likelihood of you. It's not impossible for you to get that, but the likelihood's pretty low. You know, everybody says they underwrite conservatively. You know, I've never met a syndicator, I've never met a fund manager that didn't say they underwrited conservatively. But what does that mean? Well, when it comes to the cap rate, that means you're projecting an exit cap rate that's higher. It's actually higher than what you're buying it at. How much higher do you think it ought to be for somebody to underwrite conservatively, Peter? Does it need to be half a percent higher? I mean, how much higher?

Yeah, I mean, we all know that the market's been really hot lately. And so I think to be conservative, we have to assume that the market's not going to be as good into place in three to five years. And so a really, I'd say more of a conservative kind of estimate that people use is that they expect the cap rate to increase by what they say, 10 basis points or 0.1, like for every year that you hold the property. If some people are trying to be a little bit more conservative, they'll even put in about 0.2. So, for example, let's say you buy a property, they buy it at a 4 cap 4.0, and they say they're going to sell this in year five. Well, if you're going to be conservative, you don't assume that you're going to sell it at a cap rate of 4.0. You add 10 basis points for every year, which is, let's say, five years, you're going to hold that property for. Then you would actually expect to sell this property at a cap rate of 4.5. Now, if you see a number like that. That's usually a very. Like, more on the conservative side. Some people will be really, really conservative. And they'll even give it 0.2 per year, so. Meaning that they'll buy it at 4 and they'll sell it at 5. And if the numbers still work in that scenario, you as an investor can look at this and say, like, hey, at least they're putting it into their pro forma. At least they're underwriting a little bit more of a conservative exit when it comes to this property.

Yeah. Another place I've seen them juice returns is with that first year's income. You know, if you come in and buy a property, of course they have plans to increase income. We're going to increase the income. We're going to, you know, maybe we'll do a value add. We'll make the units better. We're going to charge market rent. People haven't been charging market rent. They've been managing this well, et cetera. We think there's all this marketing we can do that'll help, et cetera. We're going to make more money. But if they're saying they're going to make dramatically more money in the first three months after they buy the property versus the last three months before they bought the property, it just doesn't change that fast, you know, And I think that's one way they juice the returns is this massive increase in income in the first year. I think your best assumption, if you're getting conservative underwriting, is to be making the same amount of income, at least for the first three to six months after the property's purchased. It just takes time to implement the changes that are going to increase income. And that's one way that they can obviously make for a really good cash on cash return. In particular that first year is by, you know, juicing that a bit. Little bit. So I think that's another tactic to maybe watch out for that maybe indicates they're not as conservative of an underwriter as they claim they are.

I wouldn't say everyone's trying to trick investors per se. I think what they're doing is they're sometimes they're extremely optimistic. I think a lot of them believe they can do it. And maybe they have. Maybe they have. Especially in the last three to five years, they've been able to go in there and because the demand has been so high. And honestly right now, it still seems like demand will be high for a lot of these properties. But I think to put that down on paper, you know, when you've hit that home run and now expect that every single time, I think it's probably a little bit aggressive.

Yeah, that's exactly right. I mean, what I ideally want out of a pro forma, you know, if I'm going to invest with somebody long term, is I want them to miss as often high as low. You know, I want them really trying to get an accurate, you know, guess, guesstimate, et cetera, of what it's going to be. Miss high, miss low. Okay, fine. But on average, you're there. Whereas I think with the optimism that a lot of them have, I typically see returns coming in below the pro forma. For example, I had a syndication. It was a multifamily apartment complex in Indianapolis, and the Pro forma was 15% a year. It was a 15% IRR. What did I actually get? I got 10%. Nothing ever went wrong. It just trailed the pro forma year after year after year for seven years. And then they sold it and I got 10%. And I think that was just from a little bit of optimistic underwriting. You know, would anybody have invested if they'd put 10% in the Pro forma? Maybe not. And I think that's the way a lot of these go. It doesn't mean it can't go the other way. You know, there's lots of people that are out there that estimate 15%, and they end up selling into a really good market. They make 24%. You know, it does go the other way, but I think on average, you generally end up a little bit lower than what the projections were. Has that been your experience as well, Peter?

Yeah. You know what? I think sometimes, to be honest with you, sponsors work backwards. They think, what's the market look like right now? What are people looking for in terms of an investment? If kind of the standard market is 13 to 15% IRR, that's where they're going to kind of put their mark, and they're going to find out and figure out a way in the pro forma, at least to make sure that you land somewhere between the 13 and 15% mark. And so if they have to tweak a little bit. And yeah, honestly, again, I think that a lot of them think they can do it. I don't think they're trying not to. And many of them have shown that they can do it, and maybe they've shown it with different properties, but they all seem to land around 13 to 15%. Even if they think they can get 30, 40%. Because I've talked to some sponsors that say, you know what, this is going to be a 30, 40% IRR. But I'm not going to put that on paper. I'm not going to put that because it would just look too crazy. And then of course, I set expectations, but the market right now seems to be somewhere between 13 and 15%, for example. Then they'll actually work the pro forma, make it conservative and make it land in that spot. So that's usually what tends to happen.

Yeah, if they're really expecting 30%, they ought to have really conservative underwriting standards to be able to get down to 13 to 15. Right. At any rate. All right, so that's an example of some of the stuff you can learn at the Financial Freedom Through Real Estate conference. We'll be talking about both active real estate investing as well as passive real estate investing there. We're going to be having a good time. This is September in la. It's a very convenient hotel to get to. I think you can even walk there from LAX. But you can sign up for that at whitecoatinvestor.com pimdcon22 Peter what else should they know about that conference before they sign up?

Yeah, I mean, this is our fourth year actually doing this conference. For those who participated, obviously we did it live back in 2019. The last two years, of course, we've done it virtual and we're back to live. And the reason why is because people have been asking for it. We've done really success. You know, we've had successful conferences the last few years doing it virtual. But I think people partly miss being live together and being at your WCI con recently. People realize the power of getting together and actually talking these things out. And sometimes, to be honest with you, when I go to these conferences, I get more out of the conversations that happen on the side outside of the room. And I will tell you, when I look back, kind of like at my last seven, eight, nine years of investing and I started going to real estate conferences and different investor conferences. I will say that a lot of the key decisions that I made that helped me decide which way to go when it came to certain types of investments, they all happen after a conversation that happened at a conference. You learn from somebody, you get to ask them, and a lot of magic happens there. And so that's why I felt like it was important for us to get back to that place to do it live. Of course we have a virtual option for those who can't make it. But what we're trying to do is really foster those connections that are there. We want people to walk away with a plan. And so for those of people that are coming live, we're not only obviously having the great content there as people speaking, but we're going to have kind of like mastermind sessions. We're even having some coaching sessions. We're going to really foster these connections which need to happen, I think, for people to really walk away with a strategy, with an idea of what to do. And so we're super excited to be able to offer that at the conference. And so we hope that people join us live and we'll have a ton of fun.

Awesome. Well, thank you so much for coming on the podcast today, Peter. And like I said, if you're interested that, it's whitecoatinvestor.com PIMDCON 22 is where you can register. The price goes up in a few days, so today is definitely the day to register. The price goes up as of August 7th, so make sure you get on there and sign up before then. All right, let's get to some of your questions. This one is a question from Nancy about Rich dad, Poor Dad. Let's take a listen.

Hi Dr. Dali, thanks for the great advice and resources. And although I'm probably 10 years late to the game, the knowledge that I've gained through reading your books and listening to the podcast has been invaluable in my quest to learn how not to be an ignoramus when it comes to money. I recently read Rich Dad, Poor dad by Robert Kiyosaki. Although there are some concepts that I readily agree with in the book, it seems to me that the general philosophy and approach to financial independence is completely opposite of your method, or dare I say the Boglehead method. The sense that I got is that squirreling away your money is for suckers and debt should be used in a way to avoid taxes and gain assets only. Of course that sounds amazing, but it sounds almost too good to be true. And because of that, I'm automatically skeptical. Then again, I don't want to miss out on something that could get me to where I want to be in life faster. What is your take on Robert Kiyosaki's method? Personally, I don't have dreams of becoming fabulously wealthy, but would like to retire early, comfortably with a little bit left over for my kids. Any thoughts would be greatly appreciated. Thanks.

All right, Nancy, good question. You're right that there are significant differences between Rich Dad, Poor dad and the White Coat Investor, which made a comment that we got a few weeks ago particularly funny. I don't know if you remember that podcast, but if you can go back and listen to that. I don't remember what podcast number it was, but I was accused of plagiarizing Rich Dad, Poor dad and it was just the doc had made a mistake after a long day at work. But at any rate, here's the deal with Rich Dad, Poor Dad. There's some stuff in there that I think you can use that is useful information. Now, that's probably true of most investing books out there. One thing that Rich Dad, Poor dad was really good at was getting people excited about personal finance, getting excited about investing, getting excited about putting something away now and building wealth and doing some cool things in your life with it. And for that I think it's great. There's a lot of criticism of both Robert Kiyosaki as well as Rich Dad, Poor Dad. In fact, there probably never actually was a Rich dad that was probably made up. You know, if you want to read some of the serious criticism about it, I'd recommend you search John T. Reed and Rich Dad, Poor Dad. It's a pretty good compilation of the problems with the book. And there are many, many problems with the book, from outright lies in it to law breaking advice to dangerous advice like if you're going to go broke, go broke big. You know, it says college is for suckers. Obviously most of us listening to this podcast are high income as a result of going to college and then professional school. But at the same time, you got to be careful not to poo poo all entrepreneurship. There are many. Although entrepreneurship is a risky pathway to wealth, there are many people who have done very well with entrepreneurship. My first million, for instance, came entirely from practicing medicine, saving money and investing it in a reasonable way. But over the long run, I've made more money through being an entrepreneur than I have from practicing medicine. And so it's not like it's impossible to be an entrepreneur and make money. It is possible. Lots of people do it. And if you have kind of an entrepreneurship bug, I would encourage you to pursue that and to, you know, in a smart, sophisticated way, to see what you can do with that, start a company, build wealth, et cetera. But I would not think that you cannot build wealth as a doc. You know, this pathway is not complicated. It's completely reproducible. If you go to medical school, you go to residency, you come out and get a halfway decent job, you live like a resident for two to five years, knock out those student loans Get a good start on your nest egg, and then you save 20% plus of your income for retirement and invest it in boring old stock index bonds. You are highly likely to retire as a multimillionaire and leave millions of dollars behind to your favorite heirs and charities after having a very comfortable retirement. It is such an easy pathway. I can't call it guaranteed, but it's extremely high percentage chance that this is going to succeed. And if you want to call that the Boglehead method, or you want to call that the WCI method, or you want to call that the boring old save 20% index fund method, it works. It works very well. But chances of you having $100 million doing that is not very high. And if that's what building wealth means to you, you're probably going to have to take more risks. You're probably going to have to take on some leverage. You're probably going to have to start some businesses. And I think that's the sort of wealth that this sort of a book Rich Dad, Poor dad, is kind of talking about. If that's not the sort of wealth that you're seeking, then this book contains lots and lots of dangerous advice. So I hope that's helpful. You know, it's like anything, right? Including this podcast. Take what you find useful. Leave the rest. All right, let's do the quote of the day. This one's from Teddy Roosevelt, and there's a lot of wisdom here in just six words. Comparison is the thief of joy. Okay, stop caring about what other people have and look at what's actually going to make you happy. And remember that investing is a single player game. All right, let's take another question off the speak pipe. This one is about FSAs and HSAs.

Hi, Jim.

My wife and I have inadvertently been contributing to both a healthcare FSA and an HSA for the past six months. This is because my wife has a PPO health plan with an FSA through her employer, and I have a high deductible health plan with an HSA through my employer. We file our taxes married filing jointly. We recently found out that we cannot contribute to both a health care FSA and an HSA in the same calendar year. How do I remedy this situation? Thanks. Okay, good question. This gets really complicated, actually. You know, the general rule is that you cannot contribute to a regular FSA and an HSA in the same year. That's true. There are some limited purpose. Sometimes they're called HSA compatible, sometimes they're called FSAs, flexible spending accounts that you can use with an HSA, they generally don't cover general health expenses, though. They're covering things like vision or, you know, that sort of a different use. You know, there are other types of flexible spending accounts. Remember, of course, the main difference between these two, right, A flexible spending account is a use it, lose it account. You either use it by the end of the year or it's gone. An hsa, you can invest for the long term. It carries over year to year. That's the main difference. And then, of course, you have to have a high deductible health plan as your only health plan to be able to contribute to a health savings account in a given year. But here's the interesting thing. When you're both working, right, you can make a family contribution to an HSA based on you and one of your kids being on the high deductible health plan. That's enough to make a family contribution. A family is either two spouses or a parent and a child. And you can do the higher family contribution to the hsa. So I wonder if your spouse is not on your health plan and has her own health plan. With an fsa, I may be okay. That might not be an issue. I would have to check with an accountant to see if there's any issue on the taxes with that, but I don't think there is because you're qualifying to use your HSA based on you and presumably a child. Now, if there's no children and you've made a family contribution to this hsa, you've definitely done a. No, no. But I don't have quite enough information from your question as to whether you've done that or not. But anyway, if you find you have contributed to the FSA illegally, I would just go to the employer and say, hey, it turns out I can't contribute to this because we have an hsa. Can we just take that money back out and put it in my paycheck? And HR should be able to fix that. So I don't think that's a big deal. Do it before the end of the year, obviously, but I don't think that's a major issue. Now, if we're talking about, you did this last year, maybe it's too late to fix it, and I'm not sure what kind of a penalty you're going to get from the IRS on that, but there probably will be one if you used it illegitimately. Hope that's helpful. All right, let's take our next question. This one from Dean on an employee Stock ownership plan. I'm guessing Dean is not a doc because most of the people that have these are not docs. Let's take a listen.

Hi Jim, this is Dean from the upper Midwest. I am actually calling on behalf of my brother in law. He is not a healthcare professional. He is likely going to switch jobs this summer with his current employer who he has been with for about 15 years now. He has a 401k. Also interestingly, he has company shares or stocks called ESOP, which stands for employee Stock Ownership plan. So he has purchased various shares of this ESOP from between about $40 to $100 per share throughout his career. The most recent annual valuation has those stock shares at $500 per share. If he quits this job, he would apparently still have the company shares until after the valuation is done for 2022, which would be sometime in 2023. So the question is about these ESOP shares since I really don't understand them. When these shares are eventually sold, I want to be sure that he is not hit with a big taxable event. So can they be sold into cash and then rolled into his 401? In other words, is this money tax def? So I could certainly help him evaluate the quality of the current 401k options and see if it's worth keeping or rolling everything into an ira. Any assistance on this money, how this money is treated or viewed after the shares are sold would be really appreciated. I appreciate everything that you do. Thank you so much.

Okay. An ESOP is an employee benefit plan, employee stock option program. Every company does them a little bit differently. The idea though is to treat employees a little bit more like owners so they care more about the outcome of the company. The idea is to incentivize them. You know, this sort of plan can also be used to facilitate succession planning for the company. But mostly it's used for employees just to, you know, as part of their compensation package. As far as the tax treatment of these shares when they're sold, there is going to be a tax bill due, assuming these are held in a taxable account. If they're inside the 401, like any investment in the 401, they can be sold without tax consequences. You don't pay taxes until you withdraw draw money from the 401k. But most of these I think are held outside of a 401K. And so you're going to pay taxes on them. You know, the bottom line is you're going to pay tax on the entire value in some way, shape or form. If you paid taxes when you were given these shares originally, you know, at $40 a share, then that part is going to be basis. You're not going to have to pay taxes on that again, the remainder of it, when those shares are sold, you generally pay at long term capital gains rates. And if that's the case, no, you can't put the Money in the 401k, you're going to pay the taxes. If you have a bunch of tax losses from tax loss harvesting, maybe that could offset it. But for the most part, this is going to be a taxable event when you get rid of those shares. And truthfully, you probably still should. Right? Because you've got pretty significant individual company risk. That's an uncompensated risk. And so as a general rule, when you're paid in company shares, whether you still work there or not, I generally recommend getting rid of them as soon as you can and diversifying that money. I think that's a general good idea. So there's lots you can learn about ESOPs on the Internet if you look that up. It's pretty common in the tech world. It's very uncommon in healthcare. And so, but you know, chances are your brother or brother in law, whatever it was, is going to have some taxes to pay. And that's just the way it is. But it's part of your compensation. You pay taxes on what you compensated. It's not the end of the world. You definitely still come out ahead after paying the taxes. All right, here's a question about which retirement account to fund first. Let's take a listen to that.

Hi Dr. Dali, thanks for all you do for our financial education. I have a question which essentially boils down to how do I know if I am an exception to the rule about which retirement accounts to fund first? I will soon be an intern. I understand that generally you aim to get an employer match first, then you go to fund your Roth IRA, then you go back to your 401k only after you max out your Roth IRA. However, I am married, filing jointly to another relatively high income professional. And once I start residency, I project our gross income to be just over $150,000 per year. I don't know how to predict the future, but I suspect this will be more than what we will be spending annually during our retirement. Also, we are moving from my residency to a state with a high income tax rate and a high cost of living. I've done enough number crunching to determine that. I think we can comfortably invest at least 25% of our gross income into retirement accounts moving forward because our household earnings are in a higher tax bracket than is probably typical for most residents. How do I make the determination whether I should still follow the general principle of funding my Roth IRA with post tax dollars fully before maxing out my 401k with pre tax dollars? I will still obviously prioritize the employer match before anything else. Thank you so much.

All right. I guess it's possible you could retire and have less income than $150,000 in today's dollars. It's entirely possible you could put money away now that's tax deferred and pull it out later at the same or lower rate. So it's not the end of the world. If you prefer to save tax deferred right now and max out that 401 before doing a Roth IRA, that's okay. I don't think you're making some huge, terrible mistake. That said, I'd still do the Roth first, and I'll tell you why. Yes, in retirement, you may be in a lower tax bracket, but the truth is, you're an intern, and your income by itself is going to be significantly higher than $150,000 in a few years. And the two of you combined are probably going to be in the $200,000, $300,000, $400,000, $500,000 range for years and years and years, for many decades. And you'll be able to do lots of tax deferred savings at that point. And so I think during residency, the general rule is Roth accounts before tax deferred accounts. And I'm not hearing anything in your situation that would really change that dramatically. Now, if you told me your spouse was making $700,000 instead of, you know, whatever it is, $90,000, I might feel a little bit differently about that since you'd already be into the top tax bracket. But at $150,000, you're still in a pretty low tax bracket. I mean, if I look at this married filing jointly, tax brackets for 20, 22, you know, $150,000 in taxable income, which you're not going to have, but $150,000 in taxable income is still in the 22% bracket. And it wouldn't surprise me at all if you can get closer to the 12% bracket, you know, you're going to have a $25,000 standard deduction. You put a little bit of money into retirement accounts, maybe you have a few other deductions. It wouldn't take that much to get down to the 12%, but you're probably going to be in the lower part of the 22% bracket, and I think there's a very good chance that you'll be paying at least 22% on at least some of your retirement income later. So I think I'd still do Roth if I were you. You don't sound like an exception to the general rule to me of what I tell residents to invest in. Unless you're getting some other massive student loan benefit out of doing this, I think I'd probably aim toward just doing Roth accounts. And if that 401 offers Roth accounts, I'd probably use those too. Very few people regret making Roth contributions later. Now, obviously the tax bill upfronts a little bit much, but you know, most people don't regret that later, so I'd go ahead and do that. As a White Coat, you have valuable knowledge. Various companies want that knowledge and they're willing to pay you for it. That's why we put together a list of recommendations for companies that pay you to take surveys. If you're looking for a profitable side gig for not too much effort, getting paid for surveys could be the perfect solution for you. You can make extra Money, start a solo 401 and use your medical knowledge to impact new products. One of the WCI columnists makes an extra $30,000 a year just doing these surveys. Sign up today and use a fraction of your downtime to make extra cash. Go to whitecoatinvestor.com mdsurveys you can do this and the White Coat Investor can help. Don't forget you only have a few days before the price goes up on PIMDCON 22. Sign up for that at whitecoatinvestor.com PIMDCON 22 do and be sure to check that out. I'm going to have a good time there and I hope to see you there. Thanks. For those of you who have been leaving us five star reviews and telling your friends about the podcast, our most recent review came in from Keerlak, who said recommend this to every doctor you meet. Went through all the podcasts over the last month and a half, bought and read the book. I feel like I already know more about finances than many of my attendings. As a PGY2 highly recommend 5 stars. Thank you so much for that review. For the rest of you, 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.

The hosts of the White coat Investor Podcasts are not licensed accountants, attorneys or financial advisors. This podcast is free entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.