WCI #278: Recession Proof Investments

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 278, Recession Proof Investments. I'm your host, Dr. Jim Dali, the founder of the White Coat Investor, and I am here with my co host, Dr. Tisha Spath. Welcome back. I haven't seen you in a few weeks.

I know it's been a while, Jim. I'm so happy to be back here.

Love what you hear on the podcast. Looking for more great White Coat investor content? Head over to our YouTube channel where you can watch video recordings of our podcast, short snippets of financial tips explained succinctly by me and others, and deep dives into topics for more in depth learning. You can even learn all about real estate with webinars from our real estate partners. Check out all this and more at@YouTube.com thewhitecoatinvestor. You can do this and the White Coat Investor can help. All right, if no one said thanks for what you do, let us be the first because your job is hard. You know, I just came off a shift this weekend. I had a patient that came in, 17 weeks pregnant, first pregnancy, and said, ah, my water broke. And those of you who work in the emergency department in L and D, you know what this usually means? It usually means that this person just peed their pants, right? It usually isn't their water broke. And in this case, unfortunately, it was her water had broken. And that's so depressing to have a live baby in there that, you know, just isn't gonna make it. It's just a terrible, terrible, sad situation. And I know you deal with those things all the time. Likewise. Have a good friend just found out, young, healthy person, just had a stroke this last week, you know, and so grateful for the care that he's been able to get and hopefully be back out adventuring with me soon. Luckily, he's not too severely affected, but sometimes we forget that our day to day work is the worst days of people's lives. And so thanks for being there for him on those days.

Thank you.

All right. What have you been up to, Theisha?

Let's see. Speaking of people doing really well, my husband's completely recovered from his open heart surgery now, so he's just 100% good to go. And we've been just relaxing and enjoying his recovery. I went down to actually the physician Moms Group conference in Kiawah island recently and took the kids with me and that was just a wonderful experience for them and beautiful speaking experience for me. It was really exciting to see women getting excited about managing their own finances. And I could just see all these people like, oh, I don't have to have a financial advisor, you know. It was really cool to see that.

Awesome. Sounds like a great time.

How about you? What have you been up to?

Mostly adventuring, actually. Adventuring and working on this real estate course. Real estate course is going to be out here in a. In. Oh, well, it'll be less than a week from the time you're hearing this podcast. It's awesome. We got a ton of people that have put a ton of work into this thing. Literally. We've been working on this for eight or 10 months and it'll be out in a week, so watch for that. We'll be talking about it next week on the podcast in a little bit more in depth. Watch the blog for the announcement. Like all courses we put out at the beginning is the cheapest price you'll ever get on it. So if you're interested in learning about real estate, you know you want to get in right during the introductory period. And like any course we put together, there's a no questions asked, 100% money back guarantee. So there's really no risk to check it out and see if it's something you'll be interested in if you've been thinking about getting into real estate investing. So aside from that, and Katie's been working a ton on that as her leg recovers from her fracture. But other than that, we've been adventuring floating rivers mostly this summer. So floated the Salmon river, floated the Green river, floated a little bit on the Colorado. So lots of rafting and looking forward to some climbing this week. We're headed up to the Wind Rivers and, and then some canyoneering next month. So should be a. Should be a fun fall too.

Awesome. Is Katie going with you to climb with her leg?

Ah, she can't yet. She's still in that period where she's weight bearing but, you know, not everything.

I'm sorry to hear that.

Plus, her. One of her legs is about, you know, it's about two thirds of the circumference of the other one. So she's still got a little bit of muscle to get back or she can do something like that. So she's working hard on that, but she's mostly trying to get back to playing soccer. She keeps trying to Rush it. Thankfully, the orthopedist told her the same thing I did, that she's got six more weeks before she can play soccer.

Oh, that sucks.

All right, let's talk about recessions today onto happier topics. Yeah. An email in response to what? I don't know what I said, maybe it was on this podcast, maybe it was in a blog post. But he sends in this email. We are not officially in a recession, though it's commonly thought that a recession is called after 2/4 of negative GDP growth. He says, which is what I thought. It's actually a much more qualitative call made by the NBER and takes into account four or five factors in addition to quarterly gdp. These include unemployment, which is currently negligible, as well as salaries and a few others that I don't recall. So this was interesting. I'm like, what are you talking about? I thought recession was just too quarters in a row of decreasing gdp, which, you know, the media talks about that a lot. It's a pretty important part of it. But he's right. The technical definition of recessions in this country, there is no technical definition. It's literally called by a committee, the NBER committee, which I thought was not only interesting but very bizarre, you know, and they say that the traditional definition is a significant decline in economic activity that is spread across the economy and that lasts more than a few months. Right. That's not a very hard and fast definition.

Right.

It's apparently up to a vote, a vote of a handful of people of whether we're in a recession or not. I guess I don't care that much. What do you think?

Yeah, I mean, it takes them a while to even get to that conclusion unit. Since they're looking backwards. They don't declare recession oftentimes many months into the recession. Like in December for the last recession, it took them a whole year to undress that the US was in fact in a recession that started in December 2007. So because it takes them, because they have to look at so many different factors like production, employment, real income, and they're not just looking at GDP or the gross domestic product. So it makes sense that it would take them a while to declare that. I think most economists and people that follow finance use the two quarter rule just because it's something has a solid number and they can call it pretty quickly and they don't have to wait for the nber, you know, pronouncement. But yes, that. He's right about that.

Yeah. So what about a depression? What's the difference between depression and recession, Is there a technical definition or do we got another committee that decides that?

Yeah, there's no actual formal definition, but generally recession is a significant, pervasive and persistent decline in economic activity. And we're usually talking about a fall in GDP for between 1.7 and 3%. A depression is when the GDP declines greater than 10%, so we're talking a much bigger drop. But again, there's no real formal definition. This is just something we all come to an agreement on at some point.

It's really interesting when we talk about depressions, almost all of us, our consciousness goes to the Great Depression, which was really the only big one in the 1900s. And we really haven't had one really, unless you count the very brief thing we had with the pandemic since the turn of the millennium. But in the 1800s this happened every 15 or 20 years. It was really, really cyclical and the economy just got hammered every 15, 20 years all the way through the 1800s. Financial history in the US in the 1800s, absolutely fascinating. Highly recommend learning more about that and realizing just how stable it was in the 1900s by comparison.

Is there a book, Jim?

There is a book and I read one. I forgot what it was called though, so let me see if I can find it.

We'll get back to you.

Ye. In the meantime, let's take a look at Matthew's question that he left on the speak pipe and he's asking about recession proof investments. Let's take a listen to that.

Hey Jim, My name is Matt. I'm a longtime white coat investor devotee at an academic emergency position in Nashville, Tennessee. I've asked questions on the podcast before. On a recent podcast with some of the real estate investment folks who you work with, they were talking about how real estate is a kind of recession proof investment and it got me thinking. Wouldn't you describe just a general index based stock investing strategy as recession proof as well? What I mean by that is that recessions are kind of a normal part of the academic or the, excuse me, the economic cycle. And honestly, if you're investing in stock based index funds, as you recommend, and I do, for the long term, during a recession, you're actually potentially kind of buying stocks on the cheap. So to me it seems a little strange to describe something, to describe that strategy as anything but recession proof when you understand the fact that recessions are normal and that as a matter of fact for the long term investor they actually may be somewhat beneficial. Just wanted to hear your thoughts on this and understand if I wasn't thinking about this in a sophisticated enough manner. Thanks.

All right. That's a great question. All right. While we were listening to that, I looked up the book. The book is America's First Great Depression, Economic Crisis and Political Disorder after the panic of 1837. If you like financial history and if you're a do it yourself investor, I think you should like financial history. I highly recommend this book.

Very, very good.

Definitely putting that on my list.

All right. Recession proof investments. Matthew does not like the term recession proof investments. I'm kind of with him. I'm not sure what guest we had on that described real estate as recession proof investment. It's obviously not. If you lived through 2008, 2009, we had a bit of a recession there and, and my recollection is real estate wasn't, you know, didn't hold up very well in 2008, 2009, so it's certainly not a recession proof investment. What are your thoughts on recession proof investments? Disha?

Yeah, I mean I think the, the background or what people usually think of as companies that are recession proof are companies with low debt, good cash flow and strong balance sheets. Basically companies that can weather a storm. And I feel like investors themselves can make themselves recession proof with a similar strategy. Having low debt, not too much leverage, good cash flow, strong balance sheets so that they don't have to pull out their money and in the, in the middle of a recession. And again, you know, this actually brings up a really good point in that the difference between a recession and a bear market because if you think about, you know, recession we just defined as either two negative quarters in GDP or when the NBER decides a year later that it was a recession. Right. But a bear market is actually just defined by investor sentiment. And if you can keep that mindset of this is, you know, this is a normal economic activity. This is part of the normal, normal economic cycle to have a recession, ups and downs. And I'm going to keep investing in stocks. You're actually keeping us from having a bear market. So. Thank you.

I love your, that's a lot of wisdom that you just said there where the people that make it through recessions, depressions, et cetera are those that are not highly leveraged people, cyclical people, speculative people. It's those with good cash flow, strong balance sheet, low debt, good emergency fund. I think that's a great insight there and I agree with you. A recession does not equal a bear market. Remember, the stock market is generally considered a forward looking Indicator, it shows up early, stocks drop and the recession comes later. And sometimes stocks drop and the recession never comes. Right. And so you got to separate those two things. They're not the same thing. But I hate this concept, this whole idea of a recession proof investment, because what that makes you think, right? You hear this, you're like, oh, recession proof investment. That means when a recession comes, I should change how I invest.

Right.

And that's where I think you get into trouble.

Absolutely right.

Because now you're going, well, I need a recession investment and then I need a bull market investment and I got to know when to switch. Well, that's really hard. If you think you know how to do that, I encourage you to keep a journal, investment journal, financial journal, whatever you want to call it. Write down all these great insights that you have and what's going to happen in the next few months, in the next few years. And I think you will probably have an experience similar to mine where you will realize you don't really know. You don't really know, and certainly not enough to bet your life savings on it. And, and that's what we're talking about when we're talking about trying to time the market. You are betting your life savings on your ability to know more than the overall market does. And I think that's a pretty risky thing to do.

Yeah.

So my approach to investing in a recession is exactly my approach to investing in a big bull market, in a big economic expansion. You know, it's a static asset allocation. I rebalance once a year when the market's doing awesome. Guess what? I'm buying more bonds, I'm buying more whatever wasn't doing well. When the market's not doing well, I'm buying more stocks. You know, when real estate gets hammered, I'm buying more real estate. It always forces me to buy low and it doesn't require me to know what's going to happen in the future. And so I think it's a very easy method to teach others how to invest. And I think it's a very easy to do for myself. And it clearly works, right? Buy and hold investing works just fine. Over the decades, are there times where if you'd been able to time the market, it would have done better? Sure. But the fact is you probably can't do that reliably. And if you can, why are you only managing your own money? Come manage mine. Manage everybody's right. You should be managing billions. You should be a hedge fund manager and be paid 2 and 20 on it. There's no way you should be investing your measly $2 million portfolio if you truly can time the market.

Yeah.

So, anyway, okay, a bit of a rant, but that's kind of how I. About switching.

That's a great point. I mean, that's a great point. And you're rebalancing with new investments so that you're always buying low. That's. That's brilliant. Thank you, Jim.

All right, let's do this one that came in by email about risk tolerance. You want to read that email?

Yeah. Okay. Thanks for all you do. I'm asking about risk tolerance. I'm a resident, and over six years, I have accumulated about 90,000 in my TSP, but watched it decline to 75,000 without intervention. This year. I plan on diversifying this year after I graduate as I have more time to evaluate other methods of investing. However, if I wasn't. Do you have any rules of thumb for when you may need to take more risk? I lost 16.7% of what I currently have invested and didn't stray from the course. Does that mean I can brave more bear markets, or do you think this is a different story when you have an attending salary? Again, thanks for what you do?

How would you answer that?

Well, yeah, I think it's a great sign that you did not budge and didn't sell your investment. So I think that's really awesome. I think it's hard to know how much of a loss you can take until you really get there. So I would base my overall risk strategy not on what's currently happening, but what you wrote down in your investor policy statement when you started, which is, you know, just stick with that plan and just continue to invest and continue to put money in even as you become an attending. What do you think?

Well, I've been telling people for years, right? If you're not sure how much risk you can tolerate, how much volatility you can tolerate, how much you can watch money that you didn't spend on a kitchen remodel or a new Tesla in order to invest it for your future, disappear down the rat hole before you panic, sell. You know, I think you should, you know, err on the side of safety until you've been through a bear market or two. If you think you can tolerate a 90% stock portfolio, maybe start at 80% and wait for your first bear market, see how it affects you. And I think that's what this investor is getting to. He's saying, you know, I had 90,000 bucks. I lost 15 grand. That's a lot of money to a resident. You know, 15 grand's a lot of money. I didn't panic. What does that mean? Well, I think it means that you're okay where you're at. That doesn't mean you should take on more risk, though. There's no rule of thumb that says, well, you tolerated this, whatever that works out to be. What's that? 17% decline, so you should take on more risk. But it does tell you that you're doing okay there. So I don't think there's any need to decrease the level of risk you're taking. The game really is the same when you become an attendant. The numbers get bigger. You invest more each month, you have more to lose, but it's the same percentages. It's really the same game. I didn't find that as I accumulated more money that I became less risk tolerant. I feel like my risk tolerance has been pretty similar over, you know, vast differences in wealth from the time I was a resident until now. And so I actually have a pretty similar portfolio to what I had 15 years ago. I don't know, it seems to work for me now. Seemed to work for me then. When the market's doing great, I wish I was being more aggressive. When the market's doing poorly, I wish I was maybe not quite as aggressive, but never so much that I really feel like I gotta sell out. But I can remember 2008, 2009, I was pretty happy. I didn't own any more in stock than I did at that point. Was I close to panic? I don't think I was close, but, you know, it's like the price is right. You want to get as close as you can to your risk tolerance without going over. Because going over is a catastrophe. Right. If you panic, sell just once, especially late in your career, that's a lot of wealth evaporating. How about you? What's your risk tolerance done? As you've accumulated more, as you make more now than you used to? Has your risk tolerance changed? Do you think you're more risk tolerant, less risk tolerant? Where do you think you're at?

I'm pretty low risk tolerance personally, so I reevaluate every once in a while. We're certainly leveraged for real estate, but yeah, I'm pretty low risk tolerant. So my portfolio is pretty conservative for my age, and I know that, but that's okay with me. My stock investing portfolio is pretty conservative, but I guess I take the risk in the real estate side. So I think in general That I would call myself pretty conservative.

Yeah. Part of it for me is, you know, when I look at my overall financial life, a ton of my financial life is tied up in some stupid little Internet company. You know, it's a huge part of my net worth and financial life. And so nothing else feels very risky to me compared to that, you know. But it's interesting. I actually carefully tracked my losses. In 2008, we lost 33% of our money, our long term investments. In 2008, that was about $78,000. And so now if we lost 33% of our wealth, that would be a seven figure loss. It'd be a lot more money. But I think overall, as I become more experienced as an investor right now, I've been through, with real money invested, I've been through 2008, I've been through 2011. You know, a lot of people don't even remember 2011, but that was 19, 20% decline in the stock market. I've been through December 2018. A lot of people don't remember that because it was so short. I've been through the pandemic, Right. Most people remember the pandemic, but again, very, very brief I've been through this year. Right. This was a 25% drop in the first six months of this year. A lot of it's come back at the time of recording, but as I go through these bear market after bear market after bear market, I become more used to them. Right. It feels more and more like I've seen this movie before and I know how it ends and I'm not putting money that I need anytime soon into those sorts of investments. And so I think it's easier to feel like it's play money, monopoly money, not real losses, even though it truly is.

Yeah, you know, I just don't. Look, I don't do those calculations when I'm. When the market's falling. I'm definitely the type that's just like, I'm not even checking my net worth today, you know, or for the next three months. If, you know, it's fine. I'll just keep doing what I'm doing.

A lot of people do that.

Yeah.

Yeah. A lot of people don't open their statements.

Yeah. I just, in a bare market, don't care to know.

Yeah. My problem is I got to invest money every month or two, and so I kind of want to know where it should go. And so that kind of forces me to see where I'm at.

Yeah. See, I have it automated, but you.

Know, it was very interesting.

Interesting, yeah.

After 2008, 2009, I totally lost interest in the markets and track. It was so boring after that. You know, in 2008, 2009, funds were going up 5 and up and down 5 and 10% a day. A day. You'd lose that in a mutual fund.

Gee.

And then so there I'm sitting, I'm sitting there in 2010 going, this is a yawner. This is totally boring. You know, why would you even want to watch this market? It's not interesting at all. Compared to the fall of 2008. That was really interesting when we thought the entire financial system was going to melt down.

Right. That was pretty scary.

It's hard to get too excited about it after that.

Yeah, see, I don't trust myself enough.

You're worried you'll panic sell.

Yeah, yeah, exactly. I don't trust myself enough to like go in and actually actively invest every month, especially now in this kind of an atmosphere. So I just have everything automated and I still have in tax loss harvested because I don't want to turn off my automation because that keeps my, you know, my psychology from affecting my portfolio. So I'm just letting it ride at the moment.

I get that question a lot.

Yeah, yeah, we talked about it last time.

People are like, well, how can I tax my harvest if I, if I got everything automated? And I'm like, it's kind of one or the other. You know, there's advantages to doing bolts, but it's really hard to do both of them.

Yeah, absolutely.

All right, let's talk about another. If there ever were a recession proof investment, particularly this recession, it would be I bonds. And let's hear this question from Mark about I bonds on the Speak pipe. Hi, this is Mark in Boston. My question is I bonds were not originally part of my investment plan, but now with inflation, I'm wondering, is it worth it to change the plan and update that to include I bonds? All right, well, it's a good question, Mark. What do you think? Is it worth it? Is it worth changing your plan now that inflation is higher?

Yeah, I've been pondering this question myself quite a lot recently too. So just a little bit of background on I bonds first. I bonds are considered safe investments in this market because they protect your money from losing value due to inflation. The interest rate that they give you is actually based on inflation and goes up with inflation. So that's nice. You can put up to $10,000 per person into an I bond through the Treasury Direct website in Fact, you can actually also purchase another 5,000 with your tax refund. So you can actually have up to $15,000 a person in I bonds. And recently it's been around 9%. So the, you know, and that 9% is guaranteed for the next six months. So that all sounds great. The downsides, potential downsides of I bonds is that you have to own them for at least a year. So the money is tied up for at least a year. If you cash it out before the five, five years, you lose three months of the interest. But if you cash it out after five years, you get to hold onto all that interest. What's kept me from actually doing it so far is just the tax considerations and our general plan for the years. But the taxes owed on I bonds, they are state and local tax exempt, but you do owe federal taxes on that money. And I do believe that that federal tax bill is at your ordinary income rate. Is that right, Jim?

Yeah, I mean, it's interest, so you got to pay ordinary taxes on it. It's ordinary interest. I mean, you don't have to pay payroll taxes. No Social Security or Medicare, but, but it's, it's interest, so.

Right, right.

No, no long term capital gains.

Exactly. Yeah. So the, the tax rate's pretty high on that. So I guess it depends on how long you plan on holding onto it. And the one way to get around the tax is to actually use the money for it, educational expenses, in which case you don't have to pay any taxes on it. So if you have kids in college, this might be a really good investment for you. What do you think, Jim?

Yeah, I think there's a phase out on it, though. I think there's a phase out on that educational.

Oh, yeah, I'll have to look that up.

Pull it up here. So the problem with phase outs. Right. Is doctors are almost always phased out.

Yeah, that's true.

Yeah. It looks like you can see it. It's form 8815. I think the phase out if you're single is 98,000. If you're married filing jointly, it's 154,000. So if your adjusted gross income is over 155, married filing jointly, you're phased out of that cool feature of savings bonds. It's too bad. It is a cool feature.

Yeah.

You know, most docs probably aren't going to get their AGI below that, especially if they're married to another person that's working. Yeah, I don't know what the right answer is to this person's question. I can tell you this. I have always had a portion of my portfolio set up, you know, dedicated to inflation indexed bonds. And you know, for the most part that has been a TIPS fund is what I've used for that, or a TIPS etf. But you know, I bonds are the last year have been dramatically more attractive than tips, right? Because when interest rates go up, well, the value of a bond like a TIPS goes down. And so TIPS actually have a negative return on the year. Meanwhile, I bonds are earning 9%, right? So they're dramatically more attractive than tips. So if I could have swapped all my tips for I bonds, that would have been wonderful thing to do and I would have loved to do that. Two issues. One, if you're investing primarily in retirement accounts, you can't put I bonds in there, right? The way you buy I bonds is you go to treasurydirect.com, you open an account and of course it's like the government running an investment company. And so it's like super hassle. You can't Even use your LastPass put in your password. You literally have to type it in on this terrible keyboard on the screen. But you got to open another account to start with. And then because they only let you buy, you know, $10,000 per entity, you know, you can buy 10,000 for you, 10,000 for your spouse. If you have a trust, you can buy 10,000 there, you can get another 5,000 with your tax return. You can actually buy some for your kids, kind of a utma like account within your account, $10,000 each there if you really want to. But it's a limitation, right? That's fine if you want to put ten grand into I bonds. But let's say you want to put a million dollars into I bonds. You just can't do it, right? You're not going to open 100 trusts in order to invest in I bonds. And so there's kind of a limitation. Their savings bonds are kind of designed for the small guy. And hopefully at a certain point, most white coat investors get to the point where it's more hassle than it's worth to add I bonds. But I did finally get around to adding I bonds right at the end of last year. We got $10,000 into an account for Katie and 10 more for me. And then after the first of the year, we put 10 each into it again and put 10 in for our trust. And so we got what's that add up to? $50,000 worth I bonds, which was enough that I thought it was worth the hassle and it's been making 9% this year. It's great. But I would have liked to put a whole lot more money in that. And you know, and if you don't have a significant taxable account like we do, you know, you're not going to put this in your 401k. You're not going to put it in your Roth IRA. So it's definitely for a unique person.

Yeah.

All right. Yeah. More questions about savings bonds. I guess this Cindy's done a nice job putting this podcast together for us. We're talking about all these recession proof investments. All right, let's take a listen to this one. I don't know who left this question. Hopefully they'll tell us here in a second.

Hi, this is Kay. Been listening to your podcast for a while. Thank you so much for all the financial advice that you are giving out. I had a question about savings bonds. I have some EE bonds that expired in 2021 that were given to me from family members, maybe around 10k which I was thinking of cashing and then buying I bonds as I don't have a ton of other cash around to buy this, I guess, investment vehicle which is turning out to be good in the current market. I was wondering if you think that is a good idea or if there are more tax efficient ways to cash in these bonds as I don't have a current need for the money at this point. Thank you so much.

So let me guess, explain the difference between EE bonds and I bonds. First, EE bonds and I bonds are both sold at face value and they both earn interest monthly. That's compounded semiannually for 30 years. And both EE and I bonds may be redeemed after 12 months. If cash during the first five years, you forfeit three months of interest payments. Like I said before, both are exempt from state and municipal taxes and are completely tax exempt if you meet the, you know, if you're not phased out, if you use it for educational expenses. But the difference is that the EE bonds, the interest rates on E bonds, is fixed for life on the bond, while I bonds offer rates that are adjusted to protect from inflation. So if it's looking like inflation's going to be high, I bonds maybe will do better. But unfortunately this kind of requires a crystal ball kind of calculation. EE bonds do offer a guaranteed return that doubles your investment if held for 20 years. But there's no guarantee with I bonds if inflation goes down. The I bonds are also going down. So this is sort of a Gestalt trying to predict the future. Call if you decide to sell your EE bonds for I bonds. Right now it seems like the right answer, but I'm not sure if that's going to be the right answer in 20 years.

Yeah, she mentions that her, her bonds are expiring. I don't know if that means that they've hit their 30 year mark. If you've got any kind of savings bond that you've had for 30 plus years, yes, you need to cash them in because they're not making money anymore. So that's the case. Even if you just turn around and you buy the exact same kind of bond, you should do that. But I don't know if you've had them for 30 years or not, but that's what it sounds like. She's saying if that's the case, yeah, you need to redeem them and move it into another investment. But without knowing your entire investing plan, I don't know if putting them into savings bonds is the right thing for you. Right. Maybe you should be paying off your mortgage or paying off your student loans or paying off your credit cards or your car loan or maxing out your 401k or, you know, saving up to buy into your practice. I don't know what the best use for you for ten grand is. It may not be to buy savings bonds. And just because the money's coming out of savings bonds doesn't mean it has to go back into savings bonds. So treat it like any other windfall, any other money you earned. It should go to your highest use for money right now, whatever that might be. But I find I bonds a lot more attractive than EE bonds because of the inflation protection component. And when times like this come along where inflation's really high, you get this huge bonus out of the I bonds and you don't get that out of the EE bonds. So I'm a much bigger fan of I bonds than I am the regular EE savings bonds. I don't own any of those. It's very interesting. If you look at them right now, you know what they pay. You know what the interest rate is on EE bonds right now?

No, I don't.

0.1%.

Ouch.

That's it. Yeah. 0.1%.

I mean, right.

You go to Allied bank right now. Right. High Yield Savings Account, it's paying what, 1.6 or something? I think as we're recording this. 1.75.

Yep, yep.

So it's hard to get excited about something that ties your money up for a year for which you got to give up three months of interest. If you cash it out up to five years and it's only paying you 0.1%. But it has this really cool feature that should not be overlooked, which is that if you hold it for 20 years, 20 years, no matter what the interest rate Is, whether it's 0.1 or 0.2 or 3 or whatever, they guarantee your money will double. And what does that work out to be? If you run the numbers, it's like three and a half percent for your money to double in 20 years. If you hold it for 20 years, you actually do a lot better than 0.1%. You get about 3.5%. And that's a little more attractive, I think, for such a safe investment. But this is something you're buying to kind of hopefully keep up with inflation. You're not going to crush inflation with EE bonds. They're a pretty safe investment. But I don't think it makes sense to buy any right now unless you're going to hold it for 20 years. And even better after that point, if you can get the interest out tax free because you spend it on education. But that would require you to have an income below a certain amount, obviously. You own any savings bonds at all, Tisha?

No, I do not. No. I've been thinking about buying some I bonds, but I haven't done it yet.

All right, let's turn the page to a different thing some people do when times are bad. Paying off rental property mortgages. It's a question from Shiva. Let's take a listen to this one.

Dear Dr. Dali, I am Shiva Rathwapli, Gastroenterologist, Physician from Phoenix, Arizona. Thank you for all the work you do and your education for physicians. My question is regarding paying off rental property mortgages at current high inflation. I have six rental properties with APR ranging from 3.8 to 4.5%. I have some extra capital to invest and I have maxed out my 401k, HSA and backdoor Roth IRA contributions for this year and have 7030 portfolio. Should I use this to pay off mortgages or buy more stocks and bonds or buy additional properties? With inflation being around 7%, does it make sense to pay 4.5% rental property mortgages?

Thank you. All right, that's a great question. And you gave us a lot of information, Shiva, but you did not give us the information we need in order to give you advice on this topic. And then what that information is, is what are your goals and how much risk do you want to take or do you need to take in order to reach them? You know, because what we're talking about here is how much leverage risk you want to run. You know, let's say, for instance, your goal is to have 50 rental properties, right? That that's your financial goal, is you want to have this real estate empire and right now you have six. Well, if that's your goal, you probably need to continue to use a significant amount of leverage. And so you've got these loans that are 3%, 4%, 5% ish, and like you mentioned, inflation's 7, 8, 9%. But more importantly, you need to go buy more properties. And so rather than using your money to pay off the loans, you want to use that money to go buy more properties, because that's your goal. On the other hand, let's say your goal is to have six paid off rental properties and you own six properties, and all that's keeping you from having six paid off rental properties is to pay them off. If that were the case, I'd say pay off the properties. The nice thing about paying off loans is you get a guaranteed return, right? So if this loan is at 4.8% interest and you pay it off, you are earning 4.8% on that money, guaranteed, no risk required. Now, obviously, if you take some risk, you leverage up, buy another property, there's a very good chance you could beat 4.8%. But you're going to have to take some risk in order to do that. And whether that's the right move for you or not depends on your risk tolerance and depends on your goals. That's about as specific as I can be on that one. I mean, if you just look at the numbers, it's always going to look better using as much leverage as you can in your life. But that doesn't take into account risk.

After talking to you and doing these podcasts with you, Jim, I have recently changed my plans a bit because initially I was in the mindset of doing one property a year and just building, building, building and getting that big portfolio. But as you've talked about leverage risk and how most people recommend about 30% of leverage risk, and I looked at the leverage risk in our portfolio. We've actually decided to pay off some of our mortgage in order to decrease our leverage risk. But first we're going to go after our primary home mortgage first, because that's what I would like to own free and clear, first of all. And that really puts it in such good perspective. Obviously, it does slow down your growth and you can't. If you're not leveraging as much, you're not expecting expanding as fast. But it does give you a lot more of a stable base, a lot more stable financial foundation to have less leverage risk. So I guess it's just like Jim said, it's really depends on what you want to do. But you do do have to realize every time you leverage that you are taking on more risk and every time you deleverage you are, you know, getting rid of a little, little bit of risk.

Yeah, for sure. It's a, it's not an easy question. I mean we all have this dilemma, right? I guess not all of us, but most docs have this dilemma. At any given time they've got a debt they could pay down and they're having to choose between that and investing. Whether it's student loans, whether it's car loan, whether there's credit cards, whether it's a mortgage, whether it's a mortgage on a rental property. Unless you have no debt at all, you're going to struggle with this question and realize that's totally normal that everybody else is struggling with it too. And that there's no right answer. There's only a right answer for you. And realize that that answer may change as your financial life evolves. You know, what's the answer for you when your net worth is $300,000 and you're a 36 year old doctor, might be totally different from what your answer might be when your net worth is $8 million and you're a 58 year old doc and thinking about retiring and you know, you may have a totally different answer at that point. And so it's pretty impossible to give you a definitive answer. Dave Ramsey would. But I'm not going to give you a definitive answer because I don't think there is one. Both of them can be right. Leverage risk is a lot like taking on market risk. You want to take as much as you can handle without going over since you never know exactly how much you can handle. Err on the conservative side.

That's a great answer. I'll lead us to the quote of the day. Never change your long term investment plan based on short term results. That kind of encompasses what we've been talking about recently, the I bonds and long term plans and when to change them, when not to change them. I think it's important to remember to not change your plan just because of short term results. Change it. But if you're going to change any investments, make sure you're Keeping your long term investment plan in mind and that's how you're making your decision. That's probably when you'll be the happiest with the results.

Yeah, for sure. Investing is a marathon. Investing is the Tour de France. Right. It's not a sprint.

Yeah.

All right, let's talk about captive insurance. We got a short speak pipe question asking about it, so let's take a listen.

Okay.

Hi Jim, my accountant is telling me that I should start thinking into a captive insurance plan due to the very high tax rate that we're paying and hopefully a very successful year. What are your thoughts about captive insurance and is this something you think we should pursue? Thanks so much for everything you do.

Okay, I'm going to define captive insurance plans and let Jim take this away then. A captive insurance plan is fully owned and controlled by its insured. So. So it's a type of self insurance. Basically, instead of paying a commercial insurer's money, the owner actually invests their own capital and resources and assumes a portion of the risk for the portfolio. Okay, so Jim, is this something he should do or not?

This is one of those things where the devil's in the details, right? Captive insurance plans can work really well for the right people and sometimes they only insure some of the risk and they still pay an insurance company to take on the majority of the risk. Sometimes you're banded together with enough other docs that you're essentially self insuring. You know, for example, you know, my physician group now is, I don't know, three or four hundred docs or something. And at that sort of size, you can you start thinking about, well, what if we just self insured, you know, everyone put their money. Instead of thus paying an insurance company and letting them take their cut for their expenses and their profits. What if we just took all of our premiums, put them into a pot, used them to pay out whatever claims came in and kept the difference, you know, and you're still pooling risk with other people. But you start going, what happens if we cut the insurance company out? And there's a few tax benefits to it as well. So this does make sense for a lot of people. This isn't like, you know, whole life insurance where it makes sense for so few people that we should, there should be a general warning against it. That general warning doesn't exist for captive insurance. It's a little bit more like, you know, a real estate syndication. You've got to look at it, you've got to do the due diligence. It's going to be right for some people, it's not going to be right for other people. Your particular one that you're looking at may or may not be a good deal, but for for the right person, these things work out really well, especially if you end up not having very many claims because you keep the difference and that's pretty beneficial. So I would definitely look at it if your accountant thinks it's a good idea. You know, get some quotes, get some, you know, more details on it, and then make a decision once you have all the information you need to make the decision. But I wouldn't necessarily just shy away from it like it's always a bad deal. You know, this isn't a, this isn't whole life insurance, this isn't a reverse mortgage where, you know, they're just not right for almost anybody. It does work out for some docs, so it's worth looking at. Love what you hear on the podcast. Looking for more great White Coat Investor content? Head over to our YouTube channel where you can watch video recordings of our podcast, short snippets of financial tips explained succinctly by me and others, and deep dives into topics for more in depth learning. You can even learn all about real estate with webinars from our real estate partners. Check out all this and more@YouTube.com thewhitecoatinfot investor. You can do this and the White Coat Investor can help. All right, reminders. It's September. If you're excited about real estate, we are going to have the WCI Real Estate course out. It's called no Hype Real Estate Investing. It's going to be out in about a week from the time this podcast drops, so watch for more information next week about that. Thanks. For those of you who are leaving us five star reviews on the podcast or telling your friends about it, WCI still grows primarily by word of mouth and so we appreciate you sharing that with people. Thisha, you wanna share our most recent review we got?

Absolutely. Dr. Dale, your podcast is truly amazing. I'm not an MD, but I listen to your podcast with great enjoyment. It is easy to follow and you cover so many different cases. I love that you have wonderful guests who share great advice. Financial literacy is so important and the earlier your start, the better off you will be. Thank you. Great review. Thank you so much for leaving that.

All right, I guess we've come to an end of our time. It's been great being with you again, Tisha. It's been great being with you the listener to this podcast. Without you, this podcast doesn't exist. We are always looking for better ways to serve you if you have feedback on the podcast. We love to hear positive feedback publicly. We want the negative feedback privately. So feel free to email us. You can send it to me editoritecodeinvestor.com and we're constantly making changes with this podcast to try to serve you better. Until next week, keep your head up, shoulders back. You've got this and we can help. We'll see you next time.

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.