WCI #38: Bitcoin, Prenups, and Investing vs Paying off Debt

This is the White Coat Investor podcast where we help those who wear the white coat get a fair shake on Wall Street. We've been helping doctors and other high income professionals stop doing dumb things with their money since 2011. Here's your host, Dr. Jim Dahli. Welcome to podcast number 38 where we're going to talk about bitcoin prenups and investing versus paying off debt.

I estimate that 80% of doctors need, want and should use a financial advisor and or an investment manager. Some investment gurus, such as Dr. William Bernstein, think my estimate is way too low. At any rate, if you want to use an advisor temporarily or for your entire life, there's no reason to feel guilty about it. Just make sure you are getting good advice at a fair price. If you need help updating your financial plan or just getting one in place, check out our list of recommended financial advisors@whitecoatinvestor.com financial advisors. You can do this and the White Coat Investor can help.

Our quote of the day today comes from Charles Farrell who said all decisions you make should help you move from being a laborer to being a capitalist. And being a capitalist, all that means is financial independence where your money's working just as hard as you are. All right, our subject today comes from a quick email that was sent in by a podcast listener, Jeremiah, a hospitalist in Minnesota. And he said, any possibility you could do a podcast on bitcoin? And I thought, wow, more bitcoin. Seems like everybody wants to talk about bitcoin these days. I actually did a newsletter special tip about Bitcoin back the 1st of December, but apparently there are a lot of podcast listeners and blog readers who don't get the newsletter or don't read them. So I encourage you to sign up for that. It's totally free and it's basically a free super secret blog post that I publish every month to those who are willing to give me their email address. And so I covered bitcoin in that. But we'll talk a little bit about it today. Bitcoin is a pretty interesting thing to watch. It's actually been fascinating. This is the first real frenzy that I've had an opportunity to see as an investor during my lifetime. And in fact it might be one of the greatest ones in the last century. And so I think it's absolutely interesting to watch as however, I prefer watching it from the sidelines because it really is not something that I'm interested in investing in. And I think it's interesting to look at something Bill Bernstein said a Couple of months ago where he said, I don't think bitcoin's in a bubble yet for four reasons. And he said there are four key components to a bubble. He said, it's not yet the subject of conversation at social gatherings. People aren't quitting their jobs to speculate in it. The skeptics aren't yet met with anger about it, and there are no extreme price projections. Well, in the meantime, all four of those things have come to pass over the last couple of months. And so if you don't think this is in some kind of a frenzy or bubble, I think you're just fooling yourself. You know, is it tulip mania from back in Holland in the 1600s when people were paying thousands of dollars for tulips, essentially? Well, maybe not yet, but it's awfully similar. There are all kinds of bitcoin millionaires out there now. And you can feel this palpable sense that people have that I call fomo, the fear of missing out. And so sitting on the sidelines, you feel like, man, why didn't I buy bitcoin when it was a buck 50? Now that it's 15 or $18,000, I mean, I can't even tell you what the price of is it, because by the time this runs, it'll be thousands of dollars different. It changes so much every day. Seems like it's up and down 20% every day. But it's gone from in the last few years from something that only true aficionados know about to something that's regularly discussed on financial forums and is in the newspaper every day. And it's getting discussed in social situations. In fact, it turns out that more people are searching for how to buy bitcoin or how to invest in bitcoin than how to invest in gold. These days, they're searching for bitcoin quotes more than they're looking for quotes of the Dow or the S&P 500. And so it certainly is a pretty massive, massive frenzy. It reminds me of that quote from Joe Kennedy before the great depression back in 1928, when he said, you know, it's time to sell when shoeshine boys give you stock tips. And I tell you what, I am seeing nurses talking about bitcoin. I'm seeing housekeepers talking about bitcoin. Everybody's talking about bitcoin. That cannot be a good sign for a good time to buy something like this. About four years ago, I wrote an article warning people not to jump into bitcoin. It was selling at about $1,000. At that point, obviously, if you bought at a thousand and held until today, you've done very, very well. But over the next year, after I wrote that article, it dropped by 75% and took two more years to recover back to that high. Since that time, obviously it's gone up a thousand percent. But when I watch this, it makes me think that this is a movie I've seen before and I know how it ends. I don't necessarily know when it ends, but. But I do know how it ends. And it ends with a lot of money lost and a lot of tears shed. I mean, a classic bubble has several different stages. The first is a stealth phase where nobody really knows about it. Maybe the smart money buys into it. And then there's an awareness phase where people start finding out about it a little bit more. And this is where institutions tend to get in on it and tend to buy some of whatever that investment may be. The next phase is really what is called the mania phase. And this is when the public finds out about it, when you and me and the nurses and the housekeepers of the hospital find out about it. And it has a rapid rise in price as more people pile in and pile in. And then the fourth phase of a bubble is the blow off phase. And that's basically when the price comes back to whatever the long term trend of that particular investment is going to be. With bitcoin, I have no idea where that long term trend is, whether it's going to settle in at $100 of Bitcoin or $1,000 a Bitcoin, or $10,000 a Bitcoin or $100,000 of Bitcoin. It's really hard to say. My crystal ball is always so cloudy. But the question I ask when people ask me about what they should do about bitcoin is what does your written financial plan say you should do about something like bitcoin? And, and chances are, chances are you don't have a written financial plan. But if you do, I'll bet it doesn't mention bitcoin whatsoever. And this is a fun thing about investing. As Warren Buffett says, there are no called strikes in investing. You don't have to swing at everything. In fact, you don't have to swing at anything. You don't strike out. There's no called strikes. You don't have to invest in bitcoin to be financially successful, especially as a high income professional. In fact, all you got to do as a high income professional, Honestly, you take 20% of every paycheck. You make and you invest it in some boring investment like a Target retirement fund in tax protected accounts as much as possible. And you do that throughout your career. You'll retire to a luxurious retirement. That's really all you have to do. Everything else above and beyond that is just bonus. But investing does not have to be complicated for you. And you certainly don't need bitcoin in your portfolio to be successful. You can afford to just sit there and watch. You can invest in stuff that's boring, you know, might only go up 25% in a really good year and might only fall 25% in a really bad year rather than 25% a day like we've been seeing with bitcoin the last couple of months. I also prefer to invest in profitable businesses. I want something that actually has profits and employees and makes money. That's what I'm interested in owning. The kind that even if the value of a company's stock drops a bit, that they're still making money. They're still making iPhones or they're still selling stuff at Walmart or they're still selling oil. That sort of things that people really want and need. So I don't really invest in things that are pure speculation. Now every investment has a certain aspect of speculation in it. But when the primary aspect of the investment is speculation, I try to avoid it. I also don't invest in currencies. I don't invest in yen or euro or any other Australian dollar or Canadian dollar. I don't invest in any currencies. So I don't know why I would want to invest in a cryptocurrency if I don't invest in a regular currency. I don't invest in precious metals like gold or silver or anything like that. And so I view all those as speculative instruments and I don't invest in them. I invest in things that make money. Reminds me a lot of what Thoreau said about it. He said a man is rich in proportion to the number of things which he can afford to let alone. I can afford to let bitcoin alone, so I'm leaving it alone. It's fun to watch, but I don't need it and so I don't touch it. Now, this has nothing to do with blockchain technology. Now blockchain technology may very well be the coolest thing since sliced bread. It may change the world in the same way as the Internet did. I have no idea. I also have no idea whether bitcoin is the next Google or whether it's the next Netscape or Ask Jeeves. As you'll recall, just because those companies were involved in the Internet doesn't mean that they became good investments. And I think it's also important to realize a little bit about investing 101. Buying anything after it went up 1,800% the year before is probably not a good idea. That is very unlikely to end well. The chances of it going up another 1800% the next year seem very unlikely to me. And so if you want to invest in Bitcoin, don't do it right after it's had this huge spike in price. And don't do it with any significant portion of your portfolio. Wait until its price has not been skyrocketing lately. And then if you think it's a good long term play for your portfolio, go ahead and invest a few percent in it. But I'm not going to. So like four years ago. I'm giving you a warning. If you're going to invest in Bitcoin, do it with a limited portion of your portfolio and you and if you make a killing on it, you can rub it in my face. I don't mind. I will congratulate you on your success. But at least when it has a massive drop in value like it will eventually and most of those currently speculating in it are flushed out of the market, it's not going to affect your career and your life plans. Do I think Bitcoin is going to go to zero? Probably not. Definitely not anytime soon. But when something is so volatile that its value changes by 1000% in a year, it is also highly likely to suffer 75 to 90% downturns. Volatility works both ways. Trees don't grow to the sky. And this one seems awfully similar to tulip mania and the South Seas bubble and the dozens and dozens of other speculative bubbles that we read about in the history books. Alright, enough about bitcoin. Let's talk for a few minutes about a prenup. And this one comes from a question I got by email and I've changed enough details and obscured enough that nobody's going to identify this person. But this is basically a resident who is married to a low or engaged to a lower earning partner and thinking about getting a prenup in order to protect himself in the event of divorce. And so this is a doc who's got a great financial plan. The plan is to save and invest more than half of income for 10 to 15 years after attending Hood with all these plans to max out retirement accounts and, you know, relatively low student loan burden and, you know, doing all these great things. Right. And so the doc is asking what would be a wise approach to drafting the prenup? I want to be able to save and invest aggressively. I want to be able to support my parents and provide for my fiance and possibly children later on. My plan is to keep all our premarital assets and investments and related growth acquired during marriage separate. Most of other things we will have is joint marital property. I have no desire to undergo a divorce, but know that it is a real possibility given the statistics out there, so might as well be prepared. However, I am a bit lost on how to draft a prenup that's fair, will stand up in court and allow me to accumulate wealth in the event of a divorce with things like a joint account. What do you think would be a fair amount for me and or my partner to contribute annually and still achieve those goals after becoming an attendee? My salary will go up markedly, and we're both fairly frugal people and think that we can live like a resident for quite some time. So what about in the event of a divorce? What do you think would be a fair way to divide up the joint account, house and other marital properties? Would you recommend paying alimony for a number of years until my partner remarries, or are there other options out there that allow me to waive alimony? This will be our first marriage. Neither of us have children or any estate or inheritance. Of course, we'll talk to family law experts when drafting the prenup, but wanted your opinion first. Well, I thought this one was pretty interesting. I'm no attorney, let's just say that right off. And each of these two partners definitely need one of their own attorneys going into this negotiation. In a lot of ways, it wouldn't be crazy for these two not to get a prenup. There's no previous marriage for either of them. There are no prior children from other relationships. There's no inheritance or expected inheritance. And honestly, there's no significant wealth accumulation yet. Basically, all of the wealth they will have in the event of a future divorce they acquired together. And so in those sorts of a situation, I don't know that a prenup is actually required. And so I think it'd be totally reasonable not to get one at all. This is basically the situation my wife and I were in. We didn't get a prenup, and I don't necessarily feel like that's a mistake. So let's talk a little bit about Divorce. So when you get divorced, which is not as bad as a lot of people think, when they look at the societal statistics for doctors, it's about 24%, whereas in general society at large, it's around 50%. And so you have about half the chance of getting divorced that most other people do. It's not quite as bad as you might think. But what you typically do is you just split what you accumulated together during your marriage. Then the higher earner generally ends up paying alimony for either a few years or until retirement age. So if that outcome is not acceptable to you, then you may need a prenup. But here's the deal. The prenups got to be agreed to by your partner. And so in a lot of ways, it's what you can talk your partner into if you want some crazy prenup that's going to eliminate alimony or some. Something like that. And of course, it's got to hold up in court as well, which you'd want an opinion on an attorney as to whether that's the case. But I would argue in this situation that it wouldn't be fair to your partner to not give the partner anything you earned during the marriage. And when you're working together as a partner, you split up your duties. Some of you spend a little bit more of your time and effort earning money. Some of you spend your time and effort doing other things, such as things done around the house, things to do with the children, those sorts of issues. And so just because it comes in on a paycheck with one person's name on it, doesn't mean it necessarily only applies to that person. So I think if this is really important to you that your partner never gets anything you earned, I think you really ought to be questioning whether you should be getting married at this point at all. You may not be ready to be married. I mean, if someone came to me and said, hey, I earn more than you, and in the event we get divorced, I don't want you to have anything that I earned or anything that's grown from the investments made by the money I earned, and I want to keep all my money separate during marriage, boy, I'd have some real second thoughts about marrying you. I'm not going to lie. I mean, if I were the lesser earning partner in this situation, I demand in that prenup that I get half of the assets, and I demand at least a few years of alimony, which is basically how this usually works out anyway. And if someone wasn't willing to give me at least that I'm not sure that's someone that would be willing to make the sacrifices necessary for a marriage to succeed long term anyway. In addition, I don't think separate finances when you're married is really a great idea anyway. I think you're much better off once you get married to combine your finances. It makes things a lot simpler, number one. And number two, it puts you on the same page, which is critical, absolutely critical for financial success. And so I know some couples out there do do the separate finances thing, but I think in general that's a bad idea and you should combine finances whenever possible. It's not a bad idea to have a little bit of money you're not accountable to your spouse for. You know, an allowance if you will, something you can spend without having to get it approved by your partner. But I think as a general rule you ought to combine your finances once you're married. Alright, let's talk about a doc who has a question about investing versus debt payoff. And this doc writes in saying, I have an additional $10,000, say a year, and I have a choice to put it toward a mortgage or to use it to fund backdoor Roth IRAs. What should I do? And this is a doc that basically has no debt besides a mortgage, is already maxing out the retirement accounts at work. This is a question I get all the time. And in fact, the first post I wrote in 2018 on the blog is pay off debt or invest. And it's not black and white. I mean, sometimes it's black and white. For example, if you decide to pay off debt instead of getting your match from your employer, that's basically leaving part of your salary on the table. That's stupid. It's black and white in that situation. You know, get the match from your employer before you do anything. Likewise, if you have some credit card with a 29% interest rate, paying that off should be a major priority in your life. That's pretty black and white too. You shouldn't be trying to invest and beating a return like 29%. I mean, even a 10% guaranteed return from paying off debt is a very attractive investment. And so when it comes to high interest rate, it's kind of black and white as well. But once you get beyond there, it's just many, many shades of gray. In this particular situation, I find the opportunity to invest in a Roth IRA where the money is tax protected and where the money is probably asset protected in your state and you'll probably get returns of 5, 8, 10% on that money to be way more attractive than paying off a mortgage where you know the after tax interest rate on that mortgage may only be one and a half to two and a half percent. I mean, I think that's kind of a no brainer to max out the Roth IRA before paying off the mortgage. But if you've maxed out all of your retirement accounts and your Roth IRA and maybe you're investing some money in taxable, I don't think it's a bad idea to put some money toward your mortgage and get it paid off early. I like being debt free as much as the next person, but you don't need to be so crazy about it that you're passing up obvious excellent investment opportunities in order to pay off low interest rate debt.

I estimate that 80% of doctors need, want and should use a financial advisor and or an investment manager. Some investment gurus, such as Dr. William Bernstein think my estimate is way too low. At any rate, if you want to use an advisor temporarily or for your entire life, there's no reason to feel guilty about it. Just make sure you are getting good advice at a fair price. If you need help updating your financial plan or just getting one in place, check out our list of recommended financial advisors@whitecoatinvestor.com financial advisors. You can do this and the White coat investor can help.

If you haven't yet purchased the online course fire your financial advisor. It's still available. Come on over to the website and sign up for it today. Head up, shoulders back. You've got this. I'll see you in the next podcast.