WCI #406: iBonds, Asset Pricing and Other Investing Questions

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.

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Hello Dr. Dali, I'm curious to hear your thoughts on the Vanguard Cash plus bank Sweep accounts. The investments are FDIC insured, but Vanguard itself isn't a bank that can be insured. Are these accounts vulnerable the same way Yoda users weren't safe when its software provider Synapse went bankrupt? It's tempting to dump my High Yield Savings account, bank savings, and use Vanguard since they already have my ira, but I'd like to fully understand the risks involved. Is it the same risk if Vanguard went under while my IRA is there? Thank you very much.

Okay, great question. I'm having to hear, having to learn about this Yoda Y o t t a debacle that apparently happened. I don't know a lot about this, but apparently last year a High Yield Savings app had a big problem. It's kind of a fintech company and I'm looking at this article from June of 2024. It says 85,000 accounts locked in fintech meltdown. We never imagined a scenario like this. For three weeks, 85,000 Yoda customers with a combined 112 million in savings have been locked out of their accounts. CEO and co founder Adam Mollis told CNBC the disruption caused by a dispute between fintech middleman Synapse and Tennessee based Evolved bank and Trust has upended lives. All right, sounds like maybe a bad thing if your money is not easily accessible. Here's the deal with cash, okay? We all need some cash, okay? Make sure you have enough cash in the places where you can get to it. After you've insured that, try to Earn something halfway decent on your cash. Those are kind of the two principles here. The first principle is kind of an emergency fund type discussion. You probably ought to have some cash in your wallet. You probably ought to have some cash in your home, maybe in a fire safe or something in your home. You ought to have some cash in your checking account, right? And hopefully that involves a local bank or credit union that you can stop by and pull cash out the next day. Banks are open beyond that sort of accessible cash. I try to earn something on my cash. And you have to pay attention because from time to time, every few years, there might be a better option. For example, when interest rates were really low a few years ago and you couldn't make anything in a money market fund, you'd go to a high yield savings account and maybe you'd make 1%. And 1% was better than no percent, which is what you were getting in your credit union, what you were getting in your checking account, what you were getting in a money market fund. At that point, Maybe you're making 0.25%, but 1% was better than that. So for quite a while, the high yield savings accounts were actually a little higher than money market funds. But most of the time, the best rate on your cash is available in a money market fund. And frankly, I think the best ones are at Vanguard. Comparable ones can be found at Fidelity and at Schwab. Now your sweep account at Vanguard, if you don't do anything special, your sweep account is the Federal money market fund, which is a perfectly reasonable money market fund. We use it a lot. And that's where most of our cash sits at the moment that I'm recording this. At times we've used their municipal money market fund. When you're in a high tax bracket, it can make sense to use that. And your after tax yield is actually a little bit higher most of the time when you are in a high tax bracket. Now, Vanguard came out with something a few years ago. This is a product they call the Vanguard Cash plus account. And if you Google that, you'll come to a page on the Vanguard website that tells you a little bit more about it. It says you could earn more with the Vanguard Cash plus account than with a traditional savings account, which pays 0.45% APY on average. So like I said, anything good is better than the usual crap. Okay? And what you're getting at your local credit union or bank is the usual crap. So this is better than that, right? Better to earn 3.65% than to earn 0.45% or 0% in your checking account or 0.1% in your savings account, right? This is better. You need to pick something better. This isn't the highest yield you can get on a high yield savings account, though. There are plenty out there that offer 4% or 4.5% or even 5% or slightly more as I'm recording this. The funny thing about this is that there's a better option, right, at Vanguard, right? You can go to a Vanguard Money market fund. If you look at the Vanguard Federal Money Market Fund, right, Today as I read this and I'm seeing their Vanguard Cash plus account offering 3.65%, I can see that the Federal Money market fund pays 4.27%. So you're going to get a higher yield just being in the Vanguard Money Market Fund than you are in the Vanguard Cash plus account. So what are you getting at the Cash plus account that would be worth a lower yield than you could earn just being in their money market fund, right? It's kind of the same place your money's at. You can still look at it with your Vanguard accounts, et cetera, but it's basically a savings account alternative. It allows you to keep your short term cash and your long term investments at Vanguard. Well, you can do that with a money market fund. So that's not doing anything special for me. It says convenient cash management, next day bank transfers. Well, I can get that in the money market fund. Direct deposit. I don't know if I can do that with the money market fund. I've never tried. I just do that in my checking account, paying bills. I use my checking account. But apparently if you want to do this at Vanguard, you could do this. You could pay bills. You can do mobile check deposit like you can at your bank. Unlimited transactions and compatibility with apps like PayPal and Venmo. So what are they competing for here? They're not competing for your money market fund money, right? That's not as convenient as this is. They're competing for the money you got sitting in your checking account. So if you can deal with this as your checking account and it works for that, you know, you can pay your bills and deposit your checks and all that sort of stuff, then this is going to be better, right, than your checking account that's paying you nothing now you're earning 3.65%, but that's what you're comparing it to. And you got to decide, well, can this do everything my checking account is doing for me right now? If so, then Maybe you want to switch to this as your checking account. I have not done this, but it seems like a reasonable thing to try, right? $0 to open an account. $0 minimum balance, $0 account service fees when you sign up for e delivery of your statement. $0 to transfer money between Vanguard accounts to do electronic bank transfers and ACH transactions. Wires may have a low fee. Well, you got that. Even if you come out of a money market fund at Vanguard. So it seems like a reasonable thing to try. I have not tried it yet, but it's not a bad thing to try. Now, as far as FDIC insurance, Vanguard is not a bank. Okay, so what do they do to get this money FDIC insured? They use a bank sweep program. There's a lot of people out here doing this. I think SOFI does it. And basically what they're doing is the end of each day, they sweep your money out to banks. So overnight, your money sits at a bank that has FDIC insurance, and it says they can do it up to $1,250,000. I think the FDIC amount, I'd have to look this up to be 100% sure. I think it's $250,000. So it's probably going to five different banks. You get that $1,025,000,000. It says $2,500,000 for joint accounts. Maybe it's $500,000. Is the FDIC limit right now? I don't know. I'd have to look it up. That's probably what it is. So it goes out to five different banks, and the next day the money comes back from the banks and it's at Vanguard, and that's how that works. Now, is this got the same risk as Yoda? Well, I guess there can be an issue transferring money back and forth between the banks. It could get locked up. Something like that could happen. I think it's far more unlikely for that to happen at a household institutional name like Vanguard than it is from a new fintech app that names itself after a Jedi from the Star wars movies. Okay, it's not spelled the same as that. Yoda. It's a different Yoda. Y, O, T, T, A. But you get my point, right? You try something totally new and weird things can happen. So I don't know that I'd put all your money in it or close your checking account yet, but I might try this thing out. I don't think it's crazy to try it out, but if I really do have my savings, my cash, that's going to sit there for months. It's going on a money market fund. I don't worry about the fact that money market funds don't have FDIC insurance. And the reason why is that you're not counting on Vanguard to give you your money back like you're counting on a bank to give you your money back. When you're in a high yield savings account, Vanguard takes the money and invests it into short term securities.

Right.

With the Federal Money Market Fund, it's basically securities from the federal government. With the Treasury Money Market Fund, it's securities from the treasury only with a Muni Money market Fund, it's short term securities from a bunch of state and municipal governments and those sorts of things. The people that issue municipal bonds. And so there's something behind it. It's not just the good faith and credit of the bank that's standing behind it and the FDIC insurance. There's something else there in a money market fund. And so it's considered a very, very safe investment. As far as money market funds breaking the buck and losing investors principle, it very, very rarely happens. I don't know that it's ever happened to individual investors. I think the only money market fund I know of that has actually happened at was basically an institutional money market fund for institutions. And I don't think they lost very much principal. It was like a 1% or something. So I don't think that this is a big risk to invest in a money market fund instead of a bank. And that's what I prefer to do. Hope that's helpful to you and answers your questions. If anybody out there has used the CashPlus account and thinks it's the cat's meow, send us an email and we'll do an update in an upcoming episode and talk about how much you love it and how awesome it's been for you. Conversely, if you've had issues with it, send us an email about that as well and we'll share that with the community. Okay? For those who aren't aware until February 27th, you can get $100 off the WCICON virtual ticket. If you go to wcievents.com you can still come to the conference. I think you can still come live. Our hotel block may be pretty full, but there's a hotel nearby that we can get you a discounted price at. You can still come in person. I think we're probably going to have some seats available even the day of the event, but most people signing up now are probably signing up virtually because they just can't arrange their clinical and personal schedules enough to come in person. And so you can still do that, right? So same dates, same times. You sign up@wcievents.com if you want $100 off, Virtual 100 is the code to use and we'd love to have you there.

Right?

With the support of top finance and wellness experts, the Physician Wellness and Financial Literacy Conference, AKA wcicon. Virtual Option brings life changing content directly to you starting on February 27th. To join live during the three day event or watch on demand anytime afterward, learn how to turn your income into lasting wealth, achieve financial freedom to spend without guilt, support your loved ones, retire comfortably and give back to the causes you care about, all from the comfort of home. All right, the code again. Virtual 100. The URL is wcievents.com we'd love to see you there. Whether you come in person, whether you come virtually. I think the Virtual option is a little bit of an entry drug. I think a lot of people take it virtually and show up in person the next year. But they're both great. And we do have people that come virtually every year. They come three, four, five years in a row because they just love the virtual option. They love the freedom. They love being able to pick it up from their own home. You do save the expenses of traveling and you can use your other CME dollars for other stuff because you don't have to pay quite as much to come virtually. Just doesn't cost as much. When we don't have to feed you, it turns out the food's great. By the way, that's one of the best parts about WC Icon. It's not cheap, but it is great food. All right, let's talk about Treasury I bonds. Love me some I bonds, but I'm starting to wonder if maybe it's time for me to get rid of them as well. I don't think it's for the same reason as this.

Speak pipe Asker hi Dr. Dali, longtime listener with my wife and I as a dual physician household, I had a question. I recently updated my money tracking app using the Empower app. When I did this, I uploaded everything that I knew I had invested, including my Treasury I bonds that I bought during COVID which was a recommended item thing to do. While I see all my other investments fluctuating up and down, day to day, week to week. The I bonds, which I bought $10,000 worth, times two hasn't changed. Was this a good investment? Am I missing something regarding this? What's actually happening with this money, as I feel the money seems to have been better invested in the market or something other than just sitting where it currently is. What are my ramifications in changing anything at this point? Maybe just to catch up on these I bonds would be helpful for everyone who put their money into it at that time. Longtime listener, thank you for what you do. Appreciate all the advice.

Okay, great question. First of all, you need to recognize that everybody that owns anything besides Bitcoin or Nvidia got to the end of 2024 and kicked themselves for not buying whatever went up the most. At least a whole bunch of us, you know, large cap growth stocks, right, Via an s and P500 or total stock market fund. The US stock market made 25% in 2024. It made 25% in 2023 as well.

Right.

That makes you go, well, why am I invested in anything else? Well, the reason why is because it doesn't do that every year. It doesn't go up 25% every year. In fact, if you look historically, the average is more like 10% a year. That's because there's lots of years where it doesn't even make 10%. It doesn't even have a positive return. Sometimes it loses 40%. And I'll tell you what, if the US stock market had lost 40% in 2024 and 40% in 2023, you would not be beating yourself up about having money in I bonds, right? I bonds are a very safe investment. What are I bonds? I bonds are a savings bond issued by the U.S. treasury. They're a savings bond. They basically don't go down in value. It's like a super super safe investment. Now, super super safe investments don't generally have high returns. You should not expect 25% of your returns out of savings bonds. That's not the way they work. So if you're disappointed that you only made 1 or 2 or 3 or 4 or 5% or whatever in savings bonds, well, that's what savings bonds do, right? They don't make a high rate of return. And if you wanted something with a high rate of return, you should have invested in something much more risky. Okay, there's two types of savings bonds. There are EE bonds that just pay you a nominal rate of interest, and there are I bonds. And I bonds pay you a real return, an after inflation return. They are adjusted for inflation each year. So I bonds are a method of hedging against the biggest risk for bonds. The biggest risk for bonds is inflation. Inflation is very Bad for bonds. If you take out a 30 year treasury that's paying you 4% and interest rates go to 9% and inflation's 9%, by the time they give you your Principal Back in 30 years, it's going to be worth a whole lot less. And what you gave them 30 years prior, that's a big risk with bonds. And the way you hedge against that is by not having all your money in bonds. Number one, you put some in stocks or real estate or something expected in the long term to outperform inflation and by taking some or even all of your bonds and indexing them to inflation. So there's two types of bonds really out there available that you can use to index against inflation. The first kind is tips, treasury inflation protected securities. The second type is I bonds, these types of very safe savings bonds that are also indexed to inflation. Now you're looking at yours going, I didn't make anything. And I worry that you're just. They haven't added the interest yet, right? They don't put the interest in there every day. In fact, I don't know how often they do it. It might be four times a year, might be twice a year. I can't remember really. It might be once a year, I don't know. But the point is it's accumulating every day even if it doesn't show up in your account. So you are making money with your I bonds. It might only be 2 or 3%. It's not the 25% your US stocks made last year, but they are making money every day even if you're not seeing it added there. Tips are kind of the same way. If you go to treasurydirect, you open an account and you buy TIPS directly there, you might think for months they're not doing anything and then all of a sudden one day they have this really great return. Then the next day they don't make anything again. Well, that's just when the interest is paid out. So don't read too much into looking at that and not seeing anything happening. I assure you your I bonds are making money. They're just not making a lot of money. And why aren't they making a lot of money? Well, number one, because they pay a very low interest rate. If you bought them in the middle of the pandemic, it might be 0% or 0.125%. That's the real interest rate on these things that you bought. That's all they Pay is inflation plus 0% or inflation plus 0.125 or 0.25 or something like that. That's all you're getting at them right now. Now, the current I bond interest rate, if you bought a new I bond today, the fixed rate is 1.2%. So you get 1.2% plus inflation. Well, inflation's not very high right now either. Back in the pandemic, inflation made it such that I bonds at one point were paying like 9.2%. It was really good for like a year. And then inflation got controlled and the rate came down. Now they're basically paying 3.11%. Okay. So it's hard to get super excited about 3.11% when the money market fund's paying 4.75% or something like that.

Right.

And so a lot of people have gone, oh, well, I was just kind of going for I bonds because they were paying 9%. Now I think I'm going to get out of them. After you've owned them for a year, you can get out of them between one year and five years. I think you give up three months of interest when you get out of an I bond and move that money to something else and invest in something else. So you can do that. If you're like, I just don't like these things, I'm going to get out of them. And after you've owned them for a year, you can do that or you can hold them long term. And if inflation goes back up, you're going to be really happy you own some I bonds as opposed to some other type of nominal fixed income investment like CDs or Treasury bonds or whatever. So I hope that's helpful with regard to what you should do. I got a separate issue with I bonds and we're actually thinking about dropping our I bonds. We've got, I don't know, we might have a low six figures in I bonds between the ones in Katie's account, the ones in my account, and the one in the trust account. That's not a big percentage of our portfolio. We've been saving money for a long time. Our investments have done well and we put a lot of money away and we have a pretty big portfolio now. And this really doesn't move the needle. You're only allowed basically to buy $10,000 a year for you, $10,000 for your spouse. If you have some other entity, a Trust or an LLC, you can open an account for them and buy $10,000. That's it, though. So if you need to put half a million dollars to work, I bonds aren't going to work for you. They're basically for people that don't make as much money as you are, not as wealthy as you, and they just don't move the needle. They act exactly the same, but at a certain point you're just complicating your life. So I got these three extra treasury direct accounts that are complicating my life, all so I can earn right now 3% on, I don't know, 100 grand or something like that. Well, maybe I ought to be just using tips instead. You can buy an unlimited amount of tips. And despite the fact that I like I bonds, I think I bonds have some cool features to them. I don't know that it's worth the hassle for me. And I think there's a lot of white coat investors in a similar situation. So you might drop your I bonds because of that issue, which is completely reasonable, but I don't think you should drop them just because, oh, they only pay 3% now. Well, they're only supposed to pay 3% now. It's a very safe investment and inflation is low. I bonds are doing exactly what you should have expected them to do in an environment like this. But I have a feeling you're just not realizing they only put the interest for the I bonds in the account every few months. They don't do it every day. So it might seem like they're not doing anything. They might not be doing much, but they are doing something. Hope that's helpful. Let's take another question.

Hello Jim, this is alex. I'm a 39 year old hospital employed surgical subspecialist in the Northeast. Thanking your team for all that you do to educate healthcare professionals. I have a question regarding ASC investments and how to consider them in relation to overall investment strategy. As a background, I make about 400k per year. We have $500,000 in various investment retirement accounts, $400,000 or so in Roth, $100,000 in pre tax or brokerage. I have $500,000 mortgage at 5.5% over 15 years that started this past year in 2024. I have $175,000 and a 529,000 for my older child, $80,000 in cash and have no student loans. I max out my 401 work and backdoor Roth IRA for my wife and myself. After expenses, I'm anticipating an additional $25 to $50k per year available to invest. Considering several options for this investment and wanted to get your advice. Option one is making an ASC Investment. This is a joint venture affiliated with my employer. I have the option of purchasing a range of amounts of shares. Distributions on a yearly basis amount to 20 to 25%. The center is established and profitable. I had a specialist accountant review their financials and give their support as well. I do cases out of the center and I've been pleased so far. Option two is funding a non governmental 457. They have low cost good Vanguard based index funds available. Option three is to prepay a mortgage. Option four is to fund a 529. Option five is a brokerage account. I'd love to hear your thoughts on how to balance these options and any additional thoughts on ASC investments. Thank you.

Welcome to the dilemma that most docs in their early career have. You have a whole bunch of great options for your money and not enough money to do all of them. This happens to everybody when you come out of residency, right? You need to replace that beater and you need to save up an emergency fund and you need to, you know, start saving for your kids college and pay off your own student loans and get into a house or pay off a mortgage. You got all these retirement accounts to max out. You can't do it all. I recommend for the first two to five years out of training that you live like a resident so you can do as much of that as you can. But you still can never do it all. There's always going to be investments available out there that you can't buy. So you do the best you can. You determine your priorities. And if you want to be done with student loans in three years, well, how much do you have to put toward them be done in three years? We'll put that much towards student loans. If you want to be done with your mortgage in 12 years, maybe that's your goal. Pay off your mortgage in 12 years. Well, how much do you have to put toward it to be done in 12 years? If you're okay paying it off at age 65, maybe you don't have to put that much toward your mortgage. It just depends on your goals. Now when you're saving for retirement, as a general rule, you want to save in at least you're good retirement accounts before you save in a taxable account. Okay, so we're talking your 401k or 403. We're talking backdoor Roth IRAs for you and your spouse. Governmental 457Bs and good non governmental 457Bs that are available to you are also great ways to save for retirement. My general recommendation for these sorts of things is 20% of your gross income ought to go towards retirement. Any amount you need to save for other goals.

Right.

Whether it's starting a business or whether it is saving for your kids, college or a second home, those sorts of things are above and beyond that 20%. So I think it's perfectly reasonable to be doing all those things. But your question is really, how does this other thing fit in this ambulatory surgical center investment and how should you think about that and how should it interact with the rest of your portfolio? Well, businesses like this, I view them as separate from my portfolio. They don't go into my asset allocation. My asset allocation is 60% stocks, 20% bonds, 20% real estate. That's our investment portfolio. I do not include the value of the white coat investor in that portfolio. I do not include the value of my home in that portfolio or my cars in that portfolio. They are not in that. They're totally separate. Likewise, when I had a mortgage, I didn't somehow blend the mortgage into that portfolio. That's my asset allocation for my long term money and that's the way it sits now. I love ownership. I like owning things, not only stocks and real estate in my portfolio, but my home, my business, my job, those sorts of things. I like owning them. Owners in the long run, assuming things are managed well, usually come out ahead of non owners. So I'm a big fan of docs owning stuff, whether that is a dialysis center, whether that is a radiology center, an urgent care center, an ambulatory surgical center.

Right.

Whatever it is, many docs have told me over the years these were their best investments. So I encourage you to invest in them. Especially if you've done the due diligence on them like you have.

Right.

It's clearly a pretty darn good investment. Is there risk there? Yes. It's one company, Right. Bad things could happen to it. Who knows what's going to happen? Don't put all your money into something like this. Right. Have a regular portfolio as well. But should you put some money into this? Absolutely. And you might want to put a little bit of money every year into it. If they let you just keep buying more, a lot of times they'll cap out how much the docs can own. Clearly you don't want to own the whole thing.

Right.

You want other people to own it and have ownership in it and bring their cases there and contribute to its success and all that sort of stuff. But I certainly wouldn't feel bad if you owned $100,000 of it, or as your wealth grows, $500,000 or a million or $2 million of this ambulatory surgical center, I think you are likely to consider that one of the best investments you ever made. Right now it's paying a yield to like 25%. Nobody else is doing that. That also tells you how risky it is, right? There's a fair amount of risk there, but it's something that not everybody has access to. And you're being offered a little bit of special access there because they want you to bring your cases there, they want you to support it. And so you might as well take advantage of the investment benefit of doing that. So I would encourage you to invest in it. I would not try to fit it into your asset allocation. Somehow carve some money out above and beyond what you're doing saving for retirement. If you can only do 10% for retirement this year because you want to put a whole bunch of money into this ASC investment, I think that's fine for a year or two or three. I don't know that I would put half of my retirement savings every year for 20 years into this sort of an investment, but I think it's a good investment to make and I try to carve something out and put it into it, but I wouldn't then try to put it in my spreadsheet and make it part of my asset allocation every year. It's going to be too weird. How are you going to rebalance into or out of this investment? You're not going to be able to very easily. So treat it as something a little bit different. Just like most people treat their practice in their home and any other businesses they may own is something a little bit different. But you know, if it makes sense to invest in it, invest in it. Okay, next question.

Hello Dr. Dalai. First, thank you for all that you do and praying for a quick recovery. I followed the blog for years and recently started listening to the podcast. We are not medical professionals but still find the information engaging and relevant. And the doctor stuff is at least interesting to learn about. My wife and I are high income business professionals, specifically management consulting at a couple of the famous firms. Because of this, our professional and personal networks give us insight and opportunity into a lot of private companies through the various flavors of private investing, PE, VC, venture debt, private credit, etc. My question is how to think about this in our asset allocation? Should we think of these investments as a suballocation of stocks company ownership, like how it works in real estate where you have a mixture of public REITs, private syndications and direct holdings. Or should they be considered their own asset class? I also wonder if this is a distinction without a difference, as 10% of your portfolio is the same thing whether you call it a suballocation of stocks or its own investment class. Or am I thinking of the asset allocation process wrong? We'd love to get your thoughts on this, and I suspect this will be coming up more in the future as big players like State street have recently filed with the sec to register ETFs in this space, which might make this investment more liquid, accessible, cheaper and transparent to other people. Thanks again for all you do.

All right, great question. How are you going to treat this? Well, I mean, if it's a business that you have significant impact and insight into, I would leave it out of your asset allocation. Like I mentioned at the previous question, I don't put the white coat investor into my asset allocation. It's something just different. And maybe you view these companies as something different, you know, something you're going to own for two or three or four years while you're consulting with them and have this unique access to them and just treat it as something different. Leave it outside of your asset allocation. If you're saying, you know what, 10% of all our savings every year is going to go toward this category, and when it gets too big because it's done well, we're going to pull some money out of that and put it toward our other categories. When it's doing poorly, we're going to rebalance toward it. And maybe you do want to include it in your asset allocation. Would I make it a separate category? I probably would. I think in that sort of a situation, whatever you want to call it, private equity or something like that, I would put a cap on it.

Right.

Whether that's 5 or 10 or 20% of your portfolio or whatever, I wouldn't put everything into it. Even if you think that you really know what's going to happen and have all your money in just three or four companies, I think that's a bad idea. Diversification works and diversification matters. So I wouldn't do that. But I think it really depends on how big these chunks are and how liquid they are, whether you include them in your portfolio or not. Hope that's helpful and answers your question. A little bit unique from the prior question where the doc is working at this surgical center and has significant insight into its success and significant impact on its success and failure. I think that's clearly something that stays out of your asset allocation in your situation. Not 100% sure. And I don't know that it matters all that much. Anyway, our quote of the day today comes from Alexa von Tobel who said a good financial plan is a roadmap that shows us exactly how the choices we make today will affect our future. Love that. So true. Okay, let's take a question off the Speak pipe about buffer assets.

Hi Jim. I have a question about buffer assets. Some retirement experts have put forth the idea of using buffer assets as a way to mitigate sequence of return risk during retirement. The assets are supposed to be either the equity from a reverse mortgage or the cash value from a life insurance plan. From what I understand, the idea is that during a series of large market drawdowns, the retiree can take income from their buffer assets in order to protect their portfolio to recover. What confuses me about this idea is that I thought a well designed portfolio would already have a buffer continuous contained within it. That is, I thought that the cash and high grade bonds are already serving the purpose of a buffer. So then are the buffer assets kind of like a second safety net below the first safety net? They seem like a complex and expensive form of insurance to protect the portfolio. Or maybe they're not. I appreciate your perspective. Thanks for what you do.

Okay, let's talk about buffer assets, not Buffett assets, right? This has nothing to do with Warren. This has a lot more to do with Wade Pfau actually, who I think has popularized this concept of a buffer asset. The idea of a buffer asset is that when your portfolio is down in value, this is something you can tap to give your portfolio time to come back up in value. So what are some examples of buffer assets? Well, a home equity line of credit is a buffer asset, right? It allows you to spend your home equity and obviously take a loan out on your home equity instead of selling stocks while they're down 22% or something like that. That's the idea behind it. Now I fear that this term even is being used to sell whole life insurance out there because this is another buffer asset. If you had a whole life insurance policy that you could borrow against and the market's down and you need something to spend, you could borrow against the whole life insurance cash value and spend that while you're waiting for the market to come back, you're waiting for your real estate portfolio to be sellable again or whatever, right? It gives you time, gives you liquid money that doesn't go down in value. There are other buffer assets Right. Anything you can borrow against is going to be a buffer asset. Technically, if you could sell it for full price, anything you could sell is a buffer asset. You could sell your second home, you could sell your fancy furniture, you could sell your Tesla, whatever, that's a buffer asset. This is the concept of buffer assets. Now cash is a buffer asset as well. If you got a whole bunch of money sitting in a money market fund making 4.75% right now and the market tanks 40% and you don't want to sell your stocks, you can spend that cash. Cash is a great buffer asset. It works very well. So yeah, if you carry a big cash buffer, you can do that. And lots of retirees do, they carry two or three or four or five years of spending in cash, which is not a bad move right now because you're getting paid well in cash. Cash is paying you 4.5%, 5%, whatever right now. And so it's not sitting there earning nothing, it's actually making money. So it's not a bad buffer asset at all. Bonds can function as kind of a buffer asset, but there are times that bonds go down. The most recent one everyone seems to be just noticing lately is 2022.

Right?

Bonds tanked in 2022. It was like the worst year for bonds ever. Even a total bond market fund I think was down 11 or 12 or 13% or something like that. Those are high quality intermediate duration bonds. If you had long term bonds or low quality bonds, they tanked even more. So there are scenarios where bonds might not work as a buffer asset. The other problem with buffer assets is it involves a little bit of market timing to use them.

Right.

You've got to decide, okay, stocks are down, surely they're going to come back. I'm going to use my cash or my buffer asset or whatever. Well, that's fine. Now you spend from your buffer asset for a year or two and now the buffer asset is gone and stocks are still down.

Right.

We've just entered great depression too. Well, now what? Now you have to sell the stocks even lower than maybe you could have sold them a couple of years prior. That sort of a scenario could happen. You could run out of buffer. So that's one issue using the buffer asset concept. The other concept is when do you replenish the buffer asset? Okay, let's say stocks are down 20%. So you spend from your cash or whatever. Now stocks have come up 10% the next year, is it time to replenish the buffer asset? Should you still be spending from the buffer asset, which one do you spend now? Well, that's not so clear anymore, is it? What about when stocks get back to what they were worth? Is now the time? What if they go up 10%? Beyond that? Is now the time to replenish the buffer asset? When do you pay back that loan on your house or your or your whole life policy or whatever buffer asset you have?

Right.

So it's not as easy as you might think at first glance to decide how to use these buffer assets. And that's one aspect that is concerning about them. The other problem with buffer assets is long term, they tend to not make very good money, right? This is the classic whole life insurance problem, right? If you go buy a whole life insurance policy because you want a buffer asset, well, for the first five or 10 or 15 years you might be just breaking even on your investment there. And even after that, your long term return on this thing could easily be only 3% or 4%, right? So while it's cool to have a buffered asset, you know what's even cooler? Having four times as much money because you earned a higher rate of return long term.

Right.

And this is kind of the argument the 100% stock folks use, right? They're like, well, I'd rather have 50% more money in retirement and then if things go down 30 or 40%, I've still got more money even if I don't have the bonds to tap in that sort of a situation. And that's a valid argument, right? It is an issue. If you spend all your money buying buffer assets, you may end up with nothing but buffer assets and not all that much of them. I ran into a doc not that long ago who's on the verge of retirement. He's been saving for 35 years or something, right? And for some reason early in his career, somebody talked him into buying a bunch of whole life insurance policies. And now on the verge of retirement, 40% of his money is in whole life insurance policies. And he's got to figure out, well, how do I get this money out? How does this work? I was told this was going to be tax free retirement income and I'm having to break the news to him that he could add twice as much money or three times as much money if he invested in something different, number one. And then number two, the options for getting the money out tax free usually mean that you're going to pay interest on it. Yeah, you can do partial surrenders up to the amount of basis. That's the cool tax break associated with whole life insurance. And after that it's either you surrender it and pay taxes at ordinary income tax rates or you pay interest on it. So that's kind of the way it works. And so that's why it's usually one of the last things you tap. It's so it sits around being available as a buffer asset if you run out of your other assets. Or I guess if there's a big market downturn, you don't want to sell stocks low. And that is an option to tap. But it has its downsides, right? And it's important to understand the downsides of using a buffer asset. Okay, let's take the next question another one off the speak pipe hi Dr.

Dali, this is Sid, a current radiology resident and long term follower of the blog and now podcast. I've read your post on asset pricing which briefly mentioned the option of taking advantage of additional risk premiums with a small value tilt. I've considered investing in a factor ETF and trying to decide on a reasonable approach. Do you have any opinion on BBR accepting that this will only cover the US market versus some kind of international small value equity ETF versus a mix of both? Or instead a more actively managed fund from Dimensional or Avantis? And side note, why are these so popular if they're quote unquote actively managed anyway? And how do they compare to, say, a Vanguard fund? Will this be discussed in any of the future podcast episodes? Thanks again for all that you do.

Okay, this is where we run into problems because we have multiple different audiences, right? People who listen to the podcast don't necessarily read the blog. People who watch this on YouTube don't necessarily take the newsletter we have every month. And some things are better explained on a podcast and other things are better explained on a blog. I have spent a great deal of time and effort discussing small value factor investing the various small value funds that are available out there. However, I have found that this topic is probably easiest covered in blog posts. So I have all kinds of blog posts on this subject and I would recommend, if you're really interested in it, that you spend some time on the blog. You can search small value or factor investing or VBR or whatever and you're going to come up with blog posts that talk about this subject extensively. Okay. For those who are not aware, the idea of factor investing is to put some portion of of your portfolio into stocks that you expect to have higher long term returns for whatever reason. You know, if you look at the long term data you see that small stocks and value stocks, right? Value stocks are kind of the opposite of growth stocks. They're a good value when you buy them. You're able to buy a dollar of earnings for a much lower price than you can if you buy the fanciest stock that's in all the headlines that's been growing rapidly, late, right? Nvidia would be a growth stock right now, and I don't know, some sort of Kmart or something would be a value stock. And it turns out in the long run, value stocks outperform growth stocks. Now, it's not entirely clear why. There's basically two schools of thought. The first school of thought is that they outperform because they're not sexy. It's a behavioral thing. People don't want to own Kmart. They want to own Walmart at least, and preferably Nvidia. And so they buy those stocks preferentially. And it's just a behavioral thing and it's a free lunch, essentially in that argument. The other argument, which I tend to lean a little bit more toward, is that it's a risk argument. You get paid more for earning for owning small value stocks because they're riskier than large growth stocks. You're taking on more risk. You should be paid more in the long run. Now, in the short run, there's no guarantee that anything is going to outperform anything else right? Now, obviously the last few years, large growth techy US stocks have outperformed small value, non tech, boring and international stocks. But that pendulum is likely to swing at some point. No idea when. Maybe it's 2025, maybe it's 2026, maybe it's 2027. It's probably not going to be 2048. It's not going to be that long before this pendulum swings back. And eventually small value stocks are again going to outperform large growth tech stocks. If you want to bet that this time is different and trees are going to grow to the sky, that's maybe not the wisest bet. The time to tilt your portfolio toward tech stocks is probably not after they've outperformed for the last two or three or five years or whatever. And so, heaven forbid you be a market timer if you're going to market time and try to predict what's going to do well in the next decade. I would probably lean toward these small and value stocks. So I don't think that's an unwise thing to do at all. Now, once you decide to do that, you got to decide how much of your portfolio you're going to put into these small value stocks, right? And there is no right answer to this question. I will tell you this. Don't tilt more than you believe. If you're not very sure at all the small value is going to outperform the overall market, but you think it probably will and maybe just tilt a little. If you're pretty darn sure, you could have a pretty sizable tilt. I have what I consider a moderate tilt. For example, US stocks make up 40% of our portfolio. In our portfolio, 25% of it is in a total stock market fund and 15% is in a small value fund. So that's a pretty substantial tilt because I believe long term that it probably is going to out. Obviously that hasn't been the case for the last five, 10 or 15 years. And a lot of us small value tilters are sitting there going, man, was that the wrong decision or what? But if you really believe it's going to outperform in the long run, you're okay holding through these 5, 10, 15, 20, 30 year periods of underperformance in order to get that long term outperformance. It hasn't been that long since it outperformed, right? Starting in 2000-2010. That was a period of time when small value definitely beat large growth stocks. But it's been a while since 2010. Many of you weren't even investing in 2010, much less 2000. So it might be hard to remember that time period. Now what should you use to do it? Well, I can tell you this. For many years I used vbr. This is Vanguard's small value index fund as a tax loss harvesting partner. When I had to move this into taxable, I used their VIOV fund, which is another small value index fund they have. However, I've been watching developments. I've liked DFA for many years, but DFA required you to Pay basically a 1% asset under management fee to an advisor to use their mutual funds. For a long time. I was never convinced that they were 1% better than what I could just buy at Vanguard. However, in the last four or five years a bunch of people broke off of DFA and formed a company called Advantis and basically came up with a DFA style small value ETF. Actually I have a whole bunch of ETFs but they have one of which is a small value US stock ETF called AVub AVUV and in response of course DFA goes okay, okay, we'll make ETFs stop leaving the company. So They've also got a small value ETF that anybody can buy without hiring an Advisor. So that 1% fee you used to have to pay an advisor to get DFA access, you no longer have to pay. So I looked at this new fund, this above fund, and decided it's a little bit smaller and a little more valuey than the Vanguard versions. And I like what they're doing with it. So we decided we were going to transition our small value tilt from these Vanguard ETFs to this Avantis ETF. And we've been doing that because ours is in a taxable account. We can't do it instantaneously. There are tax consequences to doing that. We have gains in many of our shares of vbr and I think the VBR is actually gone now, but we still have some in Vialloth, the tax loss harvesting partner. So we've been using those for our charitable contributions every year while buying more AVOV and if needed to tax loss harvest the dfa tax loss harvesting partner. So I do think these new funds are a little bit better. They're certainly a little more small and a little more value y. They are a little more expensive than the Vanguard versions, but I think the slightly higher expense ratios are probably worth paying for. No guarantee, of course, on that. Are they actively managed? Well, not really. I mean, they're a passive fund with slightly more active implementation than what Vanguard is doing. There's actually a spectrum of what Active means. Are they out there just trying to pick the good stocks and avoid the bad stocks? No, they're not, but they're doing a few things around the edges that somebody could call active management. I think they're intelligent things to do and DFA has been doing these things for the last 20 plus years. So if you want to see the track record of what it looks like when you do these things, you can see them doing that. But the main reason they outperform when Small and Value does well is they're just smaller and more value than the Vanguard versions of these funds. The Vanguard versions tend to have more mid caps than the Avantis and DFA ones have, for instance. So I hope that's helpful. I think that's about as deep as I can get into this in the podcast format. If you want more information, go read the blog posts on this. I have long blog posts talking about all the options of funds you can invest in for a small value tilt, whether you should have a small value tilt, etc. It's not very popular right now because large growth Tech stocks have done so well in the last few years. But if you're interested in doing this with your portfolio, there are plenty of people out there who are also doing this right alongside you. Lots of people out there working hard today. Thanks for what you do. It's not easy work you do. That's why you get paid so well. So if you're coming home from a hard shift, somebody died on you today, or you had to tell somebody they had cancer, or you know, you had to break the news to a family that their child's not going to do well, maybe not have the long fruitful life they're hoping for or some other terrible thing. Know that your work is appreciated even though it's hard. And thanks for being there on the worst day of people's lives. Okay, let's take a question from a dental student who wants to talk more about stocks.

Hi Dr. Daly. Thank you for your wonderful podcast and for your books you write and your blogs. I've learned quite a bit. I'm a second year dental student and beginning my financial journey early last year. I was able to even read your White Coat Investor Guide for students since we had a champion in our class.

For Careless for us.

Thank you for providing those. I have a question about long term stock performance since I'm quite young and plan to be in the stock market for a lot of years. I've seen recent news headlines talking about population pyramid inversing since birth rates are declining in many developed countries. I'm wondering if you think that'll impact long term stock performance since there'll be less of a working class to support the growing and aging population in many developed countries including the us. Thanks.

Okay, Congratulations on getting financially literate so early in your career. This is going to pay big dividends for you. For those who have no idea what he's talking about with the White Coat Investors Guide for Students, this is a book I wrote a few years ago. Not really to sell. We do sell a few of them every year, but I primarily wrote this book to give it away. We give it away via what we call the WCI Champions Program. You've still got about a month. Well, you can still register for this and all it takes is a champion in a first year class of a medical school, dental school, other professional school. If you will volunteer as the champion, we will send you a book free of charge for everybody in your class if you will agree to pass it out to them. That's it. That's the Champions Program. And in fact, if you send us a picture of some of your classmates with the books. We'll even send you some swag, you know, I don't know, a T shirt or mug or something like that. I can't remember the exact details this year, but we're trying to get this into the hands of every medical student in the country. We're doing a pretty good job getting into medical and dental students. We're getting into about 70%. We'd like to make that 100%. And we'll even give this to other classes of high income professionals that have a champion willing to pass them out. We think it's one of the best things we do here at the White Coat Investor. So please apply. If nobody's handed you this book yet this year and you're a first year, there's probably no champion in your class. You can sign up whitecoatinvestor.com champion. Okay, now your question. Your question is because developed nations have fallen populations, because nobody wants to have babies anymore, our stock's going to be worth less in the future and thus you shouldn't invest in them and you should find something else to invest you money into. Well, I guess because populations might fall, you should just put all your money in Bitcoin and leave it at that and go for it. Maybe that'll work out, maybe it won't. I have no idea. But here's the deal, right? Don't spend too much time reading doom and gloom articles in the news. What are you buying when you buy stocks?

Right?

When you put your money into a stock index fund, you're buying a tiny little share of, you know, 4,000 U.S. companies. If you're doing it with an international index fund, it might be 10,000 companies. You are now an owner of those companies. When they make money, you make money. What are you buying when you buy a stock? You are buying an earnings stream, a stream of this company earning money whether it pays out as dividends or reinvested in the company and the company becomes more valuable, whatever, you're buying an earnings stream. So as long as that company keeps making money, you will keep making money.

All right?

Now, if you really think that all these companies are not going to make much money going forward because populations might fall, then sure, don't buy them. But that's a pretty big jump from looking at demographic data to saying these companies aren't going to make any money. Right now if nobody wants to buy an iPhone in the US guess where Apple's going to sell their iPhones. They're going to sell Them in sub Saharan Africa. And what is the population of Sub Saharan Africa doing? It is booming, right? Same thing in a lot of areas of the lower hemisphere of our world. They are booming. Many of them are moving to developed countries and they're developing their own countries. So this is not a reason why I would not invest in stocks. This is not a reason why I would expect dramatically lower long term returns. In the long run, the next 40, 50, 60, 80 years is dental student's investing horizon. I would not expect dramatically lower returns because of these demographic changes. Now I have no idea what the next year or 2 or 5 or 10 hold for stock returns. My best guess is that we're not going to have as good returns for large cap growth techies, US stocks as we've seen in the last 10 years. I think it'll probably be a little bit better for international and small and value kind of stocks. I suspect they're going to do better over the next 10 years, but there's no guarantee of that. It's entirely possible that this tech stock boom is going to continue for another 10 years. My crystal ball is totally cloudy with regard to that. But in the long run, these corporations are the most profitable corporations in the history of mankind. They're going to continue to make money. And if they only make 8 or 9% instead of 10 or 11% on average per year over the next 60 years is still a smart place to invest your money. If you're really worried about stock market returns, well, there are other things to invest in that can be intelligent. You can invest into small businesses that you control. You can invest into real estate, especially if you control that.

Right?

But you got the same problems with those, right? They've still got to have a market to sell their products to. You've still got to have people that move into these homes that you're going to be renting out, right? You got, you got the same issues, so you do the best you can. You have a diversified portfolio. And if the world changes in some significant way over the next hundred years, well, you're going to abide with that and adjust to it as you go along and it'll work out. It's going to work out, right? And even if it doesn't work out as you hope, you're still going to be better off than those folks that aren't saving anything, right? Even if your investments only make 3 or 4% going forward, that's still a whole lot better than having nothing, right? Which is what is that the alternative to not invest at all. No, you must invest. You need your money to grow. You're going to need some money to stop working eventually. You're not going to want to practice dentistry until you're 89, I promise. And you're probably going to need some sort of nest egg to live off of in retirement. All right, this episode has been brought to you by Laurel Road for Doctors. Laurel Road is committed to serving the financial needs of doctors. We want to help make your money work both harder and smarter with the Laurel Road High Yield Savings Account. Build your savings with highly competitive rates, no minimum balance to open, and no monthly maintenance fees. Whether you're saving for an emergency fund or planning your next big purchase, you can keep building your savings and access your funds whenever you need them. For terms and conditions, please visit www.l Laurelroad.com WCI that's www.l Laurelroad.com wci Laura Road is a brand KeyBank NA member FDIC. Don't forget WCICON is coming up right the end of this month. You can get $100 off the virtual version using code VIRTUAL100@WCIEVENTS.com thanks for telling others about the podcast and spreading the word using reviews which actually helped more than you might think. Most recent 5 star review said WCI podcast is the best there is. Taxes, insurance, investing, estate planning and more personal financial matters covered in depth than anywhere else and I have tried many host is gifted in his ability to communicate complex topics logically and clearly. You would pay thousands for similar quality advice that you get for free here. 5 stars. Thank you for that from Fire Inch in Town. Great review. We appreciate that. That's it for this episode. Leave us speakpipe questions whitecoatinvestor.com speakpipe and we'll get them answered as best we can. Keep your head up and 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 are not licensed accountants, attorneys or financial advisors. This podcast is for your 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.