WCI #47: Staying the Course, Stock Purchase Plans, and TSP Loans

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 back to the podcast. This is episode number 47.

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Thank you for what you do. Cancer sucks. You know, I just saw a gentleman in the ER this week who who was mostly anxious about his recent pancreatic cancer diagnosis. And when I sat down and talked to him, what he was most worried about was that he was going to die. Well, the truth of the matter is he probably is going to die. I mean, none of us get out of here alive, but he's probably going to die sooner rather than later based on this diagnosis. And you know, pancreatic cancer is a nasty one, there's no doubt about it. I've got a brother in law of a brother in law who's at a young age and is dealing with this as well. It turns out his cancer is inoperable. It's just wrapped around some blood vessels and they're really not going to be able to do much about it. And these are the people that we help every single day. Sometimes we cure them, sometimes we don't. But we can always make their lives a little bit better and provide a little bit of value to them. You don't kid yourself that there's not an emotional toll that that takes on you as you take care of these people. You're not invincible either. And that's why it's so important for you to have both disability and life insurance if anybody else is depending on you. In fact, I think there were even some docs who weren't able to come to the White Coat Investor conference because bad things had happened to them. Family members hadn't been able to had died and they had to go to the funeral. Other docs were diagnosed with an illness or became disabled in between the time they signed up for the conference and when the conference was. And so it's important to realize that none of us are immortal and these bad things can happen to us. Ensure against the financial catastrophes and enjoy every minute of your lives. Speaking of the conference, we're going to have the videos for the conference available here. More details can be found on the website, but it'll be an online course, kind of like the fire your financial advisor course we talked about a few episodes ago. It'll be less expensive, but perhaps a little bit less polished, but you'll get a chance to see all the fantastic speakers that came to the conference. Basically, we're recording their talks and you'll be able to watch them online. We'll also provide a copy of their slides for those who weren't able to attend the Physician, Wellness and Financial Literacy conference in Park City, Our quote of the day today comes from Ralph Waldo Emerson, who said money often costs too much. I like that quote because it really has two meanings. It means not only is interest rate sometimes too high, that actually using money costs too much and you're better off saving up and using your own money rather than borrowing it. But also that money has a cost in that you have to trade some of your life energy or time in order to get it. So those of you watching this on the video, those of you who listen to the podcast may not know that we make videos, but most of these where I don't have a guest, we're actually recording part or all of the episode and putting it up on YouTube. But the YouTube video is really more of a the making of this podcast episode than it is the actual podcast episode. It's not as polished and we don't do nearly as much editing on it as we do on the podcast episode. So that's kind of fun for some people to watch. Others might find it a little bit distracting to see me sitting here in a T shirt in my basement making a podcast. But you should be aware that Cindy and Katie did make me go comb my hair in between the last podcast that we recorded and this one that's actually being on video. So I did dress up a little bit for you, even if I haven't shaved today. We're grateful for the feedback we receive, especially polite but negative feedback. I wanted to talk about some of the feedback we've gotten this year and our plans to address it. We're talking about feedback specific to the podcast. First, we got a lot of feedback about the podcast we had with Jordan Goodman on the show a few episodes back. A lot of listeners didn't like his more salesy approach to life and podcasts, and particularly his mention of his affiliate deals. Frankly, we didn't like it that much either, and after recording the interview, we even thought about not running it. But I'm glad we did because we got 10 times more feedback about that episode than we have about any other episode that we've done. There were over 50 comments on the show, notes themselves about it, and certainly a lot of interest in the topics that were discussed. There's so much interest in one of the products that he was pushing, mortgage acceleration that I did a blog post about it a few weeks later. So if you want my take on it, you can get it on the blog there. Basically, the mortgage acceleration does work, but not nearly as well as he made it sound on the podcast episode. And it comes at the risk of swapping money in your bank account for a home equity line of credit. People also took issues with Jordan's description of hard money loans as safe. I agree with people who criticize that while I do invest in hard money loans, mostly through some crowdfunders, but also in some funds, I don't consider it all that safe of money. You simply don't get money that yields 8 or 10% these days. That is safe money. If you need safe money, go buy some Treasuries. I've got safe money in my portfolio in the form of a TIPS fund as well as the TSPG fund. It's very safe. Hard money loans are not that safe at any rate. Some listeners don't like that we put guests like that on. Some listeners don't like that we put any guests on at all. Some people wanted me to be more confrontational with the guests during the podcast. And some listeners just said, add a little segment to the end of the podcast with your thoughts, especially if the topic is controversial. And then, of course, lots of people just enjoyed the discussion. Who knew podcasting could be so hard, right? Seriously, sometimes you feel like you can't win. You guys like guests, but I got to get the right ones and I've got to make sure that they say the right things on the podcast. So the truth is, you just can't please everybody. And we're going to try to continue to bring you high quality content and spend time on topics that we think are interesting and that we think are important for you to know about, but also just some stuff that's fun. Sometimes I actually like the idea of putting a little editorial comment at the end, like I do on a blog post, of course. For instance, on the guest posts I often do that. And so we did that with a controversial topic, merger arbitrage, that we did a few episodes later. Now we've already recorded that, but you haven't actually listened to it at the time I'm doing this, and I suspect we're going to get some negative feedback about that one as well. You have probably also noticed that I've been a little bit more confrontational with guests lately and tried to ask them the difficult questions. But like with everything we do, we're just making this up as we go along and learning along the way. More recently, I got some valuable feedback about episode 42. That was the one that was entitled one property per year, which is a common strategy among real estate investors. The most interesting part about this feedback was that it came from a real estate investor, but I'm going to read some of the email. I should note that the email was very polite and filled with praise for what we do here at the White Coat Investor, but I've cut most of that stuff out just because I want to focus on the negative part of it. Because honestly, negative feedback is the most useful kind, the email said. This last podcast email diverged about as far as I've ever noticed in White Coat Investor land from paying down debt and prudent investing. I think getting mortgaged on rentals to the point of seeking alternate financing is exactly how Dave Ramsey went bankrupt. This is beyond simply more risky. It's not something that a great majority of docs in our country need to learn more about, at least not the ones we know. We are very committed to a rental property heavy portfolio, and that's a bit atypical, so we'd love a detailed discussion from others who do this. But since we are a young couple, we only just bought our first property because we know to go slow and stay debt averse is to be wise. It's the only way to get rental returns without huge risk. We need encouragement to do this in a debt friendly way. Not another typical real estate lecture. We're not legalistic about debt, but we don't want to read Just another physician path to quick money block. This last episode felt so dissonant with your other teaching that it was enough to make me reconsider sharing the podcast with others in the future, especially since the whole point of doing so is usually to prevent friends from making unwise doctor Esque purchases or financial plans. Discussing different viewpoints is valuable, but one of the reasons we trust you so much is that you refuse to let your readers ignore safety, humility, or moral considerations. WCI to us means restrained and realistic advice. I do not want my young doc friends to hear this podcast or even think about buying a house a year because it might be quicker. I'm trying to help them avoid financial danger. You've always run a tight ship and my family truly appreciates the selectivity you've used and what you endorse, even if just by dissemination. Just don't let the personal finance and behavioral restraint posts podcasts get pushed out by new fancy ways for docs to invest. We already get that from everyone else we know. That's great feedback, huh? That's the kind of stuff that is super valuable, but I also thought there were two issues related to it that were worth addressing on the show. The first is specific to real estate investing. I'm fine with real estate being part of your portfolio, even a large part of your portfolio. I like the idea of one property per year. It's kind of catchy. But the listener is exactly right that you can't let a catchy goal cause you to make bad decisions, particularly when leverage is involved. If you're going to buy properties, each of them needs to make sense. I also think each of them needs to be cash flow positive, which usually means putting down 25 to 33% just to be cash flow, even when you take into consideration the transaction costs and all the other costs of ownership above and beyond the mortgage payment. I'm not just talking about the rent beating out the mortgage. Apparently I didn't convey that very well in the original podcast, so my apologies for that. I think that it's okay to use leverage when investing in real estate, but it needs to be a reasonable amount. Nobody ever went bankrupt without borrowing money. The second issue from that feedback that I think is worth addressing is more general. I write the blog and do the podcast with more than one audience in mind. I try to address the investing novice, but I also try to mix in some advanced topics for the hobbyists and everybody in between. Maybe I'm trying to do a little too much, but I enjoy getting out into the weeds sometimes. And like with anything, take what you find useful, do more research on the stuff that you just heard about, and leave the rest. Just because we take little side trips out into the weeds doesn't mean that I don't endorse the main highway, nor that I think that it's mandatory to get out into the weeds. The basic wealth building plan that I've been preaching for years. It works. It works well. Is it possible to do things a little bit differently. Absolutely. Might you come out ahead for doing so? You might. You might also come out behind. So be careful when you leave the main highway. And what is that highway For a physician, the highway has become a great dock. Manage your debts appropriately, Live like a resident, get your student loans paid off within two to five years after residency, put 20% of your gross income toward retirement, Understand and use your available retirement accounts and invest in a low cost, broadly diversified portfolio, mostly composed of index funds, using a written plan that you follow through thick and thin. That's the highway. And honestly, there's no reason every physician in America can't follow that highway and become wealthy. But I think you guys are smart enough to remember that that's the highway, even if I don't boil it down into seven baby steps that I repeat like they're dogma ten times every episode until you can't forget them a la Dave Ramsey. But based on the feedback, I'm not mentioning them quite often enough, so I'm going to try to do so a little bit better. We've got some great questions to do today. I love getting your questions because it helps me stay in touch with what you guys are worried about and thinking about, and it makes coming up with enough material for a podcast very easy. You can send me questions via Facebook or Twitter, or via email, or even through comments or posts on the blogs or the forums on the website. If you ask the question privately, I keep you anonymous, even if it means changing some of the details. If you ask it publicly on social media, I assume I have permission to share your name and all the gory details. Here's an email exchange I had recently with a reader sent me an email in October of 2017 asking if I was planning on selling some during this big 25% uptime or still holding on for the long run. That's it. That was the entire email. So I emailed him back. I said selling some what? Everything I own is up. My income, my business, my house, my real estate, my stocks, my bonds, interest rates on my cash, etc. But no, I plan to stay the course with my plan that seems to work pretty well. Didn't hear back from him until February 2017 when he sends me a two word email. Bummer week. I think this was right after the stock market correction when it dropped 9 or 10%. So I responded to him. Bought a bunch more just like I do every month. Got a discount on it compared to last month. Over the years it works out well. It's interesting to get these short emails from people. I'm not really sure where they're coming from or what they're asking sometimes, but he responded with another question that I thought was worth discussing today on the show. Do you purposely keep some cash on the sidelines so that when a buy opportunity comes along you have some money ready? Or do you sell some bond shares when you see a great opportunity, despite the fact that this would throw off your percentage in stocks versus percentage in bonds? I usually just invest money as I make it, but maybe it would be worth keeping some on the sidelines for big drops. That seems like it would be more a timing strategy, however. Well, I agree with the emailer. That does sound like a timing strategy. I don't purposely keep a portion of cash sitting around in my portfolio hoping that some great opportunity comes along. I invest money when I make it and I know there's going to be more money coming in next week, next month for me to invest. And I'll have to decide how to invest that money. Some months it goes into my Roth IRA and my wife's Roth ira and our HSA. Other months it goes into the 401ks. Some months our money goes into our cash balance plan through my partnership. Other months we put money into the 529s. Other months we buy real estate or buy mutual funds inside our taxable account. It just depends on the month. But I'm not holding on to hundreds of thousands of dollars wondering if some great deal on a real estate property is going to drop into my lap. I figure if a great deal drops into my lap, I can use the money I'm going to invest that month to buy it. So no, I don't keep cash on the sidelines. The problem with doing that is there's a fair amount of cash drag from doing that. When you've got a chunk of your portfolio sitting there only earning 1%. That's going to drag down the overall returns of your portfolio and then probably more than make up for anything you could have made by being ready for this great opportunity that maybe would come by. What I found is these types of opportunities usually give you a few weeks or a few months to get the money together. Here's another question that comes from a doc who's married to another earner. She says, my spouse works a non medical job at a Fortune 500 company. He has the option to participate up to 10% of his income in an employee stock purchase plan that buys stock at a 15% discount every six months. There's no limit to how much you can sell or win. The stock purchase price is the lower of the first or last day of the six month purchase period, so the minimum discount is 15% and if the stock is doing well, closer to 20%. We're doing well financially thanks to the info on this site and your affiliates. She gives a shout out to Physician on Fire. We've lived like a med student all four years of residency and this year fully paid off my loans. That's awesome. We've rented the same house all through residency and drive the same old cars. Now that we're debt free, we've been focusing on funding his 401K, my 403B and our Roth IRAs. We're currently saving about 12% of our total income. So my question is, should we be investing in the stock purchase plan? I've been reading on the Bogleheads and many there are advocating for investing as much as you can and selling immediately and taking the 15% gain just knowing you'll be paying taxes on the sale. We're doing well, but if we bought as much of this as we could, it might mean we couldn't max out our retirement accounts. Should we be taking advantage of this and if so, should we be selling immediately or waiting until the long term capital gains rates apply? So I told her that I thought either approach was fine. I love the idea of getting stock at a discount, especially when they let you sell it right away. I mean that's basically kind of like a 401k match. It's free money part of your salary. If they're going to let you buy stock for 15% less than the stock is worth, you can turn around and sell it and that's just like a bonus part of your salary and so be sure to take that. In fact, I'd take as much as I could, even if it meant not quite maxing out a retirement account. But the way I look at it is you're going to be selling that periodically and so really you're only missing out on a few months or a year of a 401 contribution. This isn't an ongoing thing because you just use the money that you put into that account that you put into the stock purchase plan to use to max out the 401k later. I mean, you're not going to hold on to this stock forever. You don't want to hold on to your own company's stock especially, but really any individual stock any longer than you have to. So if they're going to give it to you and you can sell it immediately. That's a great way to get your money. Now, there's a little bit of risk involved in holding it for a year. If you hold it for a year, however, you get to pay taxes on the gain at the lower capital gains rate, the long term capital gains rate, which might be 15 or at most 23.8%. And so that can be a pretty attractive proposition too. So how do you decide whether to sell immediately or whether to hold it for a year? Well, if it was a tiny part of my portfolio, I'd probably hold it for a year and then sell it and take advantage of that lower tax rate. If it was a big chunk of my portfolio or if I needed the money to max out my 401k that year, I'd probably sell immediately and use it for that and just pay the taxes on it. You want to be careful not letting the tax tail wag the investment dog. Here's another question from somebody about to go into medical school. A non traditional student says there aren't many financial resources available for medical students in their mid to late 30s. I have a very specific Should I be using Roth IRA savings for my former career to pay for medical school? It seems to me that a possible 8 to 12% return from the stock market doesn't necessarily be a guaranteed 7% loan interest payment. Thanks for your podcast and your help. Well, boy, 7% is a pretty attractive guaranteed return. That's why I'm a big fan of using the resources you have to avoid taking out medical school loans in the first place. But I feel a little bit different about retirement accounts. I don't like the idea of rating retirement accounts for things other than retirement, even though you can get the money out penalty free and tax free for things like an education. And you can take out up to $10,000 a year in earnings in order to buy a house, for instance, up to $10,000 of earnings to buy your first house. But I generally recommend against it if you have a taxable account. I'm all for liquidating that and using it to pay for medical school, but I think I probably wouldn't touch the retirement accounts. I'd let those ride. And I think over the years you'll probably be glad you did that. Obviously no guarantee in the next year that you're going to beat 7% or even in the long term. Really there's no guarantee, but I think that's a pretty good bet. And the idea of having that money and preserving that Roth space for future investments as well as providing future asset protection is valuable enough that I probably wouldn't rate it just to pay for medical school. But would it be wrong to do so? No. Different strokes for different folks. That would be fine if that's what you really want to do, if you're particularly debt averse. But I think in my case I wouldn't raid Roth IRA to pay for medical school. Here's another question from a couple that is active duty and interested in buying a house. So their question is really about whether they should take a TSP loan out in order to buy a house. They ask, is it always generally a bad idea? Well, generally it's a bad idea to take out any kind of 401k or tsp loan, but I don't know that it's always a bad idea. So let's talk about this. This couple is 15 years into their military service. One of them is a civilian government employee and the other one's active duty. They're maxing out their TSPs and their Roth IRAs for the last couple of years around age 40 and trying to decide how they want to get a down payment. They understand how the TSP loans work, which is actually a pretty good loan. I mean, you don't get the returns on that money while you have it borrowed out of the 401k. But you also are paying a pretty low rate on the TSP. I think it's around 2.7 right now on that loan, which is a pretty attractive rate, obviously. So I told them, well, it's always generally a bad idea. That doesn't mean it's always the worst option. And actually 401k and therefore thrift Savings Plan or TSP loans became more attractive with the recent tax law changes. And the reason why is you have more time to pay them back after you separate from your employer. Instead of having to have it paid back within 60 days of being fired. You've now got until the next October, really of the next year. And so I think that makes them a little less risky than they used to be. Still not a great idea. But the truth of the matter is this couple's really weighing six different ideas. And I think it's important to list those out and actually consider, well, which one's the best idea for us, which, which one's the worst idea. For example, they could borrow from the Thrift Savings Plan for their down payment. They could take money out of their Roth IRAs for a down payment. Remember, you can take out $10,000 of earnings and you can take out your Roth IRA contributions at any time without having to pay any penalty for doing that. The third option is to buy a home without a down payment. Using a doctor loan, they could buy a home without a down payment. Using a VA loan, they could wait to buy the home until they were able to save up a 20% down payment and use a conventional loan. And then, of course, the other option that they didn't even mention is they could avoid buying a home at all. In general, I think buying a home on active duty is a bad idea. It's kind of like buying a home in residency. I recommend you don't buy a home until your professional situation and your personal situation, your social situation are stable. And when you're in the military, by definition, your professional situation is not stable. You're going to move every three or four years. It's practically guaranteed. Not to mention, you may be deployed and all kinds of things can happen. So I think it's perfectly fine for somebody in the military to go through their whole career just renting, you know, investing plenty of money on the side. And when they get out and settle down a little bit, then to buy a home, I think that's perfectly fine. Just like residents often have this burning desire to buy a home, so do a lot of military folks. And I think when they really run the numbers on it, they realize maybe that wasn't such a smart move. But given those options that I listed out for this couple, you know, I think maybe not buying the home is probably the best one. But if they're set on buying it, I think probably the best move is to buy it with a doctor loan rather than borrowing against their retirement accounts or taking money out of their Roth ira. I think the doctor loans probably a better use of their money. But after that, of the options, you know, if they're going to buy the home and they don't want to do a doctor loan, well, I think borrowing against the TSP is probably the next best choice. I mean, the interest rate is low. You've got time to pay it back if you get fired, and worst case scenario, even if you don't pay it back, well, it's just treated as a withdrawal and you have to pay the taxes and interest on it. But I told them good luck with their decision. But obviously that's a pretty personal decision for everybody. But I think I would probably not be raiding retirement accounts just to make a down payment.

If you're finding our podcasts informative and helpful, we would encourage you to sign up for our monthly newsletter it is totally free and includes useful, actionable information not available on the regular blog posts or this podcast. It's almost like being in a secret club. The kind of club that can boost your knowledge and enhance your wealth at the same time, with no strings attached. Sign up today@whitecoatinvestor.com newsletter. You can do this and the White Coat Investor can help.

Head up, shoulders back. You've got this and we can help. Be sure to sign up for the free monthly newsletter. Not only does that give you a free monthly newsletter, but it also gives you the 12 email financial boot camp email course, which has gotten some fantastic reviews from those who have taken it. See you next time. Sam.