WCI #70: Stuff I Don't Invest In

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 White Coat Investor Podcast. This is episode number 70 stuff I don't Invest in if you are finding.

Our podcast informative and helpful, check out our website. Subscribe Since 2011 we've been working hard to provide valuable personal finance and investing information. Through thousands of blog posts written by an array of authors, you can find information on how to manage your student loans, fix and avoid common financial mistakes, understand your retirement accounts, optimize your investments, find professional help at a fair price, get started investing in real estate and so much more, all at no cost to you. You can find out more about the courses we offer, the conferences we put on, the newsletters we provide, and interact with other WCI readers through our online forum. Head on over to whitecoatinvestor.com to start learning today. You can do this and the White Coat Investor can help.

If you haven't had a chance yet, be sure to check out the White Coat Investors Facebook group. This is totally free to you. There are some minimal ads there that you'll notice, but there's a lot of great discussions going on there. So if you like getting your financial information through Facebook, this is a great resource for you. There's already over 4,000 members. Maybe by the time you hear this there might be twice that many. But it's really started off with a bang with a lot of really great people in there. Our quote of the day today comes from Morgan Housel who said a big enough bonus can convince even honest, law abiding finance workers selling garbage products that they're doing good for their customers. And I think that's really true. Boy, have I run into a lot of people who are really peddling lousy stuff that honestly believe they're helping you. So don't assume that because someone's selling you something crummy that they are trying to scam you that they actually do believe they're doing you a favor even if they really aren't. Thanks for what you do. I appreciate you. I know your patients do. Maybe not all of them, but enough of them that it makes your time worthwhile for what you're doing. So thank you for the sacrifices you have made. I've got a correction to issue. Apparently in a podcast I did a few weeks ago, I said the military Reservist retirement age is age 65. That is not true. It is age 60. Your reserve retirement starts coming in at age 60. That's obviously later than if you're active duty, in which case it starts kicking in as soon as you retire, typically after 20 years, which could be as early as really 38 years old. But for reservists it's age 60. Today I thought I'd talk for a few minutes about stuff that I don't invest in and talk with you about why that is. The first thing on my list that I want to talk about was precious metals. I, I get emails all the time from people asking, hey, should I invest in gold? How should I invest in gold, how much should I invest in gold? And I usually tell them, you want to invest in precious metals with 5 or 10% of your portfolio, that's fine, knock yourself out, go ahead and do it. But I don't invest in precious metals. And I'll tell you the reason why. The reason why is I don't expect much of a return out of them. If you look at the long term returns, gold and other precious metals, you will see that they basically keep up with inflation and that's it. If you go back hundreds of years, you'll see that an ounce of gold bought a man's suit and today an ounce of gold basically buys a nice man's suit. Whereas if that had been something like stocks or real estate, it would be worth tons more than it originally was. But because it just keeps up inflation, that's what you get. To make matters worse, it's extremely volatile. I track a number of investments in my monthly newsletter. If you'll look at that, you'll notice that perhaps the most volatile of those investments is silver. It goes up and down by 10 or 15% every month. But the long term returns are not impressive. It's just something that people use to speculate and I'm not really interested in speculating. I'm not interested in short term returns. I'm not interested in trying to trade in and out of a market to try to make a buck. I'm looking for long term investments that are going to make me money. And precious metals do not qualify in that category. Now you want to limit it to a small portion of your portfolio. I think that's fine. I think there's obviously times where the return is better than average, just like there's times when you lose a lot of money in precious metals. So that is why I don't invest in those. Next thing I don't invest in is individual stocks. In fact, I don't think I've ever owned an individual stock. I have no interest in researching Facebook and watching it drop 20% based on the fact that some investor doesn't like Mark Zuckerberg. I really don't care. I have better things to do than research among the 5,000 publicly traded stocks in the country, which ones I ought to own or not own. If I felt like I had to do that to have a successful retirement, maybe I'd be more interested in it. But all the data shows that those who buy individual stocks taking on an uncompensated risk, sometimes they get lucky and come out ahead. But most of the time they do not, even if they're professionals. And they end up underperforming the strategy of just buying all the stocks, which is basically investing in low cost, broadly diversified index funds. So that's what I do. I buy all the stocks, I own them all. I own Facebook, I own Amazon, I own Netflix, you name it, I owned it before it got big. But that's because I buy it through an index fund. Next category of things, I don't invest in actively managed mutual funds. Now, that's not entirely true. Sometimes I own a very minimally actively managed mutual fund. For example, some of the Vanguard bond funds technically are not index funds. They're actively managed, but they basically just capture the market return for that particular market. And so they basically act as closet index funds, again at very low cost. But I'm not going out there trying to find mutual fund managers that I think are going to outperform an index fund that invests in the same investments that they invest in. I just think it's a loser's game. And I think over 20 or 30 years, your chances of doing it are less than 10 to 20%. I would much rather take the guarantee of beating 80% of the mutual funds out there by investing in an index fund over my time horizon than take a gamble on trying to get, you know, the top fifth or top tenth of mutual funds that may luckily outperform an index fund. Here's another thing. I don't invest in. I don't invest in currencies, okay? I don't buy yen. I don't, you know, try to understand the foreign exchange markets. I don't buy Euros. I don't try to speculate on Greek drachmas or whatever they use in Greece. I just have no interest in it, number one. And number two, I look at it as basically a zero sum game. Before expenses. In the long run, I don't expect one currency to outperform other currencies. I expect them to go back and forth. At times one will outperform, at other times another will outperform and it'll go back and forth. And over the long run, I expect them to basically equal each other out. Of course, if you're trying to invest in them, you're going to incur costs. And so if it's a zero sum game before cost, it's a negative sum game after cost. And I'm not really interested in playing negative sum games. I extend this into the cryptocurrency space. You know, when we're talking about Bitcoin and its hundreds of competitors, this is not something that I am interested in investing in. Number one, it has a lot of the signs of a bubble, as you saw at the beginning of 2018, when the Bitcoin bubble basically burst. I mean, it was a classic bubble. It's like you read about in books, it was very impressive. But even now that that bubble has burst, I still don't know where it's going. It could be going to zero for all I know. But the nice thing about investing is there are no called strikes. You don't have to invest in everything. So if you don't understand something, if you don't really think something's likely to do well, if you don't want to speculate on stuff, if you don't want something that's particularly volatile, you don't have to invest in it. There's plenty of other great investments that you don't have to use the ones that you're not a believer in. Here's something else I don't invest in, I don't invest in startups. I'm not an angel investor. You know, some of these guys say, well, you know, I invest in 20 or 30 of these and I get one home run out of the bunch and that makes up for the losses and all the other ones. Well, the data is not actually very good that you have a positive expected return as an angel investor. So if you got a lot of money to throw away, and that's really your hobby, is to go out and find startups and meet with Startup Start starters, knock yourself out. You know, just realize it's probably a very expensive hobby because you're probably losing money on it, not to mention it takes an incredible amount of effort to do it. Well, here's something else. I don't invest in, I don't invest in commodities, alright? I Don't go out and buy a bunch of oil futures. I don't go out and buy a bunch of pork bellies and wheat futures or whatever else you can invest in. As far as commodities, it's not a market I understand particularly well. I don't see a very positive expected return in that market. And likewise, I just ask myself why. Why complicate my portfolio anymore? It's complicated enough as it is. And I haven't been convinced that adding any sort of commodities, including a commodity futures fund, is particularly wise for my style of buy and hold investing. Something else I don't invest in. I don't invest in options. That's not entirely true. My first investment was actually an option. My father came to me when I was, I don't know, 10 or 12 years old and said, hey, my buddy says we should buy these and we can make a lot of money in a short period of time. And so he put some money into some options, and he convinced me to go along with $500 of my money. And that was money that I'd gotten from the Alaska Permanent Fund dividend or something. That's the only way I could have come into that sum of money. Needless to say, a few weeks later, we both lost the entire investment. We lost it all. And, you know, that's just the way options work. It shouldn't have been a surprise to us, but that was literally our own invest, our only investment at the time. We put everything into options on some stock or something and it expired worthless. So it's not that I was particularly burned on that that I don't invest in options. I just don't see any point to it. For me, number one, I think there's a lot of very talented options traders out there that are likely going to take advantage of me knowing less than they do. And I think that's probably not a good place for me to be where I'm in a market with a lot of people that know a lot more about it than I do. But secondly, options are basically like buying insurance policies on the value of an investment. The expected return on it is zero, and after expenses, the expected return is negative. I mean, you're basically using it to hedge something, make a bet. And I'm not really interested in making bets. Gambling is not the reason I invest. Something else I don't invest in, at least not anymore, is insurance. I find the investing proposition made by insurance companies, you know, I'm talking about whole life insurance and variable universal life insurance and other types of universal life Insurance to not be very good, Betsy. I mean, if I got to tie my money up for the rest of my life and then I expect returns in the 2 to 5% range, that's not very attractive to me, especially when they're negative for the first decade. So I basically, since I got rid of the whole life insurance policy, I was sold as a medical student, have decided not to invest in insurance. And maybe somewhere down the line I'll have some estate planning reason to buy an insurance policy, I don't know. But for now, that is not something that I invest in or plan to invest in anytime soon. I basically invest in boring old index funds and real estate. That's what I invest in. You know, a lot of people think investing is a lot like gambling. You know, they refer to even to the stock market as, oh, you're just gambling your money in there. But I think investing is significantly different from gambling. For example, in investing, you have a positive expected return. You actually expect to make money, which is not the case for gambling. Gambling the house makes money. They're the ones who have the guarantee over the long run of making money. The people in there rolling the dice, playing craps or playing cards do not have an expected positive return, at least on average. And so that's one difference between gambling and investing. Also, I meet a lot of people who are looking for fun. They find investing to be boring and they're looking for a little excitement in their life. I'll tell you what, go get your excitement somewhere else. I got an email today from a doc who does base jumping. Look, you want excitement in your life? Go jump off 400 foot cliffs with a parachute. That'll be exciting for you. But I just have way more fun hobbies than investing. Investing is not that fun of a hobby. So if this is your hobby and you feel like, well, now I've learned a bunch of stuff about it, what am I going to do now? And you find yourself reaching for options and individual stocks and bitcoin. Well, you've probably carried it a little too far and you need to find a more fun hobby. When I'm buying shares of stock, I am buying real businesses with real profits. It's not a paper investment like the real estate investors like to call it. It is not some sort of throwaway thing. When you buy a share of Amazon, you own a share of those profits that Amazon makes. And every time people go online and buy something from Amazon and Amazon makes money, some of that money is yours. And that's a real live business that's making real live money, not some gambling thing. Alright, let's get into some questions. The first one kind of deals with the subject I've been addressing in this blog or this podcast. So far I'm a somewhat new attending, a couple of years into practice. I'm doing all the right things financially and I am bored. Yes, I know that's good. And this is a first world problem. I know a little. I know little about investing. I basically read your site in Bogleheads. I go on the evidence based stuff Max out every tax protected account, contribute at least 20% to index funds closer to 30% recently with increasing income. I've got my mortgage and student loans at a good low rate and set for a reasonable payoff. 14 years on the house and four on the loans. I've got term life and disability insurance and can coast on this formula to retirement. I think it would be more fun to have a small percentage and a more active and or risky investment. I'm in my early 30s, I have lots of time. I'll never be contributing less than 20% to the good formula for retirement. I'd like to put 1 to 5% of my income into something fun. How do you learn about investing in new startups? Are there resources to get into such investing? What the heck is crowdfunding? Where do you find out how to do that? Is real estate a safer but more active and risky venture? I would really like to add a small chunk into my portfolio that has some higher risk and return. I've helped kickstart a couple of sweet video games, but all I got out of it was the game for free when they launched. And I'd like to a little more skin in the game, maybe the chance for a higher payoff. What do you think? Well, I think being bored with your investments is a good thing. Then you can go focus on the other things in your life that matter more than investing. I mean, investing just should not be the most important thing in your life, particularly after you win the game. You you know, once you're financially independent, how much time do you really want to spend on just maintaining financial independence? It's not particularly fun. So let's talk about this a little bit. This is a doc that's saving enough for retirement into smart investments. So truly he can throw away that 1 to 5% that he's talking about investing on other stuff. I mean, if he wants to blow it on a wakeboat, fine. If he wants to blow it on angel investments, fine. You know, knock yourself out. As long as you're saving enough. It's up to you what you want to use your money for. But I think let's answer a few of the questions first. How do you learn about investing in new startups? One of the best places to go is to some meetings in your town among startup investors, among, you know, entrepreneurs, and just start doing some networking. And you'd be surprised how many people are out there looking for money for their startups. It might not be wise to invest in them, but there's plenty of startups to invest in all the time in most towns of any significant size. Are there resources to get into such investing? I'm sure there are resources out there. I don't really invest in them particularly, so I'm not terribly familiar with the resources. So I cannot vouch to which ones are the best ones and whether they'll lead you astray or not. The next question was, what the heck is crowdfunding and where do you find out how to do that? Well, crowdfunding refers to a bunch of people putting their money together to buy one thing. You know, I mean, technically the stock market's crowdfunding, right? I mean, there's a bunch of people that own Amazon or a bunch of people that own Facebook. I mean, that's crowdfunding at its best, right? But I think what people are usually referring to these days is crowdfunded real estate. And we're talking about going through these websites like some of my website sponsors, like Realty Shares and Realty Mogul and Equity Multiple and these kinds of sites, and going on there and buying real estate with dozens of other investors. You know, it's a form of syndicated real estate ownership where you just own a small piece of it and you can spend as little as $5,000 on an investment. And that can either be on the debt side, where you're lending money to a house flipper, or it can be on an equity side where you get your share of the rents and the appreciation and depreciation and all those kinds of problems or all those kinds of benefits, rather. But, you know, it's pretty easy to do. To go to these crowdfunding websites, you do have to be an accredited investor. But it sounds like this doc is an accredited investor investor. And that's a good way to get your toe wet in, in real estate investing and maybe some of these a little bit more risky investments. I do have some crowdfunded investments and they've treated me well. I've gotten nice returns out of them and expect to continue to. To get some more Is real estate a safer but more active and risky venture? Yes, I think that's a good description of it. It can be both safer and more risky. The thing about real estate is the market is not nearly as efficient as the stock market is, and so I think there's room there for somebody who knows what they're doing to add value to the investment. You know, even if you're just buying the house down the street and renting it out, if you're particularly good at finding deals, at managing properties, at knowing when to sell them, at managing tenants, you can really add a lot of value to an investment. Conversely, if you're not good at it, you can subtract a lot of value from an investment. So just realize that that street works both ways. But for someone who really wants to be more active, maybe increase their returns a little bit, I think real estate's a great way to go. I'm not sure kickstarting new video games is a particularly profitable investment, though. I've never really done that and don't plan to alright, next question. I just graduated from residency and I'm looking into where to invest at least 20% this year. I plan to max out my 403B and do a backdoor Roth. I remember you had a post within the last six months about other places to invest after you've maxed these out, but I've been unable to find it. When searching the blog, just remember wondering if you remember this post and could send me a link. I mean, the bottom line is once you've maxed out your retirement accounts and you want to save more for retirement, you got to invest in a taxable account. It's okay, it's not that bad. A non qualified or taxable or brokerage account is a perfectly fine place to invest and in fact many people, particularly those interested in early retirement, it makes up the majority of their investments. There are a lot of nice things about it. 1. You can invest in anything you like. You can use leverage. The rules aren't nearly as strict as in a retire account and you can spend the money on anything you like, which is great. There's a few other benefits. For example, you can donate appreciated shares to charity. Not only do you get the deduction for the donation, but you also don't have to pay the capital gains taxes and neither does the charity. You can also do tax loss harvesting with assets in a taxable account that can lower your taxes as you go along. So there's lots of neat things about a taxable account. Don't be afraid to invest in it. I mean, don't invest in it before you've maxed out your retirement accounts, but don't be afraid of it. But that's the main thing you can do once you've maxed out other available accounts, including your backdoor Roth IRA and your HSA. Alright, next question. In December 2017, I opened and contributed to an individual 401K which is my first time doing so. When my accountant was preparing taxes in the spring, he noted that I actually had overfunded the account based on my income and suggested that I contact the brokerage, which was Fidelity, and have them recharacterize the excess to the 2018 tax year. Went to the brokerage to ask that they do that and got a basic response. We're too busy to deal with you, so we'll write a letter on your behalf. I got a call a month later that the information the letter contained was incorrect, although written by an employee of the brokerage. I went in to solve this issue, was told that I needed to fill out a form and pay a 10% penalty on the excess. The accountant says that because we reported the correct amount to the irs, the form is not necessary and he's planning on reporting it as excess as a 2018 contribution on next year's taxes. I'm frustrated with Fidelity because they tell me something different every time I speak with them and contemplating switching to Vanguard Ameritrade or E Trade. I've also contemplated opening a totally new 401k for 2018 just to keep everything separate. What do you recommend? Well, this sort of thing can happen all the time. I'm always amazed by people that have an accountant. They're paying an accountant to help them with their taxes and then they don't call up the accountant when they have a tax related question. I mean, if I had an accountant, I'd call the accountant up and say hey, how much can I put in my individual 401k? That's what you're paying them for, right? Is to answer questions like that for you or people that have a financial advisor and then shoot me emails, you know, asking questions. Why would you hire some Yahoo on the Internet if you've got a financial advisor that you're paying 1% of your assets to every year? Ask the financial advisor. That's what you're paying them for. So in this case I think the accountant is right and I would go with the accountant, but that's not unusual for one of these mutual fund or brokerage Companies to screw something up. That happens all the time. And I don't know that it's any more likely with Fidelity or Vanguard or Ameritrade or E Trade. I don't think I'd switch company based on one screw up. Maybe if they keep screwing things up, I'd change. But you know, Fidelity enjoys a pretty good reputation for customer service and so I don't know that this would have been any different anywhere else. Just get it corrected for this year by following the directions of your accountant, not some yahoo on the phone at Fidelity. And then move on and ask the accountant next year to make sure you're putting the right amount in there. Remember, with the employee contribution you have until a little bit of time after the first of the year and with the employer contribution you have until you basically file your taxes the next year. So there's plenty of time to talk to your accountant about how much to put in there if you're not exactly sure. I know this year with my partnership 401k, I wasn't sure I was going to make enough at the partnership to actually, actually max it out. So I haven't actually maxed it out yet this year. I've left a little bit of space that I can wait to see how much money I make to see if I'll be able to max it out this year. All right, next question. I'm out of residency for a couple of years. I'm a child psychiatrist. I'm reading everything you've recommended for the past few weeks after it was recommended by my med school roommate. Thank you to that med school roommate. By the way. You've done somebody a huge favor. Honestly, I can't thank you enough for everything because I had no clue what savings was or how to go about it. I was just totally lost. And it appears that I've made many mistakes that I need some guidance to rectify. Well, that's not unusual. Most people once they found the white coat investor realize that they have made quite a few mistakes. I am both an employee at the hospital and have my own llc that is an S Corp files as an S Corp and this is what I've established in the last couple of months. My 401k, my employer pays up to 11% and sounds like also provides a match $0.50 on the dollar. So that's great. They also provide some stock options that I'm maximizing. That's about $500 a P paycheck. And I've set up a SEP IRA through my LLC that I'm putting some money into and also have an individual stock account. I plan to put as much as possible once I close on a house into those accounts. I've got 50% of my money in A, S and P, 520% in mid caps, 10% in small caps, 10% in international and 10% in bonds. Okay, that's not a crazy asset allocation. An aggressive one, but not crazy. I don't like the fact that you're using a SEP IRA instead of an individual 401k. The individual 401k allows you to do backdoor Roth IRAs as well, where a SEP IRA does not. So this dog is almost surely going to want to set up a solo 401k or an individual 401k. Same thing and roll that SEP IRA money in there as part of getting all this mess straightened out. Says I'm closing on a 900,000 to a million dollar house in the next two munch with a 30 year fixed mortgage. I'm now wishing I'd bought a house half this price after learning what I'd learned the past few weeks. Well, I guess it's not too late to get out now. You can always give up your earnest money. I hope you haven't put too much of it down. I suspect the doc's going to go ahead and buy the house though. I'll be setting up 520 mines for my two children once I close on the home. Yeah, assuming you have any money after paying that mortgage. I do have loans, about $150,000 still for myself and my partner that we're paying at 4%. We're reasonable spenders. Save about $100,000 a year. Well, that's good. That's actually a pretty good amount of savings given their two professions. And he's just asking for any tips recommended from the above mentioned issues. We want financial flexibility. We're willing to save a lot more than we have been but are now dedicating a lot of time to understanding this stuff. Well, this is awesome because this doc is becoming financially literate. He feels like it's too late, but it's not. It's never too late. He's very early on. I kind of wish he'd found it a few weeks before putting an offer down in that house. Because a big house, especially a million dollar house as a psychiatrist is a pretty big rock in your life. But you know, better now than later. Can you recover from that? Probably. I mean it depends on how much money they make together and how much they save. But I suspect his goal to be saving a lot more money than he is now is going to be not as easy as he thinks it will be once he's paying for and paying for the mortgage on and insuring a million dollar house. That can really eat into your ability to save a lot of money. I guess. I'd also like to see him maybe refinancing his loans and paying them off quickly. $150,000 certainly isn't the hugest loan burden we've heard about on here, but it is something that requires cash flow to meet each month. And I think getting rid of your student loans within the first two to five years out of residency is going to make you happier than dragging that out for a long time, even at 4%. So I think the stock's doing well. There's a few minor tweaks that can be done. Maybe they want to back out of that home purchase. That'll be up to him. But you know, it may not be compatible with their financial goals once they look at them carefully.

If you are finding our podcast informative and helpful, check out our website. Since 2011, we've been working hard to provide valuable personal finance and investing information. Through thousands of blog posts written by an array of authors, you can find information on how to manage your student loans, fix and avoid common financial mistakes, understand your retirement accounts, optimize your investments, find professional help at a fair price, get started investing in real estate, and so much more, all at no cost to you. You can find out more about the courses we offer, the conferences we put on, the newsletters we provide, and interact with other WCI readers through our online forum. Head on over to whitecoatinvestor.com to start learning today. You can do this and White Coat Investor can help.

Be sure you stop by our Facebook group. If you haven't joined yet, please do so. All high income professionals, but not financial professionals are welcome. Head up, shoulders back. You've got this. We can help. I'll see you next time on the White Coat Investor Podcast.

My dad, your host, Dr. Daly, is a practicing emergency physician, blogger, author and podcaster. He is not a licensed accountant, attorney or financial advisor, so this podcast is for your entertainment and information only and should not be considered official personalized financial advice.