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White Coat Investor Podcast
WCI #440: Building a Balanced Portfolio with Asset Location and Allocation
00:55:52
Today we are talking about building a balanced portfolio and get into two different questions about asset location. We discuss TIPs and when and if you should use them. We get into portfolio allocation and discuss if it is too risky to have a 100%...
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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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This is White Coat Investor podcast number 440 brought to you by Laurel Road for Doctors. Laurel Road is committed to helping residents and physicians take control of their finances. That's why they've designed a personal loan for doctors with special repayment terms during training. Get help consolidating high interest credit card debt or fund the unexpected with one low monthly payment. Check your rate in minutes. Plus White Coat investors also get an additional rate discount when they apply through LaurelRoad.com WCI for terms and conditions, please visit www.l LaurelRoad.com WCI that's www.l LaurelRoad.com WCI Laurel Road is a brand of KeyBank NA Member FDIC. All right, welcome back to the podcast. Thanks everybody for what you're doing out there. It's important work. It's sometimes, you know, not something we get thanked a lot for. That doesn't mean it doesn't matter. So if you had a bad day today, this is a chance to hear thanks for what you're doing. It's a big deal. You know, I was called to a code in the cath lab for a patient I sent down there not that long before the other day. It didn't go great. And sometimes we forget that we're there for people on some of the worst days of their lives and trying to make a difference and you know, that stuff happens. So thanks for being there. Thanks for all the training you did, thanks for all the time you spent in school and thanks for being willing to get up in the morning and drive into the hospital, drive into your clinic and make a difference in people's lives. Okay, those of you who are just at the beginning of this life changing career, we have something we call the White Coat Investor Champions Program. It's already started this year. You can sign up right now. Go to whitecoatinvestor.com champion if you are a first year medical or dental or other professional student and nobody has handed you a copy of the White Coat Investors Guide for Students yet this year, that means your class does not have a champion. All the WCI champion has to do is pass out a book to everybody in their class. We'll provide the books. All you have to do is give us your mailing address, we'll send you a box of books, you pass them out to your class. You're the champion. You get a little bit of swag if you do it. Really, that's the whole program. Our goal is to get this information into the hands of docs, the beginning of their careers when it can make the biggest possible difference. You know, I ran into somebody at a wedding reception this weekend who had somebody had given her my book as a pre med and it really made a big difference. She was already not only applying correctly and almost surely going to get into medical school. She's already lined up a couple of interviews already, but was prepared financially for what was sitting ahead of her, you know, and could apply with an appropriate mindset about the debt she was facing and so on and so forth. And that's what we're trying to do is arm you against your future financial challenges as early as possible. Please sign up whitecoatinvestor.com Champion. If you know a first year, ask them to do it. Ask them if they already have one in their class. Last year and most prior years we get this passed out to about 70% of the first year medical students in the country. We'd like to beat that this year. Please help us. Okay, lots of questions today from you guys. We're going to go over some of them and maybe take some deep dives on some of these topics. This first one's an asset location question, which might not be the most complicated topic in personal finance and investing, but it ranks up there pretty far. This one comes from Ben. Let's take a listen.
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Hi Jim, this is Ben from the Southeast. Thanks so much for all your content which I've been binging recently. I came across a podcast where you talked about asset loc and you mentioned a couple of principles that seem to be competing, so I'm just wondering how you prioritize them. The ones I'm referring to are where you advise us to put bonds and REITs and tax protected accounts and stocks, particularly if they grow through capital gains and taxable accounts. But that also we should consider putting our assets with the highest expected returns in the tax protected accounts. And we know that stocks in the long run are expected to have higher expected returns than bonds. So I know you frequently talk about not letting the tax tail wag the investment dog. So I'm guessing it would not be great to put our entire Roth IRA into just bonds just because bonds are better in a tax protected account because then we'd be missing out on a lot of the tax free growth that we would get from putting stocks in that account. So just wondering if you can enlighten us and talk a bit about how to think through those priorities. Thanks so much.
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B
Nice work. Ben. You have identified the dilemma. This is why asset location is so hard. It's those two competing priorities. I call them tax efficiency and I call them, you know, for lack of a better term, the desire to have a better tax protected to taxable ratio. Right? You're weighing those two things and they're pretty important. But lots of people get confused about asset locations. So let's, so let's maybe start at the beginning on this one and work our way back to your question, the biggest dilemma in the whole thing. First, I think that's good advice not to let the tax tail wag the investment dog. And I think we see this all the time, usually not in these sorts of fund placement questions, usually in something like an email I got this week which is somebody asking about a couple of years out of residency, I think wanting to buy a short term rental to take advantage of the short term rental loophole, which is a pretty cool tax break for those people interested in direct real estate investing. And you can make a pretty good argument that even if you want to own long term rentals, maybe you ought to make them a short term rental for the first year or two to take advantage of that short term rental loophole, which when combined with things like bonus depreciation and cost segregation studies can give you a bunch of depreciation losses up front that you can use against your earned clinical income. It's a really awesome tax break. But even with an awesome tax break like that, I wouldn't send somebody out to buy a short term rental that didn't want to own rental properties. Right? If you really just want to keep your portfolio very simple and have a handful of index funds, don't go out there and buy a rental property because the tax breaks are great. Right? That's letting the tax tail wag the investment dog. And when we get into some of these asset location questions, as far as fund placement goes, a lot of people are letting the tax tail wag the investment dog, right? First, decide what you're going to invest in. Then try to do it in the most tax efficient way that you can. It's a really important principle that you keep things in that order because the very best tax breaks you can get are usually losing all your money, right? You lose all your money in your tax deferred account. Guess what? You don't have to pay any taxes on that money ever. You didn't pay any taxes when you earned it you're not going to pay any taxes when it comes out because there's no money to come out. Very tax efficient, but it's not awesome, right? Because you don't have any money. Same thing in a taxable account, right? If you have all kinds of capital losses, well, you can use them $3,000 a year against your regular income in an unlimited amount against your capital gains, but you're not going to make money, right? The point's to make money. So make money first, worry about the taxes second. It's important to keep that order, right? When you start talking about tax efficiency, people start doing crazy stuff when it comes to taxes. This fear of taxes causes people to make dumb investments, to make dumb financial decisions. I don't know how many doctors have been swindled into buying a whole life insurance policy that they not only didn't need, but don't want once they understand how it works. Because, because they're afraid of taxes. It's a big wake up call when you leave residency and all of a sudden you're paying more in taxes than you used to earn in the entire year. It's a big wake up call and it shocks a lot of doctors into going, what can I do to reduce my taxes? Well, that's not the goal. The goal is not to reduce your taxes. The goal is to have the most amount of money left after paying the taxes. So don't forget that. Keep taxes in the right place in your life and have proper perspective about them. Okay? So let's talk about asset location. What we're typically talking about here is where you put the various kinds of mutual funds among your various kinds of accounts, right? You've got some tax deferred accounts. You got your traditional 401s and IRAs. You've got some tax free accounts, right? Most of these have the name Roth in front of them. You've got your regular old taxable brokerage, non qualified account, right? Well, what goes where? Well, probably the biggest mistake I see people make is they just ask, where should I put this, right? What type of account should I put this fund into? And that's totally the wrong question to ask. The right question to ask is of all the things I own, something has to go into the taxable account, what should it be? Or what should go into the taxable account next, right? I've already got all my US stocks in there, right? What should go in there next of all the things I own? That's the question to be asking yourself. Because the bottom line is putting Things in the right place might earn you a little bit more on an after tax basis. Right? That might be worth, I don't know, 1 or 2% a year more to actually put stuff into the right location. Now, ideally, all your investments are in Roth accounts, right? Your entire portfolio is one big fat $20 million Roth IRA. Then you don't have to deal with any sort of tax location issue. It's very tax efficient. Everything you earn, you get to keep, right? It's wonderful. But that's not the way most of our portfolios are built. Most of us have got some combination of tax deferred accounts, some combination of tax free accounts, some combination of taxable accounts, and we've got to decide where to things among those accounts. Okay, and as the caller mentioned, you're weighing a couple of things. One is tax efficiency. What do I mean by this? Well, think about a typical bond, maybe you got a total bond market fund or whatever. The entire return, for the most part, at least in the long run, is the yield, the income that it's paying out. And that income is taxed at ordinary income tax rates. The whole return gets paid out every year and it's taxed at ordinary income tax rates. That is very tax inefficient. Right? And because of that tax inefficiency, a lot of times it's great to keep bonds in some sort of account where they're not taxed as they grow, right? So you put them into your 401 or you put them into some sort of an IRA and then you get to shield that so you don't pay any taxes on it for years and years and decades and decades until you take the money out and you gotta pay on a tax deferred account, you gotta pay all that. Everything you take out is taxable income anyway, no matter what it was invested in. And in a tax free account, everything you take out is totally tax free. And so it allows you to shield that tax inefficiency of that bond fund. And so that's a lot of times why people say, hey man, put your bonds inside your retirement accounts so you don't have that issue. Well, that's pretty good advice for the most part. The problem is the other factor, the factor that you want as much of your money to be inside these retirement type tax protected accounts where it can grow quickly, right? You want your accounts to grow larger. When stuff is growing in a tax protected, tax efficient way, you want more of your money in those accounts. And so you want things that grow very quickly in Those accounts, right? You were talking. And typically, since your stocks and your real estate tends to grow faster than your bonds, that's an argument to put those sorts of assets into your tax protected accounts. And then people get even more confused when we talk about tax deferred versus Roth accounts. And they start saying things like, oh, you won't want to have high returns in your tax deferred accounts because you're going to have to pay taxes on all that money when it comes out. You're going to create yourself a required minimum distribution problem. That's nonsense. The problem all of us want to have is having to pull $800,000 a year out of our retirement accounts. That's a wonderful problem that you have tax deferred accounts that are so large you have these huge required minimum distributions every year. Oh my goodness, that's such a terrible problem, right? You're super rich and you don't know what to do with all your money. It's stupid, right? Don't think like that, okay? What you need to recognize in that respect is that a tax deferred account is like having a combined account, okay? It's really two accounts that are smushed together for a few decades. One of the accounts is your money. It works precisely like a Roth account. It's just like your Roth ira, right? It's your money. Everything that grows is going to come to you totally tax free, okay? The other part of the account is government money, okay? It's that money you didn't pay to the government when you earned it, right? You're going to pay it to them eventually, for the most part. Sometimes you can figure out a way to kind of arbitrage those rates between the time of contribution, the time of withdrawal. But for the most part, you're going to give that money to the government eventually, along with everything it earned. That's not a bad thing. It's the government's money. It's been the government's money the whole time. So don't feel bad that it's going to the government eventually. They just trusted you to invest it for them for a few decades alongside your money. But it's not a bad thing that that government money account gets bigger while yours gets bigger. That's not a terrible thing. So quit beating yourself up about the fact that heaven forbid, you're going to have to pay more in taxes later. It was never your money in the first place. That's just the government money and the earnings on the government money. So don't think about your tax deferred account as being dramatically different from your tax free account. They're really the same thing. It's just that some of that money isn't really yours. You. And when you think of it in that perspective, you realize that this advice to always put your stocks in Roth accounts and always put your bonds in tax deferred accounts is not exactly right. I've listed as one of my pet peeves about asset location. Cause the truth about it is that they're the same account. At the end of the day, just one of them's smaller than the other one. So when you put your stocks in your Roth account and your bonds in your tax deferred account, all you're really doing is tricking yourself into having a more aggressive asset allocation, a higher stock to bond ratio than you thought you had on an after tax basis. You just have more money in stocks. So of course you have higher expected returns in the long run. Right, because you have more money in stocks. So don't be surprised by that. It's not a bad thing to do. Just recognize what you're doing. You're taking on a little bit more risk and that's okay to do if you want to do it. Just recognize it's not like a free lunch to put your stocks in Roth. Right? Okay. So you're weighing those two things and as you look at each asset class, you go, well, which one of these factors matters most or matters least? Well, it's hard to say, I would say. And the truth is you don't have to get this thing perfect, right? The harder the decision, the less it matters. It's like a lot of things in personal finance that way. So what do people put into taxable? First, let's say you got a portfolio that's like mine, right? I've got 25% of my portfolio basically in a total stock market index fund, right? It's in US stocks, super tax efficient fund. That's 25% of our money. We got another 15% in small value stocks. It's not quite as tax efficient. The yields tend to be a little bit higher. Turnover can be a little bit higher. It's not quite as tax efficient. We've got another 15% in a total international stock market index fund. Now this isn't quite as tax efficient as the US Total Stock market fund because the yields are higher. There's more small and value kind of stocks in the international stock markets than there is in the US Stock markets. We're all blown up on these large growth tech stocks and so our yield on the total stock market fund is like 1.2% or something pathetically low these days. That does make it very tax efficient. But it's one reason why these days most people are sticking your U.S. stocks into your taxable account before your international stocks. Now the only counter argument for that is you might qualify for what's known as the international stock tax credit, right? Basically for these taxes that your fund paid to foreign governments, you get a credit for that, but only if you invest in that fund in a taxable account. That credit's good, but it's probably not as good as the much lower yield in the, in the US Stock market fund. So in general, people are going to put U.S. stocks, like a total stock market index into their taxable account first and the next thing's probably like a total international stock market fund. Okay? Now for lots of us, that's a big chunk of our portfolio, right? For Katie and I, that in of itself is 40% of our portfolio. So if your taxable account is less than 40% of your total retirement money, you're never going to put anything but those things into taxable. Everything else is going to go into tax protected accounts, right? It might be some real estate, might be some bonds, might be some small stocks or some value stocks, or you got some actively managed funds. Whatever you have that's less tax efficient then those big stock accounts is probably going in there. Now I think that's probably most white coat investors have got a taxable account that's less than 40% of their total. And so that's all that ends up going in taxable account is these super tax efficient stock funds. And you could tax, loss, harvest them. You can donate appreciated shares to charity. There's all these fun things you can do in a taxable account and that's probably enough of your assets in there to do that. On the other hand, some people end up in a situation like me, where most of our money's in a taxable account. You start going through each of your various asset classes going, which one should go in there next? Right? And a lot of times people go, well, equity, real estate, that's a pretty good thing to have in a taxable account, particularly if you're investing directly or you're investing in a private passive fund or something that passes through depreciation. That's usually a pretty good thing to have in a taxable account. Plus it's a pain to put it in retirement accounts. You might get UBIT tax, unrelated business income tax, not to mention your 401 isn't usually going to let you go invest in a private real estate fund. So it's just hard to invest in that in a retirement account. So a lot of times that ends up pretty early in your taxable accounts. For most of us in relatively high income brackets, tax brackets, we end up, if we have bonds in our taxable accounts, like some of our bonds are in taxable accounts, we choose to use municipal bonds. Now the beautiful thing about municipal bonds is that income is tax free, right? At least on a federal basis. And if you buy a state specific municipal bond fund, it might be state and local tax free too. And so that's very, very tax efficient. It has a relatively low return. It becomes one of those things. It's like, oh, that's a pretty good thing to put in the taxable account instead of the retirement accounts. So how do you weigh those two things, which is the question? Well, it's difficult, right? If you've gotten to the point where you've recognized that those are the two things you're weighing, you're winning this game of asset location. So don't beat yourself up about it. You probably don't have to get this perfect, get it good enough and be okay with that. Just remember to ask yourself the right question of what should go into my taxable account next? Not where does this go? That's the wrong question to ask. Hope that is helpful. Okay, this next question is also from Ben and he wants to talk about a specific asset class.
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C
Hi Jim, this is Ben from the Southeast. Have a quick question about asset location. You've mentioned that things like tips or REITs are nice to have in tax protected accounts. And stocks, particularly if they grow by capital gains, are nice to have in taxable accounts. But also that assets with higher expected returns are nice to have in tax protected accounts. So to help us think about how to prioritize those things, since we know stocks have higher expected returns in the long run than something like tips. Let's say someone had $100,000 in a Roth IRA, they have a million dollars of investable assets and they want to dedicate 10% of their portfolio to tips, how would you advise them as they're considering how much of their Roth IRA to dedicate to tips? If they put $100,000, their full Roth IRA in the tips, and they're missing out on a lot of tax free growth that they could get if they put some stocks in there. So would love to have your thoughts. Thank you so much for all you.
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B
Do well you know, it's good to get into specifics. When you get into specifics, we can have real discussions and, you know, reasonable people can actually disagree on stuff. But the better place to have a discussion about the specifics of where to place your funds is not actually on the podcast, right? The place to do this is like the forums, like the White Coat Investor forum, you know, maybe the subreddit, the Facebook group, that sort of thing. And the way you do it is you lay the whole thing out, right? This is what I've got. I've got, you know, 18% of my, you know, I got $2 million, 18% of it's in Roth accounts and 32% of it's in tax deferred accounts, and the rest is in taxable accounts. And here's my desired asset allocation, which ones should go into which account. And when you lay it all out like that, everybody can look at the whole picture and go, well, you probably ought to do this and this and this and this, right? You come up with this crazy scenario. I don't know who has their money like this. I guess there's probably somebody out there that has a million dollars and 90% of it's taxable and 10% of it's in a Roth account. And there's no tax deferred account whatsoever, right? I don't know anybody actually owns that portfolio, but if they did and they wanted 10% of their money in tips, do you put it in the Roth IRA? Well, tips tend to be one of the last things I move out of tax protected accounts. And the reason why is because they're bonds. So they're relatively tax inefficient to start with. And particularly if you own them directly, there's a phantom tax issue where you get to pay taxes on income you didn't actually receive, which annoys a lot of people right now. You get credit for it later when that stuff eventually gets sold, but it annoys people. They have to pay taxes on money they never actually received. Now that doesn't happen if you're investing through funds. You don't get that phantom tax issue. You actually get the income that you need to use to pay taxes with. But it does happen when you're buying individual tips. And you got to be okay with that if you're going to invest in individual tips, at least in a taxable account, if you buy them through your brokerage account or not your brokerage account. But in a brokerage account that's within a tax protected account, you don't have that issue. But in a taxable account you would. So they tend to be one of the last things people move into taxable. But if all you had was 10% of your money in tax protected accounts, you gotta go, well, what else do I own? Right? You're like tips. And you didn't tell me anything else in the portfolio. Maybe there's something that's even worse than tips to own in a taxable account and you'd like to have that in the Roth ira. Plus you've got this issue of weighing future returns. What would I probably do? What most people do is they tend to put their bonds into tax deferred accounts, not because there's a free lunch, as I explained earlier, but because it fools them into taking a little bit more risk with their portfolio. And so their tips tend to go into their 401, or if they got a traditional IRA because they're not doing backdoor Roth IRAs each year, maybe they go in there. But that tends to be where most people put their tips given the option. But this hypothetical investor you've set up, they don't have that option. They've got a million dollars, 10% in a Roth IRA and the rest intaxable. So they've got a much more difficult decision to make. What would I do in that situation? I'd probably put them in the taxable account. I mean, 90% of your stuff's taxable anyway. So that's getting close to about the way my account is these days. And you know what, you just suck it up and you pay the taxes because almost everything's in taxable. You know, we've got some tips left in our, in our tax protected accounts. We've got some REITs left in there. We've got a little bit of small value stocks left in there. But all our total stock market is out of the tax protected accounts. All of our total international stock market is out of the tax protected accounts. Most of our nominal bonds are out of there. Lots of our tips are out of there. All of our, most of our, all of our international small values out of those accounts. Right? It's almost all untaxable at this point point. So when you get to those scenarios, there's only so much you can do. And so don't beat yourself up about the fact that, oh, I got my tips in the wrong place or something. You know, it's not going to move the needle that much in that sort of a scenario. Hope that's helpful for you. You know, the truth is when you're starting to worry about stuff like this in portfolio construction. You've won this game, right? You win. Congratulations. You're super financially literate, right? You're worrying about these little tiny things that move the needle a little bit here, a little bit there, right? And whereas most people out there are still making massive investing mistakes, they're trying to pick stocks, they're trying to time the market, they're selling low. When the market goes down, they're not saving enough money, they're making the big mistakes. And here we are spending 10 minutes on the podcast talking about something that's relatively trivial as far as your future returns and your future, you know, meeting your future financial goals. All right, our quote of the day today comes from Bill Bernstein, who said there are only two kinds of investors. Those who don't know where the market is headed and those who don't know that they don't know. I think there's a lot of wisdom to that. You know, when you recognize that your crystal ball is cloudy, too, it frees you up from those activities that involve peering into a crystal ball. And that's an immensely liberating feeling to recognize that you only need to spend your time and effort on a few things when it comes to your personal finances and investing, because they're the only things that not only matter, but that you can control. Because there's a lot out there that you can't control. If you beat yourself up trying to control that which is uncontrollable, you're just going to be frustrated. Okay, another portfolio construction question. This one from Pedro. Let's take a listen.
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D
Hi, Dr. Dali, I'm Pedro from the East Coast. I'd like your opinion on portfolio allocation. You've covered this extensively in your podcasts and blog posts, but I'm facing a slight dilemma. My wife and I are 36 years old and physicians three years out of training. Our portfolio is about 75% stocks and 25% real estate, primarily in syndications and funds. We've been investing in stocks for about 10 years. Following the simple path to wealth and maintaining a 100% VTSAX portfolio. We will achieve financial independence at around age 45. We plan to start adding bonds to our portfolio at age 40, targeting about 40% bonds at age 45, with the other 60% divided between VTSAX International and small Cap. Then we plan to decrease the bond proportion again to around 20% some five to 10 years later. That is all good for that time in our lives with a bond tend and reasonable diversification. But until then, what should I do? From the ages of 36 to 40, your post 150 plus portfolios better than yours shows several reasonable portfolio options. But another blog post argues that a 100% VTSAX portfolio is unreasonable. Am I taking too much risk by having everything in vtsax until age 40?
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B
Okay, great question, Pedro. First of all, I think what people need to hear sometimes is that your plan is reasonable. And your goal is to come up with a reasonable plan, fund it adequately, and stick with it in the long term. And your plan is reasonable, Pedro. You're doing fine. You're doing great. I mean, you're gonna be financially independent at 45, right? You're totally winning this game. So don't beat yourself up about the small details. You're getting the big stuff, right? And that's what matters. Okay? Now, Simple Path to Wealth is a great book. J.L. collins wrote this book years ago. We pass it out all the time. In fact, it's one of our favorite wedding presents. What we often do is we put a check inside it and we write on it that when they read the book, they can cash the check. And it's amazing how long it takes sometimes after the wedding for that check to get cashed. But part of that is maybe we don't tell them that there's a check inside the book and so it sits on the shelf for a while before they get around to looking in there and finding the check. So we're trying to get better at telling people that we give wedding presents to, that there's actually a check in the book. At any rate, I think that philosophy is fine. If you've looked at my post, 150 portfolios better than yours, there's actually 200 portfolios. Then the gist of that post is that there's not a magic portfolio. The only way to know the perfect portfolio is to have a functional crystal ball, to have a time machine to essentially go back once you know what's done the best and only put your money in that. Well, none of us have that. And so it's a guess, right? Your asset allocation is a guess, and you're hedging your bets with that guess. Cause you're not sure exactly what's going to do the best. And so in my case, I put some money into stocks, I put some money into bonds, I put some money into real estate. And there's always something in there. I'm not happy. I own right in 2020 or 2022 or 2008, I'm not happy. I own a bunch of stocks, right? Because they went down in value in years like the last decade where US Stocks have kicked the pants off of international stocks. I'm not happy that I own international stocks. And when large growth stocks are doing great, I'm not happy that I have small value stocks. And when real estate is thumping stocks, I'm not very happy that I've only got 20% of my money in real estate. And when everything seems to tank except my bonds, I wish I had more money in bonds. And when everything's doing great except the bonds, I wish I had less money in bonds. You're always regretting something when you have a diversified portfolio. But you set your asset allocation by trying to balance two things. Your fear of missing out FOMO, right? What you feel in years like 2023 and 2024 when you don't have all your money in tech stocks versus your fear of loss, right? You gotta balance those two things. That's what your asset allocation is. It's a mix of investments that you can stick with even with FOMO and even with fear of loss. So that's the balance you're trying to get. You're trying to mix mostly your stock to bond ratio, your risky asset to your not so risky asset ratio. That's what you're trying to get, right? So you don't panic, sell in March of 2020, or, you know, when interest rates go up 4% and real estate struggling, like in 2022, or when the whole financial world's melting down, like in 2008, or when everything with.com after its name tanks in 2000, right? You're trying not to panic in those moments. And so you gotta have a balance there. So your plan is fine, Pedro. You've obviously funded it well. And obviously going all US stocks over the last decade or so has really worked out well for you, right? So I'm not surprised that you're pretty happy with that performance. And you're talking about being fi so early in your life because that ended up being a very fortuitous choice. It's not terribly diversified, right? I mean, it's more diversified than just picking a few stocks because you own all the stocks. You own 4,000 U.S. stocks. But let's be honest, whatever it is, 35 or 40% of the money in VTA, sax or the ETF version, VTI is currently invested in, like, the top 10 stocks, right? It's all these household tech growth stocks, stocks that we've all heard of over and over again for the last 10 years, that's where 40% of your money is. It's not terribly diversified. And so you gotta be okay with that. Now, obviously it worked out very well for you, and I think it's a reasonable way to invest. It's certainly a very simple way to invest. And that's the beauty of J.L. collins work, right? He gives you a simple path to wealth. If you can stick with that 100% US total stock market approach and you fund it adequately, it's going to work out. There's going to be some decades when it's not awesome. I started investing in what's been referred to as the last decade, 2000 to 2010. Basically, over that period of time, the s and P500 had a return of barely more than zero. It was very close to zero. It wasn't negative. It was just slightly more when you include the dividends. But it wasn't great. It was a pretty lousy decade. Everything else did better. International stocks did better. Bonds did better. Real estate did better. Small value stocks did better. Everything did better than US large stocks, particularly these growthy stocks. Now, for the last decade, it's been just the opposite. And those growthy stocks kick the pants off of everything else. And so you gotta recognize that you kind of benefited from having a tailwind at your back as you invested over the last 10 years. And recognize that that's a little bit of an issue now. It sounds to me like you've got some other stuff in your portfolio. So that's great. And I think that's gonna work out fine for you. Just recognize that being 100% stock has risks. Right? Most of the time, having more money in stocks, if you can tolerate them and not sell them low in a market downturn pays off. Right? Cause in the long run, these riskier assets tend to have higher returns. As long as you're not just buying two or three individual stocks, you're buying them all, that usually works better and putting bonds in your portfolio, but there's no guarantee of that. Bonds can outperform stocks for a very long period of time. And the US Is a little bit of an exception when you look at all the countries across the world of stocks always beating bonds. So I think there's a good case that can be made for having some bonds in your portfolio. And it sounds like you're planning to add them in a few years, which I think is very reasonable. And this idea of having a bond tent, then decreasing your bonds later throughout your retirement to help your portfolio keep up with inflation, once you've got through those worst years per sequence of returns, risk is not crazy. Now, for those of you who've never heard of this idea of decreasing your bond exposure later in life, I think it's a reasonable philosophy, even if it's the opposite of what most people do, which is decreasing their stock to bond ratio over the decades. For an early retiree, a pretty good argument can be made for this increasing stock to bond ratio. After the initial sequence of returns, risk decreases. I think it's not crazy what you're doing now. What should you do for the next four years? Well, without a functional crystal ball, I can't tell you. If I knew that international stocks were going to crush everything else for the next four years, I'd tell you to put all your money in that, but I have no idea. So I'd keep a reasonably diversified mix. And is it okay for you to stay 100% stock until then? Probably. It probably is. But be aware, right? Be aware that stocks can fall and they can stay down for a long time. There's no guarantee that they're going to outperform bonds over your investment horizon. Even with a long horizon, there's no guarantee of that. And the only real protection you can have is to just, you know, like, like Finding Nemo, like the little blue fish and Finding Nemo. What's her name? Dory. Right. Just keep swimming, just keep swimming. Just keep pouring money into that account. And if you can continue to do that, if you can put off your retirement a year or two, and maybe you don't stop working until you're 47 or 48, you know, even if those stocks tank when you're 43, maybe that's not such a big deal. So there's a lot that goes into choosing your asset allocation, but the main thing is to pick something reasonable, fund it adequately, and stick with it in the long run. Hope that's helpful. If you need to hire somebody to tell you exactly how to invest, even though they don't know any better than you do or I do, we've got a long list of financial advisors we refer to. If you go to whitecoatinvestor.com under the recommended tab, we've got financial advisors there and they'll pretty much all help you choose an asset allocation, but they don't necessarily know any better than you what's going to perform the best over the next four years. So I think you probably know enough to be managing your own money and it should be feel very competent about doing that. Just recognize there's a lot of different philosophies. There's a lot of reasonable portfolios. All you got to do is pick a reasonable one, fund it adequately, and stick with it. Okay, let's talk about ETFs. I got an email. It says I have a topic that might be helpful for the podcast. Would you consider discussing how to buy ETFs? The order types are confusing, much to my chagrin. I've always used mutual funds, not ETFs for these transactions. Now that I am about to restart a taxable account with ETFs after liquidated it. After liquidating it for a buy in, it seems reasonable to get comfortable with ETF transactions, particularly the order type market. This is pretty straightforward versus limit, stop and stop limit. Nevertheless, I had to look each up and it would be a valuable topic to review in my opinion, if you would on the podcast to further discuss the topic. How do you recommend doing ETF transactions? You always do market as your order type. Do you typically do your ETF transactions midday when the market typically is less volatile as opposed to right when the market opens or closes? What is your strategy in purchasing and selling ETFs with respect to order type and timing of the transactions? Longtime listen to the podcast. Thanks for all that you and the folks at WCI do. Okay. It's natural when you first change over from investing in mutual funds to investing in ETFs to have these questions. I had all these questions and I tried a few different things until I settled into what I do now. And let me tell you God's honest truth about these sorts of questions. In the long run, they don't matter. They just don't matter. Okay. So don't beat yourself up too much about it. You do have to make a decision and stick with it, but they don't matter that much. Okay. So is there something to be said for buying your ETFs in the middle of the day rather than right when the market opens or closes? Yeah, maybe. Right. Does it matter that much? No, because how much does the market move during the day? Well, less than 1%. And how much does that 1% matter over the next 30 years? Well, not very much. So if the only time you've got to put your money in the market today is right when the market's open on the east coast or right before they close, we'll go ahead and do it. I would not invest because of that concern. The bigger problem is people don't put money into the market. Right. The bigger Problem is people don't make contributions to their retirement account. The bigger problem is people don't save enough money. They spend it. All right? So once you've won on the big issues, quit beating yourself up about the small issues. Get the money in there, get it going. Time in the market matters more than timing the market. Okay, so here's. Let's talk about these types of orders. When you go to put an order in, right? If I log into my brokerage accounts at Vanguard, I've logged into Vanguard.com and go in there, and I go, I want to buy some VTI today. I got some money I got to put to work this month. I'm gonna invest whatever it is, $10,000 or whatever, into VTI. I go in there and I put in the order, I put vti. And sometimes they let you just invest a dollar amount so you get partial shares. Some brokerages make you specify the exact number of shares. So I use a little calculator and go, well, VTI is $200 a share, and I want 10,000 of them. That's how many shares. And I put in the share number. And then what I typically do is I use a market order. Because Basically all the ETFs I use are very liquid ETFs. They transact immediately. They have a very thin bid to ask ratio, you know, spread that spreads very thin, usually like a penny. And so I'm not getting hosed on market orders. Now, if you're buying something that almost never gets traded or you're in a really volatile market, maybe it makes sense to put a limit order on it. I did that for a while when I first started buying ETFs. And what I would find is the order didn't go through. I put in a limit order. Well, it went up a little bit in price right after I put in the order. And so the transaction wasn't happening. It wasn't happening. It wasn't happening. I'd go back in 15 minutes later, and I'd change it to a higher price. And the market moved up again. And then I was chasing my tail. I found it was easier to just put in the market order, right? Vti, vxus, these sorts of things most of us tend to be buying with Most of our ETF transactions are super liquid. You put in the market order, it's done, it's done. You got a fair price. Nobody is hosing you. The market isn't taking you out back and whooping you. You're getting a fair price, and you're done, you can move on with the rest of your day. So that's what I do. Now there are stop limit orders, right. Basically, when the market falls, it sells your shares automatically. Right. I don't do that. Right. I'm a firm believer in what Warren Buffett said. My favorite holding period for an investment is forever. So when I'm buying stuff, I really don't plan to ever sell it. The only reason I really ever sell things is when I'm tax loss harvesting. Now if you think just buying an ETF with your money you're investing every month is complicated, wait till you start tax loss harvesting, right? Because when you're tax loss harvesting an etf, you gotta sell one and you gotta buy one that's an awful lot like it, but not in the words of the irs, substantially identical. And you want to do it really quickly, right? Because you don't want the market to go up in between the time you sell the loser and you buy your future investment. And so this will give you practice on buying and selling ETFs, you know, in a hurry. But if you screw it up, all of a sudden, you might lose more money than you were really gaining in picking up those tax losses. So you got to be a little bit careful when you decide to go in and start doing your tax loss harvesting. It's not that complicated. But you want to know what you're doing. So get used to putting orders in. It's not that big a deal. Practice with 100 bucks at a time until you've done it 20 times. Then you'll be like, oh, that's how orders work is no big deal. And it only cost you a few dollars in bid ask spreads. You're not paying any commissions on most of the platforms we're all investing in these days anyway. So go ahead and do a few tiny little orders until you get used to the process and then it's not a big deal. When you start out managing a four figure portfolio, it's not a big deal to manage a five figure portfolio. When you've done that for a little bit, it's not a big deal to manage a six figure portfolio. When you've done that for a while, it's not a big deal to manage a seven figure portfolio or an eight figure portfolio. And now you're putting in orders that are six figures, you're moving around $100,000 or half a million dollars at a time. And it's just not a big deal because you've been doing it for years. So it's really not hard to do. Take a deep breath. This is your first time doing ETF transactions. You too can do this. Tens of thousands of doctors before you have figured out how to buy and sell ETFs in a reasonable way. You can figure it out. For the most part, market orders are fine to use. I wouldn't beat yourself up about it, but you know what? If you read something that scared you into using limit orders, go ahead and use limit orders. I did for a few years. And then I'm like, why am I doing this? This is stupid. All it's doing is wasting my time. And you might quit using them too. Either way, it's fine, right? A limit order just says that it's only going to transact if it can transact at that price. That's all a limit order is saying. So if for some reason, heaven forbid, as soon as you put the order in, the market drops 20% because we're back in 1987 or something, well, it wouldn't transact because you had that limit, thankfully. But for the most part, you don't have to do that. The markets are very efficient and maybe those days when the market's super volatile, you shouldn't be going in there anyway. The only reason to do that on those days is to try to really catch a bargain and maybe do some tax loss harvesting. And that's an area for experienced investors to be wading into the into the markets. If this is your first time to do an ETF transaction, don't do it on a day the market's down 4%, for crying out loud. Give yourself some practice on a normal day. Hope that's helpful. Okay, let's talk about another email I had. And I get all kinds of emails. It's a lot of fun, actually. I like it when you guys email me because I get to know what you're thinking. And of course, it provides all kinds of content that we can use on the podcast or on the blog or in the newsletters or whatever. So I get this call from someone I've exchanged emails with a number of times over the years. He says, I received a call from investing in an animated feature film. Are you aware of any such investments? And then he read it. Thank you for your interest in reviewing our offering on the name of the film. In the next 24 to 48 hours, you may receive a call from one of our staff to confirm your contact information before shipping the investment materials. In the meantime, we'd love for you to check out recent press releases on our films through the links below or visit any website, discover more about what we've been working on. And it includes some links. That's the whole email. He's like, what do you think, man? Should I invest in this? Well, first of all, if your due diligence process is just sending an email to the white coat investor saying what do you think? Is this legit? You probably need more due diligence and you probably ought to stick with publicly traded markets and probably just some index funds. If you're into private investments, you ought to have the ability to evaluate these investments on your own without the assistance of an accountant or an attorney or an advisor, much less some random podcaster out there. So the question I got in the email was, is this legit? Well, that's obviously not a very specific question, so it left me trying to guess at what the emailer was actually answering. So my first guess was, number one, is it possible to invest in a film? And the answer to that is yes, you can be one of the backers of a film and if it makes money, you make money. If it loses money, you lose money. You can invest in film. So question number two that he might be asking when he's saying, is this legit? Is is it possible to make money by investing in a film? And of course the answer to that is yes, it's possible. Maybe what he meant when he said, is this legit? Is do I invest in films? And the answer to that is no. I invest in stocks and bonds and real estate. That's what I invest in. It's a very boring portfolio. If you're looking for excitement from your portfolio, you're probably not going to invest the way I do. My portfolio is boring. I try to get my excitement from my recreational activities rather than how I invest. So I don't invest in films. I got a brother in law that makes films. I've never invested in any of his films. By the way, about the worst thing you can ever do is invest in anything your brother in law is doing. I got another brother in law in oil and gas. I don't invest with him either, but I don't invest in films. So maybe what he meant was, do I need to invest in films to reach my financial goals? Well, the answer to that of course is almost surely not right. This is a fun little thing on the side. You want to mess around with 5% of your portfolio picking stocks or investing in films or something like that, that becomes more reasonable place. Certainly not for serious money that you're trying to use to reach your financial goals. And then maybe what he meant was, do you have any advice for someone that would like to invest in films? Well, I've got some advice for that. It's the same advice I give to somebody that emails me up and asks what I think about NFTs, or what I think about some crypto asset, or what I think about investing in gold, or what I think about investing in some other private investment. Limit it to no more than 5% of your portfolio and do due diligence on it as best you can. That's the advice. But I'm not like film investor guy. There's lots of people out there that invest in films. I'm sure some might even be good at it. But I suspect a lot of people that have dabbled in it have lost money, like people who dabble in any type of new private investment usually do. So he suggests emails back, this might be a good podcast question. And I'm like, well, it might be, but I don't know that I can dedicate an entire episode to investing in films. Right. It's pretty out there as far as alternative investments go. And so I'm like, what do you really mean when you ask me, is it legit? And what he said was, I meant, should I consider this phone call as a spam or some fraudster calling me to get my personal information, or is it actually a legitimate entity calling me? Of course, I don't know if they're running a fraud or not. Obviously, frauds are most common in private investments, right? It's a lot harder to run a fraud when your investment is publicly traded on the markets and the SEC and FINRA and everybody's all regulated. It's much harder to run a fraud. It can be done, right? See Enron for details. You can run a fraud in a publicly traded investment. It's not even all that uncommon in hedge funds, right? See Bernie Madoff for details. But typically, most frauds tend to be in the private world. Maybe it's a film investment, maybe it's an NFT or some sort of crypto asset or some sort of real estate deal. I had somebody commit fraud on one of the real estate deals I invested in. Basically, the manager borrowed more money against the property that was against the LLC operating agreement. So fraud's just a lot more common in the private market. So it's entirely possible. So the emailer goes on to say, I was just surprised that a company making movies called me for investment. My assumption is that the movie's budget is several million dollars. And I can't invest a lot of money in this type of business. So why are they even wasting their time calling me? Well, guess what, when you need money, you gotta go find investors. That doesn't mean you should invest in what they're selling, but it does mean they need some capital. They obviously don't have the money to pay for it themselves, so they gotta go to investors and they can offer you some sort of return if the movie's successful, maybe make a killing. But it's pretty hard if you don't know anything about movies to know which movies are going to make money and which ones aren't. I mean, my best guess from what I see in the theaters is if it's not a sequel for something that made a lot of money, it's probably not going to make a lot of money. So keep that in mind as you choose from the films you want to invest in. Was it possible this one's a scam? Sure. I don't know if it's a scam or not. I don't have any magic due diligence wand that allows me to find out if a film investment is is a scam or whether it's going to make any money or not by you emailing it to me. I don't have any insight or connections in the industry that allow me to know whether your chosen private film or oil and gas or real estate investment is actually going to make money or whether it's being run by a fraudster or not. I do diligence, same due diligence, the same way all of us do. You try to do background checks on the principal. You look into their track record. You start out with small amounts of money and watch it for a few years, see how it does before putting large amounts of money into that sort of an investment. And a lot of people just go out and want to deal with it and they just stick with the publicly traded markets. And you can do that. You can invest all of your money into boring old index stock, bond, real estate funds and never go into the private markets at all and be perfectly successful and reach all of your financial goals. You do not have to invest in private investments to be financially successful. Whether they are real estate or they are film or they are oil and gas, whatever they might be. You do not have to invest in those things to be successful. Now it's possible that that'll be more interesting to you. It's possible that you'll get to financial independence a little bit faster. It's possible that you'll get some diversification benefits by having some of that stuff in your portfolio, but you shouldn't feel like you have to, right? There's no called strikes in investing. And if people are sending you emails about an investment from people you've never even heard of, chances of it possibly being a scam are probably a little bit higher than if you go out seeking the investment in the first place. Hope that's helpful to you. This podcast is brought to you by Laurel Road for Doctors. They're committed to helping residents and physicians take control of their finances. They've designed a personal loan for doctors, special repayment terms during training. Get help consolidating your high interest credit card debt, or fund the unexpected with one low monthly payment. Check your rate in minutes plus bytecode. Investors get an additional rate discount when they apply through LaurelRoad.com WCI for terms and conditions, visit www.latelroad.com WCI that's www.l LaurelRoad.com WCI Laurel Road is a brand KeyBank NA member FDIC all right, don't forget about our Champions program. If you're a first year medical or dental student, please volunteer to pass some books out to your class. That's it? That's the whole program? There's no other commitment you have to do. You just gotta pass the book out to your class. You can put it in their boxes. I don't care. Whatever. Sign up whitecoatinvestor.com champion and change their lives. This information is probably worth a couple million dollars to doctors. Multiply that by the hundred docs in your class and you've added a lot of value to a lot of people's lives in the future. Thanks for leaving us five star reviews. Thanks for telling your friends about the podcast. We got a recent one in from Dr. Surfer. Got to meet Dr. Surfer. That sounds like a lot of fun, said Millionaire. With his help, I'm a millionaire because of this podcast. I developed a plan and stuck to it. Easy and straightforward advice. Evergreen, yet still love hearing it. Five stars. Yep. Good advice is evergreen. Good advice doesn't change over the years. Good advice doesn't try to predict the future. Good advice doesn't require a functional crystal ball. None of us have it. So maybe the financial services industry should quit trying to pretend they have it and the rest of us can get on to being successful and reaching our goals and being able to focus on those things that really matter in our lives. Whether that's our family or our practice or our own wellness. Let's spend our time and our effort on what really matters in life and quit worrying about our finances. Keep your head up, your shoulders back. You've got this. The whole White Coat Investor community is behind you to help. We'll see you next time on the podcast.
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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.