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White Coat Investor Podcast
WCI #467: The Truths About Index Fund Investing (According to Vanguard)
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- [00:00]
Jim Dahle
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.
- [00:16]
This is White Coat Investor podcast number 467. Today's episode is brought to us by SoFi, the folks who help you get your money right. Paying off student debt quickly and getting your finances back on track isn't easy, but that's where SoFi can help. They have exclusive low rates designed to help medical residents refinance student loans that could end up saving you thousands of dollars, helping you get out of student debt sooner. SoFi also offers the ability to lower your payments to just $100 a month while you're still in residency. And if you're already out of residency, SoFi's got you covered there too. For more information, go to sofi.com WhiteCodeInvestor SoFi student loans are originated by SoFi Bank NA member FDIC. Additional terms and conditions apply. NMLS 696D welcome back to the podcast. Do you know someone who's passionate about improving financial literacy among their colleagues, trainees and students? If so, we encourage you to nominate them for the highly coveted 2026 Financial Educator of the Year Award. The winner of this prestigious award will receive a prize of $1,000. But that's not all. As an added incentive to craft a compelling nomination, we're offering the nominator who writes the best submission a free WCI online course of their choice. To nominate someone, simply visit whitecoatinvestor.com educator by April 25th. We also believe in making financial education accessible to everyone. That's why we offer free PowerPoint presentations on various financial topics specifically tailored for medical students, residents and attending physicians. Download these presentations today at the same URL. Whitecoatinvestor.com educator let's work together to make financial literacy a priority in the medical community. All right, I wanted to spend a few minutes today before we get into your questions, talking about a paper that came out from Vanguard that I think is pretty important. They titled it Setting the Record the Truths About Index Fund investing. It's a 16 page white paper, and I think it's important for people to understand what it says right in the introduction, they say, despite indexing's universal benefits, the continued popularity of index funds among nearly all types of investors across all markets has given way to debates between staunch proponents of passive investing and those of active investing, as well as some notable misperceptions tied to indexing's growth. And while the active versus passive debate may further ebb and flow as the ever evolving investing landscape shifts, the binary labels of index and active remain less significant than the underlying characteristics of the funds themselves that determine fundamental principles of both indexing and active investing. And so I think that's an important thing to understand is why index funds work. And then you can apply the principles that make index funds work to whatever investment you're looking at, whether that's in, you know, private assets of some sort, something where you can't buy an index fund, or whether you're investing in boring old stocks and bonds. So what are the benefits of index investing? Number one, diversification, right? If you go buy a total stock market index fund, you're getting, I don't know, 3,500 or 4,000 different stocks. You buy a total international stock market index fund, you're getting 8,000 stocks. You're diversified. If one of them goes bankrupt you, you're not gonna be hurt very badly. Even if it's Nvidia or Microsoft or one of these top names in the index, it's still not gonna hurt you that bad. It's just not as big a deal when you're diversified. So that's the first key benefit. The second key benefit, and this one's a really important one to understand, is the low costs. The main reason index funds beat actively managed funds is they're cheaper. It isn't that you can't beat an index. They can't do it after accounting for the cost of doing so, you got to hire all these people on fancy computers and send analysts out to check everything out, right? And after you pay for all that, you can't overcome your own costs of doing that on average. And so that's why over the long run, indexing works. The third benefit is consistent relative return predictability. Right? You don't have to worry about your manager underperforming the market. You're getting the market return every year, every month, every week, every day, every decade, right? You're going to get the market return. So you can quit worrying about whether you're underperforming the market or not. You just get the market return, and so you literally don't have to watch your managers anymore. I think there's some benefit to that. The fourth one is potential for tax efficiency, and it's not because something magic happens with index funds. They just have low turnover, and when they're not buying and selling stocks all the time, it's a low turnover fund. Like a total stock market index fund usually has a turnover of like 3 or 4%. That's it. Whereas an actively managed fund, it's not unusual to have 60% turnover or 140% turnover. Right? They're just buying and selling stuff in the fund all the time, trying to beat the market. And guess what? When you have turnover, you have tax inefficiency, you get distributed capital gains. They can be short term capital gains. It's naturally much less tax efficient. And then the fifth benefit is simplicity and transparency.
- [05:40]
Jonathan Spitz
Right?
- [05:40]
Jim Dahle
They have a precise, easily understood objective track. The market index, it's super easy to understand, it's very transparent. And so it's pretty cool that way. Okay, but the reason I want to talk about this paper is because it goes into things that people worry about with indexing. Indexing has obviously become much more popular since I started the White Coat Investor podcast. Right. Since I started the White Coat Investor blog, it's become more and more and more popular every year. And in fact, it's very interesting to take a look at index fund assets as a percentage of market capitalization. In the United States, it's as much as 23% of market capitalization is in index funds, but that's really only 12 to 13% across the rest of the world, particularly in in Europe. And so there's lots of different kinds of index funds. Even if those adds up to 23% of the market, some of it is like a large cap blend fund, others are style based funds, they're sector funds, they're global funds, whatever, but they're index funds. And so I think it's worthwhile looking at some of the concerns people have about index funds. So let's talk about these concerns that people have about index funds. One concern is that market cap weighted index funds make the big stocks bigger. People say, because everybody's indexing, Nvidia is going crazy or Tesla's going crazy or whatever the stock du jour is. And that reinforces market concentration. Vanguard argues that is not the case because indexing is market cap cap weighted. Okay? The market cap weighted index fund invests in each stock proportionally to the stock's market cap. Weighting doesn't make any stock larger than any other and doesn't reinforce concentration. Okay, well, that seems logical, but it's interesting because you show a graph, they show a graph in the paper that shows a percentage of market capitalization against the stock size. And really there's no, you know, it's not all in large caps, right? Index funds don't own an outsized share of large caps. They own stocks all over the place. As far as market capitalization goes, okay? Another argument people will sometimes make is that the growth of index fund investing inhibits price discovery. Meaning because everybody's just indexing, nobody's paying attention to what these stocks really ought to be priced at because we're all just buying blindly. We're just buying all the stocks. Well, it turns out that's the right technique to do. But you are freeloading on the active investors that are trying to figure out what these stocks are actually worth. But the truth is that the price discovery happens in the buying and the selling. So although 23% of market assets are indexed, it's not even close to 23% of the buying and selling. In fact, index fund trading volume constitutes just over 1% of total trading activity. You know, and in fact, even if you look at active fund trading volume, you know, mutual funds and ETFs, that's only about 2% of total volume. Right? So what's all the trading happen? It's broker dealers, it's market makers and other investors that constitute the lion's share of trading activity. Every day trading volumes increased from 38 trillion to about 153 trillion over the last couple of decades. So yeah, volume's gone up. But guess what? It's not the index funds doing the trading. You know, the actual index fund trading volume is tiny, right? It's less than 1% or just over 1% now. So in 2006 it was well under 1%. In 2024 it's just over 1%. But again, it's 1%.
- [09:42]
Caller 1
Right.
- [09:42]
Jim Dahle
So 99 of the trades being done out there are not being done by index funds. Index funds aren't setting the prices for these stocks. Their volume's a drop in the bucket as far as trading volume goes. Okay. The next thing that you hear sometimes is that this increase in index fund investing intensifies market volatility. And so it's interesting cause Vanguard goes through and shows, you know, this rise in index fund assets over the years, right? It was 0% in 1990, is now 23%. And the, and they plot that against market volatility? Well, there's no relationship, right? Markets are no more volatile now than they were back then. Just has nothing to do with market volatility. Okay. Another thing people say is that index fund investing limits active managers ability to perform. They say that the growth of index fund investing enhances the co movement of stocks, limiting the opportunities for active managers to Perform well. Well, it turns out that the sensitivity of volume in response to the doubling of volatility has basically been stable. So higher volume stuff, it does not necessarily become more sensitivity, more sensitive to volume than stuff that is being traded at lower volumes. So really it's just not related. There's no relationship between the growth of index fund investing and dispersion of stock volatility. Bottom line is a lot of people talk about indexing like it's creating all these problems in the world, okay? Like if everybody indexes, it's gonna break the markets. Well, we're a long way from everybody indexing, so I'll worry about that more when far more than 23% of assets or I've seen other studies that peg it at a higher number. But it still needs to be way more of the assets and more importantly, way more of the trades happening with index funds before we really have to worry about them breaking the market so that they don't work. Index fund investing is taking a free ride for sure on the active fund investors. But what else are you going to do, right? Are you instead going to take a 5% chance of beating the index fund? And that's before taxes. I mean, that's really what you're looking at over a 20 or 30 year period of picking actively managed funds that are going to beat an index or picking stocks yourself. To beat an index, you got a 5, maybe a 10% chance of pulling that off long term. That's not the way to bet. The way to bet is stick your money in the index fund, fund it adequately, stick with it, stay with your plan, stay the course and recognize that over the long run, if you'll do that, it's going to work out just fine for you and that this isn't a game you need to get into where you're picking stocks and trying to time the market and trying to pick fund managers. If you're going to invest in public equities, right, public bonds, you know, the strategy has been pretty clear shown that the best strategy is to just buy them all, keep your costs low, keep your taxes low, and spend your time actively while investing your money passively. All right, let's get into your questions. We got a lot of complicated questions in this one. I don't know if this is like a stump the chump episode or what, but let's see if I can get any of these right today.
- [13:09]
Caller 1
Hey, Dr. Dali, Chris from sunny Florida here, longtime listener, first time caller, thank you so much for the gift of white coat investor. My parents both turned 70 this year. I just sat down and had a financial planning meeting with them. I'm pleased to say that they will be well taken care of in their retirement and long term care. They have north of 5 million in assets. My dad's a retired emergency physician. My question is about their will. Currently, my sister and I will both inherit equal parts of their estate. I'm named as the executor. I'm 44. My sister is 41. She has two children, ages 6 and 10. I have no children. Mentioned to my parents that it would be a lot more meaningful for my nephews to inherit some or part or all of the estate rather than going to me and my sister, as they will probably be in their 30s when this inheritance occurs, whereas my sister and I will be in our 60s or 70s. Most likely. My parents were a bit resistant to this. It's been the tradition to pass down generationally in our family and they mentioned that I could just gift any money I wanted to my nephews. My question is, what are the tax ramifications? Step up in basis ramifications, estate tax, all those kind of issues that would occur with going directly to the nephews versus coming to me first and then being passed on to the nephews as a gift. My second question is, since I'm the executor of the state, is there any legal reason I can't circumvent the will to some degree and pass some assets on to the nephews? As long as my sisters agree with this plan. Hope this question makes sense. Thank you for all you do and have a nice day.
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Jim Dahle
All right, a few things to talk about here. First of all, well done to your dad, right? Emergency doc. $5 million plus portfolio. That's what's supposed to happen. You make this high income for 20 or 30 years and you put a good chunk of it away, invest it in some reasonable way. You're supposed to retire as a multimillionaire. So kudos to dad, Generation one, right, for doing a good job here. Having money to pass on. That's kind of where we all want to be. So that's issue number one. Issue number two, I think you ought to gift a copy of Die with Zero to your parents, have them read it, talk about it, let them think about it, and they might change their mind about when and where the money goes. When and who the money goes to. Certainly we've spent a lot of time thinking about this because it's true. Money is far more useful to inherit in your 20s, 30s and 40s than it is in your 60s and 70s, especially if you've done a good job yourself and taken care of your own finances. If you get Money in your 60s, you at that point are just managing it for the next generation, which is fine, except then they get it in their 60s and the generation after that gets it in their 60s and nobody can actually make use of this money. We just build these wealthy families and everybody dies. The richest dock in the graveyard. And I don't think that's really the point. Right. The point is to use money to make the world a better place for you, help you have a better, happier life and help others to do the same, whether you're spending it or whether you're giving it or whatever. So I think it's worth pushing on that point a little bit since they trust you enough to be the executor encouraging them to spend. Of course, anything they can possibly think of that will make their life happier. They should be buying. They want a hot tub. Buy a hot tub. They want to go on a trip, they should be buying first class tickets. That much is clear. They are not, almost surely not going to get through their five million bucks, right? So anything that's going to make them happier, they should be spending. They should also consider giving money away now rather than later. Now not so much that they have to worry that they're going to run out or something. But the fact is you can turn money into happiness a whole lot more now than you can later. So have them consider that for sure. Okay, let's talk about the step up in basis. Right? The step up in basis happens when you die. The beautiful thing about passing money generation to generation to generation to generation, not skipping anybody, is that you get that step up in basis with each generation. Well, that's great. Although apparently if you're giving money to people in their 60s, none of them are going to spend it and they're all going to give the step up in basis to the next generation anyway. So I don't know that that's necessarily a reason that you want to give it to every generation. There are estate tax ramifications as well as generations skipping tax ramifications. That topic is super complicated. If you search generation skipping tax on the White Coat Investor website, I got a long blog post about it. Every time I get a question about this, I got to go back and read the blog post because I can't remember all the details. It's super complicated. But your parents aren't anywhere near that, right? Their estate tax limit is 30 million. They have five. Right? They're not gonna get to 30, almost surely. So that part is not an issue. And I assume they're in Florida too. I don't know if that's true or not. I don't think there's an estate tax in Florida either. And so there's really no estate tax issue to worry about. So, yes, if they gave more than $19,000 away, they'd have to file a gift tax return. That's just an informational return. There's no actual tax due. You're just using up some of your exemption early. And so that would be fine to do as well. So your real question is, should they give it to you or give it to the next generation? Well, assuming you don't have an estate tax issue either, they can give it to you and you can just give it immediately to the next generation if you want to. It does use up their estate tax exemption. It will use up some of your estate tax exemption, but if you don't expect to die with 15 or $30 million plus that's indexed to inflation. Now, if married, then it's no big deal to use up some of yours. So if they give you, I don't know, let's say they give you $2.5 million and you decide you want to pass a million and a half of it right away to your nephews, you could do that. You would just use up a million and a half of your estate tax exemptions, probably fine. You probably don't need the whole thing anyway. And so that would work out fine. But if they will skip you, if they will just give it directly to those guys, then they won't use up your estate tax exemption. And so that's a beautiful thing about it. And in fact, they won't use up anything of yours because you're not in the direct line. So none of this generation skipping tax stuff applies at all. It may apply to your sister though. Again, read that blog post. Generation skipping tax is complicated stuff and worth reading about. But again, if we're talking about amounts and 5 million, maybe 10 million when you die, something like that, you're below the estate tax limits. And so all we're talking about is informational gift tax returns anyway, informational estate tax returns and that sort of thing. So it's not going to be a big deal. There's not going to be any taxes due like it would be with someone with a real estate tax problem. I think I answered your question. If not, I'm sure I'll Hear about it. But those are the things to be thinking about. Thank you for being willing to serve as an executor. It's not as easy as it sounds. The hard part is not managing the brokerage account. That part's relatively easy. Looking at the will, that part's relatively easy. The hard part's sorting things out with family members and their personal stuff. Right? Figuring out what to do with all that crap in the house, that's the hard part. So keep that in mind and do what you can in advance. And then when the time comes, recognize that they wanted to empower you to be the executor. So feel free to pull a dumpster up in the driveway and get rid of all the stuff that doesn't make sense to put in some sort of an estate sale. Feel free to use their money to pay for the commissions, to have someone else take care of all that and run an estate estate sale for you. They've got 5 million bucks. You shouldn't have to feel like you're spending a bunch of your money and your time taking care of their assets so your nephews can get every dollar out of it that they can. It's reasonable to use some of that 5 million estate to pay for managing that estate. Okay, another question about estate planning. Let's take a listen.
- [21:02]
Caller 2
Hey, Dr. Dali, longtime listener and recidivist caller. Thanks to your team for continuing to put out great content. I have two questions related to estate planning. The first is that if I inherit a house from a family member, what happens to the mortgage that they hold? Am I actually the one who assumes that mortgage, or would I need to get another mortgage? My second question is related to designating a charity as a beneficiary on any type of account that I have, am I able to name a charity directly? And would my executor then just direct the money to that charity upon my passing? Thanks a lot.
- [21:40]
Jim Dahle
Okay, what happens when you inherit a house? Well, you get the house. You now own the entire house. However, there is a lender with a lien on that house. Let's say the house is worth $600,000 and you inherit it, you've got yourself a $600,000 house. However, the house has a lien on it, right? $300,000. So if you turn around and sell that house, that's got to be paid off. So you got to give them their $300,000, and you really only inherited $300,000. Now, most lenders, when they make loans, they're not assumable loans. It doesn't go with the next person that has a house. If you sell the house, they got to get their own new loan. If you inherit the house, you usually have to get your own new loan. They're still going to want to be paid in the meantime while you're doing that. So for a few months, I think it's okay to just the estate to be paying on that mortgage. But by the time it passes to you, there probably needs to be a new loan on it or you need to sell it, pay them off and take the cash and buy something else. So I think in general, which is what you're asking, that's what you do with the inherited house that still has a mortgage on it. One other great reason, by the way, to have your house paid off in retirement so your heirs don't have to deal with that crap. Right? Who wants to deal with that stuff? Okay, your second question was about designating a charity as the beneficiary of your retirement account. And I would encourage you that if you're going to do this, you do it with accounts like an hsa, the worst kind of account to inherit and tax deferred retirement accounts like a traditional ira. Leave the Roth account to your heirs, leave the tax deferred account to your favorite charity. Right. Because the charity doesn't pay taxes, your heirs will appreciate inheriting a tax free asset and the charity won't mind inheriting taxable asset because they don't pay taxes. So I think it's fine to do. I think that's probably what we'll end up doing. And yeah, you can just name the heir or name the charity as the beneficiary and it should go right to them. Technically it doesn't go through probate. Right, because there's a beneficiary name. But somebody's probably going to have to tell the the charity that they're the beneficiary. I guess that's the executor's role and to make sure that money gets over there. But that's how it works. When you designate a beneficiary, it passes outside of probate, whether that goes to a person or whether that goes to charity. Our quote of the day today comes from Edmund Burke, who said, if we command our wealth, we shall be rich and free. If our wealth commands us, we are poor indeed. My guest today on the White Coat Investor podcast is Jonathan Spitz, the head of capital formation at WCI sponsor Lightstone Direct. Jonathan, welcome to the podcast.
- [24:29]
Jonathan Spitz
Thanks, Jim. I appreciate you having Me on Now,
- [24:32]
Jim Dahle
you guys at Lightstone do a fair amount of multifamily investing, but you also do quite a bit of industrial investing. Tell us a little bit about why you see that as a great place for investors to invest and why and what the industrial market looks like these days.
- [24:49]
Jonathan Spitz
So industrial specifically is one of the only property types really outside of data centers that's benefiting from multiple long term structural tailwinds. So what do I mean by that? So we believe that these are tailwinds for the asset class that will last not just the next five years, but the next 10 or 20 years. And those tailwinds really start with E Commerce. Right? E Commerce has been one of the biggest tailwinds for industrial real estate over the last 15 years. And we don't think that's slowing down anytime soon. So especially as what we've seen is the speed that distributors and retailers want to get goods in the hands of their consumers continues to increase. At what point was two day delivery became one day delivery and then same day delivery. So in order for businesses to do that, they need to be able to store goods closer to their customers. And so that again creates a downstream implications for the supply and demand fundamentals associated with industrial real estate. But secondly, I think what we're really seeing is reshoring. Reshoring is really all that really means is the process of bringing US manufacturing and production back to the United States. And so this is really a trend that I would say is newer, let's call it the last five or six years, but has a lot of room to run. And again, there's been, you know, as part of the big beautiful bill, there has been, there's incentives in there for businesses to reshore manufacturing. And so that again also has structural long term demand drivers for industrial real estate. Because anytime a manufacturer establishes a presence within a market, that then creates a supplier ecosystem that forms around that manufacturer and again that they need industrial space as well. But for us really what we focus on is what's called shallow or mid bay industrial real estate. So instead of acquiring 500,000 square foot to a million square foot facilities, what we want to be buying is multi tenant facilities that have suite sizes that are anywhere between 10,000 and 150,000 square feet. And the reason why is because it can suit a wide range of uses that really cover a lot of the businesses and industries that benefit from those secular tailwinds I just mentioned. So everything from the vendor that needs to deliver tires or pallets to BMW to businesses that support the Local economy. So think your local plumber or H vac contractor to your regional distributor that is distributing goods and services to metros nearby. Our businesses can serve all of these needs. And that's why what we've seen is incredibly strong occupancy, even as there's been a lot of supply that's come on the market over the last several years.
- [27:42]
Jim Dahle
So in some ways the headwinds that retail has faced are actually tailwinds for industrial.
- [27:50]
Jonathan Spitz
Yeah, 100%. Yeah. And that's something that we've seen play out. And I mean, candidly, I think retail is actually in a pretty good spot right now just because no one's been building any of it. Right. But look, I think this is an important point to mention because I think it's really important when we're talking about industrial to not paint the entire category with a broad brush. Because yes, E Commerce is certainly a major beneficiary and obviously things like ordering goods online. And I think typically when I'm talking to people in person about industrial, the first question I'll ask is, you know, everybody just name something that you're not ordering online. And usually what you hear is silence, right. For a minute. People have to think, what am I not ordering online today? You can get groceries, shoes, pet food, you name it, Right. Everything is moves through that digital or sort of that supply chain infrastructure and that distribution network and that's going to continue to grow. That being said, there has been a lot of supply in some of these larger class A industrial facilities. And so if someone opens a, you know, opens the paper or just reads the Wall Street Journal, what you might hear is a lot of supply, a lot of, a lot of vacancy right now in the market. And that's true for a lot of these big industrial facilities that were built, you know, there are a million square feet and they were built all on spec. But again, that's why we like to focus on these smaller suite sizes that can really accommodate a wide range of uses from E Commerce to supporting manufacturing and a local economy.
- [29:20]
Jim Dahle
Now, a lot of the tenants you have in industrial tend to be longer term tenants. They often invest significant amount of money into improving the space themselves. And most of the leases tend to be triple net. Can you explain a little bit more about the advantages of the tenants in industrial versus you know, typical apartment building?
- [29:39]
Jonathan Spitz
Yeah, so generally speaking, when people, when you're thinking about industrial leases, I would say broadly speaking, the larger the space, the larger, the longer the lease. So if you're investing in something that's 500,000 square foot above, you may be dealing with a 10 or a 20 year lease, which is great. And especially if it's to a credit tenant like an Amazon, obviously that helps provide a very durable, predictable stream of cash flows. Now the downside is, is if rents, rent growth starts to outpace. Typically when you're doing a 10 year lease, there are annual rent escalations built into that lease. That lease, right. Sometimes they're indexed to CPI, sometimes they're fixed at whatever it is, 2, 3%. Now what that can mean sometimes for an owner is if you're owning a long term lease like that, that if rent rents outgrow, you get predictable cash flow. But sometimes you may not. Rents may out outpace the, the rent growth that's built into the lease. So therefore you're not able to mark those leases to market as rents start to grow. But one of the advantages to the triple net lease structures that you really see across all of our buildings is that all of the underlying expenses, so think insurance, taxes, a lot of certain parts of repairs. Now there are some exclusions for things like roofs or some capex requirements that is all borne by the tenant. And so for instance, if you look at multifamily, what's happened there over the last couple of years, what we've seen is property taxes and specifically insurance costs have run way ahead of what most managers were projecting. So what that meant was that the landlord is largely absorbing a lot of those cost increases that can result in lower income for investors. What's beautiful about a triple net lease is the tenants are absorbing a lot of those increases. And so that then can protect investors as far as understanding the predictability and durability of those cash flows that you're receiving. What I'll say what we do at Lightstone mostly is we focus again back to sort of smaller suite sizes generally means smaller or shorter durations of anywhere between three and seven years. And we like that sweet spot because again, if we believe that rents are going to continue to grow, which we do in the segment of the markets that we focus in, we want that ability to market leases to market quicker, to be able to capture those higher rents as they grow over time. And that's where we use our hands on asset management and our leasing teams to be able to make sure that we're getting in front of and we understand how our properties will hold up if leases need to turn over and how are we underwriting that from managing cash reserves and at the property level.
- [32:29]
Jim Dahle
Now Lightstone offers you know, mostly individual syndications of both industrial and multifamily properties to accredited investors with minimum investments of 50 to $100,000. Why might somebody choose Lightstone over one of your competitors? What do you see as the advantages of investing with Lightstone?
- [32:49]
Jonathan Spitz
Yeah, I would really boil it down to three things, really. One is longevity. We've been in this business for 40 years. We've invested across multiple market cycles. What I can tell you about almost all of our competitors, most of them were born out of the great financial crisis. There's nothing wrong with that. But as an advantage, I mean, for us, what that means is we invested through the great financial crisis. We got punched in the face, we learned those lessons. And unfortunately, a lot of managers are learning those lessons right now because all a lot of managers knew was what a structurally declining interest rate looks like and property valuations rising as a result. So that ability that we've seen what other market cycles look like has really served us well as far as how we've positioned our portfolio in the current market environment and how we think about risk management. Additionally, I would say we put our money where our mouth is. I don't know of another manager that invests 20% of their own capital alongside investors in every deal that they do. We are the largest investor in every property that we offer. So not only are we managing the investment, but we are the largest investor in those investments. So we are heavily aligned with our LPs. The last thing I'll mention is just the breadth and depth of our platform. So we invest across a number of different asset classes, from multifamily to industrial. We've invested in retail hotels. We own 25,000 apartments, about 12 million square feet of industrial, 5,000 hotel keys, 2 million square feet of retail. So that enables us to position capital and make investments to wherever we believe is the best risk adjusted opportunity for both us and our investors. So I think the combination of those things is really what's been resonating with investors today.
- [34:40]
Jim Dahle
All right, Jonathan, thank you so much for sharing your expertise. Thank you for sponsoring the White Coat Investor podcast. White Coat Investors who are interested in learning more about investing with Lightstone Direct can go to whitecoatinvestor.com Lightstone and get more information. Thanks again for your time.
- [34:57]
Jonathan Spitz
Awesome. Thanks, Jen. Appreciate you having me.
- [35:00]
Jim Dahle
Okay, let's take another question about an
- [35:02]
Caller 3
s corp. Hi, Dr. Dali. I'm a fellow transitioning to 1099 income through an S corp. And I was advised to skip quarterly estimated payments entirely. The strategy is to let all income accumulate in the business bank account during the year, setting aside 40 to 50% in a high yield savings account for taxes in retirement and then in December, determining reasonable salary versus distributions and running one large payroll with enough withholding to meet safe harbor rules. From my understanding, the idea is that withholdings are treated as paid evenly throughout the year and this avoids penalties, allows the money to earn interest, and enables more precise retirement and income planning once the full year picture is clear. My question to you Is this a legitimate and reasonable strategy? I've cold called a few CPAs with this question and they've all been skeptical, so I'd be curious to hear your thoughts. Thanks for what you do and appreciate your insight.
- [35:51]
Jim Dahle
Okay, great question. There's a few principles to be thinking about here and it's appropriate for someone to be a little bit skeptical. Not that there's anything wrong with this strategy. This strategy is not illegal. Whether it's adequate or not depends on the details of the case. Right. So let's say you've got this W2 job and you make $300,000 at your W2 job, and you got this 1,099 job and you make $30,000 at the 1099 job. What is the best way to deal with the taxes for that 1,099 job? Well, it turns out the best way is to just increase your withholding at the W2 job, especially late in the year, because all withheld money is treated the same whether it's withheld in January or whether it's withheld in December. That's not the case with estimated quarterly payments. If you're making irregular estimated quarterly payments and they go, oh, we got to look at your income from the first quarter and you only made a tiny estimated quarterly payment then. Now we're going to start assessing interest starting in the first quarter last year because you should have paid that money on April 15th. They don't do that for withholding. Whether you're having something withheld after a Roth conversion or withheld from a paycheck or anything withheld is all treated in one bucket. They don't look at the date on which it was withheld. So that's the principle. And the idea here is, oh, we're trying to take advantage of that fact. Rather than giving the IRS a loan, we're going to keep the money in our account earning 3.5% or whatever you're getting in your high yield savings until the end of the year before we give it to the irs. Withholding? Yes, that's legal yes, you can do that. I just question whether it's going to be adequate to do that. And it really depends on the amounts. If you can have enough withheld from that last paycheck, and I don't see why you wouldn't be able to, because you can just set additional withholding at that time if you want, and just send it all in December. You could do that. This is one of those optimizer things, right? Do you need to do that to be financially successful? No. Is it illegal? No. I don't even know that it's against the spirit of the law. It's just the way the law is. You know, taxes are kind of wacky that way in that you're supposed to pay as you go. That's the principle they want to see. But it's not actually pay as you go for anybody but those making quarterly estimated payments and those who are getting paid regularly from their W2 job. Everybody else, you know, the idea is you got to be in the safe harbor. And the safe harbor is that you've paid, at least for a high earner, you paid at least 110% of what was owed last year or 100% of what was owed this year, or within $1,000 of that. That gets you into the safe harbor. But it's not like this terrible thing happens if you're not in the safe harbor, right? A lot of this, especially for those of us with very irregular income like I have, it's a guess. It's a total guess, right? I mean, I don't even get my taxes done until October 15th. And then my tax preparer comes back and says, here's what your quarterly payments ought to be. I've already made three quarterly estimated payments. By the time they tell me that, I've already made the one in April and in June and September, and they finally tell me in October 15th, here's what your quarterly estimated payments are supposed to be. Well, that's not helpful at all. Of course I have to guess because I had to file three of them already. And so a lot of this game is just a guess. And if you don't pay enough, well, guess what, you owe the IRS some interest, right? It's not the end of the world if you paid too much. Well, the IRS usually isn't going to pay you interest on that sort of thing. And so you just gave the IRS an interest free loan. Maybe it gave a little bit too much. So I haven't been anywhere near within $1,000 of what my tax bill Actually is for at least a decade, right. And sometimes I'm off by a lot. The important thing is that you don't go spend the money. Okay? If you go spend the money that you actually should have paid in taxes, that's a real problem. But if it's just sitting in your money market fund, oh, you know, bummer. I gotta pay, you know, 7% interest on this for a few months, and I only earned 4% on it in the money market fund. So what? So you gotta pay, you know, a few hundred dollars or a few thousand dollars in interest, whatever. Not a big deal. You know, you got as close as you could and that's the way the system works. So, yeah, I think the technique's legitimate, but you got to make sure that the tax bill on what you're actually paying yourself as salary is high enough to cover what you will owe for all that 1099 income. And I think it's totally possible that you could make that happen in lots and lots of situations. Now, there's lots of other underlying things we could talk about with this situation, like whether it was right to form that S Corp in the first place, Whether you're okay just leaving all that money you're earning in the S Corp for the whole year. I mean, most of us go to work and earn money because. Cause we want some of it. If you just leave it sitting in that S Corp, not only can you not go spend any of it, but you didn't get to invest it in anything but cash either. So there's downsides to leaving money in there all year. And maybe those downsides will be bigger than whatever benefit you're getting from doing it. But it's not that big a deal to make quarterly estimated payments. You shouldn't be doing backflips to try to avoid. Maybe not do backflips is the way to say it. Maybe you shouldn't be bending over backwards to try to avoid doing that. It's not that hard. The form you fill out, it's only got like eight lines on it. It takes like 30 seconds to fill out. And then you just go into the online payment system and send it in. It's not hard to make quarterly estimated payments. Once you've done it once or twice, you'll realize, oh, this isn't anything to be afraid of. I don't need to come up with some crazy scheme to avoid making the payments. It's just a matter of how many more months you're going to earn 3% on that money versus not be able to invest it in whatever you'd be investing, the amount of it that you're investing or in order to spend some of it. That's kind of what you're weighing. So hopefully that helps. Am I skeptical? Only because I don't know the exact amounts. Not because I think it's like illegal or something. I don't think it's illegal. It just might not be quite enough for you to take care of your tax bill. All right, thanks everybody out there for what you're doing. The reason why you got to wrestle with all these high income problems is because you're doing something that's very valuable in the world, right? You're treating patients that are sick or they're injured, or you're drafting up complicated legal things, or you're taking care of somebody's pet that they love very much. And who knows? I don't know what your profession is, but whatever you're doing, it's important work. So thank you for doing it. No one said thanks today. Let me be the first. Okay, let's talk about private equity for a minute. Here's a question.
- [42:35]
Caller 4
Hey Jim, thank you for all that you do. I am a full partner in a practice that will probably be selling to private equity in the next year. I am only five years out of fellowship and have been opposed to this decision, but will likely be outvoted. My questions revolve around how to prepare for this potential windfall. The total could be anywhere from $10 million to $18 million per partner. This would likely be split into two payments over three to five years. My understanding is that this will be subject to long term capital gains rates. Are there ways that I can plan ahead to reduce my capital gains taxes on this? Additionally, would you change asset allocation or investing strategy after a windfall? I have historically been nearly 100% equities, but I have some reservations with this strategy. Once I hit financial independence, I intend to keep practicing for at least 15 more years. And I worry about liability and asset protection going forward when I have so much invested. Thanks for your help.
- [43:27]
Jim Dahle
Okay, everybody out there in white coat investor land, reach down, pick up your jaw off the floor. That was a pretty impressive number you threw out there. For most of us, that sort of a windfall is life changing dramatically. Life changing changes everything you've been doing financially up until this point. And I totally understand why your older partners are big fans of this. In fact, maybe you ought to be a big fan of it because that is clearly enough money I would hope to make just about anybody listening to this podcast. Financially independent and never have to worry about money again. So, yes, lots of things should change when you inherit that kind of or not inherit. When you have a windfall of that kind of money, should you invest differently? Yes, you have much less need to take risk. You have a lot more ability to take risk. But certainly some big chunk of that ought to be forever invested in some safe way. And maybe that's a muni bond fund at Vanguard or a TIPS ladder or something like that. Some chunk of that ought to go into this pool of money that's never going to be lost, that you can live on no matter what happens in the future. And then, of course, the rest, you can invest in some reasonable way, take on a reasonable amount of risk, and consider your financial goals, whether those are philanthropic, whether that is leaving a whole bunch of money to your kids, whether that's living the good life for you. Certainly you ought to spend some of that money, right? Not only now, but later. You can now afford a lot of things that you probably couldn't afford before, and it's okay to buy some of them if you think they're going to make you a little bit more happy. So this sort of a windfall, there's a lot to think about. In general, windfall advice is don't do anything for a year, right? Keep an eye on it and, you know, let it sit in cash and earn 3 or 4% while you, while you figure out how life's going to change. And that's probably still good advice. Obviously, you want to make sure you save enough of it to pay any capital gains taxes due. Now if what you want to do with the rest of your life involves practicing medicine, I think that's okay to do. We've been financially independent now for seven, eight years, something like that, and I'm still practicing medicine. I was in the ER yesterday seeing patients, patients that could sue me for a gazillion dollars. And so I was a little worried about that. So I wrote a book called the White Coat Investor's Guide to Asset Protection. I learned about asset protection and shared what I learned with all of you. And so I think it's worth reading that book, understand what your risk actually is. It's a lot lower than most physicians think, but it's not zero. So it's worth doing some advanced asset protection planning. Now, you should still do the things that most people out there do or should be doing. You know, typical white coat investor kind of stuff. You ought to be maxing out retirement accounts, because you got to keep those in bankruptcy. You ought to title your properties properly. You know, if married, that usually means tenants by the entirety. If your states allow it, you ought to have umbrella insurance. If you don't already. This is a time when you might consider going, you know, maybe I ought to have a 5 million policy instead of a $1 million policy. Right? So you do things like that. But this is probably enough money to also consider some of the more advanced asset protection techniques. Now, these are often coupled with estate planning techniques. We're talking about things like grantor trusts, right? These irrevocable trusts. The asset no longer belongs to you. So if you get sued for practicing medicine, you don't lose that asset because it's not yours anymore. It belongs to this trust. The downside, of course, is it's irrevocable. It's going to be in that trust, but you might be able to set it up as a spousal lifetime access trust. And so the beneficiary is your spouse, and theoretically they'll still share those assets with you for the rest of your life. So there's some ways to maybe get around and be able to use some of that money even though you gave it away. Legally speaking, Some people look at Forming Family LLCs or Family Limited partnerships, and those have some estate planning benefits as well as some asset protection benefits. Certainly it seems reasonable to look into some of the domestic asset protection trusts, but this is all worth a discussion with an estate planning attorney in your state. Okay, so that's just kind of general windfall advice. That's not the question you asked, though. The question you asked is how can I pay less in capital gains taxes? Because this is going to put you in the top capital gains bracket for sure. Right? So that's 23.8% when you include the PIPACA taxes, Right. That's just federal plus your state. In my state, it'd be another 4.5% or so is what I would pay. So I'd be paying whatever that works out to be 28%. Something a little over 28% I'd be paying in taxes for that sort of a windfall. So, yeah, it's a lot of money, right? Instead of getting 10 million, now you're only getting 6 or 7, you know, so it's a lot of money. And it's reasonable to think about ways that you might be able to avoid or delay those capital gains taxes. So luckily for you, I published a post in February of 2026 about 10 ways to avoid or at least delay capital gains taxes. So what are those 10 ways? Well, the first one is to just cheat on your taxes, right? Tax evasion works great until you get caught, then you go to jail. And I can't think of a windfall that's worth going to jail for, so I don't really recommend that one. Here's another thing you can do. You can use tax losses to offset your gains. If you've been tax loss harvesting with your taxable portfolio as you go along, maybe you saved up a few hundred thousand, maybe even a few million in tax losses, and those can all be used to offset those capital gains. You now don't have to pay capital gains taxes on however many losses you have. Now, there are interesting strategies out there to try to get more of these losses. Popular one right now is direct indexing, which we talked about in a recent podcast. There are pluses and minuses to direct indexing. Aside from the expense and the worries about tracking error, you got to recognize that most of the losses come up front. This isn't something you keep getting for decades and decades and decades. But you might want to consider that to try to get a few more losses you can use to offset the gains. Now, if you hold the asset till you die, this is way number three. You get a step up in basis of death. It doesn't sound like that's going to be an option for you. I wouldn't recommend death as a way of getting a step up in this asset, but if you and all your partners held it until death, it would get a step up in basis at death. Okay. Another option which doesn't sound like it's going to work for you is to give appreciated assets instead of cash to charity. Right. So you could, theoretically, before it's sold, give away part of your share of this company to a charity. Right. So whatever goes to charity, you don't have to pay the capital gains taxes on. So if you're very charitably inclined, you might want to look into that. Okay. Another option for those who own a whole bunch of individual stocks with large capital gains is to do what's called a 351 exchange, where you're basically exchanging it into an exchange fund, an ETF that takes everybody's appreciated stocks and gives them some sort of diversification for it. Not an option for you. Okay. A 1031 exchange is typically used when you swap from one real estate investment to another real estate investment. I don't think this is going to be an option for you for your practice, but if part of this sale is also the practice land, you might be able to do a 1031 exchange with it. Method number seven is a 721 UPREIT exchange. Again, it's done with real estate. Same thing with eight Delaware statutory trust. But number nine might be an option for you, which is an Opportunity Zone fund. And this is a way to take some money, some of these capital gains you got, invest it into an Opportunity Zone, which is a type of real estate fund and get some beneficial capital gains tax treatment out of that. And they changed these recently. They work a little bit differently than they used to. But basically you get a deferral of your long term capital gains and you get a partial step up in basis. Your basis goes up 10% after five years, 15% after seven years. So that might be an option. If you're interested in investing in real estate, you might be looking to an Opportunity Zone fund, a deferred sales trust. You kind of have this happening in that you're not getting all the money in one year and so you can kind of spread it out a little bit. You only pay taxes when you actually get the capital gains. And so by spreading it out a few years, that might help you with that. That's kind of it, right? If you're going to get a capital gain, you got to pay taxes on it. And if you want to keep the money, you know, if you want to give it to charity, it's fine if you want to delay it by exchanging it into something else. But I don't think that's an option for this practice except for going into an Opportunity Zone fund. I think you're basically going to bite the bullet and you're going to have one year with a really high tax bill. You're going to have a really high income and a really high tax bill. Just be glad you get to pay at the lower long term capital gains tax rates rather than ordinary income tax rates. So you're going to lose 23.8% instead of 37%. Better than a kick in the teeth, right? There are worse things than having to pay taxes, like not having to pay to pay taxes. So I hope that's helpful to you and answers your question about what to do with it. I understand how you feel about selling, especially early in your career. This is probably a very profitable practice and chances are good you're going to make less money afterward as somebody's employer, an employer, these private equity folks, and you're probably going to have less control over your work environment. You're probably more likely to get burned out afterward. So in general, the younger partners are against these sorts of sales and the older partners are very much in favor of them. That's probably pretty typical. But you also get the benefits, right? This is a big lump sum of money you get relatively early in your life and there are benefits to that. Now you can invest it any way you want, it can be more diversified than having it all in this practice, and you can use it to have a really cool financially independent life. So congratulations to you on your success on this upcoming windfall. Great job being an owner, buying into that practice or whatever you did to build it up to make it so valuable. Well done, I say to you. Well done and sorry you got to pay taxes on your good fortune. As I mentioned at the beginning of the podcast, SoFi could help medical residents like you save thousands of dollars with exclusive rates and flexible terms for refinancing your student loans. Visit sofi.com whitecoatinvestor See all the promotions and offers they've got waiting for you one more time. That's sofi.com WhiteCodInvestor SoFi student loans are originated by SoFi Bank NA member FDIC. Additional terms and conditions apply. NMLS 696891 all right, don't forget about the Financial Educator award. Go to whitecoatinvestor.com educator not only is that where you get the slides, if you want to give presentations to your peers and trust me, you're very capable of doing it, you won't recognize that until you get to the Q and A and the end and you realize how easy their questions are to answer. That's also where you put a nomination in and hopefully win an award as the Best Nominator. Thank you for leaving us. Five star Reviews A recent one came in from Adam Henry who said, young Doc improving his financial wellness. Incredibly important information for maintaining a healthy financial lifestyle. Highly recommended. Five stars. Thank you for that. Thank you for telling people about the White Coat Investor. We know that we grow primarily through word of mouth from you telling your friends and peers and people that trust you about the White Coat Investor. And we thank you for sharing that trust they have in you with us. We'll try to do all we can to not violate that trust you've placed in us. Keep your head up, your shoulders back. You've got this. We'll see you next time on the White Coat Investor Podcast.
- [55:53]
The White Coat Investor Podcast is for your entertainment and information only and should not be considered financial, legal, tax or Investment advice Investing involves risk, including the possible loss of principal. You should consult the appropriate professional for specific advice relating to your situation.