← White Coat Investor Podcast
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- [00:00]
A
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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B
Welcome to the White Coat Investor Podcast. This episode is brought to you by SoFi.
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C
Helping medical professionals like US bank borrow and invest to achieve financial wellness. SoFi offers up to 4.6% APY on their savings accounts as well as an investment platform, financial planning and student loan refinancing, featuring an exclusive rate discount for med professionals and $100 a month payments for residents. Check out all that SoFi offers at whitecoatinvestor.com SoFi loans originated by SoFi Bank NA NMLS 696891 advisory services by SoFi Wealth LLC. The brokerage product is offered by SoFi Securities LLC, member of FINRA SIPC. Investing comes with risk, including risk of loss. Additional terms and conditions may apply.
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B
All right, we've got a great episode today. This podcast I think drops in June. We're recording it the end of April. April. So if something crazy happens in the last month and we don't mention it, that's why we've had lots of great stuff happening in our family this week. I'm literally in between a wedding and a funeral today. I'm getting on a plane in a couple of hours to go to a funeral. But it has been an exciting time in our family and lots of interesting time spent thinking about philosophy and what's really important in life. So I hope your life is going well out there. We're certainly grateful for what you do. It's not easy work. We know the audience for this podcast is mostly high income professionals like doctors. You've got hard jobs and you spend a long time in school and in training learning how to do them. You feel called to your work and we're grateful that you do because what you do is important. So nobody said thanks today. Let us be the first. All right, we've got a great interview today. We've got Ben Carlson here with us and we're going to talk about a potpourri of investing topics as well as his new book that's out. But before we get into that, I want to share our quote of the day, which is from Warren Buffett who said, if you aren't thinking about owning a stock for 10 years, don't even think about owning it for 10 minutes. Which is great advice pointing out the importance of being a long term investor. Are you buying a house soon? Do you have a better use for your money than a down payment. You probably want to look into a physician or a doctor mortgage then these allow you to not have to pay private mortgage insurance despite putting down less than 20%. If you would like to know who you can get these from in your state, go to whitecoatinvestor.com mortgages today. Okay, let's get into this interview with Ben Today on the White Coat Investor podcast. I've got Ben Carlson. He's the director of Institutional asset management at Ritholtz Wilson Wealth Management. And they do all kinds of portfolio management there for institutions and individuals to help them achieve their goals. He's written four now five books. We're going to be talking about that fifth one today and he's been named to the investment news 40 under 40 of top financial advisors. But you probably know him best from his Animal Spirits podcast. He's been doing that almost as long as the White Coat Investor has been doing a podcast. So thank you, Ben for all of the work you've done for individual investors over the years.
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D
Good to be with a fellow content provider here.
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B
Okay, let's start with the book. Risk and Reward is the new book. It talks about market history. It talks about behavioral finance. Tell us why that was important for you to write.
- [03:39]
D
So I feel like this book is kind of everything I've been doing for the past 10 or 11 years in content creation and writing. And I started out writing with the mindset of trying to explain complex topics, topics in simple, plain English. And I've been trying to explain how the stock market works and how investing works. And this idea has always come back to me that risk and reward are attached to the hip. I think all of investing is some form of trade off. Almost every financial decision you make is some sort of trade off. Today for tomorrow, tomorrow for today, all that sort of thing. Investing is this idea of regret minimization. So it's kind of like a yin and yang. And I wanted to go through the history of the last hundred years or so just to show the good and the bad side of investing in the markets and kind of provide some context around that so people understand both sides of the equation.
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B
Okay. I think the first time I heard someone argue that an individual investor really needs to understand a market history was probably Bill Bernstein, Right? He wrote a book called the Four Pillars of Investing two plus decades ago. And one of those pillars was market history. Why do you think that investors need to understand market history?
- [04:46]
D
Yeah, I'm a big Bernstein acolyte as well, and I. You know, when I first started out, I got involved in the markets, I realized I don't know enough about what's going on here. I'm still. I'm inexperienced. And so my way of learning was, you know, standing on the shoulders of giants and then reading history and understanding, like, oh, the pendulum really does swing really far in either direction. And the more you read about history, you realize the reason that so much crazy stuff happens in terms of the booms and the busts is because of human emotions. And that leads you down to the psychology part of things. And that's one of the reasons that I find markets so fascinating, is because it's like this giant laboratory for understanding human emotions and how making money and losing money can impact the way that we feel. And a lot of times, it's these things that you can't really control. Right. Jason Zweig says that emotions aren't good or bad, they just are. It's part of what makes us human. And so I think understanding that stuff, especially through the. The lens of history, is helpful for two reasons. And there's kind of two people I had in mind when I wrote this book. One is the newbie investor who's witnessed a great bull market and thinks, like, this is kind of easy. Yeah, sure, the market falls every once in a while, but it always comes back really quickly. And I wanted to show people that, no, there are still really bad things that can happen. And then the other side is like, the people coming out of the 2008 financial crisis were saying, oh, my gosh, this is. I'm out of. I'm done. I'm tapping out. It's too hard. The risk is too great. I can't be involved in this. And so I wanted to provide sort of a guide to some of both of those, and obviously people in the middle as well. But that's the thing is looking at both things, you know, like the risks, yeah, they're painful at times, but they are worth it in the end. That's the way that. That's kind of where I come out
- [06:24]
B
on this risk and reward. You can pick it up at Amazon. By the time you hear this podcast, it will be available to buy. As we're recording it. You can pre buy it. Thank you so much for writing that. You know, we talk about people that, you know, got overwhelmed after the global financial crisis. There are a fair number of people that exited the markets after they lost money and have not gotten back in. How would you advise somebody like that who's had their Money sitting in, I don't know, a money market fund or CDs or their high yield savings account, and that's it for 5 years, 10 years, 15 years. If they came to you saying, what should I do? How would you help them to still reach their financial goals?
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D
We certainly had a lot of that coming out of the 2008 financial crisis. In the mid 2010s, 2015, 2016, 17, we'd have people who say, listen, in 2008 or 2009, I tapped out and I said, I went all cash. I think they were perfect examples of why market timing is so hard. Because you don't have to just make one decision, you have to make two decisions, right? It's easy to say, all right, get me out, I'm, I'm done for a while. I, I want to just wait till the dust settles. But then you realize all those people had. It was the same story every time. It was, you know, I decided I was going to wait until the market crashed again and I'll buy when market sit on 20% and that doesn't happen now, what, the market takes off without me. And then if the market did fall 20%, it was, well, I'm going to wait for it to fall 30% now. And I say that market timing is a gateway drug for a cash addiction. You can't force yourself to get out of that position because it feels so comforting. And you go, but when I do put money to work, then it's going to fall. And I think for most of the people, you have to take more of a psychological, less math based thing because the math would tell you just put the money back into the market. The majority of the time the stock market's up three out of every four years on average. If you played the probabilities, if you were a gambling person and went to the casino, or you're gambling on FanDuel and you got a 75% chance of winning, you would take that bet all day long. But people have the psychology behind it and they go, no, but I have this lump I've been sitting on and if I put it in and then the market falls 15 or 20%, I'm going to regret that. And so for most people, it's just coming up with a plan and every month they're going to put a little bit of money to work, or every three months or every week or whatever it is, and then just sticking with that plan, come hell or high water. I think that's the thing is writing it out. And for certain People, you can give them an hour. Right. We've done this with clients who've come to us and said, I did this, I shouldn't. We had a client who did this in March of 2020. The market was down 20% or something that month. And they said, I got out of half my portfolio, I couldn't do it. And four years later, they were still sitting in cash. And they said, well, what if the market does fall? Well, I'm dollar cost averaging back in. And we said, all right, fine, we'll put some rules in place. If the market falls 20%, you can turn up the dial a little bit and put a little more in. You don't have to be. So I think some sort of psychological plan like that is probably the easiest thing for that crowd.
- [09:22]
B
Yeah. Probably not the time to try to talk them into lump summing, because the data suggests that's going to come out ahead in the long run. They're the people who actually need a DCA kind of plan.
- [09:32]
D
Yes. Yeah. Right. Even though the spreadsheet would tell you that's not the right answer.
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B
Yeah. Now, you're best known probably for trumpeting simplicity. Keep it simple. Keep it simple. And obviously, all else being equal, simpler is better. All else isn't always equal, though. What are some instances in which some additional complexity in your financial life, in your portfolio, is actually worth it?
- [09:57]
D
Yeah, that's a great question. Cause I do really believe that I think the whole idea, and I came to that because I was dealing with institutional investors, and they made things really complicated because they thought it made it more sophisticated. And I realized that it was harder to lean into the pain. When you have a complicated strategy, something's not working. It's easier to just hit the eject button and let it go. As opposed to, like, no, I should reinvest more because it's going to work out in the end. And there are now tools that I've seen in the wealth management arena that. And you have to explain this to clients, like, listen, this is more complicated. You give them the choice. Sometimes more complicated is not better. But there are options. And one of them, and I think the biggest change in the 2020s that I've seen is just this phenomenon of tax alpha and people understanding, listen, I know that I can't beat the market. It's been drilled in my head for 10, 15, 20 years. Everyone has been saying this, that indexing just wins. And that argument has only gotten stronger over time. But I can control the efficiency of taxes in my portfolio. And that's where I want to get the edges. And so now we have. Because fees went to zero on commissions in the early 2020s, late 2010s, you have the ability to customize your portfolio more through technology, through direct indexing or custom indexing. And that allows you to harvest losses because you're not buying AN S&P 500 index fund. You're buying each of the 500 stocks there. And in any given year, the average number is something like, even in an up year, 30% of all stocks in the index will still be down. And you can utilize those individual names to tax loss harvest. Now, the thing that matters is, do you have gains to offset somewhere? You can't just turn these complicated tools on just for the sake of doing it. You have to have the sale of a business or the sale of appreciated stock or, you know, stock options that are coming due. You have to have, you know, something in your life that makes sense to use these more complicated tools. So that's kind of how we position it with clients. But I am seeing once you explain how this stuff works to clients that they kind of go, oh, why wouldn't we all just do this? If the cost is pretty similar and you have these edges around that you can add value for taxes, it makes a lot of sense, but it just depends if the client actually needs it or not.
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B
Yeah, it's really an Investment act of 1940 Problem Investment Company act of 1940, where basically the funds couldn't pass the losses to you.
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D
Right.
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B
And so you have to run your own fund if you want to maximize the losses. But I agree with you. The main thing people don't think about when looking at direct indexing is, is do you have a use for those losses? Because you can get a lot of losses just tax loss harvesting at the fund level. And do you really have a use for more before you start running the risk of not tracking the market as well? If you're direct indexing and the hassle, if you want to stop doing it, there's always an additional fee. I've seen it as low as 9 basis points, but most people doing it are trying to charge quite a bit more than that. And I'm not sure that for the vast majority of people, the tax alpha is more than what's being charged for the direct indexing. Okay, so that's one example of where complexity might be worth it. What other examples have you seen where mixing it up a little bit more might be worth it?
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D
Yeah, I think a lot of it is like, how Diversified, do you want to be within your portfolio? Right, because we've seen just a simple three fund, Vanguard portfolio can do just fine for most investors, right? A lot of people when they just start out, they just put their money in a target date fund and go, why would I need anything more than a single fund? And obviously, I think the more capital you get in your portfolio, then it makes more sense to think about how much more wide diversification do I need? And I get this question all the time. And there's of course not a right answer, right? How many funds do I need? How many strategies do I need? And the answer is always, it depends. Which seems like a fallback answer for financial advisors, but it's true. And obviously one of the reasons that you add more strategies is for rebalancing. It could be for tax loss harvesting. It could be because when you need to spend the money, you want to take from certain areas and you know that parts of your portfolio could be down while others could be up, and you want to take from the ones that are up and not sell the ones that are down, these types of things. So I think it really is how much more diversification you need. And it's actually one of the biggest challenges for investors these days too, because for individual investors, they've never had it better. In terms of options, the strategies you have access to today in an ETF wrapper with really low fees, a tax efficient fund structure, there are strategies available today that you could not have possibly thought of getting 10, 15 years ago that were only available to maybe hedge funds or insurance companies if you wanted them. And now you can buy them off the shelf throughout the trading day. And I think the hard part is dealing with the temptation of like, yeah, this exists, but do I really need it? That's the hard part for investors these days.
- [14:44]
B
I mean, there's no called strikes, right? And you cannot invest in very many. Right. I mean, you would have a bizarro portfolio if you tried to incorporate even 10% of the strategies that are available out there with all these ETFs.
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D
Let me ask you, where do you think adding complexity can add value to a financial plan?
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B
You know, diversification, obviously, adding more asset classes. I think there's some value there. And people come up with this question all the time, well, how many is enough? And I've said, well, I think there's a lot of benefits in getting to three asset classes. I think you get significant benefits going to 7, and maybe there's some additional benefits getting to 10, but beyond there you're clearly just playing with your money. There's no doubt once you're beyond 10 asset classes. So I think that's one place. But I see it even not just on the investment side. I see it on the consumption side and the cash flow planning side and people doing all kinds of different things, trying to arbitrage interest rates as far as their debt versus investing, you know, kind of decisions. And the unbelievable amount of complexity that goes into people's decisions with Roth conversions, especially considering all the variables that go into the equation are all unknown and some of them are unknowable and you can really get things very, very complex.
- [16:06]
D
Well, yeah, the other big one, I guess is, you know, borrowing against your portfolio. People saying, listen, I just, I want to let that compound as long as I can, I'm going to borrow against my portfolio. It's just, it adds another few decision trees and risks to the equation, even though it could work out great for you or if you're using it as a bridge loan or whatever. And then the other one I think we've talked to a lot of clients is, you know, I'm going to buy a vacation house and how much does that complicate my life? Because now I'm doubling up on property taxes, I'm doubling up on furniture and things to take care of and places to keep clean and landscaping, all this other stuff. And, and that's, as you mentioned, like your personal life. That's just another added worry of is it worth it or not. And that's more experiential than investment for a lot of people, I think. But it's a layer of complexity to your life for sure.
- [16:54]
B
You talk about working with institutional money. I'm on the retirement plan committee for this group of physicians I'm in, I think, I don't know, it's 400 or 500 doctors in this group across a couple of states. And we have both a 401 profit sharing plan as well as a cash balance plan. The investment in the cash balance plan is a Vanguard Life Strategy fund. That's it. That's the whole investment. And so our meetings tend to be relatively short, you know, and we meet as a, as a committee to talk about investments. And it's just a good example of how you can keep it very, very simple.
- [17:29]
C
Right.
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B
I mean, it's a tax protected account and you know, you really don't have to make your life all that complicated. But it's interesting to see what docs do because we have insight, you know, not personally, for every Single one of them, but in mass of where the money is in the plan. And we see that about a third of the docs are using the equivalent of a target date fund, a target retirement fund. A third of them are picking from the menu of funds that we've selected for them, which are all, you know, low cost index funds. And a third of them have chosen the Schwab PCRA auction where basically they can buy anything that's available at Schwab. And it just kind of demonstrates that there's different strokes for different folks and different things that people want. And some people want a little more complexity to them or their advisors that are helping them. But there's a lot of different ways to skin this cat. For sure.
- [18:21]
D
I think some people get some entertainment value out of it too, the people who pick stocks. But I talk about it in the book a little bit, just, I think you really need to position, size it correctly to understand, not allow it to take over your life and have. I just think it's more brain damage, for lack of a better word, that you get when you're. Because you're constantly, if you have a brokerage account where you're picking a few stocks, you're checking it constantly. And the other stuff, you're never, you know, I'm sure with your life strategy fund and your doc group, those meetings are probably pretty short, right? And if you held, if you held 20 individual stocks, you'd be talking about a bunch of different things about what's going on with these companies. And there's something to that of just the performance reporting behind it and the amount of time that you're spending thinking about it.
- [19:03]
B
You talk about people that they're hobbyists, they find it entertaining. You've written before that investing is not supposed to be fun. Why isn't investing supposed to be fun? What happens if you try to make it fun? If you try to make it your hobby?
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C
What happens?
- [19:17]
D
It's a difficult game to play because there is this difference between obviously investing and speculating and gambling. You mentioned there's different strokes for different folks and different people look at different ways. There's obviously a lot of investors who have just turned off that entertainment value. And you can see it by the biggest ETF right now. I think it's the biggest ETF in the world is Voo, the S&P 500 Vanguard fund. It's almost a trillion dollars. Vanguard has $12 trillion. BlackRock is approaching $15 trillion. So there's obviously enough people who have realized, okay, I'm getting out of the game. But on the other hand, now you have all these individuals on Reddit and Robinhood that trade all the time and they're looking for the next thing to pounce on and they have zero day options and now we have prediction markets and all this. So it's an interesting dichotomy that we have these two different groups. And I think the hard part for most people, especially when you're young, almost the worst thing that can happen to you is you get right on one of these trades, right? You have one that works and you go, oh geez, I'm a genius. I'm going to do this again and again. And people don't realize that persistence about performance is one of the hardest things to do, even among the greatest wealth investors of all time. Having that stuff that works year in and year out. And I think that's where you set yourself up for psychologically, when the greed really kicks in and you get the overconfidence. That's the problem when you have a winner, not realizing that you might have been lucky. And we've had plenty of people come to us who said, Hey, 10 years ago I put some money in Nvidia and I let it ride for 10 years and I have this huge pile of money. And they don't say I'm going to try to do it again. They say, help me diversify this in a tax efficient manner. And so it is kind of heartening to hear people say, I get it. I know I was kind of lucky. I don't want to have to get rich twice. But that's the temptation is that I'm going to keep compounding this at the same rate. And it's easy. And of course we know it's not.
- [21:06]
B
Yeah, I think that person is actually surprisingly rare. I can recall running into somebody on an investing forum, might have been the Bogleheads forum, that had he was in his 20s and had struck it big with some sort of crypto asset. And he had literally 25 or $30 million in his 20s, but he had the good sense to recognize this is not what I should keep doing with this money. And he was looking to diversify. But I feel like that person is really rare. I feel like when people hit it big, they're looking for the next big thing until they eventually lose.
- [21:40]
D
Yeah. And especially it can really play mind games with you when you do it when you're young. Because most people have a stair step approach to building wealth over time, it slowly but surely happens. They make more money as Their career progresses, they save more money. The money compounds you slowly but surely. Get used to it. If you have a lottery ticket winning, you win a bunch of money at a young age. I think it can kind of mess with you and it's hard to stay grounded in reality. I think that's a challenging part too.
- [22:07]
B
Now, your book talks about behavioral mistakes, and clearly the biggest enemy for an investor is the person who stares them back from the mirror every morning. Right? It's ourselves. We're killing ourselves most of the time when it comes to the big mistakes that get made. If you had to rank the behavioral investing mistakes that people make, what would be in your top 10?
- [22:30]
D
I think the Internet, and I think AI too, will be the biggest confirmation bias machine ever created. I think it's never been easier to just feel like you're right even if you're wrong. And I think that there's a fine line between being really disciplined about an investment strategy and just being totally inflexible and not understanding that the world has changed. And so I think that part of it is really hard. Again, I think there's two polar opposites. One is the person who doesn't really know a lot, and once they learn a little, they think they know everything. Right. And it's being kind of naive. And the other one that I've encountered through my time working with institutions is just the people who are highly educated and they are very intelligent, but they think that makes them smarter than the market. And I think that's that overconfidence among intelligent people. And it could not just be people in the investing world. I'm sure you've dealt with this with doctors, right? Highly educated people, very intelligent, and they assume that their success in one arena automatically transfers over to this other arena. And I think that is. That can be a mistake, just assuming that, like, you can outsmart it. And, you know, I think it's probably never been harder to outsmart the market just because the sheer amount of computing power and there's literal rocket scientists and PhDs that are spend all day long trying to do that. This is the only thing they care about, you know, these code breakers. And I think trying to assume that you're smarter than the market is a really tough place to be. So having a little more humility makes a lot of sense to me.
- [24:00]
B
Yeah, I feel like I see the opposite problem as well, where people have not enough confidence. And typically when I see people becoming DIY investors, I feel like their confidence lags their knowledge, their ability, by about a year. So I don't know what it is that you want to make people confident enough that they can go out there and, and select and manage a portfolio of a handful of index funds without making them overconfident, feeling like they can go pick the next Nvidia.
- [24:29]
D
Yeah, you're right. The whole second guessing thing is really huge. And I always say one of the biggest jobs that a financial advisor can do for people is just tell me, am I going to be okay? That's what most people want to know. Because it's funny, there's a lot of people who already think, listen, these LLMs are going to put financial advisors out of business because people can just go ask them questions. And I actually do think that for a lot of DIY people, the AI is going to be great for people who never would have gone to a financial advisor in the past anyway. They can ask questions, they can poke and prod, but we still get people who say, hey, listen, I put all my information into this, into ChatGPT, I uploaded it. Is it right? What it's telling me is it right? That's what people want to know. They want some sort of assurance. And you and I both know that there's certain assurances you're never going to get, right? Because no one knows how long they're going to live. No one knows what the future returns are going to be. We don't know what inflation's going to be or interest rates or any of those things. And so people just need some sort of guidance to be like, hey, am I on the right path? Just someone let me know, please. That uncertainty, I think, is something that for a lot of people just never goes away.
- [25:28]
B
It's interesting. People do want to be reassured. I have a blog post, I think it's called something like the Backdoor Roth IRA Tutorial. It's three or four or five thousand words long. It's got screenshots of how to do it. It's got every bit of information you could possibly ever want to about a backdoor Roth ira. And then it's got three or four thousand comments below it. And yet every January and February, I get dozens of emails, comments on that post, of people who just want to know, did I do it right? Right. I mean, every bit of information they could possibly want, every question they can ask has been asked and answered 50 times in that comment section on the post. But they still want that personal assurance, yeah, you're okay. Yeah, you did it right. And I think that's a lot of what, what A good, you know, financial planner provides. You know, I've had this conversation about, you know, the threat of AI to financial planning as a profession. And the experienced planners are telling me, you gotta be kidding me. This is, you know, it's like AI replacing you as an emergency doc. What percentage of your job could AI do? And like 5%. And that's basically what they say. It's basically the same with financial planning. What we're doing is not the, the stuff you can plug into AI and have it spit something out.
- [26:42]
D
Yeah, I tend to agree with that. And I think it's going to make advisors more efficient and take away a lot of the stuff that they don't want to do anyway. That's the hope at least.
- [26:50]
B
All right, well, let's dive into a little bit more controversial topics on real estate or on investing. Let's start with real estate. I've met lots and lots of docs that have been very successful building wealth in real estate. Whether they're doing it directly, they're buying properties and renting them out. Short term rentals, long term rentals, whatever. Sometimes they're doing it passively and this typically ends up taking the form of some sort of syndication or a private fund and some that just stick with a VNQ kind of Vanguard real estate index fund. Your thoughts on real estate in a portfolio? Who should consider it, who shouldn't. What are your thoughts on it?
- [27:29]
D
Yeah, it kind of gets back to our simplicity versus complexity talk earlier. I get a lot of people and one of the things I've seen more and more in the 2020s is people who say, Listen, I've got this 2.75% mortgage, I don't want to get rid of it, but we have to move to another town because of a job or the family's getting, we've outgrown this house. Should I just keep it as a rental? And I think the place you don't want to be is like an accidental real estate investor.
- [27:52]
B
Amen to that.
- [27:53]
D
Someone who's just trying to do it on the side. I think that's a really tough place to be.
- [27:58]
B
One property is the worst number for sure.
- [28:00]
D
Yes, yes. I think you either do it or you don't do it. I think one of the biggest beauties of real estate is that it forces you to be a long term investor. And it's a very tax efficient form of investing because most you're not like buying and selling these properties all the time. And I think that's why there probably are so many Wealthy real estate investors because they just, it's not a very liquid market. And the fact that they hold on for the long term, I think that that has something to do with it. I've always said that like no one really knows what their own home return is because of all the variables involved, leverage involved and ancillary cost and all these things. Obviously that stuff is easier to calculate as a rental investor. But I think, yeah, there are a lot of questions you have to ask yourself. Do you want to be a property manager? Do you want to hire it out? How many properties do you need? What kind of cash flow? We've got one client who has a portfolio with us, but also a big portfolio of real estate rental investments all over the United States. And he had one target goal in mind. I want a monthly cash flow of X. Once I get that cash flow from real estate, like I'm set. And that was like his whole fallback. And I don't think he really cared what the appreciation was in the houses. Right. It was all about the income. So I think you also have to think about, well, what is the point of this? Am I going to try to sell these houses in 10 years for more than they're worth or am I building equity and I'm trying to just get the income or you know, so I think you have to really understand what you're getting yourself into if you're going to buy those actual tangible properties. And for some people having that tangible thing actually is more comforting. Right. I can see this, I can feel it. I know what the house is versus this stuff that's just off on my computer that shows me what it's worth. And so again, I think a lot of it probably is more personality driven. Some people are just more set up to be real estate investors than others. But I think you have to really make sure that you're going to, if you're going to do it, you're going to go all in. And if not, then yeah, you buy the ETF or something.
- [29:49]
B
Okay, let's talk a little bit about crypto. There's lots of people out there that are very into various kinds of crypto assets. There's literally thousands of them. The NFTs came up for a while and kind of rapidly disappeared. There's still plenty of Bitcoin Bros. That are true believers that are never going to exit their bitcoin positions. What are your thoughts on crypto and its place in a portfolio?
- [30:15]
D
I think the fact that bitcoin just won't die as a brand is probably the biggest, biggest and best selling point for it. It's had all these different narratives about what it's going to be over time. At first it was going to be a form of currency and it's going to replace the dollar, and then it was going to be inflation hedge and it was going to be like the digital gold. And a lot of those narratives have changed and shifted, but they keep morphing. And every time it looks like, okay, it's really dead this time and things are really bad. This crypto winter, it kind of comes back. So I think the fact that it won't die actually is one of the biggest positives for it.
- [30:47]
B
The fact that there are so many bitcoin bros who, if it drops to $10,000 a bitcoin, they'll pile in and buy a whole bunch more of it.
- [30:56]
D
It has many features of a religion or a cult. And I say that in a positive way, like the fact that there are a lot of true believers in this, whether what they believe is right or wrong. And I think from a portfolio management perspective, it's an interesting asset. Like if you go back to the Bill Bernstein, what was his first book, the Intelligent Asset Allocator, he talked about, that was my first foray into thinking about assets that act differently and rebalancing. And if you thought about bitcoin as just a form of asset allocation and you said, I'm going to have 5% of my portfolio in it, and it's this highly volatile asset, it's like four times as volatile as the stock market. If you looked at it that way and said, I'm going to use it to rebalance around a position and when it has these huge up years and it's up 100%, I'm going to sell some, get back down to Target, then it crashes down 60%, I'm going to buy some more, that actually makes sense to me. Like a really volatile asset could probably add value to a portfolio. How many people are actually doing that that own bitcoin? Probably not many. Right. So it actually seems like it could make sense in like a target date kind of fund if you actually were disciplined about putting those guardrails in place. Now other people I know say, hey, I took a flyer in this thing and I'm just going to put my money in and let it, let it ride and see what happens. And I think again, it comes back to position sizing and how much can you stand? Because I've seen since it first came out and it was 2017, was really the first year that it hit the zeitgeist, and there's been so many different iterations of it since then that it's hard to kind of keep up. And I've had trouble understanding it over the years, but it's still here. And it's a $2 or $3 trillion asset now, which is just pretty impressive, the fact that it kind of came from nowhere after the 2008 financial crisis. But I don't like people just kind of guessing like, oh, I'm going to try to pick the winner and it's not bitcoin, it's some other crypto. Or that to me seems like kind of a fool's errand. And Bitcoin to me, I don't know, seems like the biggest brand still, even though the returns of the past are not going to be the returns of the future.
- [32:55]
B
Okay, next topic. Factor investing. Small value tilting. Where does this have a place in a portfolio? I mean, for the last, if you look at the last 15 years, it's been all about having your money in large US Growth tech stocks. And anybody who had a small value tilt in their portfolio has underperformed the overall US Market in particular, maybe not so much last year and maybe not year to date this year, but for a long period of time. Is there value in going away from a total market approach and tilting a portfolio to some sort of factors?
- [33:35]
D
I look at them and I got to learn about factor investing after the dot com crisis. And all the value stocks and quality stocks did really well and kind of saved people's butts back then. And I think a lot of people went headfirst back. And then coming out of the great financial crisis, then it was the opposite. We've had plenty of conversations with clients over the years who go, why do I need to own anything else besides the s and P500? Or they make it the further away they go. Actually, maybe just the NASDAQ 100. Give me all the tech stocks. So you have a lot of those conversations. You have to remind people the benefits of diversification. I never looked at any of those factor tilts as a way to outperform the market. That to me, never really made sense. And I think a lot of the history of it was back before you even had the ability to invest in these groups of stocks. The liquidity was so much worse. I always took the, the historical back test with something of a grain of salt. But I look at these as compliments to your portfolio that there are certain environments, whether it's high inflation or low inflation or high rates or low rates where some of these other types of stocks can do well. And that's how I think you view those type of diversification is as a compliment. And yeah, small value has done a little better. I think even if you look since the COVID bottom small cap value is now maybe outperforming the S and P. So let's add like a decent little run here of three to five years where it's done better than people thought. But that's the way I look at it. It's a different type of stock that can maybe perform differently in a different environment. And I don't believe that just large cap US growth stocks are going to continue to outperform forever. And even though the last 18 months or so they've underperformed is kind of a good reminder for people of that.
- [35:13]
B
Okay, let's talk a little bit about tactical asset allocation. Essentially changing your mix of investments response to market conditions rather than having a fixed static asset allocation that you just rebalance to every year. Is there value there? Is it just too hard to doing? Is it just market timing? What are your thoughts on tactical asset allocation?
- [35:34]
D
Yes, probably a place where I've changed my mind about the most after being in the wealth management industry. And I still am of the opinion that timing the market is really hard. Like I said, you have to be right twice, right when you get out and when you get back in. But learning about things like trend following momentum investing, I think for the right person it can actually add value. And not as much from outperforming the market side of things, but more from the I needed behavioral release valve. There's certain people who just have the ability to sit through the losses and rebalance or sit through the pain and listen, I've been through four bear markets in my career. I'll be fine in a fifth. There's plenty of people who do that and you go more power to you. Great. There's other people who go, you know what, every time this happens I feel like I'm going to pull my hair out and I'm going to lose it and it's going to make me want to change my allocation. It's going to want to tap out and sell and I need something. And if you go that route, I think you need, you need rules in place. I don't think you can try to guess. I think you need some sort of pre established rules that tell you when you're going to lighten up and when you're going to get back in and I'm not a fan of all or nothing, we're going to go all in on the stock market or all the cash. I think you do it around the edges. If you're going to. Cliff Asness has said, if you're going to sin, sin a little. I think that's how you look at it. You're taking your portfolio from 6040 to 40 60. But again I think you have to have some sort of rules in place to guide your actions. And trend following is one that made the most sense to me because it's essentially based on behavior of the market. If the market is in an uptrend and you define that by moving averages and we've got a strategy that we run in house actually that's like this. But you don't try to guess and do so in a discretionary manner. You do it with a rules based strategy that you follow no matter what. I think that's the only way you can do it because sometimes it's uncomfortable and obviously nothing always works. There's going to be times where you pull the parachute and it, it doesn't work, it doesn't come out right. So I think you have to, it's the kind of thing, you can't just use it when it feels good. You have to use it all the time and understand again, the trade offs.
- [37:43]
B
Okay, gold investing, does it belong in a portfolio? Does it not? It's had a heck of a run the last few years.
- [37:49]
D
It is interesting. It's one of the most unique assets there is for sure because it's not really a currency, it's not really a commodity. It's kind of one of each. One of the things I find fascinating is the fact that gold and stocks are both done well this decade, which basically never happens. It's usually their opposites. 70s gold did really well. The stock market did really bad. 80s and 90s stock market boom, gold did terribly. 2000s it was the opposite. Gold did well, stocks did poorly. Again, 2010s the switch. Now the 2020s are both doing well. And it's kind of interesting. It's kind of like bitcoin where the narrative changes often with gold. It didn't really hedge you that great in 2022 when inflation was here. But now people say, well now we're worried about the system, the Fed and the government and all these things. And now gold's doing well. I think if you look at the history of gold, one of the interesting things to me is people have asked, well, I don't Want gold to replace the stock market. I know it's not that the history of returns doesn't tell you that, but what if it replaced some of my bond portfolio? So instead of doing a 60, 40, I did a 60, 30, 10, or a 60, 20, 20. That to me actually makes more sense than trying to change your whole stock with the understanding that gold is much more volatile than bonds. It has bigger drawdowns, but I think it could actually hedge those periods, like 2022, when the bond market did really poorly. And so I think that's one way to consider it. Again, more of a portfolio construct than replacing a bunch of assets.
- [39:10]
B
So how much is too much? Somebody really likes gold as an asset class. If they have more than 5 or 10 or 20%, is that too much in your portfolio? Where would you draw the line?
- [39:21]
D
I do think it's one of those more complementary assets. It's like a satellite, not a core. So I think a 10% or something position, you don't want it too small, where it doesn't move the needle at all. If you have a 2% position in gold, what's the point? So I think probably it has to be double digits to actually move the needle and make sense in a meaningful way. I wrote a blog post probably about a year ago, maybe 18 months ago, and this is before gold really, really took off, saying, here's why I don't own gold. I look at the history of the return of the returns and how volatile it is. And I said, I understand why certain people like having a small position in gold. It just doesn't make sense to me because whatever position I have, it's not going to move the needle. And it basically had two lost decades in the 80s and 90s, and it was in 70% drawdown. And I just said, it's kind of just not for me because I need more of a fundamental reason to own it. And so I think you just have to have a good reason one way or the other.
- [40:14]
B
My problem's always been with assets that I call speculative, whether that's gold or Bitcoin or empty land or Beanie Babies or commodities, they're not producing anything. They're not producing earnings, they're not producing dividends. Dividends, there's no interest. There's, you know, currencies are the same way. And we've just decided we're not going to invest in stuff that isn't producing stuff. And it's entirely possible to make money with classic cars or Beanie Babies or whatever, right? But we just Decided not to put those in our portfolio because we're not comfortable with them. But lots of people do put an allocation of gold or Bitcoin or whatever in their portfolio. And I think if it's reasonably sized, that's probably okay. Does it bother you to not have productive assets?
- [40:59]
D
Yeah, I'm similar to you, but I think that's one of the things that you need in today's environment is like just a no list. Right. So my colleague Josh Brown always says a good financial advisor is like the bouncer at a club standing behind a velvet rope and just mostly saying, get out of here. No, you're the riffraff. You're not getting into the club. It's exclusive list. I think with all the investment opportunities out there today, you have to have some things that you go that, you know what, that could work. It might work for some other people. It just doesn't make sense for me and I'm okay with that. I think you have to be okay with that. With everything else coming out these days, there's buffered ETFs and structured products and option income products and all these different new fixed income ways to invest. And I think you just have to have some limitations and filters in place to guide your actions these days, otherwise you're going to get overwhelmed.
- [41:48]
B
You can't invest in everything. You'll end up with a the world's worst portfolio if you try. Okay, you've got an episode out there called Never Pay off youf Mortgage. And one of the most common discussions that investors have that people interested in personal finance have that everyone has, is paying off debt versus investing. You know, investing on leverage, taking advantage of both leverage risk and market risk. Give us your thoughts on this whole dilemma. Paying off debt versus investing and how much leverage to have in your life.
- [42:19]
D
Another thing that I've completely changed my mind about, and it was probably totally market related, refinancing into a 3% mortgage in 2020. I just thought this is probably one of the great financial assets I'll have and I probably should have borrowed more money back then. I'm a personal finance person who has always had an average. I've never carried credit card debt. I don't borrow a ton of money. I just thought, if I'm going to be in this house for the long term, having more of my money concentrated, there is not a, to your point, a productive asset. The first house my wife and I owned, we paid the mortgage double, right? Every time we refinanced, we kept paying the same as we were paying at a higher rate. And then we went to sell the house and I kind of thought, well, what was the point of that? The money was just sitting in the house doing nothing. Now other people would say, no, no, it's helping me sleep at night. You have a set hurdle rate that you're paying off. And so I think my don't pay your mortgage off thing was more for people who have a low rate. I think at a certain level, call it, today's rates are probably pretty close to their 6% or so where you're kind of thinking like, does it actually make sense? That hurdle rate to me is a lot higher. But for the people who were able to get a 2, 3, 4% mortgage in the pandemic, for me, I don't think it makes a lot of sense to pay that off when inflation essentially eats into your entire payment. Right? The inflation rate right now is 3.3% and my mortgage is 3. On a real basis, it's negative essentially that I'm borrowing for.
- [43:45]
B
Are you familiar with Thomas Anderson's work? He wrote a book called the Value of Debt and it's a series of books, but the Value of Debt was kind of the first main one. You ever read any of his stuff?
- [43:55]
D
No. What did he say?
- [43:56]
B
So basically he talks a lot about it. I think it's maybe the best treatise out there on leveraged investing. And there's a few things he points out. He's like, well, you want to, you know, if you're going to do this, get the best debt you can. You know, longest term, non callable, low interest rate, you know, deductible, get the best debt you can get and, and then limit how much of it you take out. Because obviously this is the way people get into trouble with debt with leverage is they just take on too much of it. And so his recommendation was keep it between 15% and 35% of assets. You know, if you add up your home, you add up your portfolio and your retirement accounts, et cetera, keep your debt between 15 and 35%. And that's always made a lot of sense to me. Now I'm fairly debt averse person. We paid off all our debt and don't need any debt to reach our goals, so don't bother with it really. But that made sense to me intellectually. I was like, okay, this guy's making a case for using debt and he puts those guidelines around it that I've recommended that to people who are interested in thinking about it. But I think far too many People just look at it at a very superficial level where they're just like, oh, well, you know, the mortgage is 3%, so of course I should keep it. Well, never mind the fact that you have $10 million and the mortgage is only 50 grand. Right. Is that really even moving the needle? That's just making your life more complex. I think you have to take a little bit more of an overall holistic view to it. And if really this is what you're going to do because you need this to reach your goals or you want to do something that this will allow you to do, maybe look at everything and it's not just a mortgage, but what else can you use? Maybe you're using a margin loan. You go to you interactive brokers or something, they've usually got the lowest margin rates and you've got some margin loan and you've got some mortgage debt and maybe you got some debt on an investment property or two as well. And you're just looking at it holistically. And I think a lot of people, it just comes down to, oh, well, they offered me zero percent on my car, so I'm going to take it. And I don't know, do you think you have to look at it more in depth than that or do you think it's as easy as, of course, I can out invest that interest rate?
- [46:03]
D
Yeah, I think the hurdle rate thing is probably somewhere people get tripped up on and they just assume, well, I'll get 10% in the stock market or whatever. And you're right. It's probably more of a personal finance question than it is an investing question. As far as I'm concerned, I don't look at my mortgage like I'm paying off a bond or something. I know people do that. To me, it's more personal finance related. It's that fixed mortgage payment is a way for budgeting and all these other things. So I look at it way more on a personal finance thing than investing.
- [46:32]
B
Yeah, I think a lot of people, intellectually, they look at it and they say, well, I can out invest that. But behaviorally they don't actually invest the difference. I think that's the main issue with debt is most people are like, well, my RV loans only 3%, so of course I'm going to keep it. But then they're spending what they're not using to pay off that rv and I'm not sure that really gets them ahead and gets them any closer to their goals. All right, another really interesting. I think it was an episode, you guys did you said that 1 million is the worst kind of money. And I want to talk a little bit about that. What do you mean by that? Why is 1 million the worst kind of money?
- [47:12]
D
So we had someone email us in that and said we talk about the fact that people are wealthier now than they've ever been.
- [47:17]
C
Right.
- [47:18]
D
We've had a booming stock market and a booming housing market. If you just look at the numbers, the median numbers, whatever, people are now wealthier at all levels than they've been in a long time. And a lot of people emailed us in and said, well that's fine, my 401k is up and my housing price is up. And on paper it says I'm worth a million dollars, but this is the worst, worst. So it was actually a teacher, it was two teachers. And they said we don't have a very big salary, so we have a million dollars in the market and the market goes up 25% in one year. We make $250,000. That's more money than we make as teachers. And they said that can be kind of disconcerting. And they said that, they told us this is why a million dollars is just the worst amount of money. And maybe they're being a little tongue in cheek, but it was kind of, I think a lot of people view like, hey, the fact that this money is illiquid. It's stuck in a tax deferred determinant account or stuck in my home and I can't do anything with it, that means I'm not really wealthy. And I think that's just hogwash. The reason that you have a million dollars in these tax deferred accounts in your house is because you can't touch it. Right. It's actually a benefit. It's making you defer and allowing it to compound. And if you could spend it then you're not going to be a millionaire anymore. And I think that's the hang up for people is like, well, I'm not really rich because I can't touch the money. But the money's there to pad you in the future, not right now. And there's a difference between spending a million dollars and being a millionaire. Obviously it seems obvious. Some people have a hard time thinking about polar opposites.
- [48:44]
B
Right? Polar opposites, yeah. You know, I've heard that argument used though by people selling whole life insurance, forced savings. Right? Yeah. You have to put this in here and it'll build wealth over time. So I think it can be carried to an extreme. But you know Certainly liquidity has some value, but we don't need everything in our portfolios to be liquid for sure.
- [49:05]
D
Yes. And I've heard people make the claim too that, hey, I'd actually, I'm gonna retire in my 50s and I didn't put enough money in a brokerage account. I put it all in tax deferred account. So I think there is something to be said for the flexibility of having that liquidity. It's just, I think it's a push and pull.
- [49:19]
B
Yeah. Okay. Well, our time's starting to get short, but you've got the year of probably, I don't know, something like 25 or 30,000 high income professionals. You know, these are docs, dentists, business owners, engineers, whatever. Some of them have a negative net worth. You know, they're still paying off student loans and some are DECA millionaires. But thinking of that audience in particular, what would you like to say to them that maybe we haven't discussed today?
- [49:45]
D
I think the big thing is you talk about a range of people. I think that risk just means different things to different people depending on where you are in your financial life cycle. I talk about this a little bit in the book. The fact that obviously a bear market is going to be extremely risky to a retiree if they're just going into retirement and don't have any income coming in to save. But for a young person, it's going to be a great opportunity. It's not a risk at all. You should hope for bear markets when you're young. And I think there's also a difference between. You mentioned that DECA millionaire. If you have a lot of money, the percentage declines don't matter nearly as much as the dollar declines. You see a certain chunk of your portfolio. We have certain clients who tell us my financial goal is so my money doesn't go below this level. Right. If I have $10 million, I have $11 million. I never want to go below 10. And that's the way that they set their risk parameters. And so I think when you have more money, not only makes your life a little more complicated, but it can be more painful when you have losses. And so I think thinking about risk, meaning different things at different points in your life cycle is important. Young people have the biggest asset of all. It's the human capital, right. Their future savings from their earnings. Me being more of a middle aged person, it's interesting because I have a foot in one each camp. I think I'm saving more now because my income has never been higher. So A bear market is going to be okay for me, but I have a lot of money in the market too, so it's going to be painful. And so I think trying to balance those trade offs as you age is something that's interesting. And I also think we have 70 million baby boomers retiring that are either retired or going to be retired. I think the number is 13,000. Baby boomers are trying every day between now and the end of the decade. And we've just never had a group this large that's going to live this long, that's this wealthy before. And I just think about all the financial challenges that people are going to have in the years ahead and how much advice that they're going to need. We might need AI to help a lot of these people.
- [51:39]
C
Right.
- [51:39]
D
People talk about AI taking financial advisor jobs. I think there's going to be a lot of people who have trouble. Like for most people, accumulation is relatively easy, straightforward, and automatically saved. But then trying to plan out, spending down the money and giving it to heirs and all these things, that's where the tricky part comes in, I think, for a lot of people.
- [51:57]
B
Yeah, for sure. All right. We've been talking with Ben Carlson. He's half of the hosting team of the popular podcast Animal Spirits. His new book is out Risk and Reward. You can pick it up on Amazon today. It's all about market history and behavioral finance. Thank you so much, Ben, for being willing to come on the White Coat Investor podcast.
- [52:14]
D
Thanks for having me. Appreciate it.
- [52:16]
B
Hope you enjoyed that as much as we did. I've wanted to get Ben on here for a long time. You know, his new book is a great excuse to do it. Everybody wants to get out and promote their new book when they get it out there. But he's been podcasting, like I said, almost as long as we have here at the White Coat Investor. Animal Spirits is a great podcast, been highly rated, and it's always a thrill to talk with him. I think I'm going to be seeing him at the Bogleheads Conference this fall as well. I think he's going to be one of the speakers there.
- [52:42]
D
All right.
- [52:42]
B
As I mentioned at the top of
- [52:43]
C
the podcast, SOFI is helping medical professionals like U.S. bank, borrow and invest to achieve financial wellness. Whether you're a resident or close to retirement, SOFI offers medical professionals exclusive rates and services to help you get your money right. Visit their dedicated page to see all that SoFi has to offer at whitecoatinvestor.com SoFi one more time. That's whitecoatinvestor.com sofi loans originated by SoFi Bank NA NMLS 696891 Advisory Services by SoFi Wealth, LLC. The brokerage product is offered by SoFi Securities, LLC member Finra Sipc. Vesting comes with risk, including risk of loss. Additional terms and conditions may apply.
- [53:19]
B
Thank you to those of you who have left us five star reviews. It does help spread the word about this podcast. A recent one came in that said the Finance Guide for high income earners. Dr. Dali is able to guide new high earners through their financial journey in a way that is honest, simple and practical. He shows you that taking control of your own finances is empowering and simple. Such guidance is often overlooked by parents in school. This podcast is informative and invaluable for new higher individuals and families. Thanks so much for that review. Just came in a couple of weeks ago. Okay, we're at the end of the podcast, but we are not at the end of your financial life. Got to keep going. You know, part of the hardest part of this is the stay the course aspect, right? You got to get a plan in place, you got to implement it and you got to stick with it, right? You got to be saving. You know, if you're an attending physician or similar professional, you gotta be saving something like 20% of your gross income for retirement. And you gotta stick with that for a couple of decades, invest it in some reasonable manner and stay the course with your investing plan. And you'll be amazed if you do that. It will not take you that long before you will be a financially independent multimillionaire and you can do whatever you want without the financial consequences, without any bad financial consequences, without even having to consider the financial implications of it. Too many people out there are way too stressed about money. You don't have to be. Get a plan in place and you'll be amazed how much better your life is when you can concentrate on what really matters in life. The only way you can do that is by taking care of this financial stuff. So let me be the person giving you a kick in the behind to get going on whatever you need to do next. Maybe it's getting disability insurance in place. Maybe it's getting your next student loan. If you're a student. Maybe it's refinancing your loans or or your mortgage or something like that. Maybe it's finally getting a written plan in place by taking fire your financial advisor. Maybe it's hiring a financial advisor. Whatever it is, resolve to do it this week. It doesn't do you any good to just listen to this podcast if you don't actually do any of this stuff we talk about. So get out there, get it taken care of. You can do this. We're here to help. We'll see you next time on the podcast.
- [55:34]
A
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.