Common Sense Investing with Rick Van Ness - 387 | White Coat Investor (2024)

[Editor's Note: The monthly newsletter released earlier this week included the incorrect Market Update chart. Here is a link to the corrected chart. We regret the error.]

Today, we are pulling another of our favorite episodes from the podcast archive. This one is a chat with prominent Boglehead-published author Rick Van Ness. Rick has made a career of teaching financial literacy to the world. We review his 10 principles for common sense investing, and he explains why bonds are worth investing in. He talks about his current passion, which we here at WCI understand—getting a financial planin place. We discuss the importance of knowing what you value and making a plan that accounts for that.


Common Sense Investing with Rick Van Ness - 387 | White Coat Investor (2)

Common Sense Investing with Rick Van Ness - 387 | White Coat Investor (3)

Common Sense Investing with Rick Van Ness - 387 | White Coat Investor (4)Common Sense Investing with Rick Van Ness - 387 | White Coat Investor (5)Common Sense Investing with Rick Van Ness - 387 | White Coat Investor (6)

In This Show:

  • Common Sense Investing
    • Rule 1: Develop a Workable Plan
    • Rule 2: Start Saving Early
    • Rule 3: Choose Appropriate Risk
    • Rule 4: Diversify
    • Rule 5: Don’t Try to Time the Market
    • Rule 6: Use Index Funds
    • Rule 7: Keep Costs Low
    • Rule 8: Minimize Taxes
    • Rule 9: Keep It Simple
    • Rule 10: Stay the Course
  • The Case for Bonds
  • Milestones to Millionaire
  • Sponsor
  • WCI Podcast Transcript
  • Milestones to Millionaire Transcript

Common Sense Investing

Rick Van Ness has a great book to help beginners get started in investing called Common Sense Investing: Ten Simple Rules to Finance Your Dreams. He shared those 10 steps with us and described what they mean. He started off by saying that the prerequisite for any of the steps is living below your means. Before diving into investing, it’s crucial to spend less than you earn. This prevents debt accumulation—especially high-interest debt—and allows you to start saving and investing.

Rule 1: Develop a Workable Plan

Having a written financial plan is essential. Writing it down helps clarify goals and identify gaps in your knowledge. Make your plan a living document that you can adjust as needed. It helps prioritize what is important and keeps you on track.

Rule 2: Start Saving Early

The power of compound interest makes starting early extremely beneficial. Even if you feel like you can't save much due to debt or other obligations, developing a strategy to pay down debt and begin saving will set you up for future success. For those who start later, it’s never too late—just avoid taking unnecessary risks to “catch up.”

Rule 3: Choose Appropriate Risk

Match your investment risk to your financial goals and time horizons. For shorter-term goals, choose safer investments, like bonds or cash. For longer-term goals, like retirement, taking more risk with equities is appropriate. Don’t let the market's volatility lead you to take on more risk than you can handle.

Rule 4: Diversify

Diversification helps reduce risk by spreading investments across a variety of assets. This limits the impact of poor performance from any single investment. Use broad-based stock funds to minimize the risks associated with individual stocks or sectors.

Rule 5: Don’t Try to Time the Market

Timing the market, or trying to predict its movements, rarely works. Even professionals fail to do so consistently. Stick with your plan, ignore short-term market movements, and stay invested for the long term.

Rule 6: Use Index Funds

Index funds offer broad diversification and low fees, making them an efficient way to invest. They aim to match the market performance, and over time, this approach often outperforms actively managed funds, which can have higher costs and lower long-term returns.

Rule 7: Keep Costs Low

Investment fees, even small ones, can add up over time and eat into your returns. Focus on minimizing costs by choosing low-fee funds and avoiding expensive management fees. Over the long run, lower fees can mean significantly more savings for you.

Rule 8: Minimize Taxes

Taxes are one of the biggest costs in investing, especially for high earners. Be mindful of tax-efficient strategies and use tax-advantaged accounts like 401(k)s, IRAs, and HSAs. Be aware of the tax implications of buying and selling investments.

Rule 9: Keep It Simple

A simple, well-diversified portfolio is often more effective than a complex one. You don't need to chase every investment opportunity or optimize every part of your portfolio. Focus on broad diversification and avoid unnecessary complexity that doesn’t add significant value.

Rule 10: Stay the Course

Emotions can lead to bad investment decisions, especially during market volatility. Stick with your long-term plan, avoid making panic-driven changes, and remember that market downturns are normal. Staying invested and disciplined is key to achieving long-term success. If you're losing sleep over market fluctuations, it may be a sign that you need to reassess your risk tolerance.

More information here:

The 10 Commandments of The White Coat Investor

14 Financial Milestones Worth Celebrating

The Case for Bonds

After covering the 10 steps for common sense investing, Dr. Jim Dahle and Rick moved the discussion to Rick's newer book, Why Bother With Bonds. They got into the role of bonds in an investment portfolio, particularly in challenging economic conditions like low interest rates and high inflation. Rick explained that bonds are not for high returns but for safety and stability. They serve as a “ballast” to balance the risks in a portfolio, providing protection for near-term liabilities and offering peace of mind.

When this discussion happened in 2022, inflation had outpaced bond yields, which is an anomaly. Despite the inflationary moment in time, bonds remained and still remain essential. In normal circumstances, bond yields typically reflect inflation expectations. For unexpected inflation protection, TIPS (Treasury Inflation Protected Securities) and I Bonds are valuable. These bonds adjust based on inflation and offer safety through government backing. However, I Bonds are limited to individual investors, and they have restrictions on how much can be purchased each year.

The conversation warned against chasing high yields through riskier bonds—such as high-yield or “junk” bonds—which can be more volatile and correlate with stock market downturns. Instead, the advice is to stick to high-quality bonds and take additional risk with equities, if needed, for higher returns. They also touched on differing investing philosophies. While some prefer scientifically grounded approaches like modern portfolio theory, others may enjoy investing in individual companies for personal reasons. The key is to respect different perspectives, even if they don’t align with the principles of broad diversification and passive investing that might offer better long-term returns. In essence, the case for bonds is rooted in stability, not returns, and avoiding unnecessary risk is crucial even when tempted by higher yields during periods of economic uncertainty.

If you want to learn more from this conversation, see the WCI podcast transcript below.

Milestones to Millionaire

#190 – Pediatric Dentist Hits Net Worth of $6 Million

Today, we are talking with a pediatric dentist who hit a net worth of $6 million dollars! He is barely over a decade out of training. He started out in general dentistry and realized pretty quickly he wanted to specialize to increase his earning potential and enhance his lifestyle. He is a super saver who is working on increasing his spending. His advice to you is to start educating yourself now on basic financial knowledge and to get in the habit of living on less than you earn.

Finance 101: Expense Ratios

Expense ratios are a key factor to understand when making investment decisions. Essentially, an expense ratio is the operating cost of a mutual fund or Exchange Traded Fund (ETF) relative to its assets. These costs, which are deducted from the fund’s gross returns, directly impact the investor’s returns. While there are numerous types of fees in the world of investing, the expense ratio is one of the most frequently encountered fees when evaluating funds. Fortunately, the expense ratio is always provided in the fund's prospectus, or it can be easily found through financial platforms like Morningstar or Yahoo Finance.

Expense ratios are typically expressed in basis points, with one basis point equating to 1/100th of a percentage point. For instance, an expense ratio of 0.12% means 12 basis points, and it indicates that you’ll be paying 0.12% of your total investment annually as a fee to the fund manager. Lower-cost funds, like those offered by Vanguard or Fidelity, often have expense ratios under 0.20%, making them more attractive to investors. Many mutual funds and 401(k) options still have much higher fees, sometimes as high as 1% or more, significantly reducing the investor's returns over time.

The good news is that expense ratios have decreased significantly over the years due to competitive pressures and the rise of index funds, with some funds now offering zero-cost options. It's important to focus on reducing high fees rather than obsessing over minor differences between low-cost funds. Anything under 20 basis points is generally considered negligible. The goal is to identify and eliminate investments with prohibitively high fees, as keeping expense ratios low is essential for maximizing long-term returns. A good investor always knows the fees associated with their investments and aims to minimize them for better financial outcomes.

To learn more about expense ratios, read the Milestones to Millionaire transcript below.


Common Sense Investing with Rick Van Ness - 387 | White Coat Investor (8)

Common Sense Investing with Rick Van Ness - 387 | White Coat Investor (9)

Common Sense Investing with Rick Van Ness - 387 | White Coat Investor (10)Common Sense Investing with Rick Van Ness - 387 | White Coat Investor (11)Common Sense Investing with Rick Van Ness - 387 | White Coat Investor (12)

Sponsor: Mortar Group

Sponsor

Today’s episode is brought to you by SoFi, helping medical professionals like us bank, borrow, and invest to achieve financial wellness. SoFi offers up to 4.6% APY on its 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 www.whitecoatinvestor.com/Sofi. Loans originated by SoFi Bank, N.A., NMLS 696891. Advisory services by SoFi Wealth LLC. The brokerage product is offered by SoFi Securities LLC, Member FINRA/SIPC. Investing comes with risk including risk of loss. Additional terms and conditions may apply.

WCI Podcast Transcript

Transcription – WCI – 256

INTRODUCTION

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.

Dr. Jim Dahle:
This is White Coat Investor podcast number 256 – Common Sense investing with Rick Van Ness.

PearsonRavitz are disability and life insurance advisors founded by and for physicians. This White Coat Investor recommended agency grew out of one MD's experience with a career-changing on-the-job injury.

Today, PearsonRavitz serves the medical community in all 50 states. At PearsonRavitz, they help you as a doctor safeguard your most valuable asset, your income so you can protect the most important people in your life, your family. PearsonRavitz makes human connections before they make quotes. Go to pearsonravitz.com today to schedule your consultation with a PearsonRavitz advisor.

QUOTE OF THE DAY

Our quote of the day today comes from nonagenarian, Taylor Larimore, who says, “When experts disagree often it is because it doesn't matter much.” I was actually able to participate in Taylor's birthday party. It was an online Zoom birthday party a few weeks ago. Always great to hear from him.

It's always great to hear from you. I like hearing about your challenges, your successes. I like hearing about the struggles you've had. And I know they're real. A lot of you out there are having a rough time and if no one said thanks for what you do, let me be the first today.

You spend a long time learning your trade and people that you are serving are not always appreciative. So, I want you to know that people do appreciate you, even if they don't let you know that in the moment.

I don't think I've talked on the podcast for quite a while about our flagship course, Fire Your Financial Advisor. Now, my financial advisor advertisers don't like that title much. But the truth is that this course will help you to interact with the financial services industry. If that is what you desire.

It will also teach you how to write your own financial plan and follow it and maintain it and use it to become financially successful. So, whatever your approach, this course can be helpful to you. It's going to teach you the financial literacy that you never learned in medical school or residency and help you write your own financial plan.

The course is dramatically cheaper than hiring a professional financial planner to draw up your plan and takes much less time than trying to find all of this information online and in your library. It's basically no risk to you. It comes with a one-week, no questions asked, 100% money-back guarantee as long as you've taken less than 25% of the course.

We also have an option that you can use your CME fund to buy. It's basically the course plus eight hours of wellness content that makes it eligible to be purchased with your CME money. So, you can check that stuff out at whitecoatinvestor.com/fyfa and take that course if you haven't yet taken it.

I know our survey this year showed that something like 50% of White Coat Investors still don't have a written financial plan. We're going to be talking about that with Rick Van Ness during our interview coming up. But if you need help drafting it up, if you don't feel capable of writing it yourself, Fire Your Financial Advisor will actually help you to do that.

All right, let's get Rick on the line here. I want to introduce him to you and talk about some of the work that he's been doing. With me today is Rick Van Ness, prominent Boglehead published author, and somebody that has really made it a second encore career, if you will, to teach the world financial literacy in any way he can. Welcome to the White Coat Investor podcast, Rick.

Rick Van Ness:
Thank you. I’m glad to be here.

Dr. Jim Dahle:
So, let's start at the beginning here. Tell us a little bit about your upbringing and how it shaped your views on money.

Rick Van Ness:
Wow, well, that's pretty average, maybe not very interesting. I sold seeds and did other jobs as a teenager, because my view of money was just to buy things. There wasn't an interest in anything more complicated than that. My dad did work for a company that had an employee stock purchase program. So I was able to watch him keep track of his cost basis. And I learned about what stocks are and ownership, and I had a board game called stocks and bonds. So I knew that bonds were loaning money, but pretty average, just an interest in buying things.

Dr. Jim Dahle:
Yeah, but maybe a little more than a lot of people have. You actually had parents who owned stocks. I'm not sure a lot of people grew up even with that much of an upbringing that was reflective of any sort of financial literacy education. Okay. So you left home, tell us about your education and your career.

Rick Van Ness:
Right. By the way, talking about finances in my family, it was not a taboo topic and I'm glad for that. It's just that we weren't a very sophisticated family and didn't really have much wisdom there.

I chose to go to a specific college and the way that I got it was by applying to an electrical engineering program. I got my degree in electrical engineering, which led to a job at Hewlett Packard, and it was a wonderful job for 27 years. And then I got laid off. My learning from that is you never know when you're going to retire. Before age 50, I was laid off.

But by the way, another thing, or another reason why Hewlett Packard was such a great company to work for was during those years, they paid for me to get my MBA at New York University. I'd work during the day and taken the train to Wall Street and got an MBA in finance paid for by my company. And so, that's pretty terrific. I can't thank them enough for that.

We got downsized around 2001. I went through a number of jobs looking for something else that would resonate as a career and nothing really did. Nothing was as good, nothing interested me as much. I wasn't really needing to save more money for my retirement. Although I had to pay for my kids' college education, I chose to pay for my kids' college education.

And when my daughter was in college, she came home and said something that took me by surprise at how interested she was. She had this economics professor that had brown bag lunches, where they would talk about economics topics. In fact, they named the series Backpack to Briefcase. And it surprised me that she was interested in that, and I thought to myself, “I could do that.”

And so, I did. I started teaching brown bag lunch seminars at Seattle University and the University of Washington. And that was good fun, but my audience was a dozen or two dozen brown bag lunchers at a time.

And that was about the time that YouTube started taking off and started to get pretty good and interesting. I thought I could reach a lot more people doing that so I started making videos. And that was kind of fun for me also, because it just touched on a lot of areas that were fun for me.

And back then the only way to get on the internet was through your computer, not your phone. It changed later. And back then, YouTube allowed me to have an interactive session. So, I could make games out of asking kind of tricky questions and the listener would reply by touching the screen. And I would jump to a certain place and explain why that was the right or wrong answer. We could have more fun with it on a pretty dry topic learning about personal finance and investing. So that's how I got started there.

Dr. Jim Dahle:
That was more of a passion project. You were interested in finance long before you were laid off though. How'd you get interested in finance? Where'd that come from? Was it the MBA? Was it something else?

GETTING INTO FINANCE STARTED WITH A DESIRE TO MAKE MONEY

Rick Van Ness:
Finance is a pretty big word and my interest was really making money so I could spend money. It wasn't the intricacies…

Dr. Jim Dahle:
Even well into your career, huh?

Rick Van Ness:
Even well into my career. I found it very practical to buy Victorian homes and refurbish them and make them income properties. And so that required a little bit of knowledge about capital gains and how the tax system works. I'm just a curious person and that led me from one thing to another. I wound up with a degree in finance, which I didn't particularly use per se until I started explaining some of the basics of personal finance to this brown bag lunch seminar, which is how I discovered the Bogleheads and John Bogle. And that was really rather interesting to me.

One of my first projects was to take the tens of thousands of Bogleheads that would meet and didn't have a coherent explanation for what they were all about. I tried to help out with the video series. It was basically about the overhead investment philosophy, but I saw it as the 10 rules of common-sense investing.

Dr. Jim Dahle:
Well, we're going to spend some time talking about common sense investing here. It's interesting that you describe it that way, and I'm curious why that is and if it is common sense, why does this seem to be so rare for people to do what you suggest they do?

Rick Van Ness:
A lot of that is true. It does seem to me to be common sense. Once it's explained to you, I see it as common sense, but you're also right, that it's very uncommon. And the reason why I chose that name, by the way, was a reference. John Bogle has a book called the Little Book of Common Sense Investing. And so it's really a nod to him.

Dr. Jim Dahle:
Not to mention his other book, right? Common Sense on Mutual Funds.

Rick Van Ness:
Exactly. So that's really a nod to John Bogle as much as anything because he's such a colorful writer. Just a word on him, he was able to put a complex topic into some kind of a comment, like an earthy comment. Like, “Don't look for the needle in the haystack, just buy the haystack,” or he would switch around, “You get what you pay for” to “In investing, you get what you don't pay for.” And so, these are just colloquial sayings that are helpful to introduce complicated topics and they simplify it down to the essence of why it is common sense, I think.

10 COMMON-SENSE RULES FOR INVESTING

Dr. Jim Dahle:
Now, your 10 common-sense rules sometimes referred to as the Boglehead investing philosophy is actually going to serve as the curriculum at Bogleheads University. I was asked to be in charge of that for this Bogleheads meeting this fall. It's going to be a three-hour session with multiple faculty members. Kind of the first afternoon of the conference, even before the opening reception.

Let's talk about each of those 10 things today and maybe introduce them to our audience. These are the common-sense rules of investing, and surprisingly, a lot of people don't know them. And the first one is to develop a workable plan. And I preach on this all the time, “Get a written investing plan, get a written investing plan.” In your words, why is it so important to have a written investing plan?

Rick Van Ness:
Can I insert something before we talk about that?

Dr. Jim Dahle:
Sure.

Rick Van Ness:
I think there's a zero before this rule number one, there's a prerequisite that the Bogleheads don't talk about because they all meet the prerequisite, and maybe your audience all meet the prerequisite anyway. But the prerequisite is “Spend less than you earn” or “Live below your means.” And that's just really important.

The way that it manifests is in bad debt. People that don't live below their means get over their head in debt. And originally, my very, very, very first video was on the doubling of a penny for a month. Do you know what the answer is?

Dr. Jim Dahle:
What do you mean? If you double it every month for so long?

Rick Van Ness:
And if you double a penny for a month, you get $10 million. So, it's kind of a demonstration of exponential compound growth. But the reason why that's related is that bad debt can be very high interest. Today, if you look at your credit card, you'll see that you can take an advance loan out for 24% or a worker comes by your house and he'll swap out your windows for a 0% loan, which if you read about it, it's 18% interest beginning immediately and would be due if you don't pay it off within a couple of years. So there is this rule number one that qualifies you to the next 10, and that's living below your means.

RULE 1: DEVELOP A WORKABLE PLAN

Dr. Jim Dahle:
Yeah. It's hard to invest if you haven't saved anything. That's for sure. So financial plan, why is it so important?

Rick Van Ness:
Why is it so important? Well, I think what's important is that you have a plan and that you know your plan. And one way of knowing your plan is to reduce it down to something that you can see on maybe one page and look at it often and frequently.

Now, for me, writing it down is a process that gets there. It's an iterative process. There's something magical that happens when you try to put your ideas into words, and it's not quite there and you iterate and you iterate. It moves from one part of your brain to the other. Even if you could say it out loud with your spouse, talking somehow puts it in different parts of our brains and we tend to remember it. And if it's not part of your life, it's just another paper in your pile.

But if you can make a plan that's part of your life, that's magical because you can uncover what's really important to you. We forget about what's really important to us if we focus on just a few rocks, but there's a lot of medium-size and small rocks that are important to us. And if we can write those down, we can remember them. And that's why it's magical.

Dr. Jim Dahle:
Yeah. The thing I like about when you have to write it down is it shows you where the holes in your knowledge are. All of a sudden, you're like, I have no idea what to put here. I better go learn some more and do a little more research.

Rick Van Ness:
Exactly. But that's a reason people put it off because they feel like they're never ready. There's never enough information. There are too many unknowns. The futures are unknown. My dad's favorite saying was, “I'll make a plan when you tell me how long I'm going to live.” Well, that's a good reason to never make a plan, but that's actually a great reason to make a plan, which we could talk about.

But it also gets in your subconscious. If you can be thinking about what's really important to you because it's true that you often hit what you aim for. So if you can remember, “These are important to me”, you can make a lot of your dreams come true.

RULE 2: START SAVING EARLY

Dr. Jim Dahle:
All right, let's move on to rule number two, which is start saving early. Sometimes called save automatically, pay yourself first, whatever. But this audience is a little unique in that way. Doctors tend to miss out on saving in their 20s because they don't earn in their 20s. They're not even close to living within their means. They're generally stacking on the debt in their 20s. And luckily, they later tend to have higher incomes and could potentially save more at that point.

What advice do you have for the young doc who feels they don't have any spare change to invest given their huge student loan burden? And then what advice do you have for an older doctor that maybe has a tiny nest egg and is now kind of panicking and wondering if it's too late? They know the rule is to start saving early, but how would you actually do that to a typical doctor's financial path?

Rick Van Ness:
The classical way of explaining this topic is to show two individuals. One individual saves for the first 10 years of their life, puts away. And then for some reason gets pulled away, has to take care of a child or somebody and never saves again. And classically, they compare that person with somebody like your audience that has to start saving later in life and save more aggressively but never catches up. And they use that to explain the miracle of compound interest. And that's something that I got away from.

Dr. Jim Dahle:
Never save again.

Rick Van Ness:
I kind of favor two more behavioral types of explaining this topic of starting to save early. One comes from Andrew Tobius and his idea was, he took the Benjamin Franklin rule about a penny saved is a penny earned. And he twisted it to a penny saved is two pennies earned because they didn't have income tax then.

And now you could easily have a 50% income tax if you were a high-income earner with state and local taxes and social security and add them all up. And so behaviorally you could ask yourself, “Would you rather earn $1,000 and net $500 or just save $500?”

Or the other way of explaining this is kind of behavioral, it comes from Vicki Robbins. And she looks at the idea of a real hourly wage by looking at your uncompensated work expenses and your uncompensated work time.

If you add up all the expenses that you do because you're a doctor, that you aren't compensated for, transportation costs and all, you could subtract those expenses from your income, but you add up all the time that you invest that you're not compensated for, maybe educational or commuting costs.

It compresses the hourly wage to something much smaller. And then you can make real decisions about, “Do I want to spend $100 on this or work so many additional hours?” I try to explain it in those terms.

You asked about what advice I would have for young doctors. And my advice is to make yourself a plan, make sure that you're going to stick with your career and get those loans paid off and have a plan for paying off those loans, either incrementally or through a loan forgiveness plan. But have that kind of plan in mind and then overtly start saving early for all those reasons.

Dr. Jim Dahle:
Now how about for the doc who feels like, “Man, it's too late. Why bother now? I'm already 55. I'm already 60. I'm already 65. Is it just too late for me? I know I'm supposed to start saving early. So, compound interest will work. But now I'm toward the end of my career. Is it too late?” What do you tell to that doc?

Rick Van Ness:
Well, the answer is no. Of course, it's never too late. You got to start with where you are. The first step would be to figure out what you need. This doctor should figure out what he really needs to retire. For one thing, he's probably got all those years' worth of social security that's going to be his floor.

Social security is a fantastic floor for everyone with a good long working history, because it's an annuity that's good as long as you live. And you can start saving aggressively through the tax advantaged programs. Never give up, just start hacking away at it.

But the advice would be for people that are starting late, don't use that as an excuse for taking more risk than you're able to take. That's not an excuse. Never start taking more investment risk than is appropriate.

RULE 3: CHOOSE APPROPRIATE RISK

Dr. Jim Dahle:
This is a great segue. This is rule number three, is to choose appropriate risk.

Rick Van Ness:
Right, appropriate risk. What's the appropriate risk? That's matching investment risk with your need horizon. So, all your goals have needs, and each of them have individual horizons. The older doctor that has a daughter's wedding coming up this year or next, shouldn't put that money in the stock market. That money should be accessible and safe.

Obviously, retirement would have a different risk than years, 20 through 25. But yeah, making a plan as a way of identifying those needs and then matching the investment risk individually with those needs.

Dr. Jim Dahle:
People are often saying asset allocation is the most important thing. It's your most important decision, your ratio of stocks to bonds, etc. Does it really matter as much as people think? Does it really matter if you're 80% stocks or 65% stocks? At what point is it good enough? It's close enough.

Rick Van Ness:
Well, yes, it really does matter, but you can't know. You can't know the future. It's something that you could only know in hindsight. And so, people like to say that good enough it's like somebody compared it to grenades and horseshoes. Getting good enough in this context is probably, I don't know, within 10% or 20% because you just can't know the future. In hindsight, you would know what you should have done. But nobody knows that.

RULE 4: DIVERSIFY AND RULE 6: USE INDEX FUNDS WHEN POSSIBLE

Dr. Jim Dahle:
Well, speaking of protecting us from what we don't know, step number four or rule number four is to diversify, which I think hopefully everybody listening to this podcast has heard of this rule before. But what are some of the biggest issues you've seen in investors from a lack of diversification?

Rick Van Ness:
Yeah, this is widely misunderstood – this particular topic. First of all, when we say diversify, we're talking about equities. In fact, the prior portion, when we were talking about risk, is really the portion of equities and the portion of bonds. That's the easy way to control our investment risk.

If the portion of bonds is high-quality bonds, which I am in the school of Larry Swedroe who says, they should only be high-quality bonds. Don't take risks there because your risk is better compensated on the equity side of your portfolio. There's no advantage of diversifying your government-backed, even your CDs, your government-backed bond-type investments.

We're talking about equities here, diversify equities. And there's three different layers that I'll talk about. And if you only believe this top layer, you're still fine, but the top layer would be the old saying, “Don't put all your eggs in one basket.” This would be to look at your mutual fund with a thousand companies in it and say, “Well, one of them could fail and doesn't really destroy you.” So it's that “not putting all your eggs in one basket.” That's true. And that's the simplest way of what we're talking about here.

Something more insightful is that individual stocks carry uncompensated risk. Individual stocks carry uncompensated risk. Now what that means is, well, you could own down the street for me here is Boeing and Boeing has company-specific risks. For instance, the employees could go on strike and that's going to affect the value of that stock.

And then there's industry, as they call it, systematic risk that affects all industries. Company-specific risks can be diversified away. If somebody owns all of the aerospace industry, they wouldn't own that risk in our portfolio. They wouldn't pay for that risk. So it becomes an uncompensated risk.

And an example of a systemic risk might be something like aviation fuel. It's going to affect all of that industry or even something broader, geopolitical, it would affect all industries in general. But that's the second level here, which is that individual stocks carry uncompensated risk.

But the most magical way of looking at diversifying stocks is the modern portfolio theory, the Bill Sharpe and Harry Markowitz, efficient frontiers topic. And this topic is it's magical in the sense that if you look at rate of return versus volatility, you could look at any three companies, any four companies and say, “If you separate them into a shape of a square or something, the Northwest corner is going to be the highest rate of return for the lowest risk.”

And an individual might say, “Well, why would I own the Southeast corner, the lowest return and the most volatile stock?” And the answer is because a combination of them does better than any of them individually. And this is the magical insight in the efficient portfolio type work is that there actually is an ideal portfolio. An ideal portfolio that maximizes return for risk.

And that's what the academic terminology is. It's the tangential market portfolio, which in real life, for all our viewers, boils down to owning all the equities in the world in proportion to their capitalization, which is the total market, which is another way of saying. John Bogle would say something so complicated by saying, buy the whole haystack.

The whole haystack is the market portfolio or the tangency portfolio. And it has that magical attribute of being the highest rate of return for risk. You can get greater rate of returns, but for more risk. So that's what we're talking about when we're talking about diversifying this. It’s really mixing that with the appropriate portion of bonds to suit your needs.

RULE 5: DON’T TRY TO TIME THE MARKET

Dr. Jim Dahle:
Yeah. And that covers rule four, which is diversify, as well as rule six, use index funds when possible. Let's step back for a minute to rule five though, which is never try to time the market. And we've all heard this, we've all heard you shouldn't try to time the market. And yet it is so tempting. Why is it so tempting to try to time the market?

Rick Van Ness:
You are so right. I don't know the answer to that. It's one of our human foibles I guess.

Dr. Jim Dahle:
Some investors certainly have to learn to overcome it though, because if you actually keep track of your returns, you quickly learn that you're no better than anybody else at timing the market. And if you are, you should be managing a whole lot more than your money.

Rick Van Ness:
It's just proven over and over and over again that nobody can predict the market.

Dr. Jim Dahle:
Not in any sort of meaningful way, long term.

Rick Van Ness:
Not consistently.

RULE 7: KEEP COSTS LOW

Dr. Jim Dahle:
All right. Rule number seven is to keep costs low. And we're typically talking about investment-related costs, fees, whether it's financial advisor fees or expense ratios in a mutual fund, 12b-1 fees, whatever.

But how can one watch costs without becoming miserly, number one, or two, starting to perseverate on amounts of fees that really don't matter? A few basis points, difference in an expense ratio or returns, etc. How do you find that balance between watching costs without being pennywise and pound foolish?

Rick Van Ness:
I guess I'm not sure I see it that way. I don't see the relationship between watching costs and spending. There's a great graph on the Bogleheads Wiki that shows paying a typical 2% expense ratio. What is the cost of that to you? And it translates to a couple hundred thousand dollars, which translates to like 5 or 10 extra years of retirement. There's that real cost, but does it take extra work to save that cost?

I guess I think of it in terms of “Who's college education do I want to pay for?” Do I want to save to pay for my kids' college education or my broker's kids' college education? Or do I want to take my wife on a safari or send my brokers on a safari? I don't see the miserly part of it because you can be not miserly.

Dr. Jim Dahle:
I think for sure when you're talking about relatively big numbers. In investing 2% is a big number and I use this example all the time. If you take a doc saving $50,000 a year for 30 years, if they're paying 2% in investment cost, the difference after 30 years is $2 million. It's the difference between having a $6 million portfolio and a $4 million portfolio. So, you're absolutely right. The costs matter and compounded costs become very large over time.

But what happens is people learn that lesson and they start applying it to things that are very small. For example, I have people that ask me, “Should I use a Fidelity zero index fund instead of the Vanguard total stock market fund?” And we're talking about the Vanguard fund, which has an expense ratio of 0.03, three basis points. And this Fidelity fund has a ratio of zero basis points. And they think, “Oh, I should switch to Fidelity.”

And they don't realize that at that sort of level of cost, there are other things that matter more like how well they're tracking the index, and how tax-efficient the fund can be. The fact that the Vanguard fund has the ETF share class, for instance, and where your money is so you're not having to run all over the place to buy funds at many different brokerage houses.

It starts to matter much more than those expense ratios. I think that's what I was getting at when it comes to being miserly and letting the expense tail wag the investment dog, if you will.

Rick Van Ness:
Right, it could become a bad habit. But I think for me, the solution to that bad habit goes back to planning. Because you can see I'm currently a big proponent of planning. And the idea of planning in this context is identifying those things that are most important to you.

And if you can identify those things that are most important to you, then you're less tempted to, you get in the habit of saving and then you never spend. That's not the idea of it. The idea of saving is so that you can spend smoothly throughout your entire life. So that includes this concept of retirement, which is a third of your life. You've got to work for half or two-thirds of your life to pay for your retirement.

But you've also got all these other goals that you can unearth by a good planning process. And once you've unearthed them and keep them visible, I enjoy musical theater. Is it worth $100 or $200 a ticket to go to? For me, it is. Everyone has different answers to what's important to them, but it's easier to spend money on things that you've already thought through. Yeah, these are important to me and drinking at the bar is not.

There's lots of ways to spend money. If you don't think they're important to you, get them out of your life, but add more of those things that are important to you. It might be family time. It might be a family vacation once a year and you might choose to pay for it as a way of getting your family together because it's something you value. You only get to that by thinking through what's really valuable to me, which I think a plan should do. A plan is bigger than planning for your retirement.

RULE 8: MINIMIZE TAXES

Dr. Jim Dahle:
Yeah, for sure. Now, one of the biggest costs is taxes and rule number eight is to minimize taxes. And this is probably even more important for a high earner, like a doc, like those that tend to listen to this podcast. What do you think is the biggest tax cost that investors run into?

Rick Van Ness:
I don't know that one. It could be losing out on the opportunity to defer taxes. What's your answer to that one?

Dr. Jim Dahle:
I don't know. I think one of the problems is when you're not doing the other things that you get recommended to do like buying and holding or not trying to time the market or using an actively managed fund. Your investments become much less tax efficient. Now that doesn't matter in your Roth IRA so much, it doesn't matter so much in your 401(k). The lower performance matters from them doing that, but the tax cost doesn't matter.

When you're investing in a taxable account, as many of our listeners do for at least a portion of their portfolio, that starts mattering a lot. And I think there are a lot of Vanguard investors who got a big surprise at the end of last year. Those who had been investing in a target retirement fund, inside a taxable account. All of a sudden due to some changes Vanguard made with share classes of the fund, they had something like an 18% distribution, a taxable distribution of capital gains out of what they thought was a relatively tax-efficient fund of index funds.

And so, I suspect it's just not being tax efficient as they invest. It’s probably the biggest tax cost, but you're right. It might be related to not using tax-protected accounts that are available to them. I'm continually amazed how many doctors don't understand how many tax-protected accounts they have available to them, whether that's a backdoor Roth IRA or an HSA, or maybe they're not even using all of the employer-provided accounts they're given.

Rick Van Ness:
Exactly. And also, being aware of the tax consequences of selling one asset versus another, say in their taxable account or the opportunities to donate appreciated assets. Being tax-aware can affect your decisions. It should affect your decisions.

RULE 9: KEEP IT SIMPLE

Dr. Jim Dahle:
All right, rule number nine is to keep it simple. And it's been said to invest your time actively and your money passively. And I think there's a lot of wisdom there. But at a certain point, you got to ask yourself “How much higher of a return is worth additional complexity in my portfolio?”

For example, you mentioned earlier that at some point in your life, at least, you had some rental properties that you were dealing with. Significant additional complexity, and work there compared to a portfolio of index funds. How do you make that decision of when it's worth adding complexity in hope of a higher return?

Rick Van Ness:
Yeah. That would be a real individual question because adding complexity by taking on income properties, I got away from that. Because in that case, the complexity was the non-financial part of being a landlord. Get me out of that space. I guess I view it as having a limited number of heartbeats and how I want to spend my time.

If I really got satisfaction from trying to optimize my portfolio, I could play games in my taxable account by staggering asset purchases, such that one of them might be more eligible for tax loss harvesting or games like that. I just don't have time and interest in doing that. But other people might and that's fine with them.

I don't begrudge people that take it on as a game. I know people in investor clubs that have social fun choosing stocks to purchase individually, and earlier in this discussion I harped on uncompensated risk for doing that. But if they want to do it, and they're okay with that, fine.

RULE 10: STAY THE COURSE

Dr. Jim Dahle:
All right. The last of these 10 tips, these 10 rules, these principles is to stay the course. Most people fail to even get the market return because they're continually chasing performance or tinkering with their portfolios.

Right now, as we record this, it's March 8th. The market's down on the year for various reasons, whether that's inflation-related or the war in Ukraine or whatever it might be. And there are some people that are maybe struggling with staying the course. Do you have any tips for those who are losing sleep in this latest market correction?

Rick Van Ness:
My knee-jerk reaction is to say, you've got too many equities. If you're losing sleep because of what's happening this year, which is pretty mild. You could be suffering from the common greed of wanting to take advantage of the 10-year ramp-up in stock prices and got in over your head.

You should never be taking investment risks beyond what you're capable of holding. If you're losing sleep, that's a huge sign. I don't even watch it anymore. I have no value in watching the stock market because I won't be making any transactions in the next couple of years.

THE CASE FOR BONDS

Dr. Jim Dahle:
Rick, your other book is titled “Why Bother with Bonds?” and it makes the case for bonds. What do you see is the case for bonds these days when interest rates are 2% and inflation is 7%?

Rick Van Ness:
The case for bonds is not different. You don't invest in bonds for a rate of return. If you want to hire an expected rate of return, you look into equities. If you want safety, the rule for bonds in your portfolio is for safety. It's for ballast, it's for stability. It's for your near-term liabilities where you don't have room for risk. It's for being able to sleep at night. It's for your personal comfort level for investment risk.

Now, what you just described is not normal. Normally the interest rate on bonds, if you look at the bond yield curve, that includes inflation and you just described the short-term scenario of 7% inflation and whatever you said, 2% bond interest rates. That's an anomaly.

A nominal bond return includes market expectation for inflation. And if you want protection for unexpected inflation, that's where TIPS and I bonds provide value. The combination is a popular approach or strategy for achieving that combination of half or more TIPS and treasury securities, which by the way could be bank CDs or anything government insured like that is very safe.

Dr. Jim Dahle:
Yeah, it has been an interesting anomaly to watch in the last few months, maybe the last few years. And you would think in a functioning market that bond interest rates would be inflation plus, and maybe the market's not functioning because the Fed is artificially holding rates down, and has been now for some time. Which leaves the individual investor to wonder how I should react to this? And a lot of them start chasing yield. They start looking for things that pay more, despite the fact they're significantly more risky. What advice do you have for someone tempted to do that?

Rick Van Ness:
Well, let me repeat myself and then mention a new point. Larry Swedroe's opinion is that if you go after yield, in other words, you go after high yield bonds or junk bonds, those are highly correlated with the market. If the market was to crash, so would your returns there.

And so, he advises against that. He advises staying at the highest level of quality and bonds, even if that allows you to take more risk on the stock side and have a bigger portion of equities in your portfolio.

But the second piece of advice is to look at I bonds. Now, if you looked up I bonds today, you would see that there's 0% real interest rate. And so, your whole audience is going to go to 0% interest rate? Why would I ever care about that? Because it's got two pieces. It's got that fixed interest rate piece, which today is 0%. And it's for the life of the I bond when you buy an I bond. Plus, the second piece, which is plus the current rate of inflation.

In your particular example, we've got a current period with a very high yield on it for an I bond, but that's the combination that makes sense. Now, why doesn't the market take advantage of I bonds? Because it's really an opportunity that's only available to individual investors and even to a small degree, you're limited personally to $10,000 per individual. So that's $20,000 per couple. Plus, you can add more on it if you put your tax refund in that format. It's pretty small dollars in that sense and it does go in your taxable account, but it's perfect for situations like today.

Dr. Jim Dahle:
Sometimes I talk to people about investing, there's people that maybe aren't believers in the Boglehead's philosophy. And sometimes I worry the schools have been taught investing to become a little bit religious. People feel like they have to convert others to their way of thinking. Whether that be the Bogleheads philosophy, “How can I convince my dad this is the way to invest?” or whether it's the latest crypto fad. Some people in the crypto community, particularly on Twitter, it's almost a religion for them. It's an entire way of viewing the world. How can we get along with others that have a different investing religion, if you will?

Rick Van Ness:
Right. It's sort of like, do you believe in science or do you believe in alternatives? And my science is things like modern portfolio theory, which isn't quite a science I know. But others like to believe that they can invest in individual companies because there's some joy in it. There's some understanding in it. It's the company they work for. It's maybe a company that they consume their products. They like that company.

Who am I to say? Fine. Fine, if they want to invest in individual securities. I got plenty of friends, most of my friends either have actively managed funds or individual stocks. And I guess the part that breaks my heart a little bit is if they think that that's the only alternative. People that are okay with their returns because they earn 7% and never realized that the market returns 10%, I sort of feel like they've lost some opportunity, but they're okay. So I'm okay.

Dr. Jim Dahle:
All right. Tell us about your latest project, financinglife.org.

Rick Van Ness:
Yeah. financinglife.org is actually my website. It's a not-for-profit educational website where I put videos and some courses. It's mostly free content. I'm working on a current course, which I have a small fee associated to cover my costs, but it's just an educational website.

I'm currently very fascinated by the idea of planning and do it yourself investment plans. If your audience is interested in that as a topic, head for my site, I'll put on the homepage some links to materials for you do it yourself planners, do it yourself investment plans.

Dr. Jim Dahle:
All right, let's do a hypothetical. Let's say you were made the retirement czar. You could change anything about the retirement system in our country. What would you change?

Rick Van Ness:
For most of my life, I thought the way it is, is the way it is and there's no other way possible. And then recently I picked up a book and it was eye-opening to me. The book is called “Rescuing Retirement” by Teresa Ghilarducci. And she and her co-author described the problems with our retirement system and proposed a solution. And I just thought it was so eye-opening.

The solution that they pose is instead of these defined contribution plans, which have a lot of problems, they're just problematic and they definitely favor the risk, all this discussion we've been talking about, deferring your taxes and getting deductions for those tax-advantage programs.

Plus, the big problem with the 401(k) type solutions is that they don't guarantee you a secure retirement for life. Instead, you have to play the game of probability that you probably are okay for life. And since in this arena, there's no investment pooling. For your fire insurance, you all pool your assets together and you don't individually have to save enough to pay for your house if it burns down. That's the advantage of insurance.

In this arena, we individually have to save enough for longevity. The idea of pooling that risk of longevity, it gets solved by solutions like annuities. Social security is the beautiful baseline solution to that, but it's not a solution for your retirement. It's a solution to keep people out of poverty during retirement.

The proposal that they make is that everybody have a portable account that stays with them. Their employers contribute into it the same way that they might have a matching 401(k). And you contribute a small amount into it, but it's a portable account that's yours. And if you die, it goes to your heirs.

And it's managed centrally. So, you get to choose your manager. But basically, they will invest in the stock market for high returns, low cost. It could be done with a non-profit. It could be done by the government, but the idea is capturing the market returns at low cost, high returns until you retire, and then converting that to an annuity.

There you've got your mandatory contributions, which we don't have now. That's one of the problems. A lot of people don't save, but this is a mandatory small contribution. So, it's affordable, it's small and it achieves that by efficiency. Invest in the stock market until you retire. Whenever you retire, it's always your money, your account stays with you, and then it gets annuitized so that you have that security for as long as you live. And boy, I just think that that deserves discussion and I don't hear anybody discussing it.

Dr. Jim Dahle:
Yeah. Another change I'd love to see is just get rid of the alphabet soup of retirement accounts.

Rick Van Ness:
Oh my God, yes.

Dr. Jim Dahle:
The fact that this is tied to your employer at all is just crazy. It's just unfortunate that depending on who you work for, you have different options to save for retirement. You might have terrible plan options and terrible fees or no plan at all, just because you chose one employer over another. It's just a crazy hodgepodge system.

Rick Van Ness:
Taxes and investment retirement planning. Those are both way too complicated.

Dr. Jim Dahle:
Yeah, I agree. All right. We're running short on time, but you've got the ear of 30,000 to 40,000 listeners to this podcast, mostly docs. But as we learned in our recent surveys, certainly not all docs. What have we not yet talked about that you think they should know?

Rick Van Ness:
I think we've covered everything I wanted to talk about. But if they are interested in my favorite topic these days of planning and do it yourself planning instead of hiring help, because nobody's going to know more about what you want than you. You know what's important to you, then I'll have some resources on my website, which is financinglife.org.

Dr. Jim Dahle:
All right. Well, we appreciate you doing that. We appreciate you coming on the podcast and sharing some of your wisdom, and being able to go back and cover these common-sense topics that maybe we don't talk about enough on here. So, thank you, Rick. This has been Rick Van Ness, financinglife.org. You can learn more about him. You can pick up his books, both the “Common Sense” one I mentioned earlier, as well as “Why Bother with Bonds” that I have reviewed before on the blog. And again, thank you Rick, for your time.

Rick Van Ness:
Thank you, Jim.

Dr. Jim Dahle:
I hope you enjoyed that interview. It's important to remember those basic principles behind investing. Investing really doesn't have to be complicated. We can get into the weeds all the time here about retirement accounts, about real estate, about taxes, whatever.

But at the end of the day, if you get the basics right, it's kind of the Pareto principle. 20% of the effort gives you 80% of the results. Make sure you're getting that 20% right with the principles we talked about today.

SPONSOR

PearsonRavitz are disability and life insurance advisors founded by and for physicians. This White Coat Investor recommended agency grew out of one MD's experience with a career-changing on-the-job injury.

Today, PearsonRavitz serves medical community in all 50 states. At PearsonRavitz, they help you as a doctor safeguard your most valuable asset, your income, so you can protect the most important people in your life, your family. They make human connections before they make quotes. Go to pearsonravitz.com today to schedule your consultation with a PearsonRavitz agent.

Make sure if you need a financial plan and you need more help, if you don't feel like you can write it up yourself, if you don't feel like you have the financial literacy or sophistication, or you just need somebody to help provide framework, that's what our Fire Your Financial Advisor course is for. Find out more information at whitecoatinvestor.com/fyfa. Check it out at no risk.

Thanks for those of you leaving us a five-star review and telling your friends about the podcast. Our most recent five-star review is titled, “Love the addition of Dr. Spath. It's great to hear a new voice and perspective and have enjoyed the evolution of the podcast. Thanks so much for great advice. Hope Disha stays on for good.” Thanks for that great review. We appreciate that.

Keep your head up, shoulders back. You've got this and we can help. We'll see you next time on the White Coat Investor podcast.

DISCLAIMER

The host of the White Coat Investor podcast are not licensed accountants, attorneys, or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice related to your situation.

Milestones to Millionaire Transcript

Transcription – MtoM – 190

INTRODUCTION

This is the White Coat Investor podcast Milestones to Millionaire – Celebrating stories of success along the journey to financial freedom.

Megan:
Hey everybody, it's Megan, your podcast producer. I'm just here to remind you that Dr. Dahle is still resting and recovering from his accident. But don't worry, he will be back soon. He's doing well. Please enjoy this episode.

Josh:
Welcome to Milestones to Millionaire, podcast number 190 – Pediatric Dentist Hits Net Worth of $6 Million.

The sponsor today is Mortar Group. Mortar Group is a premier real estate investment firm focused on multifamily properties in both ground-up and value-add projects in the competitive markets of New York City since the early 2000s.

With over $300 million in assets under management and over 30 investments since inception, their fully integrated firm model allows Mortar to maximize efficiency and value across their investments in these niche markets.

Mortar leverages over two decades of experience in architecture, development, and asset management in their projects to build value and minimize risk for investors. Invest in tax-efficient, high-return, risk-adjusted strategies with Mortar Group at whitecoatinvestor.com/mortar.

We've got a great interview today. It was so exciting talking to this guy. Great story to tell, that's coming up. And after that, for Finance 101, we're going to talk about expense ratios. So stick around after the interview.

INTERVIEW

This week, let's welcome Phil to the Milestones to Millionaire podcast. Phil, good to see you, how are you?

Phil:
I'm doing fantastic, how about yourself?

Josh:
I'm doing very well, thank you. We have an exciting milestone for you today. You have hit a net worth of $4.5 million. You're basically halfway to being a decamillionaire. That's incredible. When somebody says that to you, you're at this point, $4.5 million, you're halfway to being a decamillionaire. What swims through your head?

Phil:
For me, it just means more time with the family. It doesn't equate into anything like a big purchase or of that sort, but really it just means, “Okay, I can kind of do this now because I enjoy it and there is no obligation to where I have to keep doing this indefinitely or I can kind of hang it up tomorrow if I really wanted to and that would be fine.” The kind of freedom and not being tied to it. I get to do it because I like it and not because I have to.

Josh:
Yeah, that's great. Do you consider yourself financially independent?

Phil:
Yes, yes, I do. Yeah. And I know however long ago it was when I filled out the questionnaire about net worth, I actually just went through everything briefly yesterday and now, if you include some home equity, it's about six, $6 million.

Josh:
So, that is a pretty big jump in a not very long span. How'd that happen?

Phil:
I think the $4.5 million was just low because I kind of did it on the spot. I might've been in between some patients or something when I was filling out the paper on the computer.

Josh:
You're more than halfway to being a decamillionaire. That's awesome. Okay, so let's break it down. What is your profession and how far are you out of school?

Phil:
I am a pediatric dentist and I've been practicing pediatric dentistry since 2013. 11 years pretty much on the head. I was a general dentist for a couple of years before going back to be a specialist. So, for two years I was a general dentist and then 11 years as a pediatric dentist. 13 years total.

Josh:
How come the decision to go back and specialize?

Phil:
I think after being in school for so long to be a dentist, I wasn't 100% certain I wanted to be a specialist. I was like “I've been in school long enough. Let's start making some money.” And then as I got out during that time, I was like, “You know what? I do like being a general dentist, but I think I want to be a specialist.” I always had it in the back of my mind. And now that I've kind of been in the real world, so to speak, I was like, “Let's go for it.” So I went general dentist for two years and then went back to a pediatric dental residency up in Philadelphia.

Josh:
Oh, that's okay. So let's talk about salary ranges then. You were a general dentist, now you're a specialist. What's the salary ranges from then to now?

Phil:
Yeah, great question. As a general dentist, the base pay that I got, it was a contract that I signed. It was $125,000 per year, a typical 09:00 to 05:00 work week, five days a week. And so, I pretty much made that for two years. Sometimes I would go above. If you do a certain amount of production you get kind of a bonus. There was 24 months as a general dentist, I maybe went over to get the bonus, maybe two or three months. And that equated to maybe an extra $5,000. So, not a huge amount.

And then after, when I went to residency, when I did apply, I wanted to go to a residency. Some, you have to pay tuition all over again. And in some residencies, you actually get paid like your hospital staff. So I was like, “You know what? I think I can get in. I'm going to go apply to ones where you're actually on salary.” And at Temple University, where I did my pediatric dental residency, our salary was like $49,000 for a first year. And it went up to like $52,000 for a second year. The same pay grade as a medical resident. Some schools, you would have to pay $50,000 a year. That's a $100,000 swing for each of the two years of school. I’m fortunate that worked out.

And then my first year practicing pediatric dentistry, I would say for the first two or three years, I was making probably $350,000 a year. And then one year I worked more than 40 hours a week. And this was probably 2017, 2018. A few years before COVID. It was a perfect year. Minimal cancellations in the office, kids not getting sick from hospital cases where those had been canceled. So, just from salary alone, I was able to clip $700,000 for that year. It was like $705,000, something like that. And it's never quite been that high, especially since after COVID, but it's starting to tick back up there.

You're talking about, to sum it all up from a general dentist at $125,000 per year, to pretty much a five times increase up to say $600,000 a year, just from being a specialist and being efficient in what I do.

Josh:
Good decision to go back to residency then, huh?

Phil:
Yeah, it worked out. I always think what would I have done if I didn't go back to specialize? And I'm sure one way or the other, I would have done something on the side like I kind of do now.

Josh:
Yeah, because if you're making $125,000 and maybe you bump it up every year, and maybe you'd be making say $200,000 this year as a general dentist, there's no way you'd have $6 million, right?

Phil:

Probably not. I'm super frugal, and I know if we get to that, talking about that later, but no, that would be very, very difficult to get to that point so quickly.

Josh:
Do you think you would have gone back to residency if you had to pay?

Phil:
I think I would have, just to know that, like I said, that was about a $100,000 per year swing for two years of getting paid versus not getting paid, but I would have made it work. Even though you paid $50,000, I probably would not have had to get a loan for all that, but I probably would have had another $50,000 in debt, I would say. So I would still go back because I could see the long-term financial gain anyway.

Josh:
Sure. Are you still in the Philly area? What part of the country are you in?

Phil:
No, we're in Fleming Island, Florida. That's pretty much like a segment of Jacksonville, Florida.

Josh:
Okay. Florida is not necessarily a low-cost living area.

Phil:
No, Jacksonville for the most part is still pretty low. In fact, in real estate, obviously there's state income tax in Florida, but it's relatively, it's not as expensive like Fort Myers, Miami, those sorts of areas down south.

Josh:
Palm Beach.

Phil:
Yeah, exactly, Palm Beach. Jacksonville is pretty, pretty economical. So it's Fleming Island.

Josh:
Is there some geographic arbitrage that play there as well? I don't know what part of the country you're from originally.

Phil:
Yeah, I'm originally from Kentucky. My wife and I are from Kentucky. So we actually just came down here on a whim. We vacationed here once and said, “Hey, it's great weather. If people vacation here, it must be something going on well.’ And then the nice little perk was no state income tax. So we just went down here on a whim, didn't know anybody with a little kiddo too.

Josh:
Okay. So how many in your family now?

Phil:
We have two kiddos, a 13 year old girl and a seven year old girl.

Josh:
Okay, your net worth is about $6 million. How is that divided up?

Phil:
Yeah, that's including everything as far as what we have, equity in homes that we have. The majority of it, about a little over $4 million, is in our Vanguard brokerage account. That includes a Roth IRA for myself and my wife. We do the backdoor every year. And that includes both of our girls 529 plans are in there as well. And then all the post tax accounts that are there. That's four points, about $4.4 million there.

And then we have about $40,000, I wrote some of these down here. We have about $40,000 in I bonds. My 401(k) with our group have about $250,000 there in a bank account. And there's a little too much in this, just a low interest checking account, but I have it just if we need it for something that comes up. There's $125,000 there.

Another online banking account, we have $50,000 there. And our health savings accounts, we have about $9,000 between my wife and myself and each of our health savings accounts.

Our personal residence right now, we owe $227,000 on it and it can sell now for $600,000. That's about $350,000 equity there. And then we have two rental properties. One is a short term rental on the oceanfront property. And there's $400,000 in equity if we were to sell that. And then our long term rental that we have is we pay cash for that. So there's no debt on that home. And if we had to sell it now, all those homes are kind of selling for $250,000.

Josh:
How's the short term rental cash flow?

Phil:
I would say that cash flows, this year has been probably the slowest year. And I think just from economy talks and inflation, there's less discretionary income for everybody. A perk though, we'll take the kids up there because we're only an hour away. We'll just use it if it's not rented. But that on average, I would say we would net about $30,000 every year.

Josh:
You talked a little bit about debt. You have a couple of mortgages. Did you have student loan debt from out of school?

Phil:
Yeah, out of dental school. No undergrad student debt. I had an athletic scholarship and some academic scholarship. Luckily I could go through that with no debt in undergrad. In dental school, I was able to leave with only $50,000 of debt. And a lot of that was from my wife. I couldn't have done any of this without her. And she's a speech therapist. That's what her profession is.

But she was actually out of school and practicing for two of the four years I was in dental school. And pretty much all of her salary was what paid our bills and allowed me to take out such little amounts of loans. And I can be extreme in frugality and a lot of people wouldn't have put up with what I did. I even knew that, but I kept reassuring her that was the method to the madness. But yeah, none of this is possible without her. She was able to really forfeit any of her luxuries from her being the sole breadwinner at the time just so I could take out as few loans as possible. A lot of that, having such little debt is from her, literally kind of paying for school as much as she could.

Josh:
It's interesting the kind of discussions you may have had with her about frugality and about saving money. Were you guys always on the same page financially or how was it for you guys?

Phil:
I would say she's kind of middle of the road as far as saving and spending where I've had numerous talks about this. I know I can be at the extreme end of saving to where almost, it's overkill. An example I can use is, I always remember this. One of our utility bills when we lived in, because I did dental school at the University of Kentucky. Like I said, I'm from Kentucky. One of our utility bills for the month was like $18, which is like, I don't know, I think base charges, I don't even know how it got that low.

Josh:
Studying in the dark? How did that work?

Phil:
Yeah, right. It was just that stuff that she put up with. But I always said “This is just temporary. Let's get out of here with the least amount of debt as possible.” Because I had classmates six times that amount of debt, six, seven times now. But she keeps me, even though I'm still frugal to this day, I think I've made a lot of progress. But even she has to slap some sense into me. Because I could borderline save just to be saving, which makes like no sense whatsoever.

Josh:
Well, yeah. That's the big question. You've amassed this huge nest egg. It sounds like you don't have to work if you don't want to, financially independent.

Phil:
Sure.

Josh:
Jim talks about this, how much is enough? But for you, who certainly has a mindset of “Saving, saving saving, I'm going to study, buy candlelight and have an $18 utility bill”, how do you then go to be like, “Oh, okay, let's spend some money now?” How do you make that transition in your mindset?

Phil:
Right. And that is a dilemma with me. I remember when we first got married and her late father said, “Phil, it's going to be hard for you to turn on spending this one day.” I'm like, “Oh no, that's the easy part.” When in reality, I am comfortable now with the lifestyle I have, but it is still harder for me to spend money than it is to save money. And I read a book recently, and I'm sure you guys are familiar, “Die With Zero.” And that opened my eyes a little bit where the concept of almost working for free, that makes it a little more tangible. If you have all this money and you're just saving to be saving, you're literally working for free because you'll never use any of that money.

I'm really trying to make a conscious effort here. I bought a new vehicle in 2019, as you probably assume paid cash for it, but up until then, I was driving the vehicle I had in high school. That year I made $700,000, I was still driving the vehicle I had in high school. A five-speed Toyota Celica, manual transmission, love that thing. But pulling into the physician parking lot, they're like, “Dude, who's parking in here?”

Josh:
Call a tow truck out here, this car doesn't belong in here.

Phil:
Yeah, right. I have all kinds of funny stories like that. But for me now, hopefully everyone gets more mature as they age, I'm really making a conscious effort to spend what I have. And because I get it, my wife always puts it in perspective that they're saying “You can't take it with you.” But still, even for me, I am always, and probably forever, will always be more comfortable if I had to save versus spend. But I think I've made progress and I still have more progress to go.

But I did buy a nice vehicle, my wife has a nice vehicle, we have a nice home. It's nowhere near what I qualified for to borrow for. I'm making progress. Because I tell my wife, “Bear with me because I think I'm still spending a ton.” Because I could be like, “Have a much smaller house, even older car.” But I'm making progress. I know that I'm the outlier.

Josh:
Have you made first class reservations yet for an airplane? Have you done that yet? That's the next step for you.

Phil:
We did not do that. But for our 15 year wedding anniversary, we did, which is 2020 COVID. I did splurge and I got us over the water bungalows at the Sandals Resort, but COVID happened and it got canceled. I pulled the trigger. I did pull the trigger.

Josh:
Somebody was saying, not yet Phil, not yet.

Phil:
Yeah, that was a pretty penny, but COVID happened. Because I think it was in May, they closed everything. I pulled some bigger purchases now.

Josh:
All right. Well, I believe in you. I believe you can make it happen.

Phil:
I think I can do it. And you know the crazy thing, once I do purchase it, to what we have, it's such a nominal amount that you don't even miss it from the checking account. And then it's like, “Okay, that wasn't that bad. I can do this.”

Josh:
If you would have gone to that Sandals Resort, it's very likely you could have come back a richer person than when you left, even though you spent a bunch of money on that, right?

Phil:
Sure, right.

Josh:
Okay, Phil. You obviously have a lot of advice to give. I think you've changed careers slightly. You've made a bunch of money. You're trying to get your spending, not in check, whatever the opposite of in check is. What kind of advice do you have for somebody who is in your position coming out of school with a little bit of debt, not too much, young family? What kind of advice do you have for someone like that?

Phil:
I think your relationship with money and how you view that is very important. And what gives you true joy. If you're someone who does like accumulating a lot of nice material things, which there's nothing wrong with that. That's one of the things. I understand that I like nice things too, but to be attached to that and have your happiness and joy and fulfillment tied to that, I think it's almost impossible to get financial independence. And that's because there's a negative correlation with saving money. If I'm saving money, then I'm depriving myself of something physical that I like.

My correlation, and I think it's just an innate thing. I've never really valued material things too much. I do like them, but if I didn't have them, it would be okay. I'd rather stay in a nice short hotel room. But if I didn't have one, if there wasn't one available, I'd be fine staying in whatever.

If you can shift what you value. For me, it's time with my family, it's finding joy in little things as trite as that sounds. Playing with my kids, that doesn't cost anything really. My hobby of working out and running, that's a nominal cost. So, saving money is almost on autopilot and I don't feel like I'm depriving myself of anything.

And then along those lines, I think you hear the word “budget” all the time. And I think the same thing, the psychology of money that you have. If you hear the word “budget”, all of a sudden you feel kind of a constriction. You feel handcuffs, you feel deprivation.

Whereas luckily as I've been, to accumulate a decent amount of money, I've never really made a budget and I've never tracked our spending. And that's because I will save a certain amount first. We're saving this much all the time. And then once I have a leftover, we can spend freely.

It's kind of like the IRS. They take what they owe first and then give you the rest. I don't budget and then save what's left over. I always save a certain amount. And then it's easier to spend because I know we already took care of the savings portion. All that is easier if, again, your relationship with money, what it can provide is something that more free time than material goods, so to speak.

Josh:
Yeah. Spoken like a true super saver. That's great, Phil. Hey, congratulations. You're going to be a decamillionaire before you know it. You come back on the podcast probably two years from now when you have that much money and we'll talk about if you're still practicing and maybe you'll have gone to Sandals by then and you'll have experienced all that you can experience. But thanks for being here. Appreciate it. Congratulations.

Phil:
Yeah, my pleasure.

Josh:
Okay, that was great. Really a lot to learn from Phil. Even if you're not the kind of person who's extremely frugal or is a super saver, Phil has some really great ideas psychologically and just in your normal life of how you can start as a dentist, make $125,000 a year, go back to school, learn some new tricks, get into some real estate and grow your nest egg to $6 million over a short period of time. Really great stuff from Phil. Really happy he was here today.

FINANCE 101: EXPENSE RATIOS

Tyler Scott:
Okay, Josh, thanks for that great interview. I'm Tyler Scott. I'm going to be helping Jim fill in the Finance 101 portions of the podcast while he is recovering. Today's topic is about expense ratios. We want to make sure we continue to expand your financial vocabulary here. And today the goal is to understand the important term of expense ratios.

Both individual investments and the accounts that hold those investments can have all kinds of fees to be aware of. There are sales loads, broker commissions, advisory fees, account fees, management fees, redemption fees, transaction fees, 12b-1 fees. It is a cavalcade of fees out there.

Today we're going to talk about just one of those types of fees. The one I think you probably read about and hear about most often at WCI as it relates to investment choices, which is the expense ratio.

An expense ratio is a measure of a mutual fund or exchange traded funds operating costs relative to its assets. It is determined by dividing a fund's operating expenses into its net assets. Operating expenses reduce the fund's assets, thereby reducing the return to investors because the expense ratio is deducted from the fund's gross return and paid to the fund manager.

You never have to calculate the expense ratio. It will always be provided in the fund's prospectus. You can also just Google it if you know the ticker symbol for the fund in question. It's available on analytics sites like Morningstar or Yahoo Finance. Good and ethical 401(k) custodians will provide the expense ratio right on the statement or website where you're looking at the investment options.

In financial conversations, you will sometimes hear expense ratios expressed as basis points or BPS for short. Written out, BPS is B-P-S. When I say basis point, that is referring to one one hundredth of a percentage point. It is the cost of the investment expressed as a percentage.

If you have an investment that has an expense ratio of 0.12%, that is the same as saying the fund has an annual fee of 12 basis points. That means you owe 0.12% of the value of your investment each year to the firm that created the investment, like Vanguard or Fidelity. If your investment is $100,000, you owe $120 as the expense ratio.

12 basis points is a very low cost fund. Sadly, most of the mutual funds and exchange traded funds out there are not low cost funds. It is not uncommon for me to review a client's list of available funds in their 401(k), 403(b), or 457, and see that all of the options have expense ratios of 1% or higher. In other words, the fees are 100 basis points and up.

When I was working at the Public Health Dental Clinic in Oregon, we had funds in our 457(b) with 240 basis point fees. That is a ridiculous 2.4% expense ratio. If I had $100,000 in that fund, they would charge me $2,400 each year just to own the fund. Imagine my returns for the year in that fund were 5%. That means the expense ratio consumed a whopping 50% of my investment return for the year. Thus, keeping expense ratios of your investments low should be a goal for any savvy investor.

Fortunately, there has been a lot of pressure to lower expense ratios since John Bogle started the index fund revolution at Vanguard in the mid-70s. Today, there are many wonderful tax efficient, highly diversified, low cost funds available at places like Vanguard, Fidelity, Schwab, et cetera.

Fidelity even offers their so-called zero funds that have an expense ratio of zero. Funds like this can be compelling to people once they learn about expense ratios. Now, some folks can become a little obsessive about whether the fund costs seven BPS or nine BPS. Don't worry about that. Don't become that person.

At WCION 2024 in Orlando, during Jim's talk on index funds, he said, “Anything below 20 basis points doesn't matter. The goal is not to go from nine basis points to seven. The goal is to go from 145 basis points to nine. If you don't know the expense ratios on the funds you are using, go find out. A good investor always knows what they are paying for their investments.”

Good luck out there, you guys. You got this.

SPONSOR

Josh:
Mortar Group is a premier real estate investment firm focused on multifamily properties in both ground-up and value-add projects in the competitive markets of New York City since the early 2000s.

With over $300 million in assets under management and over 30 investments since inception, their fully integrated firm model allows Mortar to maximize efficiency and value across their investments in these niche markets.

Mortar leverages over two decades of experience in architecture, development, and asset management in their projects to build value and minimize risk for investors. Invest in tax-efficient, high-return, risk-adjusted strategies with Mortar Group at whitecoatinvestor.com/mortar.

Thanks for joining us today. We'll see you next week on Milestones to Millionaire.

DISCLAIMER

This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.

Common Sense Investing with Rick Van Ness - 387 | White Coat Investor (2024)

References

Top Articles
Latest Posts
Recommended Articles
Article information

Author: Mr. See Jast

Last Updated:

Views: 6269

Rating: 4.4 / 5 (75 voted)

Reviews: 90% of readers found this page helpful

Author information

Name: Mr. See Jast

Birthday: 1999-07-30

Address: 8409 Megan Mountain, New Mathew, MT 44997-8193

Phone: +5023589614038

Job: Chief Executive

Hobby: Leather crafting, Flag Football, Candle making, Flying, Poi, Gunsmithing, Swimming

Introduction: My name is Mr. See Jast, I am a open, jolly, gorgeous, courageous, inexpensive, friendly, homely person who loves writing and wants to share my knowledge and understanding with you.