Podcast #192 Show Notes: Is Your Financial Plan Reasonable?
We often tell people having a written investing plan is crucial to their financial success. That requires that the investing plan first be reasonable. There are lots of portfolios out there that simply are not reasonable. That was the point behind my famous 150 Portfolios Better than Yours post. There is not just one way to invest successfully. If you pick something reasonable and fund it adequately, you are highly likely to reach your goals. In this episode we will go through 10 ways to know if your written financial plan is reasonable, answer several listener questions about their financial plans, and give you directions on how to get a written financial plan in place, if you have not done this important step yet.
In This Show:
Sponsor
We estimate that 80% of doctors need, want, and should use a financial advisor and/or an investment manager. Some investment gurus such as Dr. William Bernstein think my estimate is way too low. At any rate, if you want to use an advisor temporarily or for your entire life, there is no reason to feel guilty about it—just make sure you are getting good advice at a fair price.
If you need help updating your financial plan or just getting one in place, check out our list of recommended financial advisors at whitecoatinvestor.com/financial-advisors.
You can do this and The White Coat Investor can help
Quote of the Day
Our quote of the day today comes from King Solomon, who said
A good name is rather to be chosen than great riches, and loving favor rather than silver and gold.
Is Your Financial Plan Reasonable?
One of the most common questions we answer on the podcast is, “should I invest or pay down debt?” Followed by “how should I invest and what should I invest in?” It is tempting to give a quick answer but it is actually a disservice to these well-meaning but financially illiterate readers and listeners. They really should be asking, “how can I reach my financial goals while taking the least possible amount of risk?” The answer to that question and all the others is you need an investing plan. Once you have an investing plan, the answer to all of the questions is obvious. You don't try to reinvent the wheel every time you get paid. You just plug the money you have into the investing plan. This, of course, requires that the investing plan first be reasonable. So is your financial plan reasonable? Here are the questions to ask yourself to know if your plan is reasonable.
- Can you stick with it? The most important part of a financial plan, assuming it's reasonable, of course, is not what the plan actually is. It's whether you can stick with it. You need to match the plan to you. If you don't tolerate lots of volatility, you don't want an investment plan that requires you to do so. If you can't predict the future, you don't want an investment plan that requires you to be able to do so. But most importantly, you have to be able to stay the course with this investment plan, because you're going to need to stick with this thing for 20-50 years.
- Are you taking enough risk? You need your portfolio to do some of the heavy lifting of getting you to your financial goals. If you run the numbers, you'll discover that if you want to just invest in safe assets, you have to save 50% of your gross income for retirement. If you are not willing to do that, you have to take on some risk with your investment portfolio.
- Are you taking on too much risk? Consider a portfolio like this. Let's say you put a quarter of it into Apple stock. You put a quarter of it into a single municipal bond, 25% into Ethereum, the cryptocurrency, and maybe you put 25% into your brother-in-law's business. Believe it or not, there are actually lots of people out there who own portfolios like this, but it's not a great portfolio. It's taking on way too much risk, much of which is not actually compensated. Similarly, if you're using too much leverage. If you're just leveraged up to your teeth in a bunch of investment properties, that's just taking on too much risk, and it's likely to blow up on you. I think it was Benjamin Graham that said, “Keep your stock to bond ratio between 75/25 and 25/75”.
- Is your portfolio overly complex? Complexity is probably hurting your cause. You're bringing on a bunch of difficulties with rebalancing the portfolio. You're paying a whole bunch more in commissions and fees. It just ends up wasting a lot of time generating too much in fees and confusing the heck out of you. I see very little reason for anyone to have more than 10 asset classes in a portfolio.
- Is your portfolio overly concentrated? As an example of a portfolio that we would say is overly concentrated, consider a portfolio that's 20% TIPS, 20% total bond market, 10% total stock, 10% total international stock market and 40% small value stocks. Remember the small value stocks make up about 2% to 3% of the overall stock market. So, if you're putting 40% of your portfolio into something that only makes up 2% of the market, that's probably too big of a bet. It's overly concentrated. It's the same problem if you're trying to invest in one or two or three individual stocks. Sure, you might hit a home run, but you're making an awfully big bet on those companies.
- Are you going to get killed on taxes? If all your money is in a taxable investing account, then you surely need to pay attention to tax efficiency when it comes to the asset classes you choose to include in your portfolio. You're obviously not going to have a bunch of TIPS, REITs, junk bonds, hard money loans, and these sorts of highly tax-inefficient asset classes in your portfolio, because you're just going to get murdered on the tax bill for it. You can do what you can with asset location, but you need to at least pay a little bit of attention to that when choosing your asset allocation.
- Are you leaving free or nearly free money on the table? One example is your 401(k) match. That's like part of your salary. If you choose to invest in something that can't be invested in your 401(k), then you're probably leaving money on the table. That is a mistake. Another way is if you have a couple of asset classes with similar returns, but uncorrelated returns. Like stocks and real estate. You decide I'm just going to do real estate, or I'm just going to do stocks. That's probably a mistake because you're leaving money on the table from those two uncorrelated but similarly returning assets.
- Can you get similar performance at lower expense? A lot of people are using actively-managed mutual funds, for instance, that perform at best about like an index fund. Just not a great way to assemble a portfolio.
- Does the portfolio pass the eyeball test? By that we mean you should ask yourself three questions. One, would you put your parent’s money into this asset allocation? Two, would any reasonable person argue against it? And three, if your best friend came to you with this portfolio, would you try to talk them out of it? If you can't answer all those in the right way, maybe you shouldn't be owning this portfolio. What makes you so special that you think a portfolio that's not appropriate for anyone else you know is appropriate for you?
- If you fund this proposed investment plan adequately, will it be successful in reaching your investment goals? If the answer is no then the plan is not adequate or you need to save more money. One or the other.
Recommended Reading:
You Need an Investing Plan
How to Tell If Your Investment Plan Is Reasonable
150 Portfolios Better than Yours
Writing a Financial Plan
If you're having trouble coming up with an investment plan, there're really three ways that you can do it. You can do it the long, slow, but cheap way I did it. You can spend hours on internet forums, reading blogs, listening to podcasts, reading books, and just really geek out on this stuff and make it kind of a hobby. If you do that, you will learn enough that you can write your own investment plan. A plan that will be successful if you have the discipline to follow it.
If that's too much work, and it is for many, so you shouldn't feel guilty if it's too much work, we put together a shortcut. We call it Fire Your Financial Advisor. It's an online course designed to take you in about eight hours from being financially illiterate to being financially literate with a written investing plan. That's the product you walk out of the course with. It comes with a hundred percent money back guarantee for a week. We have lots of great feedback on it.
The third option requires even less work on your part, but it's going to require more money. That is to hire a financial advisor off our recommended page. These are people that are fee-only fiduciary advisors that we feel offer good advice at a fair price, and they can help you write up your financial plan. You can take it from there on your own if you want, or you can have them help you to implement it and manage it going forward. But however you do it, you need to get a financial plan in place.
Recommended Reading:
How to Write an Investing Personal Statement
Fire Your Financial Advisor – WCI Online Course
Reader and Listener Q&As
100% Stock Portfolio
I wanted your opinion regarding my written financial plan. I listened to the recent podcasts regarding the question with a hundred percent stock portfolio when you have a long investment horizon. I've become very debt averse as I've gotten older and have chosen to do 100% stock with my investments, but for the portion which theoretically would be in a fixed asset allocation, have instead used that to make extra payments on my mortgage and student loans. I figure that this is a known return. Do you think this is a reasonable plan?”
That is a great plan, very reasonable. If you can tolerate the fluctuations of your equities, such that you don't sell low and swear off stocks forever, then this plan is fine. Remember debt is a negative bond. On your balance sheet it's exactly the same thing, if you pay down debt versus you invest in bonds.
In fact, for a lot of people, because they have such high-interest debt, you might have student loans of 6.8% or 8% or higher, maybe credit cards at 15%, that's exactly the same as getting a 15% guaranteed return or an 8% or 6.8% guaranteed return. Obviously, you can't get that out of bonds these days. You go buy high-quality bonds, treasuries, corporates or municipal bonds, you'll be doing well to make 2% or 3%. This is a great plan, especially if you have high-interest debt. In fact, if that interest is high enough, you may even want to pay that off before you even invest in equities.
At a certain point, though, you're going to have all this debt paid off. At that point you have to ask yourself, “Do I still want to be 100% stocks?” You may want to start adding bonds at that point to the portfolio, but I'll leave that up to you to figure out in your written investing plan.
Investing vs Saving for a Home
An attorney and a resident asked, now that they have paid off all their student loans, what should they do with their remaining money? Invest or save for a home?
They've knocked off the big financial goal that most new attendings focus on with slaying their student loans. Other things that people focus on as they're coming out of training are building a reasonable emergency fund of three to six months of expenses. They focus on maxing out retirement accounts, maybe even doing some Roth conversions, if they're not yet at their peak earnings level.
You might consider saving up a down payment. They want to do a conventional mortgage so will need to save up a 20% down payment.
The greatest financial task of our lives is to save up enough money for retirement so that we can live off of it for 20-40 years in retirement. No time like the present to get started. Especially because you cannot get back retirement account space.
Whether it's an HSA, a backdoor Roth IRA for each of you, his 403(b) at the residency program, or something offered through your law firm, you want to start saving for retirement. So, try to max as many of those out as you can.
But if you're on track to have your down payment money by when you need it and if you are maxing out all your retirement accounts and you're spending as much money as you want to spend, and you want to invest more, just do it in a taxable account. Or if you're not quite saving as much as you need to inside your retirement accounts for retirement, then you have to do some of that inside a taxable account. There is no limit on a taxable account. You can always invest more money, and there's nothing that keeps you from doing it.
We would prioritize the down payment over whatever time period you need to have it by. If you want to have it in a year and you're halfway there, well, that's probably going to be a major chunk of your savings this year. If you don't need it for five years, then it might not be that big of a chunk of your savings this year. Then the rest start saving for retirement,.
But you have to balance those goals one against another and weigh them out. That is really what the budgeting and the saving process is all about. It is weighing your values and making sure your money is going where you want it to go and that it's going to what you care about most.
Investing in Gold
My question is about gold. My husband decided during this pandemic that he was going to invest $30,000 of his retirement portfolio in gold stocks and actual physical gold with a split of 75/25 respectively. We have about 9% of our entire retirement portfolio in precious metals, primarily gold.
My husband thinks that this is a good hedge against inflation. The rest are in aggressive growth assets, stocks, mid cap, small cap, and international markets. What is your opinion regarding precious metals and investing in gold stocks and physical gold with our retirement money?
We think 50% of your portfolio in gold is crazy. That's way too big of a bet on something like that. 9% is not so crazy.
Would we put 9% in there? Probably not. But anything under 5% to 10% is probably reasonable and could be justified as a reasonable asset class in your asset allocation. It doesn't really matter if you have 5% or 10% of your portfolio in gold even if gold does poorly, as long as you're saving adequately. If gold is an important part of your investment portfolio and you're holding it at 9%, that is okay.
The most important thing is that you limit your investment in gold. Sometimes people get really crazy about gold or Bitcoin or silver or commodities or whatever and they put way too much of their portfolio in it.
If you want to have it as a hedge in the event that stocks and bonds do poorly and gold does well for some reason, then it's reasonable to that with a small percentage of your portfolio. But you ought to limit it.
The problem comes in when an asset is doing really, really well, like Bitcoin has been most recently, and is going through the roof, and you get really excited about it, and you put a whole bunch of money in. Then, all of a sudden it's 35% of your portfolio, and now you have this huge bet on something that's primarily speculative.
Gold is primarily speculative. We don't put speculative assets in our portfolio at all. But is it unreasonable for someone who likes gold, who likes the investment characteristics of gold, to put a little bit in there? No, that's not unreasonable. It's okay to do if that's what you want to do.
But keep in mind what you should expect from gold. Over the long run we expect gold to keep up with inflation. That's it. We don't expect it to beat inflation. We don't expect it to underperform inflation.
If you go back 800 years, you'll see that an ounce of gold bought a nice man's suit. Today an ounce of gold buys a nice man's suit. That is basically what you should expect out of gold in the long-term.
In the short term, it's incredibly volatile. If you look at the market report, you'll see that it goes up by 5%-15% a month and then it comes down the next month. It's not quite as volatile as silver and neither one of them are as volatile as cryptocurrencies, but compared to stocks and bonds they are pretty impressively volatile. You have to deal with a lot of volatility to get inflation matching returns over the long run.
If you are going to go for gold or you are going to include it in your portfolio, you have to stay the course for a long time because the benefits of gold tend to only show up about once every 20 years or so. Then gold goes hog-wild, and you're really glad you own it in your portfolio. And then you have another 19 years where you're like, “Ah, should I really still keep gold?”
So, you have to be committed to it long-term. Set a percentage, a single digit percentage for it in your portfolio, rebalance once a year and go with it, but don't let it be 50% of your portfolio. That's way too much.
Commodities
A listener asked why he hasn't heard more people talking about commodities and asked if we would recommend potentially putting a portion into commodities.
There are books and authors out there that talk about including commodities in a portfolio. This is perhaps why asset allocation is so personal. You go out and read some books and blog posts, you figure out what you agree with, what you don't agree with, and you pick something reasonable and you stick with it for the long-term.
If it feels to you that having a few percent of your portfolio in commodities is reasonable then that is okay. Put a little bit of money into commodities, rebalance it each year and eventually commodities will do really well. They'll do better than stocks, bonds, gold, real estate and whatever for a year or two. Then they'll go back to underperforming. It's a little bit like gold that way. Yes. It's a way you can hedge your portfolio.
Do we own commodities? No. We don't find the case for them particularly strong. Why are you not hearing about commodities right now? Well, chances are you're not hearing about it because they haven't done well in quite a while. Even smart people that talk about investing on forums and who get on blogs and stuff chase performance, as well.
When something hasn't done well in a long time, do they talk about it? No. So commodities haven't done well for a long time. Bitcoin has done really well recently. So, everyone is talking about Bitcoin. But you know what? When Bitcoin does poorly, everyone stops talking about Bitcoin and starts talking about commodities.
You have to be careful not to performance chase. Pick a percentage that you can stick with for the long-term. In our case for commodities that is 0%. In your case, it might be 5%, and that's fine, but whatever you can stick with long-term, you rebalance it once a year.
Eventually, when that asset class is in favor, it will provide the benefit to the overall portfolio that you're hoping for. But a little bit like precious metals, we expect commodities to mostly over the long-term keep up with inflation, but with pretty significant volatility that you have to put up with.
We've always been impressed with how volatile commodities are and how poor the earnings can be for quite lengthy periods of time. It is just not an asset class we find particularly attractive.
Number two, every asset class you add makes your portfolio more complex. We already have eight in our portfolio. How many asset classes do you want in your portfolio? If you only want five or six, are you really going to burn one of those on commodities?
So what percentage is reasonable? A single-digit percent.
It is important as you decide on your asset allocation that you make sure it's something reasonable. If you have some of these speculative investments that are hedging investments, don't have too many of them, number one, and don't put too much of your portfolio into them, number two. But at least put enough into it that it's going to do something, if you believe in it and you really are going to put it in there, 5% is the amount to put in and go from there.
Ending
If you do not have a written financial plan in place now is the time to check this off your to-do list. If you have a plan but wonder if it is reasonable, you can get a second opinion on it in the White Coat Investor forum.
Full Transcription
This is the White Coat Investor podcast where we help those who wear the white coat get a fair shake on Wall Street. We've been helping doctors and other high-income professionals stop doing dumb things with their money since 2011. Here's your host, Dr. Jim Dahle.
Dr. Jim Dahle:
This is White Coat Investor podcast number 192 – Is your financial plan reasonable?
Dr. Jim Dahle:
Welcome back to the podcast. I hope you're as excited as I am. We're recording this on December 15th. It's not going to run until January 7th, but this is December 15th. I'm supposed to get a vaccine this week. I'm super excited about it. Either this Friday or the following Monday, I'm supposed to be vaccinated against COVID. So, I'm pretty excited about that and I'm sure a lot of you are too. Hopefully this is the beginning of the end.
Dr. Jim Dahle:
Thanks for those of you who have been serving alongside me on the front lines of this pandemic. And shoot, keep yourself safe these last few days and weeks. And maybe we can look forward to a time very soon when we won't be bringing this home to our families from the hospital.
Dr. Jim Dahle:
We estimate that 80% of doctors need, want, and should use a financial advisor and/or an investment manager. Some investment gurus such as Dr. William Bernstein think my estimate is way too low. At any rate, if you want to use an advisor temporarily or for your entire life, there is no reason to feel guilty about it—just make sure you are getting good advice at a fair price.If you need help updating your financial plan or just getting one in place, check out our list of recommended financial advisors at whitecoatinvestor.com/financial-advisors.You can do this and The White Coat Investor can help
Dr. Jim Dahle:
All right, we're going to talk a little bit today about financial plans and how you can know if your financial plan is reasonable. So, let's get into this a little bit. The first question you should ask yourself, and we're going to go through 10 of these is “Can you stick with it?”
Dr. Jim Dahle:
The most important part of a financial plan, assuming it's reasonable of course, is not what the plan actually is. It's whether you can stick with it. And in this respect, you need to match the plan to you. If you don't tolerate lots of volatility, you don't want an investment plan that requires you to do so. If you can't predict the future, you don't want an investment plan that requires you to be able to do so.
Dr. Jim Dahle:
But most importantly, you just got to be able to stay the course with this investment plan, because you're going to need to stick with this thing for 20, 30, 40, 50 years, something like that. So, you need to make sure you can.
Dr. Jim Dahle:
Question number two – “Are you taking enough risk?”. Let me give you an example of what I consider an unreasonable portfolio because it's not taking enough risk. If you put a quarter of your portfolio into gold, a quarter into whole life insurance, a quarter into bonds and a quarter into certificates of deposit, it is diversified, sure, but nothing there is expected to have much of a return. You'll be lucky to keep up with inflation, much less beat it.
Dr. Jim Dahle:
And so, it's just not taken enough risk. You need your portfolio to do some of the heavy lifting of getting you to your financial goals. And if you don't take enough risk, it won't be doing it.
Dr. Jim Dahle:
In fact, if you run the numbers, you'll discover that if you want to just invest in safe assets, like the ones I mentioned, you have to save 50% of your gross income for retirement. And I'm not willing to do that. I suspect you aren't willing to do that. And so, that means you've got to take on some risk with your investment portfolio.
Dr. Jim Dahle:
All right. The third question you should ask yourself when trying to determine if your portfolio is reasonable is, “Are you taking on too much risk?” What do I mean by that? Well, consider a portfolio like this. Let's say you put a quarter of it into Apple stock. You put a quarter of it into a single municipal bond. Maybe you put 25% into Ethereum, the cryptocurrency. And maybe you put 25% into your brother-in-law's business, right?
Dr. Jim Dahle:
Believe it or not, there are actually lots of people out there who own portfolios like this, but it's not a great portfolio. It's taken on way too much risk, much of which is not actually compensated. I mean obviously if Apple goes caput, that's a lot of your money that could disappear with that. And the other investments are all very high risk, undiversified investments. And so, a portfolio full of those is not a great idea.
Dr. Jim Dahle:
Similarly, if you're using too much leverage. If you're just leveraged up to your teeth in a bunch of investment properties, that's just taken on too much risk and it's likely to blow up on you. I think it was Benjamin Graham that said, “Keep your stock to bond ratio between 75/25 and 25/75”. And I think there's some benefit to that.
Dr. Jim Dahle:
All right. Question number four – “Is your portfolio overly complex?” Now, occasionally I see these portfolios with 20 different asset classes in them. You got eight types of bonds. You got stocks from every country, all in their own little fund, or you own 150 individual stocks.
Dr. Jim Dahle:
Those sorts of portfolios, they're just overly complex and you don't need it to be that complex. And in fact, it's probably hurting your cause if it's that complex. You're bringing on a bunch of difficulties with rebalancing the portfolio. You're paying a whole bunch more in commissions and fees. And so, it just ends up wasting a lot of time generating too much in fees and confusing the heck out of you.
Dr. Jim Dahle:
I can understand why some “financial advisors”, financial advisors in quotes of course, that do this. And the reason why is they want to make investing look complicated to you. So, you don't try to do it on your own and fire them. But I see very little reason for anybody to have more than 10 asset classes in a portfolio.
Dr. Jim Dahle:
Okay. Question number five to ask yourself – “Is your portfolio overly concentrated?” And as an example of a portfolio that I would say is overly concentrated, consider a portfolio that's 20% TIPS, 20% total bond market, 10% total stock, 10% total international stock market and 40% small value stocks.
Dr. Jim Dahle:
Well, remember the small value stocks make up about 2% to 3% of the overall stock market. So, if you're putting 40% of your portfolio into something that only makes up 2% of the market, that's probably too big of a bet. It's overly concentrated.
Dr. Jim Dahle:
It's the same problem if you're trying to invest in one or two or three individual stocks. Sure, you might hit a home run, but you're making an awfully big bet on those companies.
Dr. Jim Dahle:
Question number six to ask yourself – “Are you going to get killed on taxes?” Okay, if all your money is in a taxable investing account, then you surely need to pay attention to tax efficiency when it comes to the asset classes you choose to include in your portfolio.
Dr. Jim Dahle:
You're obviously not going to have a bunch of TIPS and REITs and junk bonds and hard money loans and these sorts of highly taxing efficient asset classes in your portfolio, because you're just going to get murdered, absolutely murdered on the tax bill for it. So, you can do what you can with asset location, but you need to at least pay a little bit of attention to that when choosing your asset allocation.
Dr. Jim Dahle:
Question number seven – “Are you leaving free or nearly free money on the table?” And there's lots of examples of this in life. One for example is your 401(k) match. That's like part of your salary. If you choose to invest in something that can't be invested in your 401(k), then you're probably leaving money on the table. And that's a mistake.
Dr. Jim Dahle:
Another way is if you have a couple of asset classes with similar returns, but uncorrelated returns. Like stocks and real estate. You decide I'm just going to do real estate, or I'm just going to do stocks. That's probably a mistake because you're leaving money on the table. Money that comes from rebalancing bonus from those two uncorrelated but similarly returning assets.
Dr. Jim Dahle:
Number eight, “Can you get similar performance at lower expense?” And a lot of people are using actively managed mutual funds for instance, that perform at best about like an index fund. Just not a great way to assemble a portfolio.
Dr. Jim Dahle:
For example, there is an S&P 500 index fund with an expense ratio of 2.41%. Or you can go to Vanguard or Fidelity or Schwab and pay zero to five basis points rather than 241 basis points.
Dr. Jim Dahle:
All right. Question number nine to ask yourself – “Does the portfolio pass the eyeball test?” By that I mean you should ask yourself three questions. One, would you put your parent’s money into this asset allocation? Two, would any reasonable person argue by humanly against it? And three, if your best friend came to you with this portfolio, would you try to talk them out of it?
Dr. Jim Dahle:
And if you can't answer all those in the right way, then you ought to ask yourself, “Well, maybe I shouldn't be owning this portfolio. What makes me so special that I think a portfolio that's not appropriate for anybody else I know is appropriate for me?”
Dr. Jim Dahle:
All right. And last question, and maybe the most important one. “If you fund this proposed asset allocation, this proposed investment plan adequately, will it be successful in reaching your investment goals?” And if the answer is no then the plan is not adequate or you need to save more money. One or the other.
Dr. Jim Dahle:
All right, I hope that's helpful to you. If you're having trouble coming up with an investment plan, there's really three ways that you can do it. You can do it the long slow, but cheap way I did it. You can spend hours on internet forums, reading blogs, listening to podcasts, reading books, and just really geek out on this stuff and make it kind of a hobby.
Dr. Jim Dahle:
If you do that, you will learn enough that you can write your own investment plan. A plan that you can follow that will be successful, and you should have the discipline to follow it and be successful with it.
Dr. Jim Dahle:
If that's too much work and it is for many, so you shouldn't feel guilty if it's too much work, I put together a shortcut. We call it Fire Your Financial Advisor. It's an online course. And it's designed to take you in about eight hours from being financially illiterate to being financially literate with a written investing plan. That's the product you walk out of the course with. And it comes with a hundred percent money back guarantee for a week. It's a great course. We have lots of great feedback on it. And you ought to check that out.
Dr. Jim Dahle:
The third option requires even less work on your part, but it's going to require more money. That's to hire a financial advisor. We keep a list of recommended financial advisors on the website. These are people that are fee-only fiduciary advisors that we feel offer good advice at a fair price, and they can help you write up your financial plan. You can take it from there on your own if you want, or you can have them help you to implement it and manage it going forward. But however you do it, you need to get a financial plan in place.
Dr. Jim Dahle:
All right, let's take some questions from you off the Speak Pipe. Our first one, let's take a listen.
Anna:
Hi, Dr. Dahle. I've been a longtime listener. I think you're the absolute grooviest. I wanted your opinion regarding my written financial plan. I listened to the recent podcasts regarding the question with a hundred percent stock portfolio when you have a long investment horizon. I've become very debt averse as I've gotten older and have chosen to do 100% stock with my investment, but for the portion, which theoretically would be in a fixed asset allocation have instead use that to make extra payments on that with my mortgage and student loans. I figure that this is a known return. Do you think this is a reasonable plan? Thanks again for all you do.
Dr. Jim Dahle:
Thanks, Anna, for that great question. That is a great plan. That's a very reasonable plan. If you can tolerate the fluctuations of your equities, such that you don't sell low and square off stocks forever, then this plan is fine because remember what debt is. It's a negative bond. On your balance sheet it's exactly the same thing. If you pay down debt versus you invest in bonds.
Dr. Jim Dahle:
In fact, for a lot of people, because they have such high interest debt, you might have student loans of 6.8% or 8% or higher, maybe credit cards at 15%, who knows, right? That's exactly the same as getting a 15% guaranteed return or an 8% or 6.8% guaranteed return. And obviously you can't get that out of bonds these days. You go buy high quality bonds, treasuries, or corporates or municipal bonds or whatever, you'll be doing well to make 2% or 3% as far as that goes.
Dr. Jim Dahle:
And so, yeah, this is a great plan, especially if you have high interest debt. In fact, if that interest is high enough, you may even want to pay that off before you even invest in equities. But yeah, that's a reasonable thing to do.
Dr. Jim Dahle:
At a certain point, Anna, though, you are debt averse, you're going to have all this debt paid off, may even have your mortgage paid off. And at that point you got to ask yourself, “Do I still want to be a hundred percent stocks?” And you may want to start adding bonds at that point to the portfolio, but I'll leave that up to you.
Dr. Jim Dahle:
All right, let's take our next question. This one comes in from an attorney.
Hillary:
Hi, there I am a long-time listener, first time communicator. And I'm an attorney. I've been practicing for 10 years. I'm a partner in my law firm. There's only three of us. I own a third of the firm. I am a pretty high-income earner. This past year, just me alone I made about $1.2 million. With that money I paid off my law school debt and my husbands, who is an orthopedic resident in Los Angeles. I also paid off his medical school debt.
Hillary:
We now have fairly healthy six figures in the bank before taxes, which all of that money we've calculated and we'll allocate. But now we're trying to decide what to do with the remaining money that we have. Do we begin investing? Do we save for a home? I've looked at the disadvantages of getting a physician mortgage for when he becomes an attending. We would much rather go with a conventional loan with a healthy down payment if possible.
Hillary:
But we're really just beginning our investment and retirement savings journey and are just looking for some sage wisdom about what makes the most sense generally speaking, now that we have some freed up income, now that our student debt is completely eliminated, which was about a half a million dollars. So, if you can provide any advice or guidance, that would be very helpful. Thanks.
Dr. Jim Dahle:
Great job, Hillary. You paid off not only your student loans, but you paid off an orthopedist student loans, $500,000. That's awesome. Congratulations on your success. That's really good. So now what? Well, now you're in the place where most new attending physician graduates are.
Dr. Jim Dahle:
You come out of residency, you have all these great uses for money, but you only have limited funds. Well, at least you've already eliminated one of those great uses for money, right? You've already paid off the student loan. So that's great.
Dr. Jim Dahle:
Other things that people focus on as they're coming out of training, they focus on building a reasonable emergency fund of three to six months of expenses. They focus on maxing out retirement accounts, maybe even doing some Roth conversions, if they're not yet at their peak earnings level. If you had some tax deferred money from a prior career from your time in residency or something like that.
Dr. Jim Dahle:
You might also consider saving up a down payment. In your case, you really want to do a conventional mortgage. So, you're going to need to save up a 20% down payment. And if you're looking at a $500,000 or a million-dollar house that might be $100,000 or $200,000, you need to save up. So that might take most of your current savings.
Dr. Jim Dahle:
And then of course, the greatest financial task of our lives is to save up enough money for retirement so that we can live off of it for 20 or 30, 40 years in retirement. Jonathan Clemons reverse to that as the greatest financial task of our lives. And I think that's true. No time like the present to get started. Especially because you cannot get back retirement account space.
Dr. Jim Dahle:
Whether it's an HSA, whether it's a backdoor Roth IRA for each of you, whether it's his 403(b) at the residency program, whether it's something offered through your law firm. Whatever's available to you, you want to start saving for retirement. So, try to max as many of those out.
Dr. Jim Dahle:
But if you're on track to have your down payment money by when you need it and if you are maxing out all your retirement accounts and you're spending as much money as you want to spend, and you want to invest more while you just do it in a taxable account. Or if you're not quite saving as much as you need to inside your retirement accounts for retirement, then you got to do some of that inside a taxable account. But there's no limit on a taxable account. You can always invest more money and there's nothing that keeps you from doing it.
Dr. Jim Dahle:
But those are sort of the ways I would think about it. I would prioritize the down payment over the whatever time period you need to have it by. If you want to have it in a year and you're halfway there, well, that's probably going to be a major chunk of your savings this year. If you don't need it for five years, then it might not be that big of a chunk of your savings this year.
Dr. Jim Dahle:
And then the rest I'd start saving for retirement, unless you have other financial goals. Maybe you got kids, you want to get 529 started with, or maybe you want to save up for a Tesla or something or whatever, whatever your financial goals are.
Dr. Jim Dahle:
But you have to balance those goals one against another and weigh them out. And that's really what the budgeting and the saving process is all about. It is weighing your values and making sure your money is going where you want to go and that it's going to what you care about most.
Dr. Jim Dahle:
Our quote of the day today comes from King Solomon, who said “A good name is rather to be chosen than great riches and loving favor rather than silver and gold”. So, you'll find that one in the Bible.
Dr. Jim Dahle:
All right. Speaking of gold, let's take a question about gold off the Speak Pipe.
Speaker:
Hello, Dr. Dahle. I'm a huge fan of your blog and podcast. You have been influential to me and I thank you very much for your work. My question is about gold. My husband decided during this pandemic that he was going to invest $30,000 of his retirement portfolio in gold stocks and actual physical gold with a split of 75/25 respectively.
Speaker:
His 401(k) and Roth IRA accounts are only about $65,000. He basically placed almost 50% of his retirement money in gold. I however invested only $15,000 of my retirement portfolio of $450,000. So combined, we have about 9% of our entire retirement portfolio in precious metals, primarily gold.
Speaker:
My husband thinks that this is a good hedge against inflation. The rest are in aggressive growth assets, stocks, mid cap, small cap, and international markets. We are in our early to mid-forties and have two small children. I'm an internist and I make close to $275,000 a year. And my husband makes about $80,000 a year as a non-physician medical professional.
Speaker:
I function currently as the sole breadwinner of this family because my husband still has school loans that I want him to pay down aggressively. Thanks to you and your suggestions, I also support my extended family who lives in a third world country.
Speaker:
So, what is your opinion regarding precious metals and investing in gold stocks and physical gold with our retirement money? Thank you very much.
Dr. Jim Dahle:
All right. Lots of questions there. I think the first comment I want to make is that it's not “his” money and “her” money, “your” money, et cetera. It's all one pot of money you guys should manage together. So, I like the way you total it up for me and told me 9% of your portfolio is in gold, because obviously from what I said earlier in the podcast, I think 50% of your portfolio in gold is crazy, right? That's way too big of a bet on something like that. 9% – not so crazy.
Dr. Jim Dahle:
Would I put 9% in there? Probably not. But I think anything under 5% to 10% is probably reasonable and could be justified as a reasonable asset class in your asset allocation. So, I can't criticize that.
Dr. Jim Dahle:
You guys are making great money. You're making $350,000 or so. It doesn't really matter if you got 5% or 10% of your portfolio in gold even if gold does poorly, as long as you're saving adequately and it sounds like you are, based on how much money you have now. So, I think you guys are doing pretty great. If gold is an important part of your investment portfolio and you're holding it at 9%, I think that's okay.
Dr. Jim Dahle:
What do I think about gold? I think the most important thing is that you limit your investment in gold. Sometimes people get really crazy about gold or Bitcoin or silver or commodities or whatever and they put way too much of their portfolio in it.
Dr. Jim Dahle:
If you want to have it as a hedge in the event that stocks and bonds do poorly and gold does well for some reason, then it's reasonable to that with a small percentage of your portfolio. But I think you ought to limit it.
Dr. Jim Dahle:
The problem comes in when an asset is doing really, really well, like Bitcoin has been most recently and is going through the roof and you get really excited about, and you put a whole bunch of money in and you put 25% of your portfolio in it. And then all of a sudden, it's 35% of your portfolio. And now you've got this huge bet on something that's primarily speculative.
Dr. Jim Dahle:
I mean, frankly gold is primarily speculative. I don't put speculative assets in my portfolio at all. The only gold I own is on my finger. And so, if you want to know what I think about gold, you can just look at my portfolio and see what's in it.
Dr. Jim Dahle:
But is it unreasonable for somebody who likes gold, who likes the investment characteristics of gold to put a little bit in there? No, that's not unreasonable. It's okay to do if that's what you want to do.
Dr. Jim Dahle:
But keep in mind what you should expect from gold. Over the long run I expect gold to keep up with inflation. That's it. I don't expect it to beat inflation. I don't expect it to underperform inflation.
Dr. Jim Dahle:
If you go back 800 years, you'll see that an ounce of gold bought a nice man suit. Today an ounce of gold buys a nice man suit. And that's basically what you should expect out of gold in the long-term.
Dr. Jim Dahle:
In the short term, it's incredibly volatile. If you look at the market report I put in my newsletter every month, you'll see that it goes up by 5% or 10 or 15% a month and then it comes down the next month. It's not quite as volatile as silver and neither one of them are as volatile as cryptocurrencies, but compared to stocks and bonds are pretty impressively volatile. And so, you've got to deal with a lot of volatility to get inflation matching returns over the long run.
Dr. Jim Dahle:
If you are going to go for gold or you are going to include it in your portfolio, you've got to stay the course for a long time. Because the benefits of gold tend to only show up about once every 20 years or so. And then gold goes hog-wild and you're really glad you own it in your portfolio. And then you got another 19 years where you're like, “Ah, should I really still keep gold?”
Dr. Jim Dahle:
So, you got to be committed to it. You got to have in your portfolio long-term. Set a percentage, a single digit percentage for it in your portfolio, rebalance once a year and go with it, but don't let it be 50% of your portfolio. That's way too much.
Dr. Jim Dahle:
All right. So, let's take a question. Now, this one is about commodities.
Speaker 2:
Hi, Dr. Dahle. I have a question about commodities. So, the general sense that I've gotten from people like yourself, Paul Merriman, Bernstein has been that commodities are too volatile and don't have a good enough return to really consider them as a significant portion of your portfolio. And that perhaps that most you can put a couple of percent in precious metals as a hedge against inflation. Bernstein mentioned you'll end up buying low and selling high more, whereas you rebalance because it's so volatile. But it's pretty much limited to that from my understanding.
Speaker 2:
However, I'm reading a book called “Asset Allocation” by Roger Gibson. And he actually talks about using it perhaps a bit more because of its typically negative correlation with US stocks. And that that can as part of an integrated portfolio end up giving you better returns with less volatility.
Speaker 2:
For example, he has a model of portfolios between one and four asset classes, asset classes being US stocks, non-US stocks, real estate and commodities and equal allocations. And interestingly the four with the best sharp ratios are the three and four asset class portfolios that include commodities, even though commodities themselves have the most volatility and the smallest return.
Speaker 2:
So, my question here is why haven't I really heard anyone else talk too much about commodities in the circle of people that I respect on the matter of investing such as yourself? Is Mr. Gibson's data simply too limited? His data is from 1972 to 2011. So, I don't know if maybe there's just not enough historical perspective or is there some other reason that I'm missing as to why you wouldn't put up perhaps more than just a couple of percent of your portfolio into commodities?
Speaker 2:
Anything that you could tell me would be greatly appreciated. And if you would recommend potentially putting a portion into commodities, if you could say kind of what constraints on the percentage of allocation of your equity portfolio you would put into that, I would greatly appreciate it. Thank you.
Dr. Jim Dahle:
All right. So, this is a good question. There are books and authors out there that talk about including commodities in a portfolio. And this is perhaps why asset allocation is so personal. You go out and read some books, you read some blog posts, you figure out what you agree with, what you don't agree with, and you pick something reasonable and you stick with it for the long-term.
Dr. Jim Dahle:
So, if it feels to you that having a few percent of your portfolio in commodities is reasonable to you, if you're convinced by the arguments of Roger Gibson and asset allocation, that this is a wise thing to do with your portfolio, then that's okay with me. Put a little bit of money into commodities, rebalance it each year and eventually commodities will do really well. They'll do better than stocks and bonds and gold and real estate and whatever for a year or two. And then they'll go back to underperforming. It's a little bit like gold that way. Yes. It's a way you can hedge your portfolio.
Dr. Jim Dahle:
Do I own commodities? No, I don't own commodities in my portfolio. I don't find the case for them particularly strong. Larry Swedroe was one who really pushed for commodities. In this case collateralized commodity futures as part of a portfolio for years and years and years and it really didn't turn out to do very well at all.
Dr. Jim Dahle:
So why are you not hearing about commodities right now? Well, chances are you're not hearing about it because they haven't done well in quite a while. And even smart people that talk about investing on forums and who get on blogs and stuff, they chase performance as well.
Dr. Jim Dahle:
And so, when something hasn't done well in a long time, do they talk about it? No. So commodities haven't done well for a long time. Nobody's talking about them. Bitcoin's done really well recently. So, everybody's talking about Bitcoin. But you know what? When Bitcoin does poorly, everybody stops talking about Bitcoin and starts talking about commodities.
Dr. Jim Dahle:
And so, you've got to be careful not to performance chase. You got to pick a percentage that you can stick with for the long-term. In my case for commodities that is 0%. In your case, it might be 5% and that's fine, but whatever you can stick with long-term you rebalance it once a year.
Dr. Jim Dahle:
And eventually when that asset class is in favor, it will provide the benefit to the overall portfolio that you're hoping for. But a little bit like precious metals, I expect commodities to mostly over the long-term keep up with inflation, but with pretty significant volatility that you got to put up with. I track a commodities index on my monthly market report in the newsletter.
Dr. Jim Dahle:
If you subscribed to the newsletter and you should, it's totally free, right? It's got lots of good stuff in there, including this monthly market report. But I've always been impressed with how volatile commodities are and how poor the earnings can be for quite lengthy periods of time. And it's just not an asset class I find particularly attractive.
Dr. Jim Dahle:
Number two, every asset class you add makes your portfolio more complex. I've already got eight in my portfolio. How many asset classes do you want in your portfolio? And if you only want five or six, are you really going to burn one of those on commodities? I probably wouldn't.
Dr. Jim Dahle:
So what percentage is reasonable? Again, I'd say a single digit percent. But the way I kind of feel about it is if I'm not willing to put at least 5% of something into a portfolio, it probably doesn't belong in there at all.
Dr. Jim Dahle:
If you don't believe strongly enough in gold or Bitcoin or commodities or whatever to put 5% of your portfolio into it, what are you doing? You're just playing with it. Putting 0.5 points into your portfolio statistically is not going to move anything. There's no point. You're just introducing unnecessary complexity and giving yourself a lot of work to do that you otherwise would not have to do.
Dr. Jim Dahle:
So those are my thoughts on it and I hope that's helpful to you. I think it’s important as you decide on your asset allocation that you make sure it's something reasonable. And if you have some of these speculative investments that are hedging investments, don't have too many of them number one, don't put too much of your portfolio into them number two. But at least put enough into it that it's going to do something if you believe in it, and you really are going to put it in there, I'd say 5% is the amount to put in and go from there.
Dr. Jim Dahle:
All right, thanks to those of you who have been leaving us five-star reviews. We really appreciate it. We had a recent one from foundersball, who said “The best. Absolutely the best physician finance podcast out there. Has transformed my approach to finances and by extension my life. A++++.” Five-stars. Thank you for that. We really appreciate those five-star reviews. They do help spread the word on the podcast.
Dr. Jim Dahle:
We estimate that 80% of doctors need, want, and should use a financial advisor and/or an investment manager. Some investment gurus such as Dr. William Bernstein think my estimate is way too low. At any rate, if you want to use an advisor temporarily or for your entire life, there is no reason to feel guilty about it—just make sure you are getting good advice at a fair price.If you need help updating your financial plan or just getting one in place, check out our list of recommended financial advisors at whitecoatinvestor.com/financial-advisors. You can do this and The White Coat Investor can help
Dr. Jim Dahle:
All right. If you need help with designing your financial plan coming up with an asset allocation, I would encourage you to check out a couple of resources. One, my post on the blog called “150 Portfolios Better Than Yours”. It actually now lists 200 portfolios and you need to pick a reasonable one and stick with it, or design your own.
Dr. Jim Dahle:
If you need help designing your own, take a look at our Fire Your Financial Advisor course. We think is the best course out there like this. We consider it to be sold at the resident price, quite frankly, and it's dramatically cheaper than hiring a financial planner to help you come up with a plan on your own. So, check that out as well.
Dr. Jim Dahle:
All right. I think it's time to wrap this up. Keep your head up, your shoulders back. You've got this and we can help. We'll see you next time on the White Coat Investor podcast.
Disclaimer:
My dad, your host, Dr. Dahle, is a practicing emergency physician, blogger, author, and podcaster. He’s not a licensed accountant, attorney or financial advisor. So, this podcast is for your entertainment and information only and should not be considered official personalized financial advice.
