7. The White Coat Investor: Bear markets, investing plans, income loss, and cushion cash.
Jim Dahle is an emergency physician who is widely known by his moniker, the White Coat Investor. He's become one of the leading voices for financial literacy and intelligent planning for those who 'wear the white coat'. In this conversation, Jim gives perspectives and strategies on managing finances during a bear market. We address the dangers of market timing, the value of a written investment plan, how Jim invests his money, and why a good financial advisor can sometimes be the best couple's therapist.
A bear market is a 20% drop from the previous high.
While it doesn’t necessarily have to come with an economic downturn or recession, it often does.
How bonds differ from stocks and why some believe bonds are safer in a bear market [03:10];
When people own stocks, they own shares of a company. If the company does well and makes profits, their stock goes up in value and pays out dividends.
A bond is a different way for a company (or government) to raise money. When you buy a bond, you loan money to the company without becoming part owner of it.
There are different types of bonds: treasury bonds (where you loan money to the U.S. government), municipal bonds (money is loaned to local or state governments), and corporate bonds (money is loaned to a company).
Bonds are generally considered safer than stocks; in an economic downturn, you’re more likely to get your principal back from a bond vs. a stock investment.
As a general rule, in a stock bear market, the value of bonds tends to go up.
For diversification, people include both stocks and bonds in their portfolio.
Why cashing out your whole portfolio when the market tanks may not be the best strategy [06:15];
The problem with getting out of the market is that at some point you’re going to need to get back in. And you’ll be faced with the decision of whether the market is going up or down.
Since it’s difficult to time the market, you run the risk of selling low and buying high -- not a winning strategy.
By the same token, pouring all of your cash into the market because you think the market can only go up is dangerous. You could be wrong and it could go down by another 40%.
Nobody has a functioning crystal ball, and pretending you know where the stock market is going in anything by the very long run is folly.
The value of having a written investment plan which tells you what you’re going to do if and when the market changes [10:00];
For Jim and his wife, their personal asset allocation is 60% stock (⅔ U.S., ⅓ foreign), 20% bonds, and 20% real estate. This distribution includes all of their long-term money (401Ks, IRAs, taxable investments, real estate, etc).
Their investment plan dictates that they continue to put new money into the market and to rebalance their accounts to their original percentages as needed. This plan has forced them to sell high and buy low by rebalancing and to continue to invest at market lows.
Over the last 4 bear markets, this plan has worked out well for them.
"When I talk about investing in stocks, it's buying ALL of the stocks via low-cost, broadly diversified index funds."
Stock investments, and why it’s better to invest in a low-cost, broadly diversified index fund rather than individual stocks [12:15];
When you buy index funds, you’re investing in the entire stock market. This is far safer than purchasing a single stock.
Different ways for coming up with your individualized written investment plan [14:15];
The strategy that takes the most amount of time but costs the least amount of money is to educate yourself by reading investment books, blogs, internet forums, etc. until you feel comfortable writing up an investment plan. This works best for people who view personal investing as a hobby.
On the other end of the spectrum is a method which requires little expertise but may cost a few thousand dollars. This involves hiring a fee-only fiduciary financial planner to help you draft a financial plan which includes an investing plan for the future.
A third option is to take an on-line course such as “Fire Your Financial Advisor!” which will provide the education you need (in about 8 hours) to formulate a written financial plan.
"An emergency fund should be accessible, liquid, safe cash or investments that you can tap in a sum equal to about 3 to 6 months of living expenses."
The importance of having an emergency fund in the event that your income drops dramatically, and how this money should be invested with the goal of having the best return OF the principal, not the return ON the principal [16:40];
Normally, in a stock market downturn, doctors are pretty insulated with fairly stable incomes. But with COVID-19, many clinicians are suffering financially as a result of lost shifts, decreased patient volumes, reduced hourly wages, etc. For most, medical practice is their sole source of income.
Our generation is indoctrinated with the idea of the importance of saving early for retirement. But we also have to ensure that we have an adequate emergency fund in the event of an economic downturn.
An emergency fund is a very accessible, liquid, safe investment (or cash) that amounts to 3-6 months of living expenses. That sum of money allows you to not sell your investments low.
This cushion is completely separate from your personal asset allocation and should be funded first, before putting money into long-term investments.
Some people build enough wealth that they no longer need an emergency fund, as their investments function as their cushion.
Ideas for alternate sources of income for physicians that can serve as another buffer in an economic downturn [25:00];
Ideally, we would have multiple income streams and could live off any given one of them.
Many physicians will leverage their medical expertise by doing medico-legal work, consulting with an insurance company, or contributing to a monetized blog or podcast.
Outside of medicine, the easiest reproducible source of income is real estate investing. Options range from publicly traded real estate investment trusts (REITs) which go up and down with the stock market to rental property. In between those extremes, if you're an accredited investor, you could invest in a real estate syndication or fund.
"It makes sense to carry debt at 2-3% and invest and make money at 7-10%."
Advantages and disadvantages of federal student loans [29:30];
The upside of government loans became clear on March 13th, 2020 when President Trump froze interest accrual on federal student loans as part his national emergency declaration.
Further, the CARES act provided that if you have federal student loans, you don’t have to make payments on them and no interest accrues between now and September 30, 2020.
With student loans, there are also income-driven repayment programs (where the payments go down if your income decreases) as well as forgiveness programs.
Disadvantages of government student loans: the interest rates are often higher than for loans in the private sector. So you should refinance them when you can and pay them off as soon as possible.
In general, Jim recommends that people try to be out of student loan debt 5 years out of residency (or school for non-physicians).
What we should do with leftover money, once we’ve fully funded our emergency cushion, 401k and backdoor Roth IRA and contributed to our 529 [34:10];
This is the position we’d hope all doctors would be in.
As soon as you’ve taken care of business and put 20% of your gross income toward retirement, you can spend the rest. And have fun with it! (Alternatively, you can start paying down your mortgage or contribute to a taxable investment account.)
How to handle discretionary spending and the conflict that can arise when there’s spousal income inequality [36:00];
Jim believes that when you get married, you set yourself up for success by treating your finances jointly, as “our money”, “our income”, “our debt”, “our spending”.
Why having a no-questions-asked allowance can help your marriage [39:50];
By giving each other a sum of money (within your budget/plan) that you’re not accountable to the other person for, it removes any negative energy around questioning each other's expenditures.
"Be generally frugal but selectively extravagant."
The wisdom of this advice: “Be generally frugal, but selectively extravagant” [42:15];
In his interview with Tim Ferriss, Ramit Sethi suggested that people spend without limit or question on the one or two things that bring them the most joy. Link to interview.
What physicians should do if they’ve lost their job, but are still several years away from retirement [46:00];
About 25% of physicians in their 60s are not yet millionaires. This takes into consideration all savings accounts, investments, home equity, cars, etc.
If you lose your job and do not have enough assets to live off of for the rest of your life, then your first priority is to get another source of income. In the meantime, you’re in damage control mode and need to try to cut spending and halt investment contributions.
How we can help our retired parents who may have lost their nest egg in the stock market [48:50];
First, see if their investment plan was reasonable for somebody their age. If the plan was not reasonable, then it needs to be fixed.
If their plan was reasonable and they lost money in the stock market but not enough to impact how they do going forward, then encourage them to take a long-term perspective. Help them rebalance their accounts as needed to keep with their original balanced goals.
The cost of health insurance and how it might be more expensive than you think [52:50];
Why renting your home to your business might be more than hoodwinkery [54:20]
The law states that you can rent your home to your business, and if you do it for fewer than 15 days per year then it can be a business deduction and is not taxable income.
This is a much better deduction than the home office deduction will ever be. (Home office deduction = square footage of office space x $5)
The best financial mindset in an economic downturn is to take a long-term perspective and know that this too shall pass. [58:20]; and
Shownotes by Melissa Orman, MD