Jim Dahle: 'Income Is Not Wealth'
The 'White Coat Investor' discusses how high earners can avoid lifestyle creep and why a minimalist approach to investing is best.
Our guest on the podcast today is Jim Dahle, also known as The White Coat Investor. A practicing board-certified emergency physician, Jim also focuses on helping other healthcare professionals get smarter about managing their money. He founded the White Coat Investor website in 2011 and it rapidly grew into the most widely read physician-specific website in the world. Jim's first book, The White Coat Investor: A Doctor's Guide to Personal Finance and Investing came out in 2014. The White Coat Investor's Financial Boot Camp: A 12 Step High-Yield Guide to Bring Your Finances Up to Speed was released in February 2019. In addition, Jim has a podcast and videocast, online courses, and runs a live conference. Jim earned his Bachelor of Science degree in molecular biology from Brigham Young University and then attended the University of Utah School of Medicine. He trained at the University of Arizona Emergency Medicine Residency Program and then served four years with the Air Force and the Navy.
“Physician Debt and Net Worth Report 2016,” Medscape.com, April 20, 2016.
“The Physician Net Worth Rule Part 2,” by Jim Dahle, whitecoatinvestor.com, Nov. 10, 2011.
“The Right Way to Use Debt in Medical School,” by Jim Dahle, whitecoatinvestor.com, Aug. 24, 2020.
“Financial Burdens and Physician Burnout,” by Jimmy Turner (The Physician Philosopher), Thephysicianphilospher.com, Nov. 13, 2019.
“7 Ways to Reduce Medical School Debt,” by Ken Budd, aamc.org, Oct. 9, 2018.
“5 Financial Planning Tips Every Young Physician Should Know,” by Michael Winters, ama.org, May 10, 2016.
The Millionaire Next Door: The Surprising Secrets of America’s Wealthy, by ThomasJ. Stanley and William D. Danko, Amazon.com, Nov. 16, 2010.
Finding a Financial Advisor
“How to Find a Good Financial Advisor at a Fair Price,” by Jim Dahle, whitecoatinvestor.com, March 8, 2019.
“The Perfect Financial Advisor,” by Jim Dahle, whitecoatinvestor.com, May 18, 2015.
“How to Tell a Good Financial Advisor From the Rest,” by Jimmy Turner (The Physician Philosopher), whitecoatinvestor.com, Aug. 10, 2019.
“What you Need to Know About Financial Advisers,” by Jim Dahle, whitecoatinvestor.com.
Asset Allocation and Portfolio Management
“150 Portfolios Better Than Yours,” by Jim Dahle, whitecoatinvestor.com, Jan. 21, 2020.
“Rules for Asset Allocation Implementation,” by Jim Dahle, whitecoatinvestor.com, Oct. 28, 2019.
“Three-Fund Portfolio,” Bogleheads.org.
The Bogleheads’ Guide to the Three-Fund Portfolio: How a Simple Portfolio of Three Total Market Index Funds Outperforms Most Investors With Less Risk, by Taylor Larimore, July 3, 2018.
“Review of Bogleheads Guide to the Three Fund Portfolio,” by Jim Dahle, whitecoatinvestor.com, Aug. 3, 2018.
“Top 10 Things Bogleheads Get Wrong,” by Jim Dahle, whitecoatinvestor.com, June 19, 2020.
“Investing in Retirement,” by Jim Dahle, whitecoatinvestor.com, July 21, 2015.
The Bogleheads’ Guide to Retirement Planning, by Taylor Larimore, Mel Lindauer, Laura F. Dogu, and Richard A. Ferri, Feb. 22, 2011.
“Cracking the Nest Egg--Decumulation Strategies in Retirement,” by Jim Dahle, whitecoatinvestor.com, May 30, 2014.
“Long Term Care Insurance,” by Jim Dahle, whitecoatinvestor.com, Sept. 6, 2013.
“The Best Ways To Use an HSA,” by Jim Dahle, whitecoatinvestor.com, Dec. 10, 2019.
“7 Reasons an HSA Should be Your Favorite Investing Account,” by Jim Dahle, whitecoatinvestor.com, Jan. 18, 2019.
“The Four Keys to Health Care Reform,” by Jim Dahle, whitecoatinvestor.com, Sept. 28, 2018.
Christine Benz: Hi, I'm Christine Benz, director of personal finance for Morningstar.
Jeff Ptak: And I'm Jeff Ptak, global director of manager research for Morningstar Research Services.
Benz: Our guest on the podcast today is Jim Dahle, also known as “The White Coat Investor.” A practicing board-certified emergency physician, Jim also focuses on helping other healthcare professionals get smarter about managing their money. He founded the White Coat Investor website in 2011 and it rapidly grew into the most widely read physician-specific website in the world. Jim's first book, The White Coat Investor: A Doctor's Guide to Personal Finance and Investing came out in 2014. The White Coat Investor's Financial Boot Camp: A 12 Step High-Yield Guide to Bring Your Finances Up to Speed was released in February 2019. In addition, Jim has a podcast and videocast, online courses, and runs a live conference. Jim earned his Bachelor of Science degree in molecular biology from Brigham Young University and then attended the University of Utah School of Medicine. He trained at the University of Arizona Emergency Medicine Residency Program and then served four years with the Air Force and the Navy.
Jim, Welcome to The Long View.
Jim Dahle: Thank you. It's wonderful to be here.
Benz: Thanks for being here. You're a practicing physician. And before we get into your work on White Coat Investor, let's discuss how the pandemic has affected that part of your life.
Dahle: At first, it was pretty dramatic in that nobody came to the hospital. People with strokes and heart attacks decided to stay home. The first effect we saw was that nobody came in, and our Emergency Department volumes dropped to almost nothing and we were all very bored at work. At this point in the pandemic, our volumes have certainly recovered. And, of course, we're seeing COVID patients as well. Shifts are now a little bit busier than average. But we're still doing OK here in Utah. We haven't had the overwhelming situation that has occurred in some other states.
Benz: How have you been with respect to some of the safety equipment where we've been hearing that there have been shortages?
Dahle: In a lot of ways, we are really, really lucky in Utah. Utah was not the epicenter at the beginning. It still is not. And so we had time to prepare. We had time to make sure our Emergency Departments and our ICUs were ready; had time to acquire all the necessary PPE. And while I don't know that I will ever throw away an N95 mask that is still functional again, we certainly have not had a period of time where I did not have adequate protective equipment to do my job. I'm very pleased for that.
I'm also pleased as we're starting to see the numbers trend downward in our state, to see our state, despite being quite a red state, just not to see the opposition to public health measures that we've seen in some of the other states. Despite it not being mandated here, at least on a statewide level, people seem to be doing the right thing here more than maybe in some states, and we're grateful for it as healthcare professionals.
Ptak: It's a bit off topic, but I'm curious how the treatment regimen for COVID has changed over the past five months or so. What have you witnessed?
Dahle: I think the treatments we have simply aren't that many of them, and so a lot of it is supportive care. It's oxygen and placing people on monitors, ventilating them as necessary. Just about everybody is getting steroids at this point. The truly sick ones are starting to get some of the antivirals. We're not using a lot of chloroquine in our hospital. But as you know, if you follow the news, it's a highly debated treatment regimen. I'm not sure we've heard the final word on that. But for the most part, it's still supportive care and trying to develop a vaccine as quickly as possible.
Benz: We want to get into your work on White Coat Investor. And let's start with the origin story. The impetus behind White Coat Investor was that you felt you were getting ripped off by the financial-services industry personally. You have a long discussion of that experience on your website. But can you give us the capsule summary?
Dahle: Sure. I think that sense of feeling ripped off is what drove me to become educated on these topics in the first place. I really didn't have any interest in personal finance or investing as an undergraduate in medical school, or even the first half of residency. But after I looked back and realized that every interaction I've had with a financial professional, whether it was a recruiter, a realtor or a mortgage lender, an insurance agent, or a financial advisor, really did not go well for me. I told myself I needed to learn this stuff or I was just going to keep getting taken advantage of over and over again. The fun part is, I learned that I loved it and I loved it just as much as medicine. I found it fascinating and like to read about it. And so I started reading about it. I read all kinds of books. I spent a lot of time on Internet forums and over the years found I was helping more than I was learning and realized that nobody was teaching this to doctors.
It was probably six or seven years after I first realized I was being ripped off before I started the White Coat Investor in May of 2011. And the goal there was to help doctors and other high-income professionals get a fair shake on Wall Street. They simply are not, or at least were not at that time, being taught anything about finance, investing, business in medical or dental schools or in residencies. It was really easy to just give them the very high-yield information, which with the incomes that they were able to command coming out of their training, could make a difference of millions of dollars in their lives. It was wonderful to be able to help these doctors to then refocus their lives on their families, on their own wellness, and, in turn, on their patients. I'm convinced that a financially secure doctor is a better doctor that provides better patient care, has fewer conflicts of interest, and can really help patients more than a doctor who is constantly stressed by student loans and bad investments.
Ptak: For those listeners who maybe are less familiar with the journey that you took, you mentioned before that you felt like you were getting ripped off. Can you put that into tangible terms? Being overcharged, an advisor who is over-transacting, maybe professing to be a stock jockey? What were those sorts of things that you encountered that you found distasteful?
Dahle: When you look back, none of it was truly illegal. When you use the term ripped off or a scam, we're usually talking about something that was illegal. But what I ran into was just par for the course, just the way the financial-services industry worked, which was in such a contrast from medicine, where everybody stands up and swears a Hippocratic oath at the end of school that they'll put the patient before them. But as an example, I was a second-year medical student and I was sold a whole-life insurance policy. I didn't even have an income. And what would have been appropriate for me perhaps, given that I was married at the time, was a large term-life policy rather than a small whole-life policy. Not only did I have the wrong kind of insurance, but I didn't have enough of it. That was just one example.
Benz: Talking about your journey to learn and inform yourself, what were some of your go-to resources in your early days of building out your information set and getting more empowered about this whole area?
Dahle: I was lucky that I lived across the street from a used bookstore in Tucson. I'd go over there to the financial books section, and I pretty much read all the books there. I'd buy them for $2 or $3 apiece and take them out and read them. And I read a lot of terrible financial books. But after a while I found a few good books and it turned out that all the good books kind of said the same things: keep your costs low, diversify widely, use index funds when possible, don't try to time the market. And as I incorporated that and thought about it and applied it to the financial life of a doctor, I think that was really why the White Coat Investor ended up taking off was that I was able to merge those two worlds of medicine and finance in a way that people really hadn't seen before. It's not that any of the information was particularly new or had not been out there; it just had not been applied to this audience before.
Other resources online included the Bogleheads® Forum. I've been a member of that for a long, long time. I think at one point I was the eighth most prolific poster on the forum. There were finance forums on various doctor forums such as the Student Doctor Network or Sermo.com. I found myself spending time in there interacting with others, learning from them, and teaching them. And I think those were probably the main resources prior to 2011. I wasn't listening to a bunch of podcasts before then, or anything like that, but mostly self-taught, interacting with others. And the nice thing about the forum format is that if you put a dumb idea out there, someone will call it dumb and tell you why it's dumb and you can argue about it for a while and it helps you really fine-tune your ideas.
Ptak: How important do you think your training as a physician was to the process by which you determine what was and what was not a useful resource to consider as you embarked on your investing journey? That's in practice a really, really hard thing, I think, for many investors to do to separate the wheat from the chaff. Do you think that the training that you went through and a more methodical mindset that was inculcated into you was important in your development as an investor?
Dahle: I do think so. I think it made me much more focused not only on finding evidence, but the quality of the evidence. There's a big trend that's been in medicine really for 20 years or so called evidence-based medicine. And you pore over these scientific papers and really dissect them, not only for what the message of the paper is, but the methods and the weaknesses of what the study was. And at the end of the day, you not only come out with the conclusion, but how strongly you should believe in the conclusion based on the quality of the evidence. I think I was able to apply that in finance in a way that was useful to me as well as other investors in that I understood when I was looking at something that yes, it was evidence, but it wasn't very good evidence and maybe I shouldn't believe it that much.
Benz: We want to talk a bit about the personal finance challenges and opportunities that physicians face. But before we get into those, would you say that a lot of what you discuss on the White Coat Investor is applicable to higher-income individuals across professions? It's not just relevant for doctors?
Dahle: Absolutely. I mean, let's be honest. Ninety-five percent of personal finance and investing is applicable to everybody. And probably 99% of what I do is applicable to all high-income professionals. Very little of it is actually doctor specific. But there are a few unique things about doctors: some asset-protection concerns, some student loan management issues, some retirement account issues. But for the most part, particularly the investing part, it's the same for other similar professions.
Ptak: On the White Coat Investor site you share statistics from a 2016 survey that one out of nine physicians in their 60s has a net worth under $500,000, and about one out of four has a net worth under $1 million despite 30 years of good paychecks. What are the key factors that impede them in your view?
Dahle: I think there are a few important factors. The first one is the same one that everybody deals with no matter what your profession or your status in life: we all tend to spend all of the money we make, and doctors are no different in that respect. In fact, they might be even worse at it because they feel the societal pressure to spend and feel like they're supposed to be rich and spend like the rich. Also, they have this pent-up demand after they spend a decade or a decade-and-a-half deferring gratification while they're in training. So, that's probably the most important factor.
Beyond that, there's a couple of other factors that really contribute to these doctors that end up really not doing well financially, being dramatic in the words of Stanley and Danko (authors of The Millionaire Next Door): under-accumulators of wealth. And I think the first one is the cost of education. A lot of people are borrowing an insane amount of money to become a doctor, and at a certain debt-to-income ratio, it becomes not a good investment. If you don't manage those student loans well, both in school and once you get out of school, I think that's a big factor that holds people back for many, many years, and sometimes their entire career. And then, sometimes bad things happen to people. You have a divorce, you end up losing a job, or you become unemployable for some reason and something happens to that income stream and they are not able to maintain that income for a 20 or 30-year period required to really build wealth. And then, of course, sometimes people just make bad investment decisions. Selling low at a market bottom in your 50s can be an unrecoverable event. Bad investments combined with high fees from advisors sometimes, combined with the high cost of getting into the field, divorces, etcetera. But probably, the main thing is they just spend too much money quite honestly.
Benz: How do you coach doctors on getting over that desire to overspend? Because as you say, there are some forces working against that where people have this pent-up demand. They have high incomes, so they might naturally think that they should grow into those higher incomes with their spending. How do you counsel people to make better decisions on that front?
Dahle: I think the first thing is they have to understand the concept that income is not wealth. Doctors have a high income, but when they come out of residency, they are among the poorest people on the planet as far as wealth goes. Most of them come out of their residency owing $200,000 or $300,000. They have a negative net worth. In that respect, they are poorer than even someone living under the aqueduct with nothing. And once they understand that concept, I think the rest kind of follows. They realize, “Oh, the whole point of this financial game is taking my high income and turning it into a high net worth.” And once that mindset changes, I think they're much more likely to be successful.
The other thing is, I give them some guidelines. I tell them, you know what you really need to be saving 20% of your gross income for retirement. And if someone will do that from the beginning to their career to the end, they will be able to maintain the same lifestyle they had throughout their career. But it really is that simple. Get rid of the student loans relatively early in your career. I tell them to keep living like a resident even while they have an attending physician salary for two to five years. Keep saving 20% or so of your gross income for retirement and don't make any big huge mistakes with it. In a lot of ways, they've already won the game. A lot of people, probably the majority of people across America, their biggest issue is their income isn't high enough to really build a lot of wealth. That's not the case for doctors. And so, they just need to deal with a few minor issues and fix those and they should be able to build significant amounts of wealth during their career.
Ptak: The average amount of medical school debt carried by new doctors has modulated a bit over the past decade. It was close to $200,000 as of 2017, and many doctors have much more debt than that. I think you've already alluded to that. Are there any hacks that medical students can use to avoid emerging from school without these enormous debt loads?
Dahle: Yes, I do think there's some hacks, but I think it's important to point out an important aspect when you talk about this statistic, this average debt coming out of medical school. Because we hear about this average, and I think it's $205,000 or something right now for MD students and $240,000 or $250,000 for DO students and perhaps $275,000 for dental students. But the truth is, there are more people graduating from medical school and dental school right now debt free than at any time in the last 30 or 40 or 50 years. With the averages going up and yet more people coming out debt free, that tells you that on the other end there are some people with these massive amounts of student loans.
For instance, I had an email yesterday from a doctor who's making about $102,000 as a general dentist and has $850,000 in student loans. We're seeing a lot more of these outlier cases where doctors are owing $300,000, $400,000, $500,000, $600,000 in student loans. I think it's important that while those are averages--and those averages are honestly pretty doable. On an average doctor's salary and an average amount of loans, you can pay that back and have a very nice financial life. But if you're in the lower quartile for income, highest quartile for debt, you may have some really significant financial problems overcoming that. I think that's probably one thing to realize is try to avoid being in that situation.
But as far as hacks, perhaps the most interesting one I saw came from a doctor who ended up paying off her student loans actually during her residency. And one of the hacks she did during medical school—she’d had a prior career and has had a substantial amount of credit available to her--but she actually took out 0% credit cards for 15 months and put her living expenses and tuition on those. And until the 0% period ran out 15 months later, she didn't take out student loans. So, it was really about a 15-month delay before her interest started accumulating on her student loans, which I thought was a pretty ingenious little hack. But the main hack is just spend as little as you have to. Go to the cheapest school you can get into. If you're single, get roommates. If you're married or have a partner, try to have your partner have a job to help cover some of the living expenses during school--the usual. Try little frugal stuff that you read about on any sort of financial blog.
Benz: To what extent do these loans that some doctors emerge from school with influence their choices, the positions that they take? Do you think that there are some choices that people make because of the headwind of these enormous borrowing costs?
Dahle: Yes, I think so. I think at a certain amount of debt a few specialties are simply eliminated from consideration. They simply do not pay enough money in order to pay off massive amounts of student loans. And so, I think there is an influence there. When they study this question, and they have studied this question, it does have an influence on the specialties that medical students choose to go into. And I think that's sad. I'd love to be able to see them choose a specialty solely, 100% solely based on their interest and where they think they can make the biggest contribution. And I think for the most part, that's still the primary consideration. I do worry about those who 100% make that decision based on where they think they can help the most despite being in a terrible student loan situation; maybe they shouldn't. Maybe there's a few people out there that ought to give a little more credence to financial factors when choosing a specialty. But for the most part, I don't think it's a huge problem. I think most people are choosing a specialty still based on interest and aptitude rather than the financial factors. It should be a factor; it probably shouldn't be in the top-three most important factors for choosing a specialty.
Ptak: Maybe a financial choice though that they face, and I think one that you've written about before, is homeownership. I think that you stated that one of the biggest mistakes you made early in your financial life was buying a home. And you tend not to be a big fan of homeownership overall for doctors just starting out in their professional lives. Is that still the case with interest rates as low as they are today?
Dahle: I think a little bit more nuanced probably ought to be explained on that point. What I tend to tell people is to not buy a house during residency. And the reason why is most residencies are three or four years long and three or four years just isn't enough time for the appreciation of the home to overcome the transaction costs of buying and selling it, not to mention residency is an incredibly busy time where you're working 80 hours a week--really don't have time to be maintaining a home either. And so, I ask people to have their default choice at least during residency be to rent a home. But I am not against homeownership. I think homeownership is great. If you're going to be in a home five-plus years, it is almost surely going to be a blessing in your life and not a curse to own it overall.
I'm a big fan of ownership, not only of your home, but of your practice when it makes sense to do so. But I've run into this strange phenomenon among graduating medical and dental students that they think the act of buying a home somehow means they've made it. And it's especially bad if they come out of their training and buy the big doctor home, despite having a net worth of negative $200,000 or $300,000, all of a sudden they picked up a mortgage of $500,000 or $600,000 or $700,000 that they really can't build wealth and pay off their student loans and cover that mortgage with. And so, I ask them to grow slowly into their income, to maybe rent until they know their job is going to be a long-term job, until their personal and professional situations are stable. But yes, if they're going to be someplace long term, I think they ought to buy a home. I think it's a great way to help build wealth, but I don't think it should be your primary method of building wealth.
Benz: We often hear these stereotypes about how people in a certain profession invest. Airline pilots like risk, for example, and so on. Are there any such stereotypes about how doctors invest their money, and if so, do you think there's any truth to them?
Dahle: Well, I think the stereotype is that there are some deals that are so bad they can only be sold to a doctor. And I think that's basically a commentary on the fact that most doctors are not financially literate. So, they qualify as accredited investors by virtue of their income. They make $200,000 or more a year, and so they qualify for all kinds of investments that may not necessarily be regulated as much as publicly traded stocks and bonds and mutual funds. Doctors oftentimes get sucked into these investments because people know they have money, and they come to them and try to raise money for investments that really maybe shouldn't be invested in at all, and certainly should not be invested in unless those risks can be diversified away. I think the classic example for doctor investments tends to be investing in a brother-in-law's business or somebody's startup that walked up to you, or some real estate deal that goes bad rather than a diversified well-thought-out plan of investing across the spectrum of reasonable asset classes.
Ptak: You offer a course called "Fire Your Financial Advisor," which aims to teach people who buy the course how to manage their own money. But one question that comes to mind is whether doctors really have the time to be their own financial advisors and more important, to ascend the learning curve to get there. What do you say to that?
Dahle: It's interesting. When I came out with that course and we tried to come up with a catchy title and picked that one deliberately knowing it was going to be kind of provocative. And a lot of the advertisers on my website that happened to be financial advisors were not super thrilled with our choice of a title for that course. But the truth is, the first module in that course teaches you how to interact with the financial-services industry, how to choose an advisor, how to know you're getting good advice at a fair price. And the truth is, I think about 80% of doctors want and need a good financial advisor. I'm not anti-financial advisor. I just recommend they ensure they're getting good advice at a fair price. It's amazing--when you ask a group of doctors what is a fair price for financial advice, none of them know. No one has ever told them the going rate for financial advice. It's helpful to explain what good financial advice looks like, explain the various ways you can pay for it, explain what a fair price is and is not for financial advice. I think that one of the biggest services I do to the physician community honestly is connecting them with the good guys and gals in the business.
Benz: We want to talk a little bit more about how to find a financial advisor. But before we get into that, how would the 80% who do need an advisor know who they are relative to the people who could maybe do this on their own? What are the characteristics that would split the two groups?
Dahle: I think of a good analogy is like a trip I took on Monday. On Monday, I went white-water rafting on the Colorado River, and this is a trip I put together. I went out and bought the boat and I bought the things I needed for it: oars and frame and life jackets and all those things. I bought a map for the river and studied YouTube videos of people going through the various rapids. I got the permit. I arranged for the shuttle to move the cars from the top of the river to the bottom. And I assembled a group of people with appropriate skills in order to go down with us. And that's the do-it-yourself mentality. On the other hand, while we were floating down the river, I ran into a group from Miami who had hired a guide service who had arranged for the permit and arranged for the shuttle, and obviously had their own boats and equipment and the expertise of the guide and all they had to do was show up and get in the boat and ride down the river. And I think that's the way people are divided in our society.
There are some people that are just very much do-it-yourselfers--hobbyists that find something very interesting and honestly would not be happy if they were not rowing their own boat down the river. And likewise, in financial services, there are some of us who are hobbyists that would not be happy if we were not managing our own investments. And we're interested enough in it that we can develop the knowledge and develop the discipline that we need to be successful at it. If that describes you, if you're the kind of person that would hate to pay $5,000 or $6,000 or $7,000 a year to somebody else to manage your investments and to draft up your financial plan, and you can sit down and write your own financial plan, you are not going to be happy with a financial advisor. On the other hand, if it is pulling teeth to get you to read a financial book and you are terrified of what might happen if you were managing your own investments, what you need to do is to get a financial advisor that will give you good advice and good service at a fair price. And that's perfectly fine. Both are perfectly legitimate ways to manage your money and perfectly legitimate ways to run a river. But you need to pick the one that fits you.
Ptak: Do you find that physicians tend to overrate their readiness to do for themselves?
Dahle: I actually see the opposite. I think their confidence follows their knowledge base by about a year. And so, I run into a lot of people who obviously know a great deal about investing but they're still a little bit unsure. And I tell them, you know, a year or two from now, you're going to look back and wonder that there was ever a time that you worried about this issue. And so, despite this reputation that doctors have, particularly surgeons, for being overconfident and thinking their knowledge in one field overlaps into other fields, I'd say the opposite is true, at least as much of the time. And so, I think it really varies by the individual. Obviously, you don't want to be overconfident about anything and get yourself into trouble. But at the same time, you’ve got to realize that a lot of managing your own portfolio is not necessarily rocket science.
Ptak: Financial advice is getting cheaper--for example, robo-advisors and some of the hybrid robo-human advisor services. Are you encouraged by those cost trends? And then more generally reflecting on the experience that you've had, observing the advice industry and being a participant in it, I suppose one could say, are you encouraged by the standards that have developed in that industry? Do you think it's healthier now?
Dahle: I do think it's healthier. I think the trends are going the right way for the most part. I like seeing this movement from commission sales to fee-only advising and now from AUM fees to hourly rates and annual retainer kind of models for charging for financial advice. I think that's a healthy movement.
I think the overall trend of seeing fees come down is also very encouraging. But I think the devil is in the details. You got to really get into the details. For example, robo-advisors--it's a fantastic idea. Let's automate as much as we can. But I occasionally have a doctor come to me and ask, “Hey, should I do this robo-advisor thing?” And the problem is, I think there is a very small sliver of the population of my readers for whom robo-advisors are right. I just think it's not that big of a step to go from using a robo-advisor to managing your own portfolio. And when you add in the problem that a robo-advisor typically won't manage all of your investment accounts--for example, they won't look at your 401(k), they'll just manage your IRA and your taxable account--I figure, well, if you've got to hire an advisor to help you with your 401(k), then you might as well have the advisor do everything. If you can do your 401(k) yourself, well, why can't you do your Roth IRA yourself? I think it's really appropriate for a relatively small percentage of my readership, maybe residents that just have their only investing account in a Roth IRA, it might be appropriate, for example.
But for the most part, I think doctors' financial lives are probably a little bit too complicated for a robo-advisor to handle on the investment management side. And on the personal finance side, you're getting almost no doctor-specific advice. Nobody is going to help you manage your student loans properly. Nobody is going to help you with your cash flow needs. Nobody is going to help you with your asset-protection concerns. And so, I think at a certain point if you need the advice, you probably need more of a full-service advisor than what you're going to be able to get from the typical robo-advisors out there.
Benz: Do you think that the financial-services industry has emphasized the investment planning piece at the expense of the personal finance or financial-planning piece? And do you see that changing at all? Do you think that financial-planning piece is getting greater emphasis these days?
Dahle: I don't know if it's getting greater emphasis or not. Certainly, the investment management is the easier part to deliver; it's the easier part to automate. It is the easier part to scale. But the real value in going to an advisor is actually the financial-planning piece, and that's probably where the biggest difference is made in people's lives, particularly lives of a high earner like a physician. It's just very interesting that people are willing to pay for investment management, but they're not willing to pay for financial planning, despite all of those factors. A lot of times advisors have found they have to charge for the investment management and throw in the financial planning for free in order to get people to hire them, which I think is a shame. I try to get people to really value the financial-planning portion and be willing to pay for it. In return, I think they get a lot better financial advice, both on the personal finance side as well as the investment management side.
Ptak: Let's imagine that there's an investor, let's say, it's a physician that has solicited advice. Maybe he's auditioning three different financial advisors. They all produce plans. And they come to you and they say, “OK, I've got these plans.” The investment management piece of it seems commoditized. I'm not going to focus too much on that. It's really the plan I'm interested in. How do I know which of these three is the best one for me? How would you advise that person if they came to you?
Dahle: I think I would probably start with just looking through it for red flags. For the most part, now there are resources out there that are relatively free, such as my website and books and those sorts of things that will point out the red flags in the financial world. For example, if you're a new graduate from residency and your financial advisor is recommending you put $30,000 or $40,000 or $50,000 a year into whole-life insurance, that's probably a big red flag. If your financial plan includes something like that, I think that ought to be a big tipoff that this might not be the best plan for you.
Other things I think are some of the methods of managing your student loans. For instance, if you were working for a 501(c)(3) and otherwise going to qualify for public service loan forgiveness, and this plan is giving obviously bad advice, like refinancing your loans so that you wouldn't be able to go for public service loan forgiveness, that would be a big red flag. But I think at that point when you know you're getting a fair price and they have put together a plan that seems appropriate to you, I think at this point it comes down to fit with the financial advisor. The idea here is that this is going to be a long-term relationship. You want someone that you're actually excited to see once a quarter and that you feel has your best interest at heart. And a lot of times it’s just a simple gut check. If it doesn't feel right, it's probably not the right person for you.
Benz: When it comes to portfolio management, you're a Boglehead, as you said, you like to keep things simple and you like to focus on index funds. What about index funds resonated with you? Was it simply the evidence-based focus that you already talked about?
Dahle: I think a lot of it came out in the writings of John Bogle, William Bernstein, Rick Ferri, Larry Swedroe. I read these books and time and time again the evidence showed that index funds were outperforming depending on the timeline 70%, 80%, 90% of actively managed funds. And I looked at myself and said, “Self, what makes you think you're in the 10% that can pick the winners?” Number one. And number two, “If you can't even pick a winning manager, what makes you think you can be a winning manager yourself picking individual stocks?” When I realized that you could get exposure to these asset classes, to U.S. stocks and international stocks and bonds and real estate and so on and so forth, through index funds for essentially free--2, 3, 4, 5 basis points a year for these mutual funds, you never had to worry about manager risk--you didn't have to really follow the investments because you knew that they were going to perform as well as the asset class performed. And you could then concentrate on the other things in your life that you cared about, whether it was your hobbies or whether it was your practice, your family, or whatever. I found that very attractive.
The other thing I realized early on was that my crystal ball was very cloudy. I needed a plan that would not require me to be able to predict the future because I realized early on that my ability to predict the future was very limited. And anybody who thinks they can do this I think should try an exercise where they take a notebook and they write down what they think is going to happen--which asset classes are going to outperform, which stocks are going to do well, what interest rates are going to do, what's going to happen in the political sphere, etc. I think after a year or two of doing this, you will convince yourself that your crystal ball is also very cloudy and that you really need something that's going to work in a wide range of future economic outcomes and not require you to be able to predict the future in order to be successful. I think that's really why I found the idea of investing in a static asset allocation of low-cost, broadly diversified index funds was a very attractive way to invest. It is highly unlikely to be unsuccessful over the long term. If I can stick with the plan and stay disciplined with it, each of those asset classes are going to have their day in the sun.
Ptak: So, the corollary to that is that when--and I would imagine you did read some of these texts, Buffett's letters, Peter Lynch's books, Hedge Fund Market Wizards, just to give examples of managers that have been quite, quite successful--you read those and you came to the conclusion that while maybe it worked for them, it wasn't right for you. How did you come to that conclusion?
Dahle: Mostly, I listen to their advice. If you ask Warren Buffett how he thinks a typical person should invest, he will tell you: go buy index funds. I tried to do what they said, not necessarily what they did, because I saw that they had a different skill set than I did. And the reason we know these names and we use these names over and over and over for decades is because they were so successful and so unique. But the question isn't what about Warren Buffett. It's why aren't there more Warren Buffetts? Because, statistically, there should be a lot more than they are, even with random chance. I think, when I realized that, I realized that I make enough money that if I just save a decent portion of it, and I invest it in some reasonable way, I'm going to have more money than I ever need to spend, and I'm going to be able to use the excess to benefit my heirs and my favorite charities. I don't need to crush the market in order to meet my financial goals. I already have a high income and the ability to have a high savings rate. I need an investment plan that's highly likely to work, that is unlikely to blow up, and that is relatively easy for me to follow for decades. And that's what I found with a Boglehead-style portfolio.
Benz: You're a proponent of maintaining a fixed asset allocation as opposed to one that changes on the road to one's goal. But that runs counter to conventional asset-allocation prescription where you take on less risk as you age. Can you discuss your thinking on maintaining that static asset allocation?
Dahle: When I talk about a static asset allocation, I'm mostly not referring to that aspect of making it less risky as you approach retirement, and I actually think it's probably a good idea to reduce your sequence-of-returns risk within the first five years of retirement and maybe the last five years of your career. I think that's probably a good idea and probably a wise thing to do.
When I say I prefer a static asset allocation, what I'm talking about is not using a tactical asset allocation, not looking at current market events, putting your finger up into the political winds and trying to decide which is going to outperform over the next year or five years or 10 years. I really have no idea whatsoever whether U.S. stocks are going to beat international stocks this year. I really don't know. I try to use an asset allocation that doesn't require me to know that. I set these percentages back when my wife and I drafted up our financial plan in 2004 and wrote out what our asset allocation was going to be--we set fixed percentages for U.S. stocks and international stocks. In some years, international stocks do better, and we end up selling some international stocks and buying more U.S. stocks. Other years, the U.S. stocks do better, and we do the opposite. But what that allows me to do is not have to know what the future holds in advance in order to be successful. By owning all of these asset classes, I'm going to own them when they have their day in the sun and over the long run it's all going to even out. Whereas I think if I was trying to predict the future, if I was trying to move these asset allocations around based on what I thought was going to do well over the next short term, what I was much more likely to do, I felt, was to chase performance and end up buying high and selling low repeatedly between these asset classes. It just seemed much wiser to me to set it up as a static asset allocation from the beginning and rebalance back once a year or every couple of years, or whatever, back to that static asset allocation. But as far as over the years reducing risk, particularly around the time of retirement, I'm certainly not against that. I think that's probably a wise move for the vast majority of investors.
Ptak: I suppose a unique issue, maybe not a unique issue, but a remarkable issue that some subscribers to the approach that you just describe--which is having a relatively static asset allocation, not trying to guess about asset class returns in the future--is that U.S. stocks and bonds have done quite well and valuations are high, yields are very, very low. I suppose as we gaze forward you would legitimately raise questions about what the potential return of the traditional U.S. 60/40 portfolio would be. Do you think it behooves investors who maybe in the past were more prone to just going with that 60/40 to be asking themselves, “Maybe we should be inching up the international equity exposure; perhaps we should be owning more equity than we did before just because fixed income has so little to offer right now?”
Dahle: I think it's absolutely fascinating to talk about. If I had to put money down in Vegas on whether I thought international stocks and small-value stocks were going to outperform U.S. large-growth stocks over the next decade, I certainly would bet that way. But I think it's important to divorce how you feel about the market from what you actually do with your investments, and to be very, very rational and very intentional and stay the course with your financial plan when it comes to actually doing things with your investments. And I'll give you an example why.
If you go back to Internet forums and you go back to financial publications in 2010, you will see that people were saying, “Get out of bonds, they're going to have terrible returns; interest rates have nowhere to go but up.” And that has basically been the tune for the last decade. Meanwhile, what has happened? Well, interest rates have stayed low. They've even fallen. Bonds have had excellent returns over the last decade, and it's one of those things that everyone felt had to be true that turned out not to be true, and I kind of feel the same way today. Yes, I expect that international stocks are going to outperform U.S. stocks, but the market can remain irrational for longer than I can remain solvent. I think the most important thing about a plan, especially if you have written up a reasonable plan, is to stick with it through thick and thin, because there are going to be times where you feel like this can't possibly happen, and then it happens again and again and again for several more years. And you want to be able to make sure that you get those gains when that does happen even though you didn't expect the gains.
Benz: Speaking of low yields, spending from a portfolio in retirement has gotten more complicated because of that. How would you suggest a DIY White Coat Investor who is about to retire approached-retirement decumulation? How would you counsel them to think about it?
Dahle: It's interesting. You see all these safe withdrawal-rate studies out there that assume somebody takes their portfolio, takes out 4% that first year, adjusts it up to with inflation each year for 30 years and never looks at the balance. I think, practically speaking, nobody, or nearly nobody, actually does it that way. I think we all naturally do the same thing we did throughout our careers--when there was more money around, we spent a little bit more; when there was less money around, we tightened our belts a little bit and spent a little bit less. And I think that same philosophy is wisely carried into retirement. I like to call this the Taylor Larimore method of decumulation spending because this is what this prominent Boglehead says he's done over the years since he retired in something like 1980: he looked at his balance every year and got a general sense of how his portfolio had done recently and spent accordingly. Essentially, he adjusted as he went.
I think it's OK to start in the same place that these safe-withdrawal studies are suggesting you start at 3% or 4% of the portfolio and then adjust as you go along. If the sequence-of-returns risk shows up--meaning you have terrible returns your first few years of retirement--you know that you're going to need to dial things back a little bit and spend a little bit less money and be a little bit more frugal. Maybe give a little bit less, travel a little bit less, etc. On the other hand, if that risk doesn't show up, you can adjust your spending upward somewhat and be able to take advantage of that fact. Even looking at the historical data, if you followed the 4% rule, on average, you died with 2.7 times what you retired with. So, bear in mind that the safe withdrawal rules are really set up to make it through the worst-case scenarios that we've seen historically. Even if this is one of those relatively bad cases going forward, those who retire right now, you should still be OK in that direction, especially if you keep an eye on and adjust as you go.
Now, if you are on the line with your spending, if you barely have enough or maybe even a less than enough, that's when I think it can behoove you to maybe get a little bit more creative. For example, a lot of people like to put a floor under their retirement spending and Social Security puts one portion of that floor in place. But you can essentially buy a pension by buying a single premium immediate annuity and essentially, in this case, you give a lump sum of money to an insurance company and they give you back a certain payment each month, guaranteed until the day you die. It essentially functions as longevity insurance for you. If you live a long time, you know this will work out well for you. They will be paying you until the last month of your life. And the benefit of that is you can cover your fixed expenses with fixed-income sources such as that single premium immediate annuity and Social Security, and then your variable expenses can come from your portfolio with its higher volatility.
Ptak: One category of expenses that a retiree might not be able to dial back on as readily is healthcare, specifically long-term care. We wanted your take on long-term-care insurance. Higher-income people often wrestle with whether they really have enough to self-insure. They might be concerned about depleting assets for the healthier spouse. How should people approach this question in your opinion?
Dahle: I really hate long-term-care insurance, and I'll tell you why. Even now, I still don't think it's ready for prime time. If you go back 10 years and look at people that bought long-term-care insurance policies, it turned out that they weren't being charged high enough premiums for them. And the companies ended up going out of business. By the time these people needed long-term-care insurance policies, they no longer had their policy, or they were surprised by what it covered and didn't cover, so on and so forth.
The good news is, I think there's a large percentage of people that do not need long-term-care policies. It's really for a group of people in the middle range. At the lower end, when people don't have much in assets, probably their best plan is to spend down their assets and use Medicaid to pay for long-term care. At the other end of the spectrum, you have people that are fairly well-to-do with portfolios of several million dollars, and they can afford to self-insure long-term care insurance. Yes, it's expensive stuff, but when you've got a portfolio of $3 million or $4 million or $5 million, even an expensive $80,000 a year is something that you can afford to pay.
Who gets left with the decision of whether to buy long-term-care insurance? Well, it turns out to be the people in the middle, the people that are married, the people who have enough assets that spending down to Medicaid would be pretty painful, especially for the remaining spouse, but at the same time, don't have the ability to pay $60,000 or $80,000 or $100,000 a year in long-term-care expenses without depleting the portfolio very readily. Now, there's no definite definition of what that range is, but probably something in the nest-egg size of $250,000 to $1.5 million. If you're in that range, you probably do need to consider long-term-care insurance, and I wish you the best of luck in it. Do the best you can. Try to get a reputable company that's been around for a long time. Try to make sure the policy is going to cover those things that you think you would want in the event that you required long-term care and hope for the best with it. But ideally, I would love to see people accumulate enough assets so they can self-insure that risk because I just don't think it's a great insurance product yet. Hopefully, in another decade it will have had all the kinks worked out of it and it will work really well. But I would love to see people be able to avoid it if they can.
Benz: How do you feel about the hybrid-type products that combine life insurance with long-term care or in some cases an annuity with a long-term care rider? I'm guessing you don't like them much better.
Dahle: I don't like them much. In fact, I like them worse just because it's harder to tell what you're getting. And I feel that complexity is never the friend of the buyer. The actuaries that design these things, they have a pretty good idea how they're going to work out, but the buyer really doesn't. And when you start combining things, it becomes really hard to sort out the details to tell if it's really a good deal for you. To make matters worse, you may be buying something you really don't need or you don't need long term in order to get something that you do. For instance, if you need long-term-care insurance long term, you may not need life insurance long term. But if you buy a combined whole-life policy, long-term-care policy, well, you're going to be paying for both, and that's not necessarily going to be cheap. They're really hard to analyze I think particularly for the lay consumer as to whether they're getting a good deal. And for that reason, I really don't like the combined products much. I can't say for sure that there's not a person for whom they won't work out better than buying the products individually. But for the most part, I prefer keeping things as vanilla as possible. I like index funds for investments. I like single premium immediate annuities if you have a need for an annuity. I like term life insurance if you have a need for life insurance. And I think when you start combining these sorts of things into combination products, I think you end up with the financial-services industry making a lot of money and the clients not making nearly as much.
Ptak: Let's stay on healthcare. A lot of financial-planning people are very excited about health savings accounts, especially for higher-income investors who can take advantage of their good tax advantages. As a physician, how do you feel about the high-deductible plans such as HSAs accompany? Do you think they incentivize better healthcare decisions or could lead people to economize in a way that's not good for their health necessarily?
Dahle: As a general rule, I tell people, choose the health plan that's right for you. If you have a very healthy family, you don't spend a lot of money on healthcare, then a high-deductible health plan is almost surely right for you. And if you're going to use that, for heaven's sake, use the HSA. It's the best investing account out there. Triple tax-free--you get a deduction going in; it grows in a tax-protected way; when you take the money out, if you spend it on healthcare, it comes out tax-free. You can spend it on anything you want after age 65 without penalty, just paying the taxes on it. So, in that respect, it functions at least as well as a 401(k) or a traditional IRA. So, I'm a big fan of health savings accounts as an investor.
As far as a solution to our healthcare woes that we have in this country, I think maybe it's part of the solution. Anybody that thinks there's a simple solution to our healthcare problems just doesn't understand how large this problem is. As a general rule, I'm a big fan of things that increase transparency of pricing in healthcare so people can make rational economic decisions. And I'm a big fan of people having at least some skin in the game. I think people make better decisions when they're spending their own money rather than third-party money, such as that from an insurance company for somebody who's already maxed out their out-of-pocket payments. In that respect, I do like the concept of a high-deductible health plan and an HSA. But again, the devil is in the details. I think you really have to dive in before you can say it's always the best thing for anybody to use.
Benz: There's been a lot of discussion about how our U.S. healthcare system could be better, and we've seen that in stark relief during this crisis as we've seen the disadvantages of tethering our healthcare coverage to employment. If you were in charge, what are one or two reforms that you would embrace to help make the system run better for people in terms of patient outcomes?
Dahle: I think a couple of things. The first thing is people need to realize that healthcare is expensive. It's interesting if you look at people's budgets, sometimes they budget less money for healthcare than they do for their cell phone, and they need to realize that this is a major budget item. This is like your rent. This is like your food. It's not a small-budget item. And I think people have been protected from that for too long by the fact that their employers are paying 50% or 80% or 100% of their health insurance premiums and they haven't realized that it's never going to be cheap. There's highly trained people doing very high-liability work 24/7, 365, using very expensive technologies. Healthcare is never going to be cheap. And so, I think that mindset change needs to take place, that we need to realize that a big part of our national dollar and our individual budgets is going to go toward healthcare. So, that's number one.
Number two, I think those two goals that I mentioned--skin in the game and transparency of prices--are key to letting the market solve as much of this problem as it can solve. And I think the market can solve a lot of the problem. If you look at these items that insurance really doesn't cover--things like LASIK surgery, for instance, things like dental care--all of a sudden, the prices are much more rational because people are using their own money to pay for it. I think if we can apply those principles more in healthcare than we do now, I think we'll have a better healthcare system.
But we also need to recognize that particularly in healthcare there is a role for government, and we got to realize that it has never been a completely market-based system. It's not even close to being market-based at this point. And we need to make sure that we take our American values of caring for each other and that we have systems in place to make sure that those who are the least fortunate among us are at least able to get basic care taken care of. It’s obviously going to be a hybrid approach. How we get there from here is even more complicated. And I thought a long time about maybe a third career of trying to reform our healthcare system. But it is such a big, difficult problem to solve; we're going to need a lot more than just a few people working on it. We're going to need consumers working on it, healthcare industry itself, politicians, economists, everybody working to solve what may be the biggest economic problem in America today.
Benz: Well, Jim, this has been such a thought-provoking multidimensional conversation. We really appreciate you taking the time to be with us today.
Dahle: You're very welcome. It's my pleasure and I appreciate all the work you do.
Ptak: Thank you so much.
Benz: Thanks so much.
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Ptak: And at @Syouth1, which is, S-Y-O-U-T-H and the number 1.
Benz: Finally, we'd love to get your feedback. If you have a comment or a guest idea, please email us at TheLongView@Morningstar.com. Until next time, thanks for joining us.
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