Jim Dahle: Is Avoiding Taxes Costing You Money?

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Today on the podcast, we welcome back Dr. Jim Dahle. Jim is a practicing ER physician, and he’s also the founder of The White Coat Investor, which is a financial education platform for healthcare professionals. The White Coat Investor includes a podcast, blog, conferences, and other educational resources. He is also the author of several books about money and investing, including his most recent, The White Coat Investor’s Guide to Asset Protection. One of the highlights from the episode was Jim’s explanation of how he shifted to become a “recovering optimizer” with his finances. We also liked his idea of creating a “20s fund” for your children as a way to shift part of their inheritance to an earlier point in life, and we found his discussion of his climbing accident to be impactful, particularly how the experience made him think about what really matters in life.

Episode Highlights

• Managing Unexpected Portfolio Wealth
• When to Use Cash, Bonds, and TIPS
• Weighing Private Investment Trade-Offs
• Direct Indexing and Tax-Loss Harvesting
• Optimizers, Satisficers, and the “Too Hard Pile”
• Behavioral Biases and Teaching Kids About Money
• Lessons From Jack Bogle
• Finding What Matters After a Climbing Accident

More From The Long View

If you have a comment or a guest idea, please email us at TheLongView@Morningstar.com.

Transcript

Christine Benz: Hi, and welcome to The Long View. I’m Christine Benz, director of personal finance and retirement planning for Morningstar.

Amy Arnott: And I’m Amy Arnott, portfolio strategist for Morningstar.

Benz: Today on the podcast, we welcome back Dr. Jim Dahle. Jim is a practicing ER physician, and he’s also the founder of The White Coat Investor, which is a financial education platform for healthcare professionals. The White Coat Investor includes a podcast, blog, conferences, and other educational resources. Jim is also the author of several books about money and investing, including his most recent, The White Coat Investor’s Guide to Asset Protection. Amy, a couple of things jumped out at me in this conversation. One was Jim’s shift from being an optimizer, with respect to his finances, to a recovering optimizer. I also appreciated his discussion of his climbing accident, which came toward the end of the podcast. Jim talked about how that experience got him thinking more about what it’s all for.

Arnott: Yeah, I agree. I thought those were really interesting parts of the conversation too. I also liked his idea of creating a “20s fund” for your children. And this is basically money that you set aside that the kids would receive at age 21 that they could use for travel, a down payment on a house, a car, basically any type of important life goal. It’s a way of shifting part of the inheritance to an earlier point in life when it might be more of a benefit than if the kids inherited money in their 60s. I thought that was an interesting idea.

Benz: I like that discussion too. OK, let’s go ahead and get into the show. Dr. Dahle, welcome back to The Long View.

Jim Dahle: Thank you. It’s always wonderful to be here.

Managing Unexpected Portfolio Wealth

Benz: Well, it’s great to have you here. As we were prepping for this conversation, you mentioned that one topic that’s top of mind for you these days is just this incredible amount of wealth that has been created during this long-running bull market. You mentioned that people with seven- and even eight-figure portfolios are becoming kind of commonplace. I’m wondering, as you interact with people whose portfolios have outstripped their wildest dreams, are there any recurrent themes that you hear from them?

Dahle: Yeah, it’s wild. People are so rich now, and obviously some of that’s inflation, but I can’t believe the number of emails I’m getting from people with $8 million, $10 million, $12 million, and $15 million. A lot of it is just because they were index-type investors. They tended to be fairly aggressive because they didn’t love what bonds have done to them since 2022. And so they tended to have a lot of money in US stocks. Obviously there’s been a huge tailwind there the last three or four years, and people who had been doing everything right just really benefited from that tailwind.

I think a lot of them aren’t quite used to it yet. I think they’re still trying to figure out what it means for their lives. They’re still trying to figure out, well, how do I spend more money? I guess I need to look into giving a little bit better. And well, now I’m paying an awful lot in taxes, and I feel like I shouldn’t be paying this much in taxes. The typical issues that people deal with when they’re wealthy, it just seems like there are a whole lot more of those people these days than maybe there was two or three years ago.

When to Use Cash, Bonds, and TIPS

Arnott: You’ve also said that a lot of folks that you’ve talked to who have been super successful as investors still seem to have very high risk appetites and they might not be inclined to take Bill Bernstein’s advice to quit playing because they’ve already won the game. What are they doing instead? Do you still talk to a lot of people who have very equity-heavy portfolios?

Dahle: Yes. And nobody loves bonds. They look at five-year returns for a total bond market fund and they see that it’s zero or whatever it is right now. It hasn’t been awesome in the last five years. Any time period that includes the worst year ever in bonds, which is 2022, doesn’t look good. It doesn’t look good. And people go, “Well, why would I bother investing in that?” Some of them are saying, “Well, I’m just going to use cash for my short-term needs and then everything else in equities.” I’m getting a lot of questions about that these days. But honestly, bonds are more attractive than they’ve been in many, many years. Finally, bonds are kind of where they’re supposed to be. This is kind of a normal interest rate environment and the yield curve is no longer inverted. So, you get paid more for taking additional term risk.

We’re kind of back to normal, but people are still investing by looking in the rearview mirror and going, “I don’t want bonds.” The other thing I see is something that is a little worrisome because you do tend to see it near the top of every bull market, which is people using a lot more leverage, right? They’re talking about asset-backed loans. They’re talking about cash-out refinances of investment properties or even their own home. You see people looking for leverage, mutual funds and ETFs, and I think you see a lot more use of leverage. I’m also seeing a fair amount of talk about private placement life insurance among these wealthier people. They just feel like, oh, there are a lot of taxes and is there something I can do to reduce my taxes? Sometimes they don’t get far enough to go, am I better off even paying the taxes than I am reducing the taxes?

That seems to be a big problem for people sometimes. They just hate paying taxes so much that they’re actually willing to have less money themselves than they would if they were paying a little bit more in tax. But those are kind of some of the trends I’m seeing among the particularly wealthy people that seem to have become newly wealthy in the last few years.

Benz: I wanted to ask Jim about that cash versus bonds question. I know quite a few people who have that equity-cash barbell, where they don’t really have much room for bonds and don’t see the case for them. I started to wonder: Is that the worst thing in the world, having a higher allocation to cash-type assets and maybe very little in fixed income? What’s the downside?

Dahle: No, I think it’s a completely reasonable position to take. It’s essentially a Larry Swedroe position. He says, take your risk on the equity side, keep your bonds very safe, very high quality, very short term. Short-term Treasuries, for instance. Well, the shortest-term bonds are cash, right? That’s what cash is. They’re very, very short-term bonds. You’re really not running interest rate risk. It’s a reasonable position to take. Theoretically, instead of having 25% in bonds, maybe you have 20% in cash, and the rest in equities, and that’s probably about the same expected performance long term. However, I think people are, again, just looking in the rearview mirror and saying, “Oh, bonds have crappy returns.” And well, cash made 3% or 4% the last few years, whereas bonds made nothing or 1%, or I don’t know what it is, probably depends on exactly what type of bonds you’re looking at.

But again, any period of time that includes 2022 for bonds looks pretty bad in the rearview mirror. And what people forget is that most of the time, in most time periods and over most time horizons, bonds do outperform cash. That’s just the way the yield curve normally is. When you take more interest rate risk, the yield is higher, and the best predictor of your long-term returns is the current yield. People forget that if interest rates stay about like they are right now, bonds are going to outperform cash. If interest rates fall, bonds are going to dramatically outperform cash. And if interest rates rise, of course, in that situation, the shorter term you have on your fixed income portfolio, the better. Obviously, if rates are going up, you’re better off in cash than you are in bonds, especially longer-term bonds.

Arnott: Among people who do own bonds, we’re seeing a lot of enthusiasm for TIPS,

. Real yields on TIPS are the highest they’ve been since 2008. A lot of people are worried about this kind of sticky inflation that we’ve been seeing, and TIPS can protect against that. Do you think that TIPS mainly make sense for people who are actively spending down from their portfolios in retirement, or does anyone who owns bonds need TIPS?

Dahle: Yeah, I love TIPS. You’re talking to a TIPS enthusiast. I mean, the biggest risk for bonds is inflation, right? Inflation devastates nominal bonds, especially long-term nominal bonds. I mean, you do not want to look at what your bond returns were in the ’70s when inflation was high. It’s just really, really bad. TIPS can help protect against that. Now, they’re not this perfect inflation hedge. People learned that in 2021, 2022. Real rates went up 4%. And so, yes, the value even of TIPS went down, not as much as nominal bonds, but they did go down. You’ve got to keep in mind what TIPS really are, which is this long-term locking in this real income in the long run. It doesn’t mean the value of them doesn’t fluctuate as they go along. I think if you’re going to invest in bonds, I think you ought to include TIPS in that portfolio.

Since I started investing when I had a four-figure portfolio, we added some bonds to it and we included TIPS. We’ve always split our bonds half nominal, half TIPS. I think they’re a great investment. They’re particularly useful, I think, for people who are trying to lock in a liability-matching portfolio, especially around the time of retirement. I think even buying individual TIPS and planning on that being all they’re spending—or at least their essential spending, for the year that the TIPS matures—I think can be a very savvy way to avoid sequence of returns risk. I think there’s a place for TIPS in many people’s portfolios. I would not say ignore them until you’re retiring, unless you’re ignoring bonds completely. If you’re looking at bonds, I think TIPS are one of the best kinds of bonds out there.

Benz: Just to follow up on that idea of a laddered portfolio of TIPS bonds maturing throughout my years in retirement, how do you come down on that question of individual bonds, whether TIPS or individual nominal Treasury bonds versus a fund? Do you have a clear preference? What is it?

Dahle: I’m a little bit agnostic. I have tried both. What I have discovered is it was a little more of a hassle than I was willing to deal with to build out a long TIPS ladder. I think it’s a very great strategy. It’s a wonderful strategy for somebody who’s retiring with just enough, meaning they want to spend approximately 4%-ish of their portfolio. Thankfully, we’ve been lucky enough, or blessed enough, or whatever you want to call it, that we’re probably going to be spending significantly less than that. The sequence of returns risk strategy that we’re going to be using is mostly just not spending that much of our portfolio. We don’t necessarily need a great other sequence of returns risk solution like a TIPS ladder. And the truth is, when you’re building a TIPS ladder, what you really have is you’ve built a fund, right?

When you look at your 20 or 30 individual TIPS each maturing in a different year, that really doesn’t perform all that differently from a fund with the same duration as your overall portfolio. Although it’ll cost you a little bit to buy a fund—maybe it’s 5 or 10 basis points from a good bond fund—it’s worth the convenience for us. We decided just to use a single TIPS ETF, and we’re slowly liquidating that bond ladder that we had started constructing just because it was too much of a pain. I turned to Katie, my wife, and said, “Do you want to deal with this if something happens to me?” And she said, “No, let’s just put it in a bond fund. We have enough money.” And that’s what we’re doing. I think you can make a good case either way. I think it’s more important if sequence of returns risk is more significant in your life to be thinking about these things, to be thinking about building a TIPS ladder, to be thinking about using a single premium immediate annuity or two or three, to be thinking about delaying Social Security until 70, to be thinking about these things that people do to put a floor under the retirement spending to make sure they don’t run out of money to protect against sequence of returns risk.

Weighing Private Investment Trade-Offs

Arnott: With the growth in wealth for individual investors and more people owning portfolios with seven or even more digits, we’ve also seen a big push for more complicated investment approaches, including private equity and private credit. What are your thoughts on that?

Dahle: It’s interesting to see that push when US large-cap stocks have done so well in the last few years. You would think people would be going, “Oh, I just want to load up on my S&P 500 index fund because it’s crushing it and it’s super easy.” It is dramatically easier to invest in a portfolio of index funds or even a target retirement fund than to step into the private investing market. I had the opportunity to stand on the New York Stock Exchange this last week, and it’s pretty fun to visit the mecca of capitalism in that way, but we don’t realize what a wonderful blessing it is for us to be able to have the transparency and the rules-based market that we do to be able to invest. Obviously, that’s only present for publicly traded investments. Once you step into the private world, all of that is gone.

Your protections from the Securities and Exchange Commission and Finra are dramatically less in the private world. That’s why most of these investments require you to be either an accredited investor, which is generally somebody with a million dollars in investments or more, or even a qualified purchaser, which is someone with at least $5 million in investments or more, because you’re not as protected. These investments can and do go to zero. They’re often highly leveraged, and while most people running private investments are not scammers, it’s far easier for a scammer to hide out in private investments than it is in publicly traded investments. There are lots of reasons not to enter the private investing market at all. That said, there are also some reasons that it might be worthwhile for some people. For example, these investments tend to be more illiquid, and you think, well, that’s a bad thing, not a good thing.

But if you can be paid for taking some illiquidity with some portion of your portfolio, well, a lot of us are interested in that, right? If you can get an extra 1%, 2%, or 3% return because you’re willing to have your money tied up for a year or three, well, I’m willing to do that with some portion of my portfolio in order to earn more. That sounds like a good trade-off to me. I think a lot of people look at it that way as well. A lot of people also hate market volatility. While all the volatility we’ve seen in the last three or four years seems to be upward, they can remember 2008. They can remember 2011 and 2018 and 2020 and 2022 and even the dot-com meltdown. I’m not sure there are a lot of investors around that still remember ’87, much less the stagflation of the ’70s, but markets also go down, and the publicly traded markets feel so much more volatile, and maybe the private markets are just hiding that volatility better because they’re not marked to market each day, but they feel so much more volatile and that bothers a lot of people.

When you own a portfolio of rental properties down your street, or you’re invested in these private investments that aren’t marked to market, your portfolio doesn’t feel quite as volatile. People appreciate that as well. Obviously, there are lots of great companies out there and great real estate investments that are not publicly traded. Some of the highest-returning companies in America are small businesses that are still growing, that are still on a hockey-stick kind of trajectory, that are growing at 20% and 30% and 40% per year. Well, that’s a lot harder to do when you’re Google GOOGL or Amazon.com AMZN or Exxon[Mobil] XOM, and you’re already large. People get excited about being in these smaller companies; these privately traded companies that maybe don’t have to answer to quite so many shareholders, and they appreciate their particular missions, or they appreciate their agility and those sorts of things.

I mean, obviously until a few months ago, even a big company like SpaceX SPCX was not a publicly traded company. If you wanted a piece of that prior to it going public, you had to be willing to invest in private investments. I get the appeal. I think for a lot of people, they’re investments that are sold rather than bought. They’re certainly optional. You do not have to invest in private investments to become financially independent and have a wonderful retirement, but I think if you are eligible for them and not afraid to have a bit more of a complex illiquid portfolio, you may find something in there that makes sense for you.

Benz: I was reading through your conversation with Larry Swedroe where you talked about private credit, and I felt that you were a little warmer to private credit than private equity. Wondering if you can walk us through your thinking there and also what role you would see private credit playing in a portfolio. You talked about how bonds are the low-risk portion of your portfolio, so presumably you wouldn’t want to hold private credit as a surrogate for high-quality fixed income, but maybe just talk us through your thinking there.

Dahle: Sure. Well, a lot of people, particularly when they step into the private markets, they get this mindset of, “I’ve got to shoot the lights out. I gotta hit a home run here. If I’m not going to be buying index funds or I’m not going to be buying a TIPS ladder, I might as well go for the fences.” And that is not the case. You don’t have to do that. Even in the private markets, there are ways to invest with less risk. I think this is perhaps best illustrated in the real estate markets, right? You can be the equity investor in the real estate capital stack, and you have the highest potential returns. If the investment ends up doing really well, you get to keep all the extra. And then there’s mezzanine debt and preferred equity, these kinds of intermediate positions. And then there’s the lender, the lender in first position, and that is the person taking the least amount of risk in the investment.

Often when I talk to people who want to get into real estate investing, I mention to them that you don’t have to take maximum risk, especially with your first few investments. You can invest on the debt side. You can be the lender, in essence. And yes, you’re not going to get 25% returns if it does really well. You’re only going to get whatever, 8% or 9% returns if it does really well. And that’s OK. You’ve got to be OK with that, but you’re taking dramatically less risk. I have had a real estate investment, and in this case, unfortunately, I was the equity investor. When rates went up in 2022, that was really bad for leveraged real estate investments. And so, with this particular investment, all the equity investors were cleaned out. They had 100% loss of their investment, but the mezzanine debt, the preferred equity, they got all their cash back, as well as their interest.

Of course, the primary lender, the debt investor, got all their money back and all the interest they were due. The only people that lost money were the equity investors. That is the appeal of being a debt investor. You’re taking less risk, you’re in a better position in the capital stack. That can be really appealing to people. One of the downsides of being that debt investor, of course, is that it’s not a very tax-efficient investment, right? Pretty much your entire return is being paid out to you every year and you’re paying taxes on ordinary income tax rates. People prefer to have these sorts of investments inside some type of a tax-protected vehicle, whether that’s a retirement account or an annuity or some sort of private placement life insurance or something where it’s not being completely taxed every year.

That’s the real downside to investing on the debt portion of the portfolio is just really tax inefficient. And if you’re already in a high tax bracket, that can eat up a pretty significant portion of your return.

Arnott: If someone does want to venture into private credit in a more tax-efficient way, what type of expenses would they be looking at?

Dahle: Well, I mean, I think to do it in a tax-efficient way, you need to do it inside something like a retirement account, like a self-directed IRA or self-directed solo 401(k) or something like that. But the expenses on these investments are highly variable, right? I mean, investing—and great thanks for this belongs to Jack Bogle—investing particularly in the public markets is essentially free now, right? If you want to go buy all the stocks in the world, you’re going to be paying less than 10 basis points on that index fund. In fact, Fidelity’s got a few that they don’t even charge an expense ratio. It’s zero. Now I don’t think that’s significantly different from paying three basis points to Vanguard, but it’s free. Essentially, investing is free now in the publicly traded markets, and that’s not the case in the private markets. It wouldn’t be unusual at all for you to be paying on something like a private real estate debt fund.

It wouldn’t be unusual at all for you to be paying a fee of 1% of the assets plus 20% of the return above something like 8% a year. That would be pretty typical fee structure for these sorts of investments. You have to look at it and go, “Yes, that after-fee return is still worth it to me to be able to invest in this asset class.” And the way I look at it is this isn’t a bond replacement. This isn’t a stock replacement. It’s something else. It’s another asset class. It acts completely different from those two. Equity real estate is different from debt real estate, and debt real estate is different from bonds. If you’re going to have an allocation to these sorts of things, it’s separate from your stock allocation. It’s separate from your bond allocation.

Direct Indexing and Tax-Loss Harvesting

Benz: Sticking with complicated strategies that wealthy investors are embracing, one that has been getting the heavy sell over the past few years is this idea of direct indexing or other strategies that use active tax-loss harvesting. Can you talk about that? You have been, I think, pretty critical of those strategies because they introduce so much additional complexity, but maybe talk about your thinking.

Dahle: Yeah. I don’t know that I’d say I’m critical about it. I think some of these companies are overselling the value of the losses. And let me explain. I’m a fan of tax-loss harvesting. I tax-loss harvest our taxable account. When there’s a loss, I see no reason to hold on to it. I sell that investment, buy something similar to it, but not, in the words of the IRS, substantially identical, and basically book that loss without really changing my asset allocation. I’ve been doing this for years. 2020 and 2022 were opportunities to harvest large losses. We’re carrying around seven figures of losses, but on your taxes each year, you can only use $3,000 of those losses against your ordinary income. It doesn’t do you any good to have $300,000 of them if that’s the only way you’re using these losses.

You’ve got to have some other reason to have the losses. It might be selling some of the winners in your portfolio to generate retirement income. You could use some losses for that for sure. But if you’re really trying to get more losses than a few tens of thousands, you’ve got to have something in your future that seems to suggest you can benefit from those, whether that’s the sale of a business or a medical or dental practice, or whether that’s selling your home that’s above the exempted amount, but you’ve got to have a reason to have these losses. Otherwise, spending a bunch of money and a bunch of hassle to get the losses really isn’t worthwhile. They all go away when you die. It’s not like you get to pass them onto your heirs or something. You’ve got to ask yourself, how valuable would more losses be to me?

And if the answer is very valuable, well, maybe now it’s worth paying a little extra and dealing with a little more hassle to engage with a very low-cost direct indexing provider. But this is a little bit of a lifelong commitment to direct indexing. You really ought to plan to stick with them the rest of your life because getting out of that can eat up most or all of the losses that you booked along the way in order to cancel out the gains to move back into, say, an index fund portfolio. If you leave this direct indexing provider and they were direct indexing the S&P 500 for you, they’re going to hand you 500 stocks. You’re going to have 500 individual stock positions, and you’ll have to go through the hassle of selling each of those and deciding which ones have substantial capital gains, which ones don’t, maybe holding onto the ones that do and building your portfolio around that.

It’s not an insignificant amount of hassle. Don’t go down that route if the losses don’t have significant value to you in the first place. But if you’re looking at selling a $5 million business down the road and you could sure use another million or $2 million in losses to put against those capital gains, it may be worthwhile for you to look into some of these strategies to get more capital losses.

Optimizers, Satisficers, and the ‘Too Hard Pile’

Arnott: We also wanted to talk a bit about your evolution as an investor, and you’ve written that you first started getting interested in investing in personal finance when you were in the middle of your medical residency. I’m wondering how your own leanings as an investor have changed as your portfolio has grown. It seems like you’re very comfortable with “good enough” investing and avoiding complexity. Were you always that way or have you evolved more in that direction over time?

Dahle: I think what happens to most people the longer they do this and as they build wealth in particular is they move, even people that are very interested in this stuff, they’re hobbyists for lack of a better term, they move from being what we call an optimizer to a satisficer. An optimizer is trying to eke every little bit of cash out of their budget so they can invest it for their future. They’re trying to eke every little bit of extra return or every little tax advantage they can get. They end up with fairly complex financial lives, fairly complex portfolios. They end up spending a lot of time for maybe pretty minor gains and, after a while, gains that aren’t even going to change their lives at all. I don’t claim to be a completely reformed optimizer yet, but I’m certainly trending in that direction.

I see the wisdom behind being more of a satisficer, and I’m certainly trying to do that more and more as I go. For example, we had a change in our portfolio eight or 10 years ago where we just dropped three asset classes basically. We just said, “What are we doing? We need a simpler portfolio. It’s too hard to manage this across five or six or seven retirement accounts. This doesn’t make sense for us to be doing.” We simplified our asset allocation significantly. I also just let the small things go a whole lot more than I used to, and we’re certainly much more free with our spending than we used to. But I think that’s pretty natural for most people as they build wealth. If you continue to be a hyperoptimizer, once you have enough and even beyond enough, you got to ask yourself, “What am I missing out on really in my life by virtue of doing this? Is this really my favorite hobby? Would I really rather be doing this than spending more time with my kids or my grandkids or whatever?” For most people, the answer is going to be no, I don’t like it that much. There are other things I would rather do with my life than play with my spreadsheets.

Benz: I wanted to ask, Jim, what were the three asset classes that went on the cutting room floor?

Dahle: Well, they were mostly things like large value, right? I already had money in small value, and I was like, “Well, why do I have money in large value and small value, just have small value and a total stock market fund?” We also had a small allocation. So, we dropped the large value, we dropped the small, we just put it into small value, and that allowed us to drop asset classes. We also had an allocation to mid-caps, a separate allocation to mid-caps, and we dropped that. I think those were the three asset classes we dropped.

Benz: Can you generalize about doctors and their proclivities as investors and maybe where they land on that optimizer satisfies your spectrum?

Dahle: Well, I mean, doctors are like anybody else. They run the whole spectrum, right?

Benz: Yeah.

Dahle: You’ve got doctors that have not paid any attention whatsoever to their finances. It’s actually shocking to do net worth surveys of doctors in their sixties. You will learn that about 25% of them, despite making $200,000, $300,00, or $400,000 a year for their entire career, do not even have $1 million of it left. Their net worth, everything, house, car, retirement accounts, investments, it doesn’t add up to $1 million and they might have made $8 or $10 million during their careers. You’ve got that sort of doc on one end of the spectrum, and then you’ve got those who become kind of investing hobbyists and really pay a lot of attention to this stuff and really optimize things. And you combine that with a $300,000, $4000,00, or $500,000 income, and it’s pretty amazing what you can do. I think you see doctors that run a huge gamut.

It is a very wide range of wealth among doctors, certainly more than a lot of people would expect considering that the incomes are often not that different. But I wouldn’t say that they’re necessarily optimizers or satisficers. I think it’s like anything else; there’s some of each.

Arnott: You also recently wrote about the value of having a “too hard pile,” and you shared some activities and strategies that might be in it. What are some of the key ones or key things that you put in that pile?

Dahle: Yeah, there are so many things you can do with your investments, so many things you can do with your finances that just add a great deal of complexity. It isn’t that it’s not necessarily intelligent; it’s just that it takes an awful lot of effort to understand it, implement it, and maintain it. I’ve run into people that use option strategies, for instance, and they’re like, “Well, all I do is I just check every morning at about 9:45 in the morning how things are going and then make a decision on what to do that day.” Well, that’s too hard for me. I don’t need a strategy that I have to log in to investing accounts every day. I’m lucky if I log in to investing accounts every month. Often I go several months without logging into investing accounts. Any strategy that requires me to do that is by far too hard for me.

And that often includes things like options. It often includes highly leveraged types of investments. As a general rule, we’ve decided just not to have debt in our lives at all. Now, some of our investments have debt inherent to them, but we don’t actually have any personal debt, no mortgage, no margin loans, no consumer debt, none of that. We just got rid of that about a decade ago in our lives. We just found our lives were a lot simpler without it. And that doesn’t mean that you can’t come out ahead by investing on margin. You can. And some very smart people have said maybe it’s optimal to have an amount of debt, something like 15% to 35% of your assets. And we decided, eh, too hard. It’s too hard for us. It’s like that TIPS ladder, too hard for us. It just doesn’t match us. And so, you’ve got to recognize that at the end of the day, investing is a single-player game.

It’s you against your goals, and you only need a strategy good enough to reach your goals and then you won the game. You don’t need a strategy that’s harder than that. I think most people will, if they keep looking into more and more different ways to invest and more ways to manage your portfolio, that they will eventually hit a level where they’re like, “Eh, it’s too hard for me. I’m not going to do that.” And that’s OK. That’s probably a good thing for most people. Now everyone’s going to draw that line in a different place. Some people might say, “It’s too much for me to pick a handful of index funds. I’m going to hire a good financial planner that offers good advice at a fair price.” And that’s fine too. Everybody’s somewhere along that spectrum and you’ve just got to figure out where you are, recognize it, and not try to be somewhere else on the spectrum that doesn’t fit you.

Behavioral Biases and Teaching Kids About Money

Benz: Earlier you referenced this issue with people whose portfolios have grown a lot, and they’re getting close to retirement. They’re not spending in line with what the planning advice would tell them they could spend. What’s your response to that? I hear from some people who kind of say, “Stop bugging me about this because I’m fine. I like what I’m spending.” What’s your retort?

Dahle: Well, it’s their money. They can do what they want. They’re absolutely right about that. If they want to quit being bugged, that’s fine. They can quit reading your columns, Christine. But there are really two big problems in personal finance. They’re both behavioral problems. As soon as you solve the first one, it’s time to start working on the second one. Most people never solve the first one, and most of the people who solved the first one never solved the second one. Let me describe what these are. The first one is saving enough money that you can build a nest egg large enough to live the rest of your life. Most people, they just don’t save enough money. If you look at the statistics, something like 40% of retirees are living on nothing but Social Security. They either never built a nest egg or they spent it so rapidly in retirement that it’s gone.

This is a big problem for people. People have a hard time doing it. But for those who do solve this problem, as soon as you get it solved, recognize it’s time to start working on the second problem, which is how to spend and give that money. It’s hard for people who have this frugal mindset that optimize their portfolios, optimize their financial lives, learned how to budget, carved out a big chunk of it to invest it for the future, chose a reasonable plan to invest it. It’s very hard for that person to flip the switch on the day of retirement and go from being a net saver to being a net spender. Most people can’t do it. Statistics suggest something like six out of seven retirees aren’t touching their principal at all. They’re basically investing as though they’re immortal, and that’s just not the case.

They’re not immortal. And so, it is a problem. It’s difficult for people to do. It takes work, right? I view there being five money activities in life: earning, saving, investing, spending, and giving, and they’re all about as hard as one another. Those people who turned out to be pretty good at earning and saving and investing, you may be not that good at spending. There’s probably some stuff you can spend money on that is going to make your life happier and the lives of others happier. There are certainly some good causes that you would support that you could give to if you’re willing to put in the effort and the research and think for a few minutes about how much of your money you really can give away safely. And it’s work, yes, but it’s work that’s worthwhile to get good at all five of those activities.

Arnott: You and your wife have four children. What kind of things have you done to impart financial responsibility to them or teach them about investing?

Dahle: Well, the first thing is we’re a lot more transparent than most people are. We’re transparent with friends and family and the general public, and obviously that extends to our children as well. Money is not a hush-hush subject in our household. It’s something that’s talked about all the time. And as they get older, the conversation changes, right? Obviously, you can discuss more complex things with a 17-year-old than you can with a 6-year-old, but we start very early. They have some funds for their college and for their ’20s and those sorts of things, and they own basically all the stocks in the world in those funds. When we drive down the street and we drive past McDonald’s MCD, I point out, “You own that.” We drive past Home Depot HD, and I point out, “You own that.” Every time we pass a publicly traded company—and in your daily drive, you pass a lot of publicly traded companies—you can point out to your children what it means to own something, what stocks are, and what bonds are.

You can teach them all these things. You can teach them about debt, and you’ll be surprised how young they can be and learn these basics about personal finance. But we try to teach them about work. We encourage them to have lemonade stands. We encourage them to do allowances. We set up matches for them for various things. And then as they get into their high school years, we start getting very serious about teaching them the basics of personal finance and investing. By the time my kids leave home, they know about index funds. They know about buy-and-hold philosophies. They know about the importance of critical types of insurance. They know how retirement accounts work. They go to the required … And Utah’s good this way where we live. It’s got mandatory personal finance class in high school. In high school, the teacher asked a question of, who knows what a Roth IRA is?

And my kids are the only ones in their class that knew what a Roth IRA was, much less had one already that they’d been contributing to for years. There are lots of ways that you can teach your kids personal finance and investing. Recognize that you have the ability to do that even if you don’t know everything, even if you don’t consider yourself a hobbyist. It’s important to be having these conversations because you don’t want them to have the experience you had probably, which is you walked out into the world at 18 or 19 or 20 years old knowing nothing and had to learn everything by experience. And that’s not an awesome way to learn.

Benz: Sticking with kids, you’ve often talked about this idea of a “20s fund” for your kids. Can you talk about what that is, what type of account you would recommend for it, and what sorts of investments would go inside it?

Dahle: Sure. The 20s fund idea came out of the fact that I was poor in my 20s. In college, I was literally donating plasma for grocery money, right? I mean, my parents had enough money to fly me home for Christmas and to fly me home for the summer, and they let me live at home for free while I was doing a summer job during my college years, but that was it. I was on my own for the rest. Every March or so, I’d run out of money. The money I’d saved up from the summer before, and I’d need to get to the end of the school year without being too hungry. I didn’t like that. I missed out on a lot of opportunities in my 20s that I think would’ve been really cool, like owning a car, like maybe going to Europe, those sorts of things. The first time I ever really went outside the country in a significant way was after I graduated from medical school. I was 28 years old.

I just think the 20s are a pretty awesome decade, and if there was ever a time when you could use a little bit more money, even though you don’t yet have the capacity to earn it, it’s your 20s. That’s one purpose of the 20s fund, so my kids don’t have that experience. They can do some of those things that you can only do in your 20s and have a little bit more of an enjoyable time than I had. But the other purpose of the 20s fund is that it is a little bit of an early inheritance. My kids stand to inherit substantially more money than what we give them when they head out the door in their 20s, and this lets us see how they manage it. So far, we’ve been very pleased with what we’ve seen, but if they ended up being super spendthrifts, that would tell us when they do get their eventual inheritance, it needs to be in some sort of a spendthrift trust because they’ve shown they can’t handle a lump sum.

I think those are really the two purposes of a 20s fund for us. You can define this any way you like. Some people would include the Roth IRA. We helped them to do with their earnings as teenagers. Some people would include their 529s for their college savings, but the main fund we’re talking about here was a custodial account. This was a UTMA account, which they gained control of at 21. Literally, Vanguard called me up and said, “It’s time for this to be moved out of your account, so we’re moving it over to her account when my child turned 21.” Sure enough, the next day I had no visibility into this account anymore. It was her money. Wow. If she wanted to go spend it on whatever she wanted, she could do that. That’s the account that we use for it, a UTMA account.

So far, children have shown that they’re being very, very responsible with that money. We’re pretty pleased about that. But that’s the idea behind a 20s fund is it’s just way more useful to inherit money in your 20s than it is at the age at which most people inherit money, which is around age 60. By age 60, if you’ve planned your financial life reasonably well, some big lump sum of money as an inheritance is not going to change your life at all. It’s completely useless to you, whereas it could have really made a difference in your life if you had received it decades earlier.

Arnott: Can you talk a little bit more about how the 20s fund has worked in practice for your kids? Did they end up using that money for travel or other things that you sort of had in mind?

Dahle: Yeah. I mean, the idea behind it was travel, a car, a wedding, a honeymoon, maybe if they needed some additional college money, a down payment on a house, a mission trip somewhere in Europe. Those are sort of the ideas behind this 20 fund, and every family is going to be a different size. Some people obviously can’t afford to do it at all. You’ve got to take care of yourself first before you can be giving money to the next generation. But we basically just invested in index funds. I think half of it was in a total stock market index fund. The other half was in a total international stock market index fund, and we made contributions to it. Occasionally, they made contributions to it. They received an inheritance from a grandfather of a few thousand dollars. That went into that UTMA account as well. But we’ve always told them, “This is your money.” We talked about it being their money.

We showed them the statements when they came in, and those quarters when they lost money, we pointed out that they had lost money. And when the quarters went and done really well, I showed them, “Look, this is what your money can do. It can make more money than you can make.” We were able to teach lots of lessons along the way using that fund, but basically it’s now their money, right? They can withdraw it and transfer the money to their bank account and pay any capital gains taxes due on it. It’s their money that’s given to them when they turn 21, in essence. So far, the only real use we’ve seen from it is that our oldest bought a used car with it. The rest of it’s just been sitting there growing, and I suspect most of them are going to get used mostly for a house down payment given the housing crisis these days.

Lessons From Jack Bogle

Benz: I have to ask, Jim, you’ve referenced index funds a few times through this conversation. You are part of the Bogleheads community, an active contributor to the Bogleheads Forum. You knew Jack Bogle in his lifetime. You attended a celebration of the index fund’s 50th birthday this past week. Can you talk about your interactions with Jack?

Dahle: Yeah. I was honored to be invited to an opening bell ceremony at the New York Stock Exchange. Fascinating opportunity if you’ve never been there. It’s a beautiful building. Feels like it belongs in DC more than New York. It’s just that kind of huge columns, high ceilings kind of a building. But it’s interesting to stand on the floor of the New York Stock Exchange. It is not what you’ve seen in movies that are 20 or 30 years old, where as soon as the bell rings, everybody starts screaming and holding papers in their hand. There’s a big mosh pit in the middle, right? It’s all electronic now. It’s actually not even that loud. Standing right behind you are the folks from CNBC giving their daily market commentary in a little booth. It’s still pretty interesting to recognize that that is where, in large part, it’s kind of the mecca of capitalism.

It was a wonderful opportunity to be there with staff from Vanguard as well as a whole bunch of people who have helped get the word out about index funds and index investing over the last 20 and 30 and 40 years. It was a real “who’s who” of the indexing community that was invited to that ceremony and a brunch reception following. It was a great opportunity to be there. I only actually met Jack Bogle one time in person, and it was at a Bogleheads conference. I think it was in, oh, it must have been 2016 or ’17 or something like that. I was hoping to meet him earlier, probably 2008, but he had to miss the conference due to being in the hospital with his heart. Those may not know this, but he had a heart transplant and lived for many years after getting that heart transplant.

And so, he had to deal with substantial medical issues in the last couple of decades of his life. But one of the most remarkable things about Jack Bogle is that had he run Vanguard like Fidelity was run, or some of these other big investing firms, he would’ve been a billionaire, and he died wealthy, right? He was able to endow hundreds and hundreds of scholarships at the private high school he had attended and do a whole bunch of other wonderful things, but he did not die a billionaire. The reason why is because he essentially gave his firm away to the investors and it was a really remarkable thing. And once he did that, he took that mindset with him and his sheer force of will with him throughout the next four or five decades of his life and really tried to do the right thing for people.

When he’d stand up and make a fuss about some change that had happened in the financial-services industry, you could be sure that he really did feel that way. He felt like, if this new innovation or whatever—a classic example might be that he was very against ETFs—he was worried people would just start day trading him. And obviously, there’s lots of people that do day trade ETFs, but you knew where he was coming from, and he really did care about the individual investor. That’s what I appreciated the most about Jack Bogle, is it was a refreshing mindset shift compared with most of the people in the financial-services industry.

Finding What Matters After a Climbing Accident

Arnott: In addition to your work on The White Coat Investor, you’re still a practicing physician. How does your work in the ER contribute to and help inform the other work that you do with The White Coat Investor?

Dahle: What I discovered is that I’ve got a little bit of an ADD kind of personality, and having two part-time jobs is just about perfect for me. When I get sick of one, I can go do the other and vice versa. But one of the beautiful things about being an emergency physician is you get to be with people on one of the worst days of their life. We all have an ER story. We’ve all been to the ER once or twice or three times in our life for ourselves or for a family member, and it’s generally a terrible day. Something bad is happening, somebody’s really sick, somebody’s really hurt, somebody’s dying, somebody died. And it’s wonderful to be with people on those days of their lives and help walk them through that process. Even though sometimes it feels like I work at the opposite of Disneyland, right?

Disneyland’s the world’s happiest place. The ER is the world’s least happy place, right? It’s a very stressful place for a lot of people and a very unpleasant place for a lot of people, but it’s a real privilege to be there with them at that time of their life. But as far as investing goes, I think the most powerful lesson you can take from the ER is that there are things that are more important than money in life. One of those is your health and one of those is your family. And to remember that and always keep money in its proper place in your life, that it is a tool to help you to build happiness, to build productivity, to build purpose and goodness and to help others in your life, and really to remember that the game isn’t just about dying the richest person in the graveyard.

A lot of times we invest and we run our financial lives as though that was the goal. And I hope it really isn’t for most people when they sit down and think about it. And a moment like going to the ER as a patient, or even as a doctor or a nurse who works there, is a good reminder that there are more important things in life.

Benz: You had a fairly serious climbing accident a few years back. I’m wondering if you can talk about how that affected your approach to work or the rest of your life.

Dahle: Yeah. For those who haven’t heard this story, we put a video together on The White Coat Investor YouTube channel that you can check out. If you just Google Jim Dahle’s climbing accident, you’ll probably find it. It’s about a four-minute video that includes footage taken from my climbing partner. But essentially, I had a really bad fall in a really bad place. I had about a 35-foot fall before I was caught by the rope on the north face of the Grand Teton a couple of summers ago. And it was not a clean fall. I did not land cleanly. I hit a few ledges on the way down, suffered a pretty severe head injury, smashed up my wrist and my shoulder and some ribs and some vertebrae, and I was a real trauma patient. Took two helicopters to get me off that mountain and to the trauma center, and I’m incredibly grateful for not only my rescuers, for coming in my moment of need, but all the doctors and nurses and therapists and everybody who helped take care of me and nurse me back to health after that episode.

But anytime you have an episode like that where literally five days were erased from my life that I have no memory of whatsoever, it causes you to step back for a minute, feel a little bit more humble, and really ask yourself what really matters in your life. How do you really want to spend the rest of your life? What is your purpose on this planet? And obviously, having gone through that, I’ve had some opportunity to have a little more introspection into that. I hope one of the things that I’ve gained out of it is a lot more compassion for other people, not just medical patients and trauma patients who are going through something like I did, but just for other people and their challenges. A lot of times, until we’ve had some bad things happen to us, we don’t have as much empathy and compassion as maybe we should for others who are having bad things happen to them, whether those are financial episodes or health episodes or abuse kind of situations or just bad market returns.

But I like to think I’m a lot more compassionate and feel a lot more empathy for other people in their situations these days. My podcast producer, at least, tells me that I seem a lot nicer now than maybe I was a few years ago. And I don’t know if that’s an indictment of the person I was before or a compliment for the person I’m becoming, but really in life, that’s what we’re doing is we’re trying to become better and better people each year. Hopefully, I don’t recommend anybody fall off a mountain, but if you do, hopefully you come back a better person than you were.

Arnott: One question we’ve been asking a lot of our guests recently is what their go-to podcast websites or blogs are. I’m wondering what resources would be on your short list?

Dahle: Yeah, I think early on people learn how they learn, and I’m kind of a book and forum guy. That’s how I tend to learn financial things. I tend to read books, and I tend to ask and answer questions on forums. Obviously, we’ve created a lot of websites and forums, The White Coat Investor, and I do spend time on that, but some of the other forums I frequent are the Bogleheads forum, the Student Doctor Network Forum, and then a lot of forums that align with some of my personal interests, whether that be rafting or mountain biking or climbing or whatever.

But as far as blogs, two of my favorites have been around for a long time. There’s Harry Sit at The Finance Buff and Mike Piper at The Oblivious Investor, and they have just been cranking it out now for even longer than The White Coat Investor has been around. I appreciate not only their attention to detail and willingness to get into the weeds on topics from time to time, but their ability to bring it back to the big picture. And so I think those are two sites that are well worth spending some time on.

As far as podcasts go, I enjoy entertainment as much as the next person, but I tend to bounce around on my podcasts. I’m not sure I spend a lot of time on any given podcast. One person who gets a lot of flak in the personal finance and investing community is Dave Ramsey. But if you spend some time on his podcast, you recognize that he’s doing an awful lot of good with the audience that he’s talking to. There are a lot of people that just struggle with getting their incomes up, and budgeting, and saving money, and getting out of debt. I’ve learned a lot from him about how to coach people and teach people how to do that and how to think about their money. I don’t necessarily agree with everything he’s ever said or done. I think there’s some value there to listening to a few episodes of his podcast as well.

Arnott: Yeah. We talked to another person recently who said he thought that Dave Ramsey had done more good for more people than any other person in personal finance, just because of how he has helped people with really serious debt issues.

Dahle: Part of it’s just a function of, it’s just a really popular podcast. There are a lot of people that are listening to it, and so I think a lot of it is that if you can reach your message to a lot of people, you can do a lot of good.

Benz: Well, Jim, we always appreciate the chance to sit down with you, learn from you, and hear your insights. Thank you so much for being here.

Dahle: It’s my pleasure.

Arnott: Thanks again, Jim.

Benz: Thank you for joining us on The Long View. If you could, please take a moment to subscribe to and rate the podcast on Apple, Spotify, or wherever you get your podcasts. You can follow me on social media at Christine Benz on LinkedIn or @christine_benz on X.

Arnott: And Amy Arnott on LinkedIn.

Benz: George Castady is our engineer for the podcast. Jessica Bebel produces the show notes each week, and Jennifer Gierat copy edits our transcripts. 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.