# Q&A on Investments – Calculating ROI, Dollar-Cost Averaging vs. Lump Sum, UTMA Accounts & TIPS – Podcast #215

This podcast is all about you and what you want to talk about. Today it is investments. How do you calculate return on investment? What is the best way to use a UTMA account? Why shouldn’t you go 100% TIPS? Which is better for investing, dollar cost averaging or lump sum? These are the topics we discuss in this episode. If you have questions you want answered on the podcast, record them here. We also dive into why you shouldn’t get a car loan, how much malpractice coverage you should have as asset protection, and the challenges of lending money to family.

Remember that closing the fund is usually at the beginning of its 5-to-7-year life liquidations not at the end. So, you really can’t compare the return at closing because you’re just starting with the investment at closing. So, keep that in mind.

But the question is how do you calculate your investment return? The way I calculate return is to calculate a dollar-weighted return. I do that with a calculation called XIRR. You can do that in any financial calculator or any spreadsheet. If you go to Excel or Google sheets, it has this function as part of the spreadsheet. That is where I calculate my return.

All you have to know to calculate your return is the inputs, meaning the money you put into the investment, and the money that you put in later, or any money that you took out of the investment, like a dividend or an interest you paid or whatever, return of principal, and the dates of those cash flows.

Once you know all that, you can calculate an annualized return. You can make a few other adjustments to the sheet in order to get a return for a given year. You can change the dates, etc.

What I’ve noticed, however, is that many of these real estate investments give you a return that isn’t quite accurate, and it’s almost always better than what I calculated it to be on XIRR. That might be just because I only calculate the money as it leaves my bank account and comes back to my bank account. They might be using other dates to calculate it to make it look a little bit better, like the dates they got the money.

But that really doesn’t matter to me. All I care about is my return in and out of my account. I think that’s the best way to do it.

But your broader question, you’re trying to compare this real estate fund to your stock and bond return. Well in 2020, your stocks did awesome. So did your bonds. So, I’m pretty sure your real estate looked really bad. It looked particularly bad because most of these properties in a private syndication or a private fund are not revalued every day like the stock market is. They’re probably not even revalued every year. And so, you really don’t know what that property or that investment is worth. You can’t really tell what your return is until the investment has gone round trip.

What I generally see when I look at my spreadsheet, when I look at my equity real estate investments, whether they’re syndications or private funds, is generally relatively low returns. Then all of a sudden, once it goes round trip, the return gets dramatically higher. So I wouldn’t necessarily feel too bad that your returns are low as is generally the case in the beginning with these longer-term real estate investments. Obviously, if it’s not performing according to the proforma, that’s really what you can compare it to. That was their projections. You can look at those and see how they’re doing on those. That’ll give you a hint of whether you’re on track to meet the projected returns or not.

That is probably more interesting and more useful to you. It’s simply comparing the distributions and value as it’s updated to the proforma rather than actually calculating your return and comparing it to stocks and bonds, or even publicly-traded REITs.

There are a couple of things you’re missing. The first one is mortgages are often tax-deductible, car loans are pretty much never tax-deductible unless they’re owned by a business. So, a 2% house loan is generally a little bit more attractive than a 2% car loan, aside from the fact that it’s longer-term, as well, most of the time.

But putting that aside, the main thing you’re not looking at is behavior. You are making an assumption that lots of people make that this is just all about the math. In my experience, it’s rarely about the math. It’s probably 80% behavioral and 20% math. While it makes sense to borrow money at 2% and earn money at 8%, in reality, when people borrow money they spend more money.

The other thing you may not be considering is the cash flow aspect. You still have to make the payments, and that is money that could be used for something else. Frequently, once people are debt-free, it is used to work less. I know I felt much more comfortable dropping down on shifts when I didn’t have to make a mortgage payment.

So, is it dogmatic to say never take out a loan? I suppose it is, but there’s some wisdom there as well. I’m not a big fan of borrowing money for cars. I think it’s kind of silly actually, as a doctor, to borrow money for a car. Most docs are getting paid \$15,000 – \$20,000 – \$40,000 a month. You can get reliable transportation for \$5,000. So, if you can’t save up a week’s worth of income relatively quickly in just a couple of months on a doctor’s salary, you probably have a spending problem and need to fix that first.

Now, granted, most docs don’t want to drive a \$5,000 car. I don’t have a problem with that. Go get a \$10,000 car, a \$20,000 car, go get yourself a \$120,000 Tesla X, whatever you want to drive, but I want it to be something you can afford.

The way I can tell if I can afford something is whether I have that much money in the bank. If I have that much money in the bank, I can afford it. It’s very clear, and no one can argue I couldn’t afford that car. If you can reach all of your financial goals and can still drive whatever you want, then I encourage you to drive whatever you want.

But if you don’t have much money, if you have a negative net worth, if you’d like to build some wealth, if you’re in your “live like a resident” years, shoot, go get yourself a \$5,000 or \$10,000 car. They are surprisingly reliable.

If you need a reliable car and don’t have much money, yes, you can borrow a little bit to pay for that car. But when I’m talking about a car loan, I’m talking about a \$5,000 car loan. If you have a \$30,000 car loan, what that tells me is you’re probably not that good at managing money.

Because most of the people who do that aren’t that good at managing money. Despite the mathematical argument that if I can borrow at 2% and earn at 6%, I’m going to come out ahead. Now, I can’t argue against that math, but I think you’re a pretty rare person if you’re actually doing it.

You get into this habit of borrowing, especially after you’ve lived for four years in medical or dental school on borrowed money, you just become immune to it. It holds you back.

We received a couple of questions about using Uniform Transfers to Minors Act (UTMA) accounts. One from a soon-to-be medical student wondering how best to handle the \$24,000 in unrealized long-term capital gains that has been held in a UTMA account. By her second year of medical school her income will presumably be \$0, at least in earned income. So it will be really easy to sell those shares, even with the capital gain of \$24,000, and not pay any taxes on it. Now, obviously, make sure all those gains are long-term.

Another listener is the parent sending their child to school and has lots of money saved up for that expense. 529s are designed for paying for college. That’s why you put the money in there. All the earnings are tax-free, penalty-free when used for college. Use the 529 to pay for college.

If you run through that, then raid the UTMA account. There is a good chance their son can take that UTMA money out at 0% as well. It might be just as good as that 529 money, other than it hasn’t been growing tax-protected, given that he’s probably in a low tax bracket while he’s in school.

A listener loaned money to family in another country to buy a condo to live in. Now she wondered if she should put her name on the title.

Things get really complicated when you are moving money between family members, particularly when one family member has a much higher income than other family members.

I have at times given money to family members, but I make it very clear when I give it to them that it is a gift and I have no expectations whatsoever of that money coming back. I have no control whatsoever over how they spend it. It is now their responsibility to be good stewards of that money. I don’t tend to get into investments with them. I don’t tend to wrap myself into ongoing costs associated with them. I would be a little bit hesitant, in fact, if I were in this situation, to have my name on the title of a property in another country.

Personally, I’d kind of step back a little bit from this and just look at it as you helped out your family members. That is great. It’s wonderful to be in a position that you can do that. But maybe I wouldn’t get all tied into the finances by doing something like getting my name on the mortgage or getting my name on the title.

This is really a diversification question. TIPS do not act the same as nominal bonds in various economic scenarios. There are some scenarios where nominal bonds do better and some scenarios where TIPS do better.

I’m a big TIPS fan. Half of my bond allocation is in TIPS and it has been for years and years and years. But there are times when that is not the right move. It’s impossible to tell in advance whether it’s the right move or not. But there are times that it is not. And so, I would maintain both types of bonds and at least in some quantity in order to have diversification.

Future inflation is just as hard to predict as future interest rates, future asset class returns. My crystal ball is cloudy. If there’s unexpected inflation and it goes through the roof, then you’ll be really glad you owned a whole bunch of TIPS. If there is not, maybe you’ll regret owning a whole bunch of TIPS.

Remember also, though, that TIPS yields are also very low right now. It’s not like there’s some free lunch there where you can just jump into TIPS and make all kinds of more money than you can in nominal bonds. Nominal bonds tend to price in expected inflation. So, the only protection you’re getting from the TIPS is unexpected inflation. So, if the inflation is expected to be high then bond yields should be higher, whether they’re nominal or inflation-linked bonds.

Another listener asked what would be some of the best tools for a high-income earner to invest in? They’ve done a great job finishing residency and are almost done paying off student loans. They’ve been putting away money for retirement already now for years. But they don’t have a plan.

You need a written plan. How much money you need to save each year, what investment accounts you’re going to use, what investments inside those accounts you’re going to use to fulfill your desired asset allocation. You need a plan.

There are basically three ways to get a plan. One is to write your own. Some people are really hobbyists, they’re into the stuff, they listen to podcasts. They read blogs. They spend hours a day on financial internet forums. They love to read finance books and they can sit down and they’re honestly qualified to write their own financial plan.

Other people need a little more help. For those people, I have put together a course called Fire Your Financial Advisor. There’s a second version of it, that actually comes with Continuing Medical Education Credit. But this course is designed to take you from having no financial plan, to having your own written financial plan and understanding it—being financially literate and knowing about investment accounts and knowing what investments to put inside those accounts.

The third option takes perhaps the least amount of work, but is the most expensive. That is to go hire a financial advisor. There are financial planners who will help you put together a plan, whether or not you continue to use their services to implement the plan or maintain the plan. They may just write the plan for you if that’s all you want. We keep a list of recommended financial advisors. I would recommend you do one of those three things in order to get a financial plan in place.

The reason you can’t find that data is because it doesn’t exist. If anybody has it, it’s probably the malpractice insurance companies and they’re not sharing it. Trust me. I’ve looked hard for that data.

Here’s my thoughts on medical malpractice coverage. You want enough malpractice coverage that it pays for a few things. Number one, it needs to pay for a robust defense. A lot of times you get a lawsuit, and it is garbage. It’s still going to drag you through the mud for six months or five years or whatever, but it’s garbage. There’s no merit to it. You want to have the resources available to defend yourself against that garbage. A malpractice policy does that. It doesn’t just pay for settlements and for any judgements that are made against you. It also pays for your defense. So, you want a big enough policy that it’s going to cover that.

The second thing you generally want is the person that you hurt, that you have to settle with, or that gets a judgment against you, you want them and their attorney to walk away with a big chunk of money. Why do you want them to have a big chunk of money? So, they’re happy with that chunk of money rather than wanting to come after your money.

Because when you are in a malpractice lawsuit that looks like you’re going to settle, or perhaps lose, remember whose money you’re playing with. You are playing with the insurance company’s money. In a lot of ways, you are just the defense witness for the insurance company. It’s not your money you’re losing. The vast majority of lawsuits are settled or paid out at policy limits or less. Actually, the vast majority are dismissed, but of the ones that actually have a payout, a very few of them are done for above policy limits.

But you know what? If you come in there with a \$250,000 policy, they’d look at that and go, “What’s that going to pay for?” And the attorney goes, “I’m not doing all this work for my cut of a third of a quarter-million dollars.” Now they all want to go after your personal assets in addition. Even if it is just \$100,000 or \$200,000 of your personal assets, you’ve changed the game.

I don’t think these little tiny policies are a good idea. I think once you get into the seven figures range, most people that get handed a million dollars are going to feel pretty good about that. When you’re into that range, then you can satisfy that need for both the attorney and the client to get a lot, and have it feel like a lot. I’m not sure that you get anything extra there by going from a \$1 million-\$3 million policy to a \$2 million-\$6 million policy. Remember that the first number is per incident per patient. And the second one is per year.

The third guideline is to carry what everybody else is carrying. You don’t necessarily want to stand out in this regard. I’m in Utah. I’m an emergency physician. Everybody here carries \$1 million-\$3 million. And so, I carry \$1 million-\$3 million. And that’s not some big secret. It’s going to be the first thing that comes out in a malpractice lawsuit discovery process. They’re going to find out my policy pays \$1 million-\$3 million.

I don’t know how big of a fear that is about the deep pockets being an issue. I think by the time somebody decided to sue you, after that is usually when they do discovery and find out how much malpractice coverage you have. So, I don’t think you’re necessarily attracting lawsuits that way.

It wouldn’t surprise me, however, the ones who are in it, if they find out you have a \$2 million-\$6 million policy that they only want to settle for \$2 million, instead of \$1 million. That wouldn’t surprise me a bit.

I also asked this question to a malpractice provider, the attorneys for the company that provides malpractice. It was two or three carriers ago, but they laughed and said, “Yeah, we’ll sell you a \$2 million-\$6 million policy if you want it. But it’s very hard for us to in good faith recommend it to you.” They thought it was kind of a waste of money.

Take from that what you will. We had an asset protection expert on here a few podcasts ago, and he didn’t think it was a bad idea at all, to have a bigger malpractice policy. And so, you’ll have to decide on your own what that’s worth.

I think it’s important in any discussion on this topic to really define what we’re talking about. The problem is the vast majority of people out there are using the term “dollar-cost averaging” wrong. They are not talking about dollar-cost averaging. They are talking about periodic investing, as are you in this particular question. Let me explain the difference.

You cannot lump sum an investment if you do not have a lump sum. Likewise, you cannot dollar-cost average an investment, unless you have a lump sum. If you don’t have the money, you cannot make a lump sum and you cannot dollar-cost average. All you can do is periodically invest. When you get the money, you invest.

So, somebody who makes \$15,000 a month and invests \$5,000 a month, every month they invest \$5,000. That’s periodic investing. And when the market goes down, they benefit from that. They can buy more shares because the price is lower. When the market goes up, they buy fewer shares. So, on average, the cost of their shares is lower than it would be if they bought it all at the median price.

However, that’s what most of us do, because that’s just how we make our money. We make our money periodically. So, we invest periodically.

Now imagine that you received an inheritance. Now you have to decide what to do with it. Do you put all the money in right now? Do you put some of the money in once a quarter for the next year, or do you put some of the money in every six months for the next six years?

What do you do? Well, if you look at the data on that, most of the time you come out ahead by putting all that money in at the very beginning because the markets generally go up. So, in general, over time, if you spread those investments out over 18 months or over six years, most of those future investments are going to be at a higher price. And so, that’s unfortunate. You should have invested it all at once.

Of course, every now and then, one out of every three years or so, the market goes down and then you’re kicking yourself. But the truth is the right move academically is to just lump sum it.

But you’re not in a position to lump sum the money because you don’t have all the money at the beginning of the year. You are in a position to periodically invest. I like what you’re doing in that you put the money into the tax-protected accounts first, because most of the time your investments are going to go up throughout the year. And so, you’ve had the money in the tax-protected accounts the longest, your Roth IRAs and your HSA and your 401(k).

I do the same thing you do. I put it in at the beginning of the year. Now, I continue to invest throughout the year. That money tends to go into lower priority investments, mostly my taxable investing account. And so, I’m getting the benefits of periodically investing because I’m investing throughout the year, even when things go down. But I’m also most of the time coming out ahead because I’m putting money into the tax-protected accounts first.

So, I wouldn’t necessarily complicate your life by trying to spread it out in every account throughout the year. I would simply do what you’re doing.

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Our quote of the day comes from Graham and Dodd.

The truth is, by the time you know enough to pick up an investment consultant, you probably know enough to do it yourself, unfortunately. It’s such a difficult process, sometimes, to choose an advisor.

After finding White Coat Investor two years ago, this physician has felt freed by this continuing financial education. Her debt was an emotional burden. Paying off her student loans felt like a huge weight off her shoulders and enabled her to focus on bigger priorities like funding 529s for her children. If that is your next goal see our review on 529 plans.

Intro:
This is the White Coat Investor podcast where we help those who wear the white coat get a fair shake on Wall Street. We’ve been helping doctors and other high-income professionals stop doing dumb things with their money since 2011. Here’s your host, Dr. Jim Dahle.

Dr. Jim Dahle:
This is White Coat Investor podcast number 215 – How to calculate return on investment.

Dr. Jim Dahle:

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Dr. Jim Dahle:
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Dr. Jim Dahle:
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Dr. Jim Dahle:
All right, let’s do our quote of the day. This one comes from Graham and Dodd. “The investor should not be a sole consultant unless he has training and experience sufficient to qualify him to advise others professionally”.

Dr. Jim Dahle:
I think there’s a lot of truth to that. The truth is by the time you know enough to pick up an investment consultant, you probably know enough to do it yourself though, unfortunately. It’s such a difficult process sometimes to choose an advisor.

Dr. Jim Dahle:
Thanks for what you do. Life can be difficult in the high paid professions. Whether you are a doctor or a lawyer or a dentist or a professional bike rider, your life is likely difficult, and that’s why you get paid so much to do it. So, thanks for going through that and for all the sacrifices you’ve made.

Dr. Jim Dahle:
You can do this and WCI can help. We want you to be successful. So, we’re going to give anyone who refinanced more than \$100,000 in student loans through WCI links at whitecoatinvestor.com/student-loan-refinancing free access to the White Coat Investor flagship course, Fire Your Financial Advisor.

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Dr. Jim Dahle:
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Dr. Jim Dahle:
All right, today, we are going to do questions. Your questions. This podcast is all about you and what you want to talk about. So, if you want to leave us a question here at the White Coat Investor, all you have to do is go to the Speak Pipe. Whitecoatinvestor.com/speakpipe is a site where you can record up to a minute and a half question. Don’t feel like you got to use the whole minute and a half. But we’ll get you on the podcast and get your questions answered. Our first one comes in from an anonymous listener. Let’s take a listen.

Speaker:
Hi, Jim. I wanted to get your take on something. Oftentimes you will hear talking heads in the finance world dogmatically say that you should never take on debt to buy a depreciating asset. And usually this is in reference to financing a car purchase.

Speaker:
Now I agree that debt can be dangerous if it influences you into buying a car that you otherwise can’t afford. However, once I decided to buy a particular car at a particular price, I see no problem with using financing.

Speaker:
As a thought exercise, imagine I’m simultaneously buying a \$50,000 car and the \$50,000 house. And imagine that the bank will 100% finance both purchases each with a 2% interest rate. Well, in this scenario, it makes absolutely no difference whether I take out the loan on the car or the loan on the house, even though technically the car is a depreciating asset while the house is an appreciating asset.

Speaker:
So, what do you think Jim? When people say that you should never take out loans to buy a depreciating asset, is that just a dogmatic, amazing expression that ignores math? Or is there some fundamental consideration that I’m missing? Thanks a lot.

Dr. Jim Dahle:
All right. Good question. Well, yeah, I think there’s a couple of things you’re missing. The first one is mortgages are often tax deductible, car loans are pretty much never tax deductible unless they’re owned by a business. So, a 2% house loan is generally a little bit more attractive than a 2% car loan aside from the fact that it’s longer term as well, most of the time.

Dr. Jim Dahle:
But putting that aside, the main thing you’re not looking at is behavior. You are making an assumption that lots of people make that this is just all about the math. And in my experience, it’s rarely about the math. It’s probably 80% behavioral and 20% math. And so, while it makes sense to borrow money at 2% and earn money at 8%, in reality, what I think people do when they borrow money is they spend more money.

Dr. Jim Dahle:
When you are not pulling out the green stuff, when you are not writing the check, when you are not doing the wire, when you are not watching your bank account balance drop by \$60,000 when you buy a \$60,000 car, it is less psychologically painful to buy it. And so, you are likely to buy more frequently. You’re likely to spend more money.

Dr. Jim Dahle:
I think that is a true for the vast majority of people. Maybe you’re some sort of cold calculating homo economicus that this does not affect, but the truth is the vast majority of people are affected by it. And so, I think you spend more when you spend borrowed money.

Dr. Jim Dahle:
The other thing you may not be considering is the cash flow aspect. You still have to make the payments and that is money that could be used for something else. And frequently, once people are debt-free it is used to working less. I know I felt much more comfortable dropping down on shifts when I didn’t have to make a mortgage payment. Now I have another source of income with WCI. But psychologically, I think there’s a real there.

Dr. Jim Dahle:
So, is it dogmatic to say never take out a loan? I suppose it is but there’s some wisdom there as well. I have never had a car payment. Now my parents gave me a loan for the first car they gave me. They gave me the car and told me I had to pay them back when I got into residency. So, I owed them \$3,000 for that, but that was the only car loan I ever had. And I paid them back with like my second paycheck in residency.

Dr. Jim Dahle:
And so, I’m not a big fan of borrowing money for cars. I think it’s kind of silly actually as a doc to borrow money for a car, right? Most docs are getting paid \$15,000 – \$20,000 – \$40,000 a month. And you can get reliable transportation for \$5,000. So, if you can’t save up a week’s worth of income relatively quickly in just a couple of months on a doctor’s salary, you probably have a spending problem and need to fix that first.

Dr. Jim Dahle:
Now, granted, most docs don’t want to drive a \$5,000 car. I don’t have a problem with that. Go get a \$10,000 car, a \$20,000 car, go get yourself a \$120,000 Tesla X, whatever you want to drive, but I want it to be something you can afford.

Dr. Jim Dahle:
And the way I can tell if I can afford something is whether I have that much money in the bank. If I have that much money in the bank, I can afford it. It’s very clear and no one can argue I couldn’t afford that car. And so, if you can reach all of your financial goals and still drive whatever you want, then I encourage you to drive whatever you want. I don’t care if it’s an F-250, I don’t care if it’s a Tesla. I don’t care if it’s a Spider, whatever you want to drive, knock yourself out, if you can afford it without setting yourself back and knowing your financial goals.

Dr. Jim Dahle:
But if you don’t have much money, if you have a negative net worth, if you’d like to build some wealth, if you’re in your “live like a resident” years, shoot, go get yourself a \$5,000 or \$10,000 car. They are surprisingly reliable. You think it’s a piece of junk, it’s not. If you’ve never driven a car in that price range, you’d be surprised how many years you can drive it for.

Dr. Jim Dahle:
This car I bought about a year ago is a \$5,000 car. It’s a ten-year-old old Honda Civic, a very reliable brand with 120,000 miles on it. You talk to Civic owners how long their car goes, that car is only halfway through its life. It will probably go another 10 years. I expect to teach my next two kids how to drive a stick in that car. It’s a reliable car. And of course, we’ve had no issues whatsoever with it in the last year.

Dr. Jim Dahle:
And so, if you need a reliable car and don’t have much money, yes, you can borrow a little bit to pay for that car. But when I’m talking about a car loan, I’m talking about a \$5,000 car loan. If you got a \$30,000 car loan, what that tells me is you’re probably not that good at managing money.

Dr. Jim Dahle:
Because most of the people who do that aren’t that good at managing money. Despite the mathematical argument that if I can borrow at 2% and earn at 6%, I’m going to come out ahead. Now, I can’t argue against that math, but I think you’re a pretty rare person if you’re actually doing it. In general, what I think you probably do is you go next and instead of maybe you borrow for your vacation or maybe you borrow for another car, maybe you borrow for your spouse’s car, maybe you borrow more for your house than you otherwise would.

Dr. Jim Dahle:
And so, I think you get into this habit of borrowing, especially after you’ve lived for four years in medical or dental school on borrowed money, you just become immune to it. And it really does retard your wealth progression. It holds you back. And I think that’s the case for the vast majority of people.

Dr. Jim Dahle:
Honestly, when I run into people who are millionaires, I interview them on the Milestones to Millionaire podcast, and I ask them, “Well, what role does debt play in this?” Very few of them say it had any sort of significant role at all. The vast majority of people, the same desire that drives them to save money, also drives them to pay down their debts. I think it’s very rare for somebody that is really into borrowing money to really build a lot of wealth.

Dr. Jim Dahle:
And so, good luck going down that pathway, it’s your money and your decision. But in general, I don’t regret becoming debt-free. It’s been three or four years now since we paid off all our debts and our net worth has done nothing but climb dramatically in that time period. And so, I have no regrets whatsoever about living that way. And I plan to keep living that way. We even cash flow our big home renovation. And so, I’m a big fan of debt-free living. It certainly has helped me to be happier in my life, but if you want to take out a car loan at 2%, it’s your life, you can do whatever you want.

Dr. Jim Dahle:
All right, let’s take our next question. This one comes from Bethany and let’s take a listen.

Bethany:
Hi, this is Bethany from Florida. Thank you for all that you’ve done to help us become informed investors. I was wondering, last year I invested in a real estate fund and I’m trying to understand how to compare returns from that fund to my stock and bond returns. It’s projected to be a 5-to-7-year investment. So, I assume the early returns will be low and then increase as properties are sold. But how do you calculate returns on your real estate investments? And can you only fairly assess their performance after the fund has closed? Thank you.

Dr. Jim Dahle:
Great question, Bethany. Remember that closing the fund is usually at the beginning of its 5-to-7-year life liquidations at the end. So, you really can’t compare the return at closing because you’re just starting with the investment at closing. So, keep that in mind.

Dr. Jim Dahle:
But the question is how do you calculate return? Well, the way I calculate return is to calculate a dollar weighted return. And I do that with a calculation called XIRR. And you can do that in any financial calculator or any spreadsheet. If you go to Excel or Google sheets, it has this function as part of the spreadsheet. And that’s where I calculate my return.

Dr. Jim Dahle:
All you have to know to calculate your return is the inputs, meaning the money you put into the investment, any the money that you put in later, or any money that you took out of the investment, like a dividend or an interest you paid or whatever, return of principle, and the dates of those cash flows.

Dr. Jim Dahle:
Once you know all that, you can calculate an annualized return. You can make a few other adjustments to the sheet in order to get a return for a given year. You can change the dates, et cetera.

Dr. Jim Dahle:
I have a tutorial on that on the website. If you just go to whitecoatinvestor.com and search XIRR, it’ll pop right up. There’s a little sample spreadsheet there and they’ll walk you right through the process. So that’s what I use to calculate my return.

Dr. Jim Dahle:
What I’ve noticed, however, is that many of these real estate investments give you a return that isn’t quite accurate, and it’s almost always better than what I calculated to be on XIRR. And that might be just because I only calculate the money as it leaves my bank account and comes back to my bank account. They might be using other dates to calculate it to make it look a little bit better like the dates they got the money.

Dr. Jim Dahle:
But that really doesn’t matter to me. All I care about is my return in and out of my account. And so, I think that’s the best way to do it. So, I’d encourage you to learn to use that.

Dr. Jim Dahle:
But your broader question, you’re trying to compare this real estate fund to your stock and bond return. Well in 2020, your stocks did awesome. So did your bonds, right? So, I’m pretty sure your real estate looked really bad. It looked particularly bad because most of these properties in a private syndication or a private fund are not revalued every day like the stock market is. They’re probably not even revalued every year. And so, you really don’t know what that property or that investment is worth.

Dr. Jim Dahle:
For example, I’ve had a syndication now for three or four years. I think it was a \$100,000 investment. And if you go onto their website, it still tells you it’s worth \$100,000. It certainly is not worth \$100,000. Might be worth less, might be worth more, but it’s not even \$100,000 I can guarantee you that.

Dr. Jim Dahle:
And so, really you can’t tell what your return is until the investment has gone round trip. In the 5-to-7-year equity real estate investment, you’re stuck anyway so who really cares what the return is? It’s not like you’re getting out early or something, but you really can’t fairly calculate it until the end.

Dr. Jim Dahle:
For example, I have a real estate fund. For the first year you put money in with capital calls actually is about two years. I think we were putting money in with capital calls shortly after those capital calls ended. We started getting principal back. So I think the fund has sold two or three properties already, and I’ve gotten the principal back from those properties. And so, if I go on the website, this one actually does relatively frequently mark things to market.

Dr. Jim Dahle:
And so, I’ve still got more than my initial investment in there, but I’ve gotten some of my principal back and then I’ve gotten some income distributions as well. And so, it’s a little bit unfair to compare that to the return of something that’s marked to market every day.

Dr. Jim Dahle:
Now I can do it. I plugged the numbers into the XIRR and I can tell exactly what my return has been. In fact, if I pull that up here, that is an interesting fund to look at just because we’re in the middle of it. I’ve started getting some of my principal back and so on and so forth. And so, let’s pull that up and let’s see what my return actually is on this investment, as of today, anyway.

Dr. Jim Dahle:
Across my investment spreadsheet with a bunch of XIRR calculations for each investment, it tells me that my return on this particular investment is an annualized return of 9.21%. And that’s over a period of four years so far, but this investment like yours is another three or four years to run. And in the end, it wouldn’t surprise me a bit if that return is significantly higher than that. I actually expected to be higher than that perhaps in the 15% range.

Dr. Jim Dahle:
And that’s partly a result of the fact that leverage is being used in the investment. And part of the fact that I’m probably being paid a premium for being willing to be a illiquid for so many years. But that’s kind of where we’re at right now.

Dr. Jim Dahle:
If I would have looked at that a couple of years ago, it might’ve said 2%. And so, obviously that would have looked really bad. Some of my other investments, like here’s one that is only 3.16%. And that’s because the value of the property hasn’t been changed. So, that’s just the income that’s come from it, about a 3% income that’s come off that particular syndication.

Dr. Jim Dahle:
And so, what I generally see when I look at my spreadsheet, when I look at my equity real estate investments, whether they’re syndications or private funds, is generally relatively low returns. And then all of a sudden, once it goes round trip, the return gets dramatically higher. For example, there was one down the street from me for a while. See if I can find it here in my spreadsheet. And it was an equity investment. I think it might’ve been preferred equity, but there it is right there. I think it gave me returns at 4% or so. And then when it finally went round trip, it was 13.66%.

Dr. Jim Dahle:
And so, I wouldn’t necessarily feel too badly that your returns are low as generally the case in the beginning with these longer-term real estate investments. Obviously if it’s not performing according to the proforma, that’s really what you can compare it to. That was their projections. You can look at those and see how they’re doing on those. That’ll give you a hint of whether you’re on track to meet the projected returns or not.

Dr. Jim Dahle:
And that’s probably more interesting and more useful to you. It’s simply comparing the distributions and value as it’s updated to the proforma rather than actually calculating your return and comparing it to stocks and bonds, or even publicly traded REITs. I hope that’s helpful to you Bethany.

Dr. Jim Dahle:
Okay, let’s take our next question from Emma.

Emma:
Hi, Dr. Dahle. I was recently accepted into medical school for the upcoming year, and I am preparing my finances for this undertaking. It took two years off from school to work before attending medical school. And I have managed to save approximately \$26,000 in cash, along with some savings bonds that are still reaching maturity.

Emma:
I am thinking of going to medical school in Texas, which means I’ll be able to cover my additional expenses in tuition for the first year with most of my savings. So, I was wondering how best to handle money that has been held in a UTMA account.

Emma:
My wonderful parents have always advocated for savings and put a sum into a UTMA account that has approximately \$24,000 in unrealized long-term capital gains. I want to use this money for school and I’m trying to pay the least amount of taxes on it, if possible.

Emma:
My income from this year is likely to be in the \$25,000 range. My question is this. If I withdraw a portion of the money this year and stay under the income limit of \$40,000, will I have to pay capital gains tax on the amount withdrawn? If this is true and I don’t have to pay capital gains on an annual income of \$40,000, my plan is to withdraw a portion this year and cash out the remainder of the account next year. Thank you for all you do. I’ve been listening to your podcast for years, and I appreciate all your advice.

Dr. Jim Dahle:
I’m not sure if there was a question in there just in case of how awesome you are and how awesome your plan is. I think our plan is great. I love that you’re thinking about the capital gains because you, at least by the year after you enroll in medical school will presumably have an income of \$0, at least an earned income. And so, it’s going to be really easy to sell those shares, even with the capital gain of \$24,000 and not pay any taxes on it.

Dr. Jim Dahle:
So, it’s pretty awesome. You’re basically in the 0% long-term capital gain bracket. Now, obviously make sure all those gains are long-term, right? But yeah, 0%. It’s great. What wonderful parents you have that we’re willing to do that for you. Obviously, if they have some 529 money for you too, that would be a great thing to use.

Dr. Jim Dahle:
As a general rule, I like to see you using your cash first before you start borrowing money in medical school. If you don’t take any loans out until your third or fourth year, well, it’s that much longer before the interest starts adding up. I make an exception. If you’ve got that money in retirement accounts, if you have an old 401(k) or something from your working years, maybe I wouldn’t cash that out.

Dr. Jim Dahle:
What I would do with that though, and again, pay attention to income brackets while you’re doing it. But what I would do with that is I would try to convert it to a Roth account during medical school, during those years when you don’t have any earned income. And so, I think that’s also a great option.

Dr. Jim Dahle:
But it sounds like you’ve got a great plan to me. Maybe you don’t want to cash those out this year because you got half a year of earned income. Maybe you cash them out next year. And if that means you got to borrow a little bit of money as an MS-1, I think that’s fine to avoid that taxation. If you don’t have to borrow any, because you’ve got the cash to cover that, even better.

Dr. Jim Dahle:
And maybe you do in Texas, probably the cheapest medical schools in the country are in Texas. But I think your plan is solid. I think you have some really nice parents and I wish you the best of luck. Congratulations on getting into medical school.

Dr. Jim Dahle:
Let’s take our next question here.

Marie:
Hello, Dr. Dahle. It’s Marie. Would you have any insight on owning apartments, condominiums or land in a foreign country? I gave my sister in the Philippines a 20% down payment on a condominium for her and my parents to live on. So, the condo is probably worth around \$80,000 based on today’s exchange rate.

Marie:
So, I recently took on dual citizenship. I now can theoretically be placed on the title to own this with my sister once they’ve paid off the mortgage. So, it’s their primary residence. They and we are not making money on this. And as mentioned, the monthly mortgage is still due. So, I wanted to get your take on this. Thank you.

Dr. Jim Dahle:
All right, Marie. That’s really nice of you to put that down. You didn’t mention if that was a loan or if you’re considering yourself an owner of this property, or whether that was a gift to your parents or siblings. Things get really complicated when you’re moving money between family members, particularly when one family member has a much higher income than other family members.

Dr. Jim Dahle:
I have at times given money to family members, but I make it very clear when I give it to them that it is a gift and I have no expectations whatsoever of that money coming back. I have no control whatsoever over how they spend it. And that it’s now their responsibility to be good stewards of that money. I don’t tend to get into investments with them. I don’t tend to wrap myself into ongoing costs associated with them. I would be a little bit hesitant in fact, if I were in this situation to have my name on the title of a property in another country.

Dr. Jim Dahle:
This is probably not an awesome investment for you anyway. I would not view this as an investment, I would view it as a consumption item, right? It’s not producing any income whatsoever for you. It has actually required expenses every month as that mortgage has to be paid, and this thing’s going to have to be kept up and so on and so forth.

Dr. Jim Dahle:
So, I would not really look at this as part of your investment portfolio. In fact, I would reconsider, it sounds to me like you’ve made it as some sort of a loan or co-investment or something. I would maybe reconsider that. Assuming you’re like the vast majority of my audience, and you’re a high-income professional with presumably \$200,000 or \$300,000 or \$400,000 a year in income, I’m pretty sure your family is not making that in the Philippines. And I might just reconsider this as a gift and maybe just step away from the whole thing and let them manage it going forward. But that’s up to you. That really comes down to the agreement you made with your family members, and so on and so forth.

Dr. Jim Dahle:
As a general rule, buying an investment property in another country is not something I would do, but I also don’t have dual citizenship. So, if this is someplace you imagine yourself retiring or spending a great deal of time there, maybe it’s not as big of a deal to you. But I don’t even like owning an investment property in another state. If I can’t drive past it, and look at it and do minor repairs or whatever on it, I don’t really want to own it at all.

Dr. Jim Dahle:
In fact, I don’t like land lording, period. So, most of my investments are now fairly passive as far as real estate goes. But if you’re into landlord and you’re into a landlord on the other side of the planet, well, I don’t know if that’s necessarily a bad thing, but I don’t think it’s a game I would get into.

Dr. Jim Dahle:
The other issue of course, is any income you do get from that you’re going to owe US taxes on. And so, you’re going to have to look at the tax treaties between the US and Philippines and see how that stuff is all treated. And there are attorneys and accountants that specialize in relationships between the US and countries where people frequently go to. If you go to the US-Canada border or US-Mexico border in those border towns, you can often find attorneys and accountants that kind of specialize in cross border financial stuff like this. I don’t know where exactly you’d go to find a US-Filipino specialist, but I’ll bet you could find one, if you’re really interested in.

Dr. Jim Dahle:
Personally, I’d kind of stepped back a little bit from this and just look at it as you helped out your family members. And that’s great as a wonderful thing to do. It’s wonderful to be in a position that you can do that. But maybe I wouldn’t get all tied into the finances by doing something like getting my name on the mortgage or getting my name on the title. Good luck with that, Marie. Thanks for your question.

Dr. Jim Dahle:
Let’s take our next one here. This one comes from Matt.

Matt:
Hi, Jim. This is Matt. I’m a retired academic. I have all of my portfolio in a 403(b) with TIAA CREF. I’m currently about 55% equities, 45% bonds. And of that bond of about half TIPS, about half just a regular bond index fund. I’m wondering at this point, is there any reason I shouldn’t go 100% TIPS? Bond yields are so low right now, and there is inflation that’s maybe on the horizon. What’s the downside of the bond portfolio that’s all TIPS? Thanks very much for your help.

Dr. Jim Dahle:
All right. Great question, Matt. This is really a diversification question. TIPS do not act the same as nominal bonds in various economic scenarios. There are some scenarios where nominal bonds do better and some scenarios where tips do better.

Dr. Jim Dahle:
I’m a big TIPS fan. Half of my bond allocation is in TIPS and it has been for years and years and years. But there are times when that is not the right move. It’s impossible to tell in advance whether it’s the right move or not. But there are times that it is not. And so, I would maintain both types of bonds and at least in some quantity in order to have diversification.

Dr. Jim Dahle:
Future inflation is just as hard to predict as future interest rates, future asset class returns. And my crystal ball is cloudy. If there’s unexpected inflation and it goes through the roof, then you’ll be really glad you owned a whole bunch of TIPS. If there is not, maybe you’ll regret owning a whole bunch of TIPS.

Dr. Jim Dahle:
Remember also though, that TIPS yields are also very low right now. It’s not like there’s some free lunch there where you can just jump into TIPS and make all kinds of more money than you can in nominal bonds. And nominal bonds tend to price in expected inflation. So, the only protection you’re getting from the TIPS is unexpected inflation. So, if the inflation is expected to be high then bond yields should be higher, whether they’re nominal or inflation linked bonds.

Dr. Jim Dahle:
So, I hope that’s helpful to you. I know TIPS and I-bonds and commodities and anything else that seems to have some sort of inflation protection factor is really all the rage right now. But the truth is this little bump in inflation we’ve had this spring might be the beginning of a trend. It might be a one-off and we’re back to 1% or 2% inflation by the fall. It’s really hard to tell at this point. So, I would hedge your bets and diversify your portfolio and stick with your written plan. I hope that’s helpful.

Dr. Jim Dahle:
All right, our next question comes from Billy.

Billy:
Hi, this is Billy. My wife is finishing up her residency here in the next two months, and we’ll be getting a fairly large income. For the last five years during residency, I’ve been the breadwinner and been the one that contributed to retirement plans. Starting in August, my wife will start her job as an orthopedic surgeon and have a pension plan as well as the opportunity to contribute to non-qualified accounts.

Billy:
Our goal is to be financially independent by the age of 50. We’re almost paid off on her student loans. I have no student loans. We’re going to get a sizable chunk of equity from selling our home where we are at currently. We plan to pay off the remainder of her student loans and continue with our current vehicles with no payments.

Billy:
Based on your experience, what would be some of the best tools for a high-income earner to invest into? Currently, we have signed up for a Vanguard account and a Wells Fargo account and plan to invest in mutual funds and index funds. We’d love to hear any additional insight.

Dr. Jim Dahle:
All right, Billy and Emily, great job so far. You guys are doing awesome. You finished an orthopedic surgery residency, right? One of the highest paid fields, at least on average in all of medicine. You’re almost done with student loans by the time you come out of residency. Billy’s been putting away money for retirement already now for years. You guys are in an enviable position. You’re way ahead of your peers, way ahead of where I was coming out of residency. And I don’t suspect you’re going to have any difficulty at all in reaching financial independence by age 50.

Dr. Jim Dahle:
But what you don’t have is a plan. You need a written plan that’s going to get you there. How much money you need to save each year, what investment accounts you’re going to use, what investments inside those accounts you’re going to use to fulfill your desired asset allocation? You need a plan.

Dr. Jim Dahle:
And so, there’s basically three ways to get a plan. One is to write your own. Some people are really hobbyists, they’re into the stuff, they listen to podcasts. They read blogs. They spend hours a day on financial internet forums. They love to read finance books and they can sit down and they’re honestly qualified to write their own financial plan. And certainly, they’re in the investing component of their financial plan, which is one of the easier parts.

Dr. Jim Dahle:
Other people need a little more help. For those people, I have written a course or put together a course called Fire Your Financial Advisor. There’s a second version of it, that actually comes with Continuing Medical Education Credit. And maybe you can use your wife’s CME fund to pay for that if you like.

Dr. Jim Dahle:
But this course is designed to take you from having no financial plan, which appears to be where you’re at right now to having your own written financial plan and understanding it and being financially illiterate and knowing about investment accounts and knowing about investments to put inside those accounts.

Dr. Jim Dahle:
The third option takes perhaps the least amount of work, but is the most expensive. And that’s to go hire a financial advisor. There are financial planners who will help you put together a plan, whether you continue to use their services to implement the plan, to maintain the plan. They may just write the plan for you if that’s all you want. And we keep a list of those under recommended financial advisors at the White Coat Investor website. So, I would recommend you do one of those three things in order to get a financial plan in place.

Dr. Jim Dahle:
But if you are like most doctors, your plan is probably going to look something like saving 20% to 30% to 40% of your gross income for retirement. And that’s divided into whatever available retirement accounts you might have. Maybe at your work you have a 401(k). Maybe at her work, she has access to a 403(b) and a 457. And then you can each also do a backdoor Roth IRA. So that’s \$6,000 a year this year for each of you.

Dr. Jim Dahle:
And if your only health insurance plan is a high deductible health plan, you can also use a health savings account, which is like a triple tax-free account. It’s basically a stealth IRA, and you can use that.

Dr. Jim Dahle:
But above and beyond that, and you’ll probably be above and beyond that I suspect given your income, everything has to be invested in just a regular old taxable account. And you can open one of those at Vanguard or Wells Fargo or Fidelity or Schwab.

Dr. Jim Dahle:
I’m a little partial to Vanguard. I like Vanguard. They’re mutually owned, costs tend to be low. Sometimes people complain about the service a little bit because the costs are so low and they grow so fast that maybe their phone reps aren’t as well trained as they should be so on and so forth.

Dr. Jim Dahle:
But I don’t know that I would necessarily let anybody I actually liked going anywhere near Wells Fargo, given the track record of that particular bank. And so, I might encourage you to think more on the lines of Vanguard or Fidelity or Schwab or even ETrade or TD Ameritrade, those sorts of companies than a Wells Fargo bank.

Dr. Jim Dahle:
But in general, you’ll use those retirement accounts. You’ll invest the rest in taxable, whether those are very tax efficient mutual funds in that taxable account, or whether those are investments in investment real estate, whether directly, if you’re into being a landlord or indirectly via private syndications or funds. But that’s a typical portfolio for a doctor.

Dr. Jim Dahle:
But you want the plan out and then you choose investments to fulfill the plan rather than just a hodgepodge of picking investments that you think are good. And that’s what a lot of people ended up doing. And so, they end up with this alphabet soup of investments and nothing really fits together, or they think they’re diversified and they really just own a bunch of the same stuff. But what you really need at this point is a plan.

Dr. Jim Dahle:
The good news, you’re starting from a fantastic place. You’re way ahead of the vast majority of doctors financially. And I think your goals are probably very realistic. But you need a plan that takes you from where you are now to your goals of what you want to accomplish. And so, I’d recommend you get that in place as soon as possible.

Dr. Jim Dahle:
All right, our next question comes from Nick. Let’s take a listen to the next question.

Nick:
Hi, Dr. Dahle. My name is Nick. I’m a physician in the Midwest. My wife and I were doing some estate planning. And I was talking to the attorney about asset protection. And I was pleased to hear her say the same thing, which I’ve heard on your podcast, which is that there’s really not a lot of great benefit to doing any kind of fancy asset protection strategies. And certainly not unless you’ve got a giant \$10 million plus portfolio or something like that. She said, essentially having good malpractice insurance is the best thing you can do.

Nick:
My question then is, is there any reason, is it better to increase your malpractice coverage? I’ve got a standard \$1 million-\$3 million policy. If I switched to a \$2million-\$5 million or something bigger, is that better coverage or is that just making me a bigger target for a potential suit? I haven’t been able to really get any good data on that. So, I wanted to see your thoughts. Thanks.

Dr. Jim Dahle:
Great question, Nick. The reason you can’t find that data is because it doesn’t exist. And if anybody has it, it’s probably the malpractice insurance companies and they’re not sharing it. Trust me. I’ve looked hard for that data.

Dr. Jim Dahle:
Here’s my thoughts on the topic. You want enough malpractice coverage that it pays for a few things. Number one, it needs to pay for a robust defense. A lot of the times you get a lawsuit and it is garbage. It’s still going to drag you through the mud for six months or five years or whatever, but it’s garbage. There’s no merit to it. And you want it to have the resources available to defend yourself against that garbage. And a malpractice policy does that. It doesn’t just pay for settlements and for any judgements that are made against you. It also pays for your defense. So, you want a big enough policy. That’s going to cover that.

Dr. Jim Dahle:
The second thing you generally want is you want the person that you hurt, that you have to settle with, or that gets a judgment against you. You want them and their attorney to walk away with a big chunk of money. And why do you want them to have a big chunk of money? So, they’re happy with that chunk of money rather than wanting to come after your money.

Dr. Jim Dahle:
Because when you are in a malpractice lawsuit that looks like you’re going to settle, or perhaps lose, remember whose money you’re playing with. You are playing with the insurance company’s money, right? In a lot of ways, you are just the defense witness for the insurance company. It’s not your money you’re losing. And the vast majority lawsuits are settled or paid out at policy limits or less. Actually, the vast majority are dismissed, but of the ones that actually have a payout, a very few of them are done for above policy limits.

Dr. Jim Dahle:
But you know what? If you come in there with a \$250,000 policy and they’d look at that and go, “What’s that going to pay for?” And the attorney goes, “I’m not doing all this work for my cut of a third of a quarter million dollars”. And all of a sudden you pissed them off. Now they all want to go after your personal assets in addition. Even if it is just \$100,000 or \$200,000 of your personal assets, you’ve changed the game.

Dr. Jim Dahle:
And so, I don’t think you want to get into that business. Some people try going bare on their insurance. This was really popular about 20 years ago. I don’t think that’s a very good idea. I don’t think these little tiny policies are a good idea. I think once you get into the seven figures range, most people that get handed a million dollars are going to feel pretty good about that. Maybe not if you run over some CEO or damaged some NFL player’s knee or something in a botched surgery. Maybe they’re not so happy with a million dollars, but for the vast majority of people, a million dollars is still a lot of money.

Dr. Jim Dahle:
And so, I think when you’re into that range, then you can satisfy that need for both the attorney and the client to get a lot, and have it felt like a lot. And I’m not sure that you get anything extra there by going from a \$1 million-\$3 million policy to usually a \$2 million-\$6 million policy, but maybe you have looked at one that was \$2 million-\$5 million. I don’t know. Remember that the first number is per incident per patient. And the second one is per year. That’s what those \$1 million-\$3 million means.

Dr. Jim Dahle:
And so, I think the third guideline is to carry what everybody else is caring. You don’t necessarily want to stand out in this regard. I’m in Utah. I’m an emergency physician. Everybody here carries \$1 million-\$3 million. And so, I carry \$1 million-\$3 million. And that’s not some big secret, right? It’s going to be the first thing that comes out in a malpractice lawsuit discovery process. They’re going to find out my policy pays \$1 million-\$3 million.

Dr. Jim Dahle:
It’s not some big secret that I can’t announce on a podcast. Plus, this is what everybody else has. So, that’s what I carry. So, I don’t stand out. Not only do I not look like the guy who doesn’t want to take care of somebody if I screw up, but nor do I look like the super deep pocket’s person.

Dr. Jim Dahle:
I don’t know how big of a fear that is about the deep pockets being an issue. I think by the time somebody decided to sue you, after that is usually when they do discovery and find out how much about practice covers you have. So, I don’t think you’re necessarily attracting lawsuits that way.

Dr. Jim Dahle:
It wouldn’t surprise me however, the ones who are in it, if they find out you have a \$2 million-\$6 million policy that they only want to settle for \$2 million, instead of \$1 million. That wouldn’t surprise me a bit.

Dr. Jim Dahle:
I also asked this question to a malpractice provider, the attorneys for the company that provides malpractice. It was two or three carriers ago, but they laughed and said, “Yeah, we’ll sell you a \$2 million-\$6 million policy if you want it. But it’s very hard for us to in good faith recommend it to you”. They thought it was kind of a waste of money.

Dr. Jim Dahle:
And so, take from that, what you will. We had an asset protection expert on here a few podcasts ago and he didn’t think it was a bad idea at all, to have a bigger malpractice policy. And so, you’ll have to decide on your own what that’s worth. Why not get a quote and see what you think? But I’ll bet if you’re like most docs, you’ll choose to just use what other people are using.

Dr. Jim Dahle:
Now, don’t forget with asset protection, that there are a few other things you can do that are cheap, easy and effective besides just buying malpractice coverage. For instance, not all of your risk is related to your work. You have personal liability sometimes too.

Dr. Jim Dahle:
So, make sure you boost up your homeowners and your auto liability coverage and stack an umbrella policy on top of it. Something big, \$1 million, \$2 million, \$5 million, something like that. Luckily, those are pretty cheap. For just a few hundred dollars a year you can get a pretty big policy with personal liability coverage.

Dr. Jim Dahle:
Also max out your retirement accounts. In every state retirement accounts get significant asset protection. So, in the crazy occurrence, which is what all is asset protection planning is about, is as crazy above policy limit judgment. You at least get to keep the money in retirement accounts. If you’re in a tenant by the entirety state, and you’re married, you can title both your home as well as your investment accounts and bank accounts, sometimes as tenants by the entirety. And then they have to actually sue both of you in order to get access to that.

Dr. Jim Dahle:
So, those are cheap, easy ways to provide significant asset protection without doing expensive, convoluted, overseas trusts or anything like that. And I suspect there’s probably more bang for your buck there than buying a little bit larger malpractice coverage.

Dr. Jim Dahle:
But why not get a quote? Why not ask your insurance company what it would be to increase it? But expect it to be a significant expense. It might even cost you twice as much to have twice as much coverage.

Dr. Jim Dahle:
All right, let’s take our next question. This one’s from Sam.

Sam:
Hey Jim, this is Sam from California. We appreciate everything that you do. And really you made an indelible mark for my wife and our financial education. And so, we thank you.

Sam:
Our question pertains to the dollar cost average versus lump sum. Every year in January and February, we try to max out our 401(k) HSA as well as backdoor Roth in January. Now throughout the year, we do dollar cost averaging in our taxable account with a set amount of savings.

Sam:
Last year, as we all know, the money that we placed in January lost a significant amount in March, and throughout the year probably gained about 15%. Whereas the dollar cost averaging taxable accounts have gained significantly more. We then made the changes this year, but we were thinking about the next year, how about what we ought to do, whether you recommend continuing the lump sum every January versus dollar cost averaging pretty much everything, including our retirement accounts. Once again, thank you so much. We look forward to hearing from you.

Dr. Jim Dahle:
Okay, Sam, good question. I think it’s important in any discussion of this topic to really define what we’re talking about. And the problem is the vast majority of people out there are using the term “dollar cost averaging” wrong. They are not talking about dollar cost averaging. They are talking about periodic investing. And as are you in this particular question. Let me explain the difference.

Dr. Jim Dahle:
You cannot lump sum an investment if you do not have a lump sum. Likewise, you cannot dollar cost average an investment, unless you have a lump sum. If you don’t have the money, you cannot make a lump sum and you cannot dollar cost average. All you can do is periodically invest. When you get the money, you invest. I hope that makes sense.

Dr. Jim Dahle:
So, somebody who makes \$15,000 a month and invests \$5,000 a month, every month they invest \$5,000. That’s periodic investing. And when the market goes down, they benefit from that. They can buy more shares because the price is lower. When the market goes up, they buy fewer shares. So, on average, the cost of their shares is lower than it would be if they bought it all at the median price.

Dr. Jim Dahle:
However, that’s what most of us do, because that’s just how we make our money. We make our money periodically. So, we invest periodically. We get to take advantage of that over the years. Sometimes we have a year that’s like the coronavirus pandemic. And sometimes we have a year that’s like 2008 and sometimes we have a year that is like 2000 or 2002 and we get really good prices in our investments. Other years, maybe you don’t get as good of a price, but over the long run, it kind of evens out and works out fine.

Dr. Jim Dahle:
Now imagine that you received an inheritance. Let’s say you got a million-dollar inheritance from your rich uncle. And now you’ve got to decide what to do with it. Do you put all the money in right now? Do you put some of the money in once a quarter for the next year, or do you put some of the money in every six months for the next six years?

Dr. Jim Dahle:
What do you do? Well, if you look at the data on that, most of the time you come out ahead by putting all that money in at the very beginning, the reason why is because the markets generally go up. So, in general, over time, if you spread those investments out over 18 months or over six years, most of those future investments are going to be at a higher price. And so, that’s unfortunate, right? You should have invested it all at once.

Dr. Jim Dahle:
Of course, every now and then, one out of every three years or so, the market goes down and then you’re kicking yourself. You’re all “Oh, why didn’t I dollar cost average this in?” Well, the truth is the right move academically is to just lump sum it. And so, that’s why I wrote a post once on the blog that’s called “Dollar Cost Averaging is For Wimps” because basically most of the time you’ll be better off lump summing that money.

Dr. Jim Dahle:
But you’re not in a position to lump some of the money because you don’t have all the money at the beginning of the year. And so, you are in a position to periodically invest. And I like what you’re doing in that you put the money into the tax protected accounts first, because most of the time your investments are going to go up throughout the year. And so, you’ve had the money in the tax protected accounts the longest, your Roth IRAs and your HSA and your 401(k).

Dr. Jim Dahle:
I do the same thing you do. I put it into the beginning of the year. Now I continue to invest throughout the year. That money tends to go into lower priority investments, mostly my taxable investing account. And so, I’m getting the benefits of periodically investing because I’m investing throughout the year, even when things go down. But I’m also most of the time coming out ahead because I’m putting money into the tax protected accounts first.

Dr. Jim Dahle:
So, I wouldn’t necessarily complicate your life by trying to spread it out in every account throughout the year. That’s especially a hassle if you’re doing backdoor Roth IRAs and trying to do it in there. I would simply do what you’re doing. And then rest assured that you did get a good price on a lot of the investments you have, it just happened to be the ones this year that were in the taxable account.

Dr. Jim Dahle:
No big deal though. I think your plan is good. I wouldn’t necessarily change it. But I think that’s a different way to think about dollar cost averaging, maybe a little bit deeper than most people actually think about it.

Dr. Jim Dahle:
All right, let’s take our next question. This one comes from Jennifer.

Jennifer:
Hi, Dr. Dahle. This is Jennifer and I’m a 48-year-old general dentist. My husband and I have a high school student who will be attending college in about two years. Our net worth is approximately \$5 million, which does not include our son’s 529 plan, UTMA or Roth IRA accounts.

Jennifer:
I realize we will not qualify for financial aid. He has approximately \$270,000 in his 529 plans, \$40,000 in an UTMA account and \$40,000 in a Roth IRA. With the impacts of the secure act, is it a sound idea to not utilize these accounts to pay for college and allow these counts to mature? Thanks for all you do.

Dr. Jim Dahle:
All right. Well, first of all, congratulations on your success. You’re 48 years old worth \$5 million. You got \$270,000 in a 529. You’re doing pretty awesome. So, let’s acknowledge that upfront.

Dr. Jim Dahle:
Second, I’m not sure I understand your question and why you think the secure act itself would affect how you should pay for college. The secure act did a number of things. This was passed at the end of 2019. It made it easier to set up Safe Harbor retirement plans for small business owners. It made us so part-time workers could participate in an employer retirement plan. It pushed back the RMD age from 70 and a half to 72. It changed the stretch IRA from indefinite to 10 years, and allowed 401(k)s to offer annuities. But I’m lost on the connection of why you think that is relevant to how you’re going to pay for your son’s college.

Dr. Jim Dahle:
How would I pay for it? Well, 529s are designed for paying for college. That’s what they’re for. That’s why you put the money in there. It comes out tax-free. All the earnings are tax free, penalty free when used for college. So, you got a huge 529. I’d use the 529 and pay for college.

Dr. Jim Dahle:
If you run through that then your son is left trying to decide what to do with his other money. He can take out student loans, he can raid as UTMA account. He can raid as Roth IRA account. I would probably raid the UTMA first. And at that point if he’s going to be a dentist or something and if he’s actually going to go through all that money, then maybe at that point, take out a few loans. I probably would not raid the retirement money. I think that’s just so valuable that I probably wouldn’t touch that.

Dr. Jim Dahle:
But there’s a good chance like the caller we had earlier in this podcast that he’ll be able to take that UTMA money out at 0% as well. It might be just as good as that 529 money, other than it hasn’t been growing tax protected, given that he’s probably in a low tax bracket while he’s in school.

Dr. Jim Dahle:
But that’s how I’d pay for it. I suspect he may get all the way through college and maybe even a significant amount of grad school without even exhausting that 529. It’s a pretty, pretty large 529 you’ve managed to accumulate there. So, congratulations on that.

Dr. Jim Dahle:
Remember, there’s a couple of other things you can use to pay for his schooling if you like. Your cash flow, right? You didn’t get to \$5 million without making good money. So, you’ve got a significant amount of money coming in. You’ve been used to saving and investing it. You can take some of that money that you’ve been saving, investing, and actually cashflow some of his schooling. So that’s an option.

Dr. Jim Dahle:
The other thing you can do is you can raid your own savings. You probably have a significant taxable investing account. If you got to \$5 million by 48, you probably got a taxable investing account that you can raid without having to pay any penalties. And you can use that to pay for some of his schooling, if you like as well. So, you got all kinds of options. Great job on setting your life up, such that you have those options. But I hope that’s helpful as you decide how exactly to pay for school. But I agree with you, he’s not getting any financial aid.

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Dr. Jim Dahle:
Thanks for those of you who’ve left us a five-star review and told your friends about the podcast. Our most recent one comes in from Mikey who said, “Listen to these podcasts if you want to take care of your finances and stress less about your financial future. A MUST for all white coats”. Thank you, Mikey, for that five-star review.

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

Disclaimer:
My dad, your host, Dr. Dahle, is a practicing emergency physician, blogger, author, and podcaster. He’s not a licensed accountant, attorney or financial advisor. So, this podcast is for your entertainment and information only and should not be considered official personalized financial advice.

Originally posted at https://www.whitecoatinvestor.com/qa-on-investments/