The White Coat Investor Philosophy – Podcast #87

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 professional stop doing dumb things with their money since 2011. Here’s your host, Dr. Jim Dahle.

Welcome to White Coat Investor Podcast, number 87: The White Coat Investor Philosophy. This episode is sponsored by Larry Keller. Larry is an independent insurance agent who works almost exclusively with physicians. He’s been a member of the White Coat Investor community for years, writing guest posts, over contributing to the scholarship fund and participate in the comments sections. He has been a long term advertiser on the site. He’s been thoroughly vetted by me and hundreds of White Coat Investor readers who have used him to put their long term disability and term life insurance in place. He can also help you review your insurance coverage or give you a second opinion on a policy you’ve been offered. I cannot recommend him anymore highly for your needs. If you’re in the market for disability or term life insurance or think maybe you should be, contact Larry at lkeller@physicianfinancialservices.com or by phone at 800-481-6447.

Thanks for what you do. Thanks for doing that work that you spent a decade learning how to do. There are a lot of people dependent on you and they’re glad you are there today or you’re going to be there today if you’re on the way into work even if they forgot to say it. Also, be sure to send us SpeakPipe questions. You can give us those questions at speakpipe.com/whitecoatinvestor, and we’ll get your voice on the podcast and answer your questions.

Our quote of the day today comes from Morgan Housel who said, there’s a lot of money to be made in the finance industry, which despite regulations has attracted armies of scammers, hucksters, and truth vendors promising the moon.

Most of these podcast episodes these days are answering your questions. We’re not going to do that today. I’ve got something special planned. In fact, we’re going to try to up our game this year with the podcast as much as we can.

I really didn’t expect this podcast to become as popular as it has. I guess that’s no different than the blog though. I never expected the blog to get as popular as it became either. But Cindy tells me that in the last month, and we’re recording this on December 11th, but in the last month we’ve had 108,000 downloads of podcast episodes, which is a ton of downloads. So, thank you for listening, thank you for sharing it with your friends, thank you for telling other people about it. It really does help spread this critical message among physicians and other high income professionals.

But I get a lot of people that ask a question to me about the podcast, which basically boils down to which one should I listen to first? When I started podcasting, there really wasn’t an underlying plan. I just wanted to do a show that was reasonably entertaining and informative and then maybe see if we could monetize it just like everything else in the White Coat Investor Empire. This isn’t a well thought out book or an online course. We have those if you’re interested in a step by step plan, we’ve got several things with the White Coat Investor that we offer that sort of an approach. But that’s not what the podcast is. When we first started, we just tried to answer some questions and put some information out there.

So, I thought for this first podcast of 2019 that I’d lay out the White Coat Investor philosophy. So, if someone asks you, “What podcast should I start with?” You can confidently say, “Podcast number 87.” I’ve got a brand new shirt on today, this is going to look good on the YouTube channel, and in 2019 we are upping our game with the podcast.

I actually spend more time preparing for the three podcasts we’re recording today that I have in the past. There’s this podcast we’re doing right now and then we’re recording also number 91 that will run in a few weeks as well as an interview I have that I’m really excited about with Joel Shofer that we’re going to record in about an hour here. But that will run a few weeks after this one does, maybe about a month after this one does. But it’s going to be great all about military physicians.

But today we’re going to talk about the White Coat Investor philosophy. I’m actually going to go through 12 steps or 12 points of the White Coat Investor philosophy, if you will. The first one is this, financial planning makes you happier. By having your financial ducks in a row, you will have less stress, less burnout, less divorce and less suicide among physicians. I firmly believe that happy doctors provide better patient care. I’m firmly convinced that the work I am doing actually improves patient care. Yes, it’s a little bit of an indirect connection, it’s difficult to prove, but I think it really does happen. I think if we can get your finances taken care of, and you can at least be on the road toward financial independence, that you will worry less about your money and spend more time worrying about your patients.

Sure, some docs may become financially independent and bail out of medicine altogether, or maybe just work less because they’d rather be doing something else. I would argue we really don’t want those docs practicing medicine anyway, or at least as much as they are. But just like an NFL lineman shouldn’t be forced to play any longer than he wants to, neither should a doc. If you pay back your student loans and any service obligation you may have had, you’re under no obligation whatsoever to keep practicing medicine. Time is your most precious commodity. Use it the way you think best.

Now, I would hope that that includes some continuing to practice medicine. Even if you’re well on your way to financial independence or already financially independent. Certainly, I’ve continued to practice medicine, but I do it now on my terms. I don’t do it at night. I’m basically off at 10:00 PM when it comes to working shifts in the ER now, and I’ve cut my shifts back to allow some time to do the White Coat Investor, another important part of my life that I believe in. I think if there’s something else you wish to be doing with your time, I wouldn’t feel any ethical qualms about practicing less than maybe you thought you would when you signed up for medical school.

Point number two of the philosophy, this is that wealth comes mostly from making a lot and saving a lot, not your investing prowess. It’s interesting, when I thought I was going to be writing about when I started the White Coat Investor blog, I thought I’d be writing all about investing. I thought I’d spent a lot of time on estate planning and asset protection. But at the end of the day, what really makes a difference are good personal finance habits. Your goal should be to be a good earner and a saver and an adequate investor. If you can do that, you will become wealthy, you will meet your financial goals.

It turns out that frugality matters. Try to resist living like a doctor. Save 20% of your gross income and grow into your income as slowly as you can. Make as much money as you can, especially early in your career. Negotiate your contracts well, work hard, if you’re interested, do a side hustle.

Point number three, you need a reasonable written investing plan. There are many roads to Dublin, I am not going to prescribe an asset allocation to you that you must follow to be successful. I’ve seen lots of books that have been written like that and that give you the reasons behind some particular asset allocation plan. The truth is, that any reasonable plan will do. There is no perfect portfolio, and if there was, you couldn’t know what it wasn’t advance. It turns out the investor matters more than the investment. So, make a written investing plan, write it down. If you can’t write it down, hire help until you can. Then follow your plans, stay the course through market ups, market booms, and market busts, make sure you are following that plan and it will lead you, so long as it’s a reasonable plan, it’s adequately funded, it will lead you to success. It will lead you to reach your investing goals.

Point number four, buying and holding a strategic asset allocation of low cost broadly diversified index mutual funds is the best foundation for a portfolio. This method of investing is basically free. There’s really no monetary cost, there’s no time or effort required. Yes, there is a tiny amount, but it’s enough that is negligible, it can be ignored.

You can build an index fund portfolio for less than 10 basis points a year. Fidelity’s offering index funds that don’t have any expense ratio at all right now. The main Vanguard ones are only three or four basis points only. That’s basically free. Once you put your assets into there, it takes almost no time and effort to maintain it. You just put your contributions in each month, maybe once a year you rebalance. Literally, you can manage this sort of portfolio an hour a year, that’s really all it takes. I think it’s a great foundation for investing plan. Even if you had other things to it, it’s a great foundation.

I said, strategic, meaning you’re not trying to time the market, you’re not trying to make tactical asset allocation changes according to what you think is going to happen in the future. I said low cost, right? We’re going for the very low cost index mutual funds here, and you want broadly diversified funds. Just because it says index in it. If it’s an index of marijuana companies, that’s not what you’re looking for.

The nice thing about this sort of an investing approach is you get to focus your efforts where they matter most. Since nobody actually knows the future, there’s no sense in worrying about it or listening to those who are trying to predict it. We spend way too much time listening to gurus who are trying to tell us what happens in the future. At the end of the day, if you ask him and pin him down, they really don’t know what’s going to happen any better than you do. If they think they do, just follow their track record and it’ll turn out in not very long time that they really don’t, just like you would expect.

Point number five, insure well, but only against financial catastrophes. What are the financial catastrophes? Disability, if you are depending on your income. Health; illness and accidents and injuries they can get very expensive very quickly as physicians know. Liability, both professional malpractice and personal can be covered with an umbrella policy and your auto and homeowners and renters policies. Property insurance for expensive property that you really can’t afford to replace. Typically, your home, but there may be other bits of property you have as well.

If anybody else is depending on your income, life insurance. Now, I’m not a big fan of whole life insurance, this shouldn’t be news to anybody that’s been following me for very long. Whole life insurance, one of the main problems with it is you’re buying insurance against something that isn’t a financial catastrophe. Dying after you become financially independent is not a financial catastrophe. That’s the whole point of whole life insurance, you’re buying insurance for your whole life so that it pays out whenever you die. Even if you die at 90, it’s going to pay out. But you got to pay for that. That’s why a typical whole life policy costs eight to 10 times as much as a term life policy. You don’t just cancel it when you become financially independent. So, you’re buying unnecessary insurance, and there’s a cost to that.

Remember with insurance, that insurance is a bad deal. On average, you’re losing money with insurance. Think about it. What’s the income to the insurance company? Well, it’s the premiums you pay. And then they’ve got all these expenses; they’ve got to run a company, they’ve got to pay commissions to the people selling stuff, they’ve got to make a profit, and they of course, got to pay out to anybody who has something terrible happen to them. Once you subtract all of that out, they’re taking in a lot more money than they’re paying out. On average, those who buy insurance are losing money.

I’m not saying don’t buy insurance when you need it, when you need it, insure well. But if you don’t need it, don’t buy it, because it’s a losing proposition on average.

Point number six, live like a resident for two to five years out of residency, whether you’re going for public service loan forgiveness, or whatever else is happening. It is so much easier not to grow into your income than it is to cut back once you have grown into your income.

That period of time, right when you come out of residency and you’re all fired up about your new career and excited to work hard and you’re used to working hard and you’re used to not spending much, that is the time to become wealthy. The way you do it is you earn as an attending, and you spend as a resident. You can take the difference between those two, which is likely a six figure amount and pay off your student loans very quickly, catch up to your college peers with retirement savings and maybe even save up a down payment for your dream home. It’s really a great way to become very wealthy very quickly.

Point number seven, when you are financially literate, you can ensure you’re putting your money on what you value. I don’t really care what you value. I don’t care if it’s a wake boat, I don’t care if it’s fancy vacations to Europe, I don’t care if it’s a nice house, I don’t care if you’re retiring at 40, I don’t care if it’s putting your kids in private school, whatever it is. But if you’re financially literate and you’re financially disciplined you can make sure your money is going to those things that you care about. Maybe you want to go travel the world with your posse, I really don’t care, but you can put your money there.

Number eight, get good advice at a fair price, or learn how to be your own financial planner and investment manager. That is certainly a doable task for somebody with the intellect of a physician, but you have to be interested. If you’re interested, you will gain the knowledge required to do this task and you will gain the discipline required to do this task. If you’re not that interested, it’s okay to hire a financial advisor. Get one that’s offering good advice at a fair price. Good advice means they’re telling you things like you’re hearing on this podcast and other reliable sources of investing information. A fair price is a four figure amount. If you’re paying more than $10,000 a year, I can point you to an advisor that will give you as good as or better advice for less money. Even if you have, a lot of money and you’re paying an assets under management fee, you better start negotiating that fee down or going somewhere that is less expensive.

Point number nine, understand and use your tax advantaged accounts. Each of us has tax advantaged accounts available to us, as long as we have earned income. That might be from your employer, 401(k), a profit sharing plan, a 403(b), a 457(b), a 401(a). It just depends on the employer what they’re offering. But you need to get your plan document and you need to read it. You have a second job as a pension fund manager, and you need to actually do something about that job because you weren’t given any training for it in medical school or residency. So, it’s time to get yourself some.

If you’re self-employed, you’re going to want an individual 401(k). You might even be able to have a defined benefit plan, which is often called a cash balance plan, and it is really another IRA or 401(k) masquerading as a pension. It can be a great idea for people who want to put a lot of money away in a tax deferred manner. You can do a Roth IRA, most physicians are going to have to fund this through the back door, i.e, indirectly by putting it into a traditional IRA and then rolling that into a Roth IRA, converting that to a Roth IRA is probably more accurately said. You can do that for your spouse as well.

If you’re saving for college, you can use a 529 account or an educational savings account. If you are saving for health care costs, you can use a health savings account. There are all these tax advantaged accounts. They all have different contribution limits, different rules. You need to understand how they work and which ones are available to you and use them. They will help your money to grow faster. They will protect your assets from your creditors, they will make your estate planning easier. They are the single greatest tax break available to you as a practicing physician. Know about them and use them.

Point number 10, pay cash and avoid debt. It’s interesting, we become debt numb in medical school. It’s from spending all the monopoly money I guess. Every semester you go in, you sign the paper, they take a bunch out for your tuition and they give you all this money. Meanwhile, it’s more money every semester you’re blowing on tuition then you’ve made in your life. So, you don’t really understand what it’s like to have to pay back $100,000 or $200,000, or heaven forbid, $500,000, right? It’s an inconceivable amount of money to most medical students. If that attitude toward debt persists into your career, you’re never going to build much wealth. You’ll have a couple of car payments, you’ll have some credit card payments, you’ll have student loans, you’ll have a mortgage on your first home and your second home and maybe a second mortgage on your first home and your second home, you’ll have a boat loan. All of a sudden, all those payments you’re making are going to keep you from building wealth.

Get in the habit of not buying stuff that you can’t afford. How do you know if you can afford it? If you can pay cash for it, you can afford it. Yes, I understand the math behind borrowing at a low rate and hopefully earning at a higher rate. If you’re in one of those situations, and you’re convinced that you’re actually investing the difference, go right ahead. But most of the time we’re human. We borrow at a low rate, we forget to invest at the higher rate, we spend it on something we want and we end up poorer because of it. Don’t do that.

Point number 11, minimize your taxes and know the tax code. The tax code is not that complicated. The basics here are easily understood. Know the difference between a deduction and a credit. Know an above the line versus a below the line or an itemized deduction. Know where the various forms feed into the 1040. Now, there’s a few changes here for 2018 that you’re going to notice if you’re doing your own taxes. But at the end of the day, it’s going to be the same system for the most part. Understand it, and then when there’s changes, you can understand the changes.

I’m always amazed to talk to people who really understand how the tax code works and they just parrot things they hear on social media or even in the mainstream media and assume that they’re actually true when they aren’t. For example, a lot of people think that doctors don’t pay much in taxes. They think they’re not paying taxes because they hear this thing about the rich not paying taxes because some journalist found some real estate investor that was able to depreciate so much their properties that they cancel out all of their income. So, they just assume that you’re in that same category. They have no idea that you’re paying a six figure amount in taxes every year. It’s important to understand the tax code. You can’t win this game without knowing the rules.

All right. Finally, point number 12 is about asset protection. Do the simple asset protection stuff, but don’t spend a lot of time or money on the complex stuff. The truth is, this outcome that we’re all so worried about as physicians is this being sued above our policy limits and actually having to lose personal assets to one of our patients. The truth of the matter is, you’re far more likely to lose money to your spouse. The physician divorce rate is actually better than the average in this country, it’s about 24%. It’s a little lower for a dual doctor couple, but that’s way higher than your chances of being sued above policy limits.
I calculate that risk as about one in 10,000 per year in emergency medicine. It’s not zero, but it’s awfully close. It’s interesting, I read a paper not that long ago about how much these docs had to shell out, the ones that were actually sued about policy limits. We’re all worried about this $76 million judgment, right? But if you look at the amounts, it’s like 50 grand or 100 grand. Yeah, it sucks to lose 100 grand, but it’s not going to kill you for the rest of your financial life, right? It’ll be a setback, but that’s it.
So, realize that that is the risk you’re trying to protect against. It’s not some huge thing that’s highly likely to wipe you out. Once you realize that, you become a little bit more logical about what you’re going to do with your asset protection. You do the easy things, you max out your retirement accounts, you make sure you title your house properly, use tenants by the entirety titling if you’re in a state that allows it. Know your state’s asset protection rules; what’s protected, what isn’t, etc. You can maybe make a few steps there and favorite putting money into things that are protected versus things that are not protected.
But for the most part, remember that your first line of defense is insurance. So, buy malpractice insurance, buy plenty of personal liability insurance, make sure that insurance company has a seven figure amount on the line. So they’re going to mount a robust defense for you, and then live out your life. You can’t spend all this time trying to squirrel money away to an overseas trust and having a complex formula, a family limited partnerships and LLCs to try to keep anybody from possibly ever being able to get any of your assets in the event of an above policy limits judgment. It’s just not a high enough risk to spend a lot of time lying awake at night worrying about.
Let’s talk for just a minute about what I invest in. Remember, there’s many roads to Dublin, you just need a reasonable investing plan. It doesn’t have to be the same as my investing plan. Anything reasonable is okay. I basically invest in stock, bond and real estate investment trust index mutual funds with 85% of my portfolio. That’s it. The last 15% is mostly real estate, syndicated properties and now mostly private real estate funds, but also an area that I have some expertise in, physician financial websites. That’s my portfolio. That’s all I invest in.
There are a lot of things I don’t invest in. There are no called strikes in investing, you don’t have to invest in everything, but I don’t invest in collectibles, precious metals, currencies, cryptocurrencies especially like Bitcoin, individual stocks, options, commodities, individual properties, or whole life insurance. That doesn’t mean you can’t be successful investing in some of those things. But I think your odds are lower, and I think I’ve shown you that you can be successful without investing in any of those things.
One other thing I’d like to talk about today, now that it’s the first of the year, and that time when we all do New Year’s resolutions is student loan refinancing. This is as much of a no brainer as there is in physician finance. If you have private student loans, see if you can refinance them to a lower rate, you probably can. If you’re an attending, you’re not going for public service loan forgiveness, and don’t have some insane debt to income ratio like three to four x, see if you can refinance your loans to a lower rate. Do it again and again as you pay off those loans. Each time you do it through my links, you’ll get $200 to $1,000 in cash back. You’ll also likely qualify for a lower rate each time is your debt to income ratio and credit score improve. As far as I can tell, I’ve negotiated the best rates on the internet with each of the top student loan refinancing companies.
You can find these deals at whitecoatinvestor.com/student-loan-refinancing. It’s the first link under the recommended tab on the website, or the biggest button right in your face, right when you log into whitecoatinvestor.com. The links will also be in the podcast notes for this podcast. Seriously, I’m trying to make this as easy as I can for you.
Let’s talk for just a minute about each of these companies. Splash Financial is one of the newer companies and are constantly trying to innovate. For a while, they had the very best resident fellow loan program. I hope it comes back soon, but until then, the only companies offering true resident fellow programs are SoFi and Laurel Road.
Next on the list is Earnest. Earnest is cool because they let you mold your loan to exactly your terms. You want a 44 month loan? You can do that with Earnest. Custom term, custom interest rate and $300 back. Why pay more interest than you have to? What’s not to like here? That’s a great deal.
Next on my list is LendKey. They’re constantly improving and basically go out to over 300 credit unions all over the country trying to get you the best rate. One unique thing they will do is they’ll refinance Parent PLUS loans for parents. If you go through my link, you can get $300 cash back with them.
Credible is next on my list, they’re the kayak of student loan refinancing, they have about 10 different lenders and go to all 10 of them to find the best deal for you. You apply once and you’re basically playing with 10 different companies. When they first came to me, they wanted to be an exclusive provider to my readers, but the problem was they didn’t have all the best companies on their list, the ones I’m talking about today. So, I said no. But I still love the idea of a one stop shop. They’re totally worth including in your search. Putting them on your list adds another 10 companies you checked rates with, but you only had to do a single application. That’s a cool feature and the $300 to $1,000 cash back doesn’t hurt either. Seriously, can’t make this any easier for you to do.
ELFI was formerly known as South East Bank. It’s one of my newer partners, but they’ve been the lowest rate provider for some of you White Coat Investors. They’re offering $350 cash back and they’ll refinance a loan as low as $15,000. That’s a pretty tiny loan, a lot of companies won’t touch that, but ELFI will. Like LendKey, they’ll also do Parent PLUS loans.
SoFi is well known to most of you. They’re the gorilla in the room of student loan refinancing. They’ve been a long term partner of the White Coat Investor. I’ve been with them longer than their CEO has. SoFi started about six months after this blog did. They’re apparently much better business people than I am obviously, because it’s a much bigger company. But I’ve been working with them for most of their existence. Tons of you end up refinancing with SoFi because the customer service experience is so good. It’s dramatically better than Fed loans, right? And the rates are low. Even those of you who end up going somewhere else, say things like, “I went with Laurel Road or CommonBond, because the rate was an eighth of a point better. But I remember wishing SoFi had come back with the lowest rate because the experience was so good.”
They do have the lowest rate a lot of the time, but not always. That’s why you need to apply to several of these companies. SoFi has given $300 back, if you go through my links.
First Republic Bank is a fun one, they usually have the lowest rates available. Unfortunately, they have very strict geographic restrictions. So, if you live in the right place, which is basically close to one of their branches, you can get a very low rate. If you don’t, you can skip applying here. They’re really looking for a long term banking relationship with you, and I’m not even sure they’re making money on your student loans, given how low the rates are. But you get $200 back if you go through my links.
Laurel Road is the lender formerly known as DRB. This is my longest relationship with a lending company. I’ve been with them since almost the beginning. I’ve seen their growing pains and successes. They’ve always been known for low rates. Unfortunately, in the early years, they’re also known for a clunky online interface and hit and miss customer service. That’s all gone away since the rebranding as Laurel Road, but the rates have stayed just as low. They’re giving $300 back to White Coat Investor listeners and readers.
Brazos Higher Education, this one is for you Texans out there. If you thought First Republic had limited geography, at least they’re in more than one state. But if you’re in Texas, be sure to include Brazos on your list. They’re the only nonprofit on the list and boast that that status allows them to get you lower rates. You get $400 cash back if you go through my links.
Last but not least, is CommonBond. These guys have been around about as long as Laurel Road and SoFi, they’re one of the pioneers of the student loan refinancing stuff. They have a pretty impressive social mission. For every loan, they refinance, they help fund the education of a child. Two for one, that’s pretty good. They also have great service and low rates. They’ve helped a lot of you over the years. They also I believe offer, let me check, $500 cash back to you if you go through the links on the White Coat Investor website.
So, lots of great companies there. I’m proud to partner with each and every one of them, but you got to apply to more than one. You don’t know which one’s going to offer you the best rate. While the cashback is nice, the lowest rate is probably worth more. If it were me, I’d apply with all of the ones I was eligible for. Seriously, I really would apply with all of them. Once you gather up the paperwork, it’s super easy to apply to a second and third and fourth one. In fact, you can actually get a pretty accurate rate quote in just two minutes online with most of these companies.
Then once I refinanced, I check in about a year later to see if I should do it again. This is a pretty competitive business, and you might be surprised how badly they want your business. If you haven’t refinanced, you owe it to yourself to do it today.
All right, so we’ve talked about the white coat investor philosophy, we’ve talked about a no brainer that a lot of you still need to do, which is refinancing your student loans. We’ve talked a little bit about how good this podcast is going to be this year. That’s my commitment to you. I’m going to work really hard at it, and we’re going to try to make it just as awesome as the blog has been over the years, and really bring you a quality product and fulfill the mission of the White Coat Investor, which is to give you a fair shake on Wall Street.
This episode was sponsored by Larry Keller. Larry is an independent insurance agent who works almost exclusively with physicians. He’s been a member of the White Coat Investor community for years, writing guest posts, over contributing to the scholarship fund and participating in the comments section. He’d been a long term advertiser on the site. In fact, he was even a speaker at the White Coat Investor Conference in Park City last March. He’s been thoroughly vetted by me and hundreds of White Coat Investor readers who have used them to put their long term disability and term life insurance in place. He can also help you review your insurance coverage or give you a second opinion on a policy you’ve been offered. I cannot recommend him any more highly for your needs.
If you’re in the market for disability or Term Life or think that maybe you should be, contact Larry at lkeller@physicianfinancialservices.com, or by phone at 800-481-6447. Head up, shoulders back, you’ve got this, we can help. You got an entire community of docs and other high income professionals behind you. See you next time on the White Coat Investor Podcast.
My dad, your host, Dr. Dahle is a practicing emergency physician, blogger, author and podcaster. He is not a licensed accountant, attorney or financial advisor. So, this podcast is for your entertainment and information only. It should not be considered official, personalized financial advice.