Today we chat with prominent Boglehead published author Rick Van Ness. Rick has made a career of teaching financial literacy to the world. We review his 10 principles for common sense investing as well as hear why Rick thinks bonds are worth investing in. He talks about his current passion, which we here at WCI understand—getting a financial plan in place. We discuss the importance of knowing what you value and making a plan that accounts for that.
How Rick Van Ness Found His Way to Finance
Tell us a little bit about your upbringing and how it shaped your views on money.
“Well, that's pretty average and maybe not very interesting. I sold seeds and did other jobs as a teenager, because my view of money was just to buy things. There wasn't an interest in anything more complicated than that. My dad did work for a company that had an employee stock purchase program. I was able to watch him keep track of his cost basis. I learned about what stocks are, and I had a board game called Stocks & Bonds. So, I knew that bonds were loaning money, but pretty average, just an interest in buying things.”
Yeah, but maybe a little more than a lot of people have. You actually had parents who owned stocks. I'm not sure a lot of people grew up even with that much of an upbringing that was reflective of any sort of financial literacy education. Tell us about your education and your career.
“By the way, talking about finances in my family was not a taboo topic, and I'm glad for that. It's just that we weren't a very sophisticated family and didn't really have much wisdom there. I chose to go to a specific college for their electrical engineering program. I got my degree in electrical engineering, which led to a job at Hewlett Packard, and it was a wonderful job for 27 years. Then, I got laid off. I learned that you never know when you're going to retire. Before age 50, I was laid off. Hewlett Packard was a great company to work for, and they paid for me to get my MBA at New York University. I'd work during the day and then take the train to Wall Street, and I got an MBA in finance paid for by my company. That was pretty terrific. I can't thank them enough for that.
I went through a number of jobs looking for something else that would resonate as a career, and nothing really did. Nothing was as good, nothing interested me as much. I wasn't really needing to save more money for my retirement, although I chose to pay for my kids' college education. When my daughter was in college, she came home and said something that took me by surprise at how interested she was. She had this economics professor that had brown bag lunches, where they would talk about economics topics. In fact, they named the series Backpack to Briefcase. It surprised me that she was interested in that, and I thought to myself, ‘I could do that.' So, I did. I started teaching brown bag lunch seminars at Seattle University and the University of Washington. That was good fun, but my audience was a dozen or two dozen brown-bag lunchers at a time.
That was about the time that YouTube started taking off. I thought I could reach a lot more people doing that so I started making videos which I had a lot of fun doing. Back then, the only way to get on the internet was through your computer, not your phone. Back then, YouTube allowed me to have an interactive session. I could make games out of asking kind of tricky questions and the listener would reply by touching the screen. I would jump to a certain place and explain why that was the right or wrong answer. We could have more fun with it on a pretty dry topic, learning about personal finance and investing. That's how I got started there.”
That was more of a passion project. You were interested in finance long before you were laid off, though. How'd you get interested in finance? Where'd that come from? Was it the MBA? Was it something else?
“Finance is a pretty big word, and my interest was really making money so I could spend money. Even well into my career I still felt that way. I found it very practical to buy Victorian homes and refurbish them and make them income properties. That required a little bit of knowledge about capital gains and how the tax system works. I'm just a curious person, and that led me from one thing to another. I wound up with a degree in finance, which I didn't particularly use per se until I started explaining some of the basics of personal finance to this brown-bag lunch seminar, which is how I discovered the Bogleheads and John Bogle. That was really rather interesting to me.
One of my first projects was to take the tens of thousands of Bogleheads that would meet and didn't have a coherent explanation for what they were all about. I tried to help out with the video series. It was basically about the overhead investment philosophy, but I saw it as the 10 rules of common sense investing.”
More information here:
Top 8 Investing Lessons from the Bogleheads
The 10 Rules of Common Sense Investing
We're going to spend some time talking about common sense investing here. It's interesting that you describe it that way, and I'm curious: if it is common sense, why does this seem to be so rare for people to do what you suggest they do?
“It does seem to me to be common sense. Once it's explained to you, I see it as common sense. But you're right, that it's very uncommon. The reason why I chose that name, by the way, was a reference. John Bogle has a book called the Little Book of Common Sense Investing. It's really a nod to him.”
Not to mention his other book, right? Common Sense on Mutual Funds.
“Exactly. It was really a nod to John Bogle as much as anything, because he's such a colorful writer. Just a word on him, he was able to put a complex topic into some kind of earthy comment. He would say, ‘Don't look for the needle in the haystack, just buy the haystack,' or he would switch around, ‘You get what you pay for' to ‘In investing, you get what you don't pay for.' These are just colloquial sayings that are helpful to introduce complicated topics, and they simplify it down to the essence of why it is common sense.”
Now, your 10 common-sense rules, sometimes referred to as the Boglehead investing philosophy, are actually going to serve as the curriculum at Bogleheads University. Let's talk about each of those 10 things today and maybe introduce them to our audience. These are the common-sense rules of investing, and surprisingly, a lot of people don't know them. The first one is to develop a workable plan. And I preach on this all the time, “Get a written investing plan, get a written investing plan.” In your words, why is it so important to have a written investing plan?
Develop a Workable Plan
“Before we talk about that, I want to add that I think there's a zero before this rule No. 1. There's a prerequisite that the Bogleheads don't talk about because they all meet the prerequisite, and maybe your audience does as well. But the prerequisite is to spend less than you earn, or live below your means. That's just really important. The way that it manifests is in bad debt. People that don't live below their means get over their head in debt. Originally, my very, very, very first video was on the doubling of a penny for a month. Do you know what the answer is?”
What do you mean? If you double it every month for so long?
“If you double a penny for a month, you get $10 million. It's a demonstration of exponential compound growth. The reason why that's related is that bad debt can be very high interest. Today, if you look at your credit card, you'll see that you can take an advance loan out for 24%. Or a worker comes by your house and he'll swap out your windows for a 0% loan—which if you read about it, it's 18% interest beginning immediately and would be due if you don't pay it off within a couple of years. There is this rule that qualifies you to the next 10, and again that is living below your means.”
It's hard to invest if you haven't saved anything. That's for sure. So, why is a financial plan so important?
“Why is it so important? Well, I think what's important is that you have a plan and that you know your plan. And one way of knowing your plan is to reduce it down to something that you can see on maybe one page and look at it often and frequently. For me, writing it down is necessary. It's an iterative process. There's something magical that happens when you try to put your ideas into words, and it's not quite there and you iterate and you iterate. It moves from one part of your brain to the other. Even if you could say it out loud with your spouse, talking somehow puts it in different parts of our brains and we tend to remember it. And if it's not part of your life, it's just another paper in your pile. If you can make a plan that's part of your life, that's magical because you can uncover what's really important to you. We forget about what's really important to us if we focus on just a few rocks, but there's a lot of medium-size and small rocks that are important to us. If we can write those down, we can remember them.”
The thing I like about when you have to write it down is it shows you where the holes in your knowledge are. It tells you where you need to learn some more and do a little more research.
“Exactly. But that's a reason people put it off because they feel like they're never ready. There's never enough information. There are too many unknowns. The future is unknown. My dad's favorite saying was, ‘I'll make a plan when you tell me how long I'm going to live.' Well, that's a good reason to never make a plan. Writing it down also gets it in your subconscious. It's true that you often hit what you aim for. If you can think about and remember what is important to you, you can make a lot of your dreams come true.”
More information here:
Start Saving Early
All right, let's move on to rule No. 2, which is to start saving early. Sometimes called save automatically or pay yourself first. This audience is a little unique in that way. Doctors tend to miss out on saving in their 20s because they don't earn in their 20s. They're not even close to living within their means. They're generally stacking on the debt in their 20s. Luckily, they later tend to have higher incomes and could potentially save more at that point.
What advice do you have for the young doc who feels they don't have any spare change to invest, given their huge student loan burden? Then, what advice do you have for an older doctor that maybe has a tiny nest egg and is now kind of panicking and wondering if it's too late? They know the rule is to start saving early, but how would you actually do that on a typical doctor's financial path?
“The classical way of explaining this topic is to show two individuals. One individual saves for the first 10 years of their life. Then, for some reason gets pulled away, has to take care of a child or somebody and never saves again. Classically, they compare that person with somebody like your audience that has to start saving later in life and saves more aggressively but never catches up. They use that to explain the miracle of compound interest, and that explanation is something that I have gotten away from.
I favor more behavioral types of explaining this topic of starting to save early. One type comes from Andrew Tobias. His idea was that he took the Benjamin Franklin rule about a penny saved as a penny earned, and he twisted it to a penny saved is two pennies earned because they didn't have income tax then. Now you could easily have a 50% income tax if you were a high-income earner with state and local taxes and Social Security. Behaviorally, you could ask yourself, ‘Would you rather earn $1,000 and net $500 or just save $500?' Or the other way of explaining this is behavioral comes from Vicki Robbins. She looks at the idea of a real hourly wage by looking at your uncompensated work expenses and your uncompensated work time. If you add up all the expenses that you have because you're a doctor, that you aren't compensated for such as transportation or commuting costs, educational costs etc, you could subtract those expenses from your income. You add up all the time that you invest that you're not compensated for, and it compresses the hourly wage to something much smaller. Then you can make real decisions about, ‘Do I want to spend $100 on this or work so many additional hours?' I try to explain it in those terms.
You asked about what advice I would have for young doctors. My advice is to make yourself a plan, make sure that you're going to stick with your career, get those loans paid off, and have a plan for paying off those loans, either incrementally or through a loan forgiveness plan. Have that kind of plan in mind and then overtly start saving early for all those reasons.”
Now, how about for the doc who feels like, “Man, it's too late. Why bother now? I'm already 55. I'm already 60. I'm already 65. Is it just too late for me? I know I'm supposed to start saving early. So, compound interest will work. But now I'm toward the end of my career. Is it too late?” What do you tell that doc?
“Well, the answer is no. Of course, it's never too late. You have to start with where you are. The first step would be to figure out what you need. This doctor should figure out what they really need to retire. For one thing, they probably have all those years' worth of Social Security that's going to be the floor. Social Security is a fantastic floor for everyone with a good long working history, because it's an annuity that's good as long as you live. You can start saving aggressively through the tax-advantaged programs. Never give up; just start hacking away at it. But the advice would for people that are starting late is don't use that as an excuse for taking more risk than you're able to take. That's not an excuse. Never start taking more investment risk than is appropriate.”
More information here:
Choose Appropriate Risk
This is a great segue. Rule No. 3 is to choose appropriate risk.
“Right, appropriate risk. What's the appropriate risk? That's matching investment risk with your need horizon. All your goals have needs, and each of them have individual horizons. The older doctor that has a daughter's wedding coming up this year or next shouldn't put that money in the stock market. That money should be accessible and safe. Obviously, retirement would have a different risk than years 20 through 25. Make a plan as a way of identifying those needs and then match the investment risk individually with those needs.”
People are often saying asset allocation is the most important thing. It's your most important decision, your ratio of stocks to bonds, etc. Does it really matter as much as people think? Does it really matter if you're 80% stocks or 65% stocks? At what point is it good enough? At what point is it close enough?
“Well, yes, it really does matter, but you can't know. You can't know the future. It's something that you could only know in hindsight. Getting good enough in this context is probably, I don't know, within 10% or 20% because you just can't know the future. In hindsight, you would know what you should have done. But nobody knows that.”
More information here:
Your Crystal Ball Predictions for 2022
Diversify and Use Index Funds Whenever Possible
Speaking of protecting us from what we don't know, step No. 4 or rule No. 4 is to diversify, which I think hopefully everybody listening to this podcast has heard of this rule before. But what are some of the biggest issues you've seen in investors from a lack of diversification?
“This is widely misunderstood—this particular topic. First of all, when we say diversify, we're talking about equities. In fact, the prior portion, when we were talking about risk is really the portion of equities and the portion of bonds. That's the easy way to control our investment risk. If the portion of bonds is high-quality bonds, don't take risks there because your risk is better compensated on the equity side of your portfolio. There's no advantage of diversifying your government-backed bond-type investments. We're talking about equities here, diversify equities. There's three different layers that I'll talk about. If you only believe this top layer, you're still fine, but the top layer would be the old saying, ‘Don't put all your eggs in one basket.' This would be to look at your mutual fund with a thousand companies in it and say, ‘Well, one of them could fail and doesn't really destroy you.'
Something more insightful is that individual stocks carry uncompensated risk. Individual stocks carry uncompensated risk. Now what that means is companies have company-specific risks. For instance, the employees could go on strike, and that's going to affect the value of that stock. Then, there's industry, as they call it, systematic risk that affects all industries. Company-specific risks can be diversified away. If somebody owns all of the aerospace industry, they wouldn't own that risk in their portfolio. They wouldn't pay for that risk. It becomes an uncompensated risk. An example of a systemic risk might be something like aviation fuel. It's going to affect all of that industry or even something broader, geopolitical, it would affect all industries in general. But that's the second level here, which is that individual stocks carry uncompensated risk.
The most magical way of looking at diversifying stocks is the modern portfolio theory, the Bill Sharpe and Harry Markowitz efficient frontiers topic. This topic is magical in the sense that if you look at rate of return vs. volatility, you could look at any three companies or any four companies and say, ‘If you separate them into a shape of a square or something, the Northwest corner is going to be the highest rate of return for the lowest risk.' Then, an individual might say, ‘Well, why would I own the Southeast corner, the lowest return and the most volatile stock?' The answer is because a combination of them does better than any of them individually. This is the magical insight in the efficient portfolio type work that shows there actually is an ideal portfolio. An ideal portfolio that maximizes return for risk.
That's what the academic terminology is. It's the tangential market portfolio—which in real life, boils down to owning all the equities in the world in proportion to their capitalization, which is the total market. Or as John Bogle would say, buy the whole haystack. The whole haystack is the market portfolio or the tangency portfolio. It has that magical attribute of being the highest rate of return for risk. You can get greater rate of returns but for more risk. So that's what we're talking about when we're talking about diversifying. It’s really mixing that with the appropriate portion of bonds to suit your needs.”
Never Try to Time the Market
That covers rule 4, which is diversify, as well as rule 6, use index funds when possible. Let's step back for a minute to rule 5, though, which is never try to time the market. We've all heard this, we've all heard you shouldn't try to time the market. Yet it is so tempting. Why is it so tempting to try to time the market?
“You are so right. I don't know the answer to that. It's one of our human foibles I guess.”
Some investors certainly have to learn to overcome it though, because if you actually keep track of your returns, you quickly learn that you're no better than anybody else at timing the market. And if you are, you should be managing a whole lot more than your money.
“It's just proven over and over and over again that nobody can predict the market.”
Keep Costs Low
Rule No. 7 is to keep costs low. We're typically talking about investment-related costs or fees, whether it's financial advisor fees or expense ratios in a mutual fund. How can one watch costs without becoming miserly, No. 1, or No. 2, starting to perseverate on amounts of fees that really don't matter? A few basis points' difference in an expense ratio or returns, etc. How do you find that balance between watching costs without being pennywise and a pound foolish?
“I guess I'm not sure I see it that way. I don't see the relationship between watching costs and spending. There's a great graph on the Bogleheads Wiki that shows paying a typical 2% expense ratio. What is the cost of that to you? It translates to a couple hundred thousand dollars, which translates to like five or 10 extra years of retirement. There's that real cost, but does it take extra work to save that cost? I guess I think of it in terms of ‘Whose college education do I want to pay for? Do I want to save to pay for my kids' college education or my broker's kids' college education? Or do I want to take my wife on a safari or send my brokers on a safari?' I don't see the miserly part of it, because you can be not miserly.”
In investing, 2% is a big number, and I use this example all the time. If you take a doc saving $50,000 a year for 30 years, if they're paying 2% in investment cost, the difference after 30 years is $2 million. It's the difference between having a $6 million portfolio and a $4 million portfolio. So, you're absolutely right. The costs matter and compounded costs become very large over time. But what happens is people learn that lesson and they start applying it to things that are very small. For example, I have people that ask me, “Should I use a Fidelity Zero Total Market Index Fund instead of the Vanguard Total Stock Market Fund?” We're talking about the Vanguard fund, which has an expense ratio of 0.03, three basis points. And this Fidelity fund has a ratio of zero basis points. And they think, “Oh, I should switch to Fidelity.”
They don't realize that at that sort of level of cost, there are other things that matter more—like how well they're tracking the index and how tax-efficient the fund can be. The fact that the Vanguard fund has the ETF share class, for instance, and where your money is, so you're not having to run all over the place to buy funds at many different brokerage houses. It starts to matter much more than those expense ratios. I think that's what I was getting at when it comes to being miserly and letting the expense tail wag the investment dog, if you will.
“Right, it could become a bad habit. But I think for me, the solution to that bad habit goes back to planning. You can see I'm currently a big proponent of planning. The idea of planning in this context is identifying those things that are most important to you. If you can identify those things that are most important to you, then you get in the habit of saving and then you never spend. That's not the idea of it. The idea of saving is so that you can spend smoothly throughout your entire life. That includes this concept of retirement, which is a third of your life. You've got to work for half or two-thirds of your life to pay for your retirement.
You also have all these other goals that you can unearth by a good planning process. Once you've unearthed them and keep them visible, you can act accordingly. I enjoy musical theater. Is it worth $100 or $200 a ticket to go to? For me, it is. Everyone has different answers to what's important to them, but it's easier to spend money on things that you've already thought through. Yeah, these are important to me, and drinking at the bar is not. There's lots of ways to spend money. If you don't think they're important to you, get them out of your life, but add more of those things that are important to you. It might be family time. It might be a family vacation once a year and you might choose to pay for it as a way of getting your family together because it's something you value. You only get to that by thinking through what's really valuable, which I think a plan should do. A plan is bigger than planning for your retirement.”
Minimize Taxes
“I don't know that one. It could be losing out on the opportunity to defer taxes. What's your answer to that one?”
I don't know. I think one of the problems is when you're not doing the other things that you get recommended to do like buying and holding or not trying to time the market or using an actively managed fund. Your investments become much less tax efficient. Now, that doesn't matter in your Roth IRA so much, it doesn't matter so much in your 401(k). The lower performance matters from them doing that, but the tax cost doesn't matter.
When you're investing in a taxable account, as many of our listeners do for at least a portion of their portfolio, that starts mattering a lot. I think there are a lot of Vanguard investors who got a big surprise at the end of last year. Those who had been investing in a target retirement fund inside a taxable account. All of a sudden due to some changes Vanguard made with share classes of the fund, they had something like an 18% distribution, a taxable distribution of capital gains out of what they thought was a relatively tax-efficient fund of index funds.
I suspect it's just not being tax efficient as they invest. It’s probably the biggest tax cost. But you're right. It might be related to not using tax-protected accounts that are available to them. I'm continually amazed how many doctors don't understand how many tax-protected accounts they have available to them, whether that's a Backdoor Roth IRA or an HSA, or maybe they're not even using all of the employer-provided accounts they're given.
“Exactly. Also, being aware of the tax consequences of selling one asset vs. another, say in their taxable account or the opportunities to donate appreciated assets. Being tax-aware can affect your decisions. It should affect your decisions.”
Keep It Simple
Rule No. 9 is to keep it simple. It's been said to invest your time actively and your money passively. I think there's a lot of wisdom there. But at a certain point, you have to ask yourself, “How much higher of a return is worth additional complexity in my portfolio?” For example, you mentioned earlier that at some point in your life, at least, you had some rental properties that you were dealing with. Significant additional complexity and work there compared to a portfolio of index funds. How do you make that decision of when it's worth adding complexity in hope of a higher return?
“That would be a real individual question because adding complexity by taking on income properties, I got away from that. Because in that case, the complexity was the non-financial part of being a landlord. Get me out of that space. I guess I view it as having a limited number of heartbeats and how I want to spend my time. If I really got satisfaction from trying to optimize my portfolio, I could play games in my taxable account by staggering asset purchases, such that one of them might be more eligible for tax-loss harvesting or games like that. I just don't have time and interest in doing that. But other people might, and that's fine for them. I don't begrudge people that take it on as a game. I know people in investor clubs that have social fun choosing stocks to purchase individually, and earlier in this discussion, I harped on uncompensated risk for doing that. But if they want to do it, and they're OK with that, fine.”
Stay the Course
The last of these 10 tips or principles is to stay the course. Most people fail to even get the market return because they're continually chasing performance or tinkering with their portfolios. Right now, as we record this, it's March 8. The market's down on the year for various reasons, whether that's inflation-related or the war in Ukraine or whatever it might be. There are some people that are maybe struggling with staying the course. Do you have any tips for those who are losing sleep in this latest market correction?
“My kneejerk reaction is to say, you've got too many equities. If you're losing sleep because of what's happening this year, which is pretty mild, you could be suffering from the common greed of wanting to take advantage of the 10-year rampup in stock prices and got in over your head. You should never be taking investment risks beyond what you're capable of holding. If you're losing sleep, that's a huge sign. I don't even watch it anymore. I have no value in watching the stock market, because I won't be making any transactions in the next couple of years.”
The Case For Bonds
Your other book is titled, “Why Bother with Bonds?,” and it makes the case for bonds. What do you see is the case for bonds these days when interest rates are 2% and inflation is 7%?
“The case for bonds is not different. You don't invest in bonds for a rate of return. If you want a higher expected rate of return, you look into equities. The rule for bonds in your portfolio is for safety. It's for ballast; it's for stability. It's for your near-term liabilities where you don't have room for risk. It's for being able to sleep at night. It's for your personal comfort level for investment risk. Now, what you just described is not normal. Normally, the interest rate on bonds, if you look at the bond yield curve, that includes inflation, and you just described the short-term scenario of 7% inflation and whatever you said, 2% bond interest rates. That's an anomaly.
A nominal bond return includes market expectation for inflation. If you want protection for unexpected inflation, that's where TIPS and I bonds provide value. The combination is a popular approach or strategy for achieving that combination of half or more TIPS and treasury securities, which by the way could be bank CDs or anything government insured like that is very safe.”
It has been an interesting anomaly to watch in the last few months, maybe the last few years. You would think in a functioning market that bond interest rates would be inflation plus, and maybe the market's not functioning because the Fed is artificially holding rates down and has been now for some time. Which leaves the individual investor to wonder how they should react to this. A lot of them start chasing yields. They start looking for things that pay more, despite the fact they're significantly more risky. What advice do you have for someone tempted to do that?
“Well, let me repeat myself and then mention a new point. Larry Swedroe's opinion is that if you go after yield (in other words, you go after high-yield bonds or junk bonds), those are highly correlated with the market. If the market was to crash, so would your returns there. He advises against that. He advises staying at the highest level of quality bonds, even if that allows you to take more risk on the stock side and have a bigger portion of equities in your portfolio.
The second piece of advice is to look at I bonds. If you looked up I bonds today, you would see that there's 0% real interest rate. Your whole audience is going to go to look at 0% interest rate and wonder why would I ever care about that? Because it has two pieces. It's got that fixed interest rate piece, which today is 0%. That is for the life of the I bond when you buy an I bond. Plus, the second piece, which is plus the current rate of inflation.
In your particular example, we've got a current period with a very high yield on it for an I bond, but that's the combination that makes sense. Why doesn't the market take advantage of I bonds? Because it's really an opportunity that's only available to individual investors. You're limited personally to $10,000 per individual. That's $20,000 per couple. Plus, you can add more on it if you put your tax refund in that format. It's pretty small dollars in that sense and it does go in your taxable account, but it's perfect for situations like today.”
Sometimes I talk to people about investing, there are people that maybe aren't believers in the Boglehead's philosophy. Sometimes I worry the schools have been taught investing to become a little bit religious. People feel like they have to convert others to their way of thinking. Whether that be the Bogleheads philosophy of, “How can I convince my dad this is the way to invest?” or whether it's the latest crypto fad. Some people in the crypto community, particularly on Twitter, seem like it's almost a religion for them. It's an entire way of viewing the world. How can we get along with others that have a different investing religion, if you will?
“It's sort of like, do you believe in science or do you believe in alternatives? My science is things like modern portfolio theory, which isn't quite a science, I know. But others like to believe that they can invest in individual companies because there's some joy in it. There's some understanding in it. It's the company they work for. It's maybe a company that they consume their products. They like that company.
Who am I to say? Fine. Fine, if they want to invest in individual securities. I have plenty of friends that have actively managed funds or individual stocks. I guess the part that breaks my heart a little bit is if they think that that's the only alternative. People that are OK with their returns because they earn 7% and never realized that the market returns 10%, I sort of feel like they've lost some opportunity, but they're OK. So, I'm OK.”
More information here:
What Is an I Bond? — Are They A Good Investment?
Alternative Retirement System for the US
All right. Tell us about your latest project, financinglife.org.
“Financinglife.org is actually my website. It's a not-for-profit educational website where I put videos and some courses. It's mostly free content. I'm working on a current course, which I have a small fee associated to cover my costs. But it's just an educational website. I'm currently very fascinated by the idea of planning and do-it-yourself investment plans. If your audience is interested in that as a topic, head for my site, I'll put on the homepage some links to materials for you do-it-yourself planners, do-it-yourself investment plans.”
Let's do a hypothetical. Let's say you were made the retirement czar. You could change anything about the retirement system in our country. What would you change?
“For most of my life, I thought the way it is is the way it is, and there's no other way possible. Then, recently I picked up a book and it was eye-opening to me. The book is called “Rescuing Retirement” by Teresa Ghilarducci. She and her co-author described the problems with our retirement system and proposed a solution.I just thought it was so eye-opening. They talk about these defined contribution plans, which have a lot of problems and definitely favor the risk, all this discussion we've been talking about, deferring your taxes and getting deductions for those tax-advantaged programs. Plus, the big problem with the 401(k) type solutions is that they don't guarantee you a secure retirement for life. Instead, you have to play the game of probability that you probably are OK for life. In this arena, there's no investment pooling. For your fire insurance, you all pool your assets together and you don't individually have to save enough to pay for your house if it burns down. That's the advantage of insurance. In this arena, we individually have to save enough for longevity. The idea of pooling that risk of longevity, it gets solved by solutions like annuities. Social Security is the beautiful baseline solution to that, but it's not a solution for your retirement. It's a solution to keep people out of poverty during retirement.
The proposal that they make is that everybody have a portable account that stays with them. Their employers contributed into it the same way that they might have a matching 401(k). You contribute a small amount into it, but it's a portable account that's yours. If you die, it goes to your heirs. It's managed centrally. So, you get to choose your manager. But basically, they will invest in the stock market for high returns, low cost. It could be done with a non-profit. It could be done by the government. But the idea is capturing the market returns at low cost, high returns until you retire, and then converting that to an annuity.
There you've got your mandatory contributions, which we don't have now. That's one of the problems. A lot of people don't save, but this is a mandatory small contribution. So, it's affordable. It's small, and it achieves that by efficiency. Invest in the stock market until you retire. Whenever you retire, it's always your money, your account stays with you, and then it gets annuitized so that you have that security for as long as you live. Boy, I just think that that deserves discussion, and I don't hear anybody discussing it.”
Another change I'd love to see is just get rid of the alphabet soup of retirement accounts. The fact that this is tied to your employer at all is just crazy. It's just unfortunate that depending on who you work for, you have different options to save for retirement. You might have terrible plan options and terrible fees or no plan at all, just because you chose one employer over another. It's just a crazy hodgepodge system.
“Taxes and investment retirement planning. Those are both way too complicated.”
We're running short on time, but you've got the ear of 30,000-40,000 listeners to this podcast, mostly docs. But as we learned in our recent surveys, certainly not all docs. What have we not yet talked about that you think they should know?
“I think we've covered everything I wanted to talk about. But if they are interested in my favorite topic these days of planning and do-it-yourself planning instead of hiring help, because nobody's going to know more about what you want than you, then I'll have some resources on my website, which is financinglife.org.
I hope you enjoyed that interview. It's important to remember those basic principles behind investing. Investing really doesn't have to be complicated. We can get into the weeds all the time here about retirement accounts, about real estate, about taxes. But at the end of the day, if you get the basics right, it's kind of the Pareto principle. Twenty percent of the effort gives you 80% of the results. Make sure you're getting that 20% right with the principles we talked about today.
Sponsor
PearsonRavitz are disability and life insurance advisors founded by and for physicians. At PearsonRavitz, they help you as a doctor safeguard your most valuable asset, your income, so you can protect the most important people in your life, your family. PearsonRavitz makes human connections before they make quotes. Go to pearsonravitz.com today to schedule your consultation with a PearsonRavitz advisor.
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If you haven't already, be sure to check out our flagship course, Fire Your Financial Advisor. It will teach you how to write your own financial plan and follow it and maintain it and use it to become financially successful. It's going to teach you the financial literacy that you never learned in medical school or residency and help you write your own financial plan. The course is dramatically cheaper than hiring a professional financial planner to draw up your plan and takes much less time than trying to find all of this information online and in your library. It's basically no risk to you. It comes with a one-week, no questions asked, 100% money-back guarantee as long as you've taken less than 25% of the course.
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Quote of the Day
Our quote of the day today comes from nonagenarian, Taylor Larimore, who says,
“When experts disagree often it is because it doesn't matter much.”
Milestones to Millionaire
#59 – Resident with $100K in Assets
This primary care physician achieved $100K in assets less than six months after residency. Developing a written financial plan early, budgeting, and tracking his goals help this physician get a great start on his net worth from the beginning. Building wealth is addictive, and seeing that number grow can encourage you to save even more. You would be surprised at how quickly wealth can accumulate when you make good decisions, even just during residency.
Sponsor: PKA Insurance Group
Full Transcript
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.
Dr. Jim Dahle:
This is White Coat Investor podcast number 256 – Common Sense investing with Rick Van Ness.
Dr. Jim Dahle:
PearsonRavitz are disability and life insurance advisors founded by and for physicians. This White Coat Investor recommended agency grew out of one MD's experience with a career-changing on-the-job injury.
Dr. Jim Dahle:
Today, PearsonRavitz serves the medical community in all 50 states. At PearsonRavitz, they help you as a doctor safeguard your most valuable asset, your income so you can protect the most important people in your life, your family. PearsonRavitz makes human connections before they make quotes. Go to pearsonravitz.com today to schedule your consultation with a PearsonRavitz advisor.
Dr. Jim Dahle:
Our quote of the day today comes from nonagenarian, Taylor Larimore, who says, “When experts disagree often it is because it doesn't matter much.” I was actually able to participate in Taylor's birthday party. It was an online Zoom birthday party a few weeks ago. Always great to hear from him.
Dr. Jim Dahle:
It's always great to hear from you. I like hearing about your challenges, your successes. I like hearing about the struggles you've had. And I know they're real. A lot of you out there are having a rough time and if no one said thanks for what you do, let me be the first today.
Dr. Jim Dahle:
You spend a long time learning your trade and people that you are serving are not always appreciative. So, I want you to know that people do appreciate you, even if they don't let you know that in the moment.
Dr. Jim Dahle:
I don't think I've talked on the podcast for quite a while about our flagship course, Fire Your Financial Advisor. Now, my financial advisor advertisers don't like that title much. But the truth is that this course will help you to interact with the financial services industry. If that is what you desire.
Dr. Jim Dahle:
It will also teach you how to write your own financial plan and follow it and maintain it and use it to become financially successful. So, whatever your approach, this course can be helpful to you. It's going to teach you the financial literacy that you never learned in medical school or residency and help you write your own financial plan.
Dr. Jim Dahle:
The course is dramatically cheaper than hiring a professional financial planner to draw up your plan and takes much less time than trying to find all of this information online and in your library. It's basically no risk to you. It comes with a one-week, no questions asked, 100% money-back guarantee as long as you've taken less than 25% of the course.
Dr. Jim Dahle:
We also have an option that you can use your CME fund to buy. It's basically the course plus eight hours of wellness content that makes it eligible to be purchased with your CME money. So, you can check that stuff out at whitecoatinvestor.com/fyfa and take that course if you haven't yet taken it.
Dr. Jim Dahle:
I know our survey this year showed that something like 50% of White Coat Investors still don't have a written financial plan. We're going to be talking about that with Rick Van Ness during our interview coming up. But if you need help drafting it up, if you don't feel capable of writing it yourself, Fire Your Financial Advisor will actually help you to do that.
Dr. Jim Dahle:
All right, let's get Rick on the line here. I want to introduce him to you and talk about some of the work that he's been doing. With me today is Rick Van Ness, prominent Boglehead published author, and somebody that has really made it a second encore career, if you will, to teach the world financial literacy in any way he can. Welcome to the White Coat Investor podcast, Rick.
Rick Van Ness:
Thank you. I’m glad to be here.
Dr. Jim Dahle:
So, let's start at the beginning here. Tell us a little bit about your upbringing and how it shaped your views on money.
Rick Van Ness:
Wow, well, that's pretty average, maybe not very interesting. I sold seeds and did other jobs as a teenager, because my view of money was just to buy things. There wasn't an interest in anything more complicated than that. My dad did work for a company that had an employee stock purchase program. So I was able to watch him keep track of his cost basis. And I learned about what stocks are and ownership, and I had a board game called stocks and bonds. So I knew that bonds were loaning money, but pretty average, just an interest in buying things.
Dr. Jim Dahle:
Yeah, but maybe a little more than a lot of people have. You actually had parents who owned stocks. I'm not sure a lot of people grew up even with that much of an upbringing that was reflective of any sort of financial literacy education. Okay. So you left home, tell us about your education and your career.
Rick Van Ness:
Right. By the way, talking about finances in my family, it was not a taboo topic and I'm glad for that. It's just that we weren't a very sophisticated family and didn't really have much wisdom there.
Rick Van Ness:
I chose to go to a specific college and the way that I got it was by applying to an electrical engineering program. I got my degree in electrical engineering, which led to a job at Hewlett Packard, and it was a wonderful job for 27 years. And then I got laid off. My learning from that is you never know when you're going to retire. Before age 50, I was laid off.
Rick Van Ness:
But by the way, another thing, or another reason why Hewlett Packard was such a great company to work for was during those years, they paid for me to get my MBA at New York University. I'd work during the day and taken the train to Wall Street and got an MBA in finance paid for by my company. And so, that's pretty terrific. I can't thank them enough for that.
Rick Van Ness:
We got downsized around 2001. I went through a number of jobs looking for something else that would resonate as a career and nothing really did. Nothing was as good, nothing interested me as much. I wasn't really needing to save more money for my retirement. Although I had to pay for my kids' college education, I chose to pay for my kids' college education.
Rick Van Ness:
And when my daughter was in college, she came home and said something that took me by surprise at how interested she was. She had this economics professor that had brown bag lunches, where they would talk about economics topics. In fact, they named the series Backpack to Briefcase. And it surprised me that she was interested in that, and I thought to myself, “I could do that.”
Rick Van Ness:
And so, I did. I started teaching brown bag lunch seminars at Seattle University and the University of Washington. And that was good fun, but my audience was a dozen or two dozen brown bag launchers at a time.
Rick Van Ness:
And that was about the time that YouTube started taking off and started to get pretty good and interesting. I thought I could reach a lot more people doing that so I started making videos. And that was kind of fun for me also, because it just touched on a lot of areas that were fun for me.
Rick Van Ness:
And back then the only way to get on the internet was through your computer, not your phone. It changed later. And back then, YouTube allowed me to have an interactive session. So, I could make games out of asking kind of tricky questions and the listener would reply by touching the screen. And I would jump to a certain place and explain why that was the right or wrong answer. We could have more fun with it on a pretty dry topic learning about personal finance and investing. So that's how I got started there.
Dr. Jim Dahle:
That was more of a passion project. You were interested in finance long before you were laid off though. How'd you get interested in finance? Where'd that come from? Was it the MBA? Was it something else?
Rick Van Ness:
Finance is a pretty big word and my interest was really making money so I could spend money. It wasn't the intricacies…
Dr. Jim Dahle:
Even well into your career, huh?
Rick Van Ness:
Even well into my career. I found it very practical to buy Victorian homes and refurbish them and make them income properties. And so that required a little bit of knowledge about capital gains and how the tax system works. I'm just a curious person and that led me from one thing to another. I wound up with a degree in finance, which I didn't particularly use per se until I started explaining some of the basics of personal finance to this brown bag lunch seminar, which is how I discovered the Bogleheads and John Bogle. And that was really rather interesting to me.
Rick Van Ness:
One of my first projects was to take the tens of thousands of Bogleheads that would meet and didn't have a coherent explanation for what they were all about. I tried to help out with the video series. It was basically about the overhead investment philosophy, but I saw it as the 10 rules of common-sense investing.
Dr. Jim Dahle:
Well, we're going to spend some time talking about common sense investing here. It's interesting that you describe it that way, and I'm curious why that is and if it is common sense, why does this seem to be so rare for people to do what you suggest they do?
Rick Van Ness:
A lot of that is true. It does seem to me to be common sense. Once it's explained to you, I see it as common sense, but you're also right, that it's very uncommon. And the reason why I chose that name, by the way, was a reference. John Bogle has a book called the Little Book of Common Sense Investing. And so it's really a nod to him.
Dr. Jim Dahle:
Not to mention his other book, right? Common Sense on Mutual Funds.
Rick Van Ness:
Exactly. So that's really a nod to John Bogle as much as anything because he's such a colorful writer. Just a word on him, he was able to put a complex topic into some kind of a comment, like an earthy comment. Like, “Don't look for the needle in the haystack, just buy the haystack,” or he would switch around, “You get what you pay for” to “In investing, you get what you don't pay for.” And so, these are just colloquial sayings that are helpful to introduce complicated topics and they simplify it down to the essence of why it is common sense, I think.
Dr. Jim Dahle:
Now, your 10 common-sense rules sometimes referred to as the Boglehead investing philosophy is actually going to serve as the curriculum at Bogleheads University. I was asked to be in charge of that for this Bogleheads meeting this fall. It's going to be a three-hour session with multiple faculty members. Kind of the first afternoon of the conference, even before the opening reception.
Dr. Jim Dahle:
Let's talk about each of those 10 things today and maybe introduce them to our audience. These are the common-sense rules of investing, and surprisingly, a lot of people don't know them. And the first one is to develop a workable plan. And I preach on this all the time, “Get a written investing plan, get a written investing plan.” In your words, why is it so important to have a written investing plan?
Rick Van Ness:
Can I insert something before we talk about that?
Dr. Jim Dahle:
Sure.
Rick Van Ness:
I think there's a zero before this rule number one, there's a prerequisite that the Bogleheads don't talk about because they all meet the prerequisite, and maybe your audience all meet the prerequisite anyway. But the prerequisite is “Spend less than you earn” or “Live below your means.” And that's just really important.
Rick Van Ness:
The way that it manifests is in bad debt. People that don't live below their means get over their head in debt. And originally, my very, very, very first video was on the doubling of a penny for a month. Do you know what the answer is?
Dr. Jim Dahle:
What do you mean? If you double it every month for so long?
Rick Van Ness:
And if you double a penny for a month, you get $10 million. So, it's kind of a demonstration of exponential compound growth. But the reason why that's related is that bad debt can be very high interest. Today, if you look at your credit card, you'll see that you can take an advance loan out for 24% or a worker comes by your house and he'll swap out your windows for a 0% loan, which if you read about it, it's 18% interest beginning immediately and would be due if you don't pay it off within a couple of years. So there is this rule number one that qualifies you to the next 10, and that's living below your means.
Dr. Jim Dahle:
Yeah. It's hard to invest if you haven't saved anything. That's for sure. So financial plan, why is it so important?
Rick Van Ness:
Why is it so important? Well, I think what's important is that you have a plan and that you know your plan. And one way of knowing your plan is to reduce it down to something that you can see on maybe one page and look at it often and frequently.
Rick Van Ness:
Now, for me, writing it down is a process that gets there. It's an iterative process. There's something magical that happens when you try to put your ideas into words, and it's not quite there and you iterate and you iterate. It moves from one part of your brain to the other. Even if you could say it out loud with your spouse, talking somehow puts it in different parts of our brains and we tend to remember it. And if it's not part of your life, it's just another paper in your pile.
Rick Van Ness:
But if you can make a plan that's part of your life, that's magical because you can uncover what's really important to you. We forget about what's really important to us if we focus on just a few rocks, but there's a lot of medium-size and small rocks that are important to us. And if we can write those down, we can remember them. And that's why it's magical.
Dr. Jim Dahle:
Yeah. The thing I like about when you have to write it down is it shows you where the holes in your knowledge are. All of a sudden, you're like, I have no idea what to put here. I better go learn some more and do a little more research.
Rick Van Ness:
Exactly. But that's a reason people put it off because they feel like they're never ready. There's never enough information. There are too many unknowns. The futures are unknown. My dad's favorite saying was, “I'll make a plan when you tell me how long I'm going to live.” Well, that's a good reason to never make a plan, but that's actually a great reason to make a plan, which we could talk about.
Rick Van Ness:
But it also gets in your subconscious. If you can be thinking about what's really important to you because it's true that you often hit what you aim for. So if you can remember, “These are important to me”, you can make a lot of your dreams come true.
Dr. Jim Dahle:
All right, let's move on to rule number two, which is start saving early. Sometimes called save automatically, pay yourself first, whatever. But this audience is a little unique in that way. Doctors tend to miss out on saving in their 20s because they don't earn in their 20s. They're not even close to living within their means. They're generally stacking on the debt in their 20s. And luckily, they later tend to have higher incomes and could potentially save more at that point.
Dr. Jim Dahle:
What advice do you have for the young doc who feels they don't have any spare change to invest given their huge student loan burden? And then what advice do you have for an older doctor that maybe has a tiny nest egg and is now kind of panicking and wondering if it's too late? They know the rule is to start saving early, but how would you actually do that to a typical doctor's financial path?
Rick Van Ness:
The classical way of explaining this topic is to show two individuals. One individual saves for the first 10 years of their life, puts away. And then for some reason gets pulled away, has to take care of a child or somebody and never saves again. And classically, they compare that person with somebody like your audience that has to start saving later in life and save more aggressively but never catches up. And they use that to explain the miracle of compound interest. And that's something that I got away from.
Dr. Jim Dahle:
Never save again.
Rick Van Ness:
I kind of favor two more behavioral types of explaining this topic of starting to save early. One comes from Andrew Tobius and his idea was, he took the Benjamin Franklin rule about a penny saved as a penny earned. And he twisted it to a penny saved is two pennies earned because they didn't have income tax then.
Rick Van Ness:
And now you could easily have a 50% income tax if you were a high-income earner with state and local taxes and social security and he had them all up. And so behaviorally you could ask yourself, “Would you rather earn $1,000 and net $500 or just save $500?”
Rick Van Ness:
Or the other way of explaining this is kind of behavioral, it comes from Vicki Robbins. And she looks at the idea of a real hourly wage by looking at your uncompensated work expenses and your uncompensated work time.
Rick Van Ness:
If you add up all the expenses that you do because you're a doctor, that you aren't compensated for, transportation costs and all, you could subtract those expenses from your income, but you add up all the time that you invest that you're not compensated for, maybe educational or commuting costs.
Rick Van Ness:
It compresses the hourly wage to something much smaller. And then you can make real decisions about, “Do I want to spend $100 on this or work so many additional hours?” I try to explain it in those terms.
Rick Van Ness:
You asked about what advice I would have for young doctors. And my advice is to make yourself a plan, make sure that you're going to stick with your career and get those loans paid off and have a plan for paying off those loans, either incrementally or through a loan forgiveness plan. But have that kind of plan in mind and then overtly start saving early for all those reasons.
Dr. Jim Dahle:
Now how about for the doc who feels like, “Man, it's too late. Why bother now? I'm already 55. I'm already 60. I'm already 65. Is it just too late for me? I know I'm supposed to start saving early. So, compound interest will work. But now I'm toward the end of my career. Is it too late?” What do you tell to that doc?
Rick Van Ness:
Well, the answer is no. Of course, it's never too late. You got to start with where you are. The first step would be to figure out what you need. This doctor should figure out what he really needs to retire. For one thing, he's probably got all those years' worth of social security that's going to be his floor.
Rick Van Ness:
Social security is a fantastic floor for everyone with a good long working history, because it's an annuity that's as good as long as you live. And you can start saving aggressively through the tax advantage programs. Never give up, just start hacking away at it.
Rick Van Ness:
But the advice would be for people that are starting late, don't use that as an excuse for taking more risk than you're able to take. That's not an excuse. Never start taking more investment risk than is appropriate.
Dr. Jim Dahle:
This is a great segue. This is rule number three, is to choose appropriate risk.
Rick Van Ness:
Right, appropriate risk. What's the appropriate risk? That's matching investment risk with your need horizon. So, all your goals have needs, and each of them have individual horizons. The older doctor that has a daughter's wedding coming up this year or next, shouldn't put that money in the stock market. That money should be accessible and safe.
Rick Van Ness:
Obviously, retirement would have a different risk than years, 20 through 25. But yeah, making a plan as a way of identifying those needs and then matching the investment risk individually with those needs.
Dr. Jim Dahle:
People are often saying asset allocation is the most important thing. It's your most important decision, your ratio of stocks to bonds, etc. Does it really matter as much as people think? Does it really matter if you're 80% stocks or 65% stocks? At what point is it good enough? It's close enough.
Rick Van Ness:
Well, yes, it really does matter, but you can't know. You can't know the future. It's something that you could only know in hindsight. And so, people like to say that good enough it's like somebody compared it to grenades and horseshoes. Getting good enough in this context is probably, I don't know, within 10% or 20% because you just can't know the future. In hindsight, you would know what you should have done. But nobody knows that.
Dr. Jim Dahle:
Well, speaking of protecting us from what we don't know, step number four or rule number four is to diversify, which I think hopefully everybody listening to this podcast has heard of this rule before. But what are some of the biggest issues you've seen in investors from a lack of diversification?
Rick Van Ness:
Yeah, this is widely misunderstood – this particular topic. First of all, when we say diversify, we're talking about equities. In fact, the prior portion, when we were talking about risk, is really the portion of equities and the portion of bonds. That's the easy way to control our investment risk.
Rick Van Ness:
If the portion of bonds is high-quality bonds, which I am in the school of Larry Swedroe who says, they should only be high-quality bonds. Don't take risks there because your risk is better compensated on the equity side of your portfolio. There's no advantage of diversifying your government-backed, even your CDs, your government-backed bond-type investments.
Rick Van Ness:
We're talking about equities here, diversify equities. And there's three different layers that I'll talk about. And if you only believe this top layer, you're still fine, but the top layer would be the old saying, “Don't put all your eggs in one basket.” This would be to look at your mutual fund with a thousand companies in it and say, “Well, one of them could fail and doesn't really destroy you.” So it's that “not putting all your eggs in one basket.” That's true. And that's the simplest way of what we're talking about here.
Rick Van Ness:
Something more insightful is that individual stocks carry uncompensated risk. Individual stocks carry uncompensated risk. Now what that means is, well, you could own down the street for me here is Boeing and Boeing has company-specific risks. For instance, the employees could go on strike and that's going to affect the value of that stock.
Rick Van Ness:
And then there's industry, as they call it, systematic risk that affects all industries. Company-specific risks can be diversified away. If somebody owns all of the aerospace industry, they wouldn't own that risk in our portfolio. They wouldn't pay for that risk. So it becomes an uncompensated risk.
Rick Van Ness:
And an example of a systemic risk might be something like aviation fuel. It's going to affect all of that industry or even something broader, geopolitical, it would affect all industries in general. But that's the second level here, which is that individual stocks carry uncompensated risk.
Rick Van Ness:
But the most magical way of looking at diversifying stocks is the modern portfolio theory, the Bill Sharpe and Harry Markowitz, efficient frontiers topic. And this topic is it's magical in the sense that if you look at rate of return versus volatility, you could look at any three companies, any four companies and say, “If you separate them into a shape of a square or something, the Northwest corner is going to be the highest rate of return for the lowest risk.”
And an individual might say, “Well, why would I own the Southeast corner, the lowest return and the most volatile stock?” And the answer is because a combination of them does better than any of them individually. And this is the magical insight in the efficient portfolio type work is that there actually is an ideal portfolio. An ideal portfolio that maximizes return for risk.
Rick Van Ness:
And that's what the academic terminology is. It's the tangential market portfolio, which in real life, for all our viewers, boils down to owning all the equities in the world in proportion to their capitalization, which is the total market, which is another way of saying. John Bogle would say something so complicated by saying, buy the whole haystack.
Rick Van Ness:
The whole haystack is the market portfolio or the tangency portfolio. And it has that magical attribute of being the highest rate of return for risk. You can get greater rate of returns, but for more risk. So that's what we're talking about when we're talking about diversifying this. It’s really mixing that with the appropriate portion of bonds to suit your needs.
Dr. Jim Dahle:
Yeah. And that covers rule four, which is diversify, as well as rule six, use index funds when possible. Let's step back for a minute to rule five though, which is never try to time the market. And we've all heard this, we've all heard you shouldn't try to time the market. And yet it is so tempting. Why is it so tempting to try to time the market?
Rick Van Ness:
You are so right. I don't know the answer to that. It's one of our human foibles I guess.
Dr. Jim Dahle:
Some investors certainly have to learn to overcome it though, because if you actually keep track of your returns, you quickly learn that you're no better than anybody else at timing the market. And if you are, you should be managing a whole lot more than your money.
Rick Van Ness:
It's just proven over and over and over again that nobody can predict the market.
Dr. Jim Dahle:
Not in any sort of meaningful way, long term.
Rick Van Ness:
Not consistently.
Dr. Jim Dahle:
All right. Rule number seven is to keep costs low. And we're typically talking about investment-related costs, fees, whether it's financial advisor fees or expense ratios in a mutual fund, 12b-1 fees, whatever.
Dr. Jim Dahle:
But how can one watch costs without becoming miserly, number one, or two, starting to perseverate on amounts of fees that really don't matter? A few basis points, difference in an expense ratio or returns, etc. How do you find that balance between watching costs without being pennywise and pound foolish?
Rick Van Ness:
I guess I'm not sure I see it that way. I don't see the relationship between watching costs and spending. There's a great graph on the Bogleheads Wiki that shows paying a typical 2% expense ratio. What is the cost of that to you? And it translates to a couple hundred thousand dollars, which translates to like 5 or 10 extra years of retirement. There's that real cost, but does it take extra work to save that cost?
Rick Van Ness:
I guess I think of it in terms of “Who's college education do I want to pay for?” Do I want to save to pay for my kids' college education or my broker's kids' college education? Or do I want to take my wife on a safari or send my brokers on a safari? I don't see the miserly part of it because you can be not miserly.
Dr. Jim Dahle:
I think for sure when you're talking about relatively big numbers. In investing 2% is a big number and I use this example all the time. If you take a doc saving $50,000 a year for 30 years, if they're paying 2% in investment cost, the difference after 30 years is $2 million. It's the difference between having a $6 million portfolio and a $4 million portfolio. So, you're absolutely right. The costs matter and compounded costs become very large over time.
Dr. Jim Dahle:
But what happens is people learn that lesson and they start applying it to things that are very small. For example, I have people that ask me, “Should I use a Fidelity zero index fund instead of the Vanguard total stock market fund?” And we're talking about the Vanguard fund, which has an expense ratio of 0.03, three basis points. And this Fidelity fund has a ratio of zero basis points. And they think, “Oh, I should switch to Fidelity.”
Dr. Jim Dahle:
And they don't realize that at that sort of level of cost, there are other things that matter more like how well they're tracking the index, and how tax-efficient the fund can be. The fact that the Vanguard fund has the ETF share class, for instance, and where your money is so you're not having to run all over the place to buy funds at many different brokerage houses.
Dr. Jim Dahle:
It starts to matter much more than those expense ratios. I think that's what I was getting at when it comes to being miserly and letting the expense tail wag the investment dog, if you will.
Rick Van Ness:
Right, it could become a bad habit. But I think for me, the solution to that bad habit goes back to planning. Because you can see I'm currently a big proponent of planning. And the idea of planning in this context is identifying those things that are most important to you.
Rick Van Ness:
And if you can identify those things that are most important to you, then you're less tempted to, you get in the habit of saving and then you never spend. That's not the idea of it. The idea of saving is so that you can spend smoothly throughout your entire life. So that includes this concept of retirement, which is a third of your life. You've got to work for half or two-thirds of your life to pay for your retirement.
Rick Van Ness:
But you've also got all these other goals that you can unearth by a good planning process. And once you've unearthed them and keep them visible, I enjoy musical theater. Is it worth $100 or $200 a ticket to go to? For me, it is. Everyone has different answers to what's important to them, but it's easier to spend money on things that you've already thought through. Yeah, these are important to me and drinking at the bar is not.
Rick Van Ness:
There's lots of ways to spend money. If you don't think they're important to you, get them out of your life, but add more of those things that are important to you. It might be family time. It might be a family vacation once a year and you might choose to pay for it as a way of getting your family together because it's something you value. You only get to that by thinking through what's really valuable to me, which I think a plan should do. A plan is bigger than planning for your retirement.
Dr. Jim Dahle:
Yeah, for sure. Now, one of the biggest costs is taxes and rule number eight is to minimize taxes. And this is probably even more important for a high earner, like a doc, like those that tend to listen to this podcast. What do you think is the biggest tax cost that investors run into?
Rick Van Ness:
I don't know that one. It could be losing out on the opportunity to defer taxes. What's your answer to that one?
Dr. Jim Dahle:
I don't know. I think one of the problems is when you're not doing the other things that you get recommended to do like buying and holding or not trying to time the market or using an actively managed fund. Your investments become much less tax efficient. Now that doesn't matter in your Roth IRA so much, it doesn't matter so much in your 401(k). The lower performance matters from them doing that, but the tax cost doesn't matter.
Dr. Jim Dahle:
When you're investing in a taxable account, as many of our listeners do for at least a portion of their portfolio, that starts mattering a lot. And I think there are a lot of Vanguard investors who got a big surprise at the end of last year. Those who had been investing in a target retirement fund, inside a taxable account. All of a sudden due to some changes Vanguard made with share classes of the fund, they had something like an 18% distribution, a taxable distribution of capital gains out of what they thought was a relatively tax-efficient fund of index funds.
Dr. Jim Dahle:
And so, I suspect it's just not being tax efficient as they invest. It’s probably the biggest tax cost, but you're right. It might be related to not using tax-protected accounts that are available to them. I'm continually amazed how many doctors don't understand how many tax-protected accounts they have available to them, whether that's a backdoor Roth IRA or an HSA, or maybe they're not even using all of the employer-provided accounts they're given.
Rick Van Ness:
Exactly. And also, being aware of the tax consequences of selling one asset versus another, say in their taxable account or the opportunities to donate appreciated assets. Being tax-aware can affect your decisions. It should affect your decisions.
Dr. Jim Dahle:
All right, rule number nine is to keep it simple. And it's been said to invest your time actively and your money passively. And I think there's a lot of wisdom there. But at a certain point, you got to ask yourself “How much higher of a return is worth additional complexity in my portfolio?”
Dr. Jim Dahle:
For example, you mentioned earlier that at some point in your life, at least, you had some rental properties that you were dealing with. Significant additional complexity, and work there compared to a portfolio of index funds. How do you make that decision of when it's worth adding complexity in hope of a higher return?
Rick Van Ness:
Yeah. That would be a real individual question because adding complexity by taking on income properties, I got away from that. Because in that case, the complexity was the non-financial part of being a landlord. Get me out of that space. I guess I view it as having a limited number of heartbeats and how I want to spend my time.
Rick Van Ness:
If I really got satisfaction from trying to optimize my portfolio, I could play games in my taxable account by staggering asset purchases, such that one of them might be more eligible for tax loss harvesting or games like that. I just don't have time and interest in doing that. But other people might and that's fine with them.
Rick Van Ness:
I don't begrudge people that take it on as a game. I know people in investor clubs that have social fun choosing stocks to purchase individually, and earlier in this discussion I harped on uncompensated risk for doing that. But if they want to do it, and they're okay with that, fine.
Dr. Jim Dahle:
All right. The last of these 10 tips, these 10 rules, these principles is to stay the course. Most people fail to even get the market return because they're continually chasing performance or tinkering with their portfolios.
Dr. Jim Dahle:
Right now, as we record this, it's March 8th. The market's down on the year for various reasons, whether that's inflation-related or the war in Ukraine or whatever it might be. And there are some people that are maybe struggling with staying the course. Do you have any tips for those who are losing sleep in this latest market correction?
Rick Van Ness:
My knee-jerk reaction is to say, you've got too many equities. If you're losing sleep because of what's happening this year, which is pretty mild. You could be suffering from the common greed of wanting to take advantage of the 10-year ramp-up in stock prices and got in over your head.
Rick Van Ness:
You should never be taking investment risks beyond what you're capable of holding. If you're losing sleep, that's a huge sign. I don't even watch it anymore. I have no value in watching the stock market because I won't be making any transactions in the next couple of years.
Dr. Jim Dahle:
Rick, your other book is titled “Why Bother with Bonds?” and it makes the case for bonds. What do you see is the case for bonds these days when interest rates are 2% and inflation is 7%?
Rick Van Ness:
The case for bonds is not different. You don't invest in bonds for a rate of return. If you want to hire an expected rate of return, you look into equities. If you want safety, the rule for bonds in your portfolio is for safety. It's for ballast, it's for stability. It's for your near-term liabilities where you don't have room for risk. It's for being able to sleep at night. It's for your personal comfort level for investment risk.
Rick Van Ness:
Now, what you just described is not normal. Normally the interest rate on bonds, if you look at the bond yield curve, that includes inflation and you just described the short-term scenario of 7% inflation and whatever you said, 2% bond interest rates. That's an anomaly.
Rick Van Ness:
A nominal bond return includes market expectation for inflation. And if you want protection for unexpected inflation, that's where TIPS and I bonds provide value. The combination is a popular approach or strategy for achieving that combination of half or more TIPS and treasury securities, which by the way could be bank CDs or anything government insured like that is very safe.
Dr. Jim Dahle:
Yeah, it has been an interesting anomaly to watch in the last few months, maybe the last few years. And you would think in a functioning market that bond interest rates would be inflation plus, and maybe the market's not functioning because the Fed is artificially holding rates down, and has been now for some time. Which leaves the individual investor to wonder how I should react to this? And a lot of them start chasing yield. They start looking for things that pay more, despite the fact they're significantly more risky. What advice do you have for someone tempted to do that?
Rick Van Ness:
Well, let me repeat myself and then mention a new point. Larry Swedroe's opinion is that if you go after yield, in other words, you go after high yield bonds or junk bonds, those are highly correlated with the market. If the market was to crash, so would your returns there.
Rick Van Ness:
And so, he advises against that. He advises staying at the highest level of quality and bonds, even if that allows you to take more risk on the stock side and have a bigger portion of equities in your portfolio.
Rick Van Ness:
But the second piece of advice is to look at I bonds. Now, if you looked up I bonds today, you would see that there's 0% real interest rate. And so, your whole audience is going to go to 0% interest rate? Why would I ever care about that? Because it's got two pieces. It's got that fixed interest rate piece, which today is 0%. And it's for the life of the I bond when you buy an I bond. Plus, the second piece, which is plus the current rate of inflation.
Rick Van Ness:
In your particular example, we've got a current period with a very high yield on it for an I bond, but that's the combination that makes sense. Now, why doesn't the market take advantage of I bonds? Because it's really an opportunity that's only available to individual investors and even to a small degree, you're limited personally to $10,000 per individual. So that's $20,000 per couple. Plus, you can add more on it if you put your tax refund in that format. It's pretty small dollars in that sense and it does go in your taxable account, but it's perfect for situations like today.
Dr. Jim Dahle:
Sometimes I talk to people about investing, there's people that maybe aren't believers in the Boglehead's philosophy. And sometimes I worry the schools have been taught investing to become a little bit religious. People feel like they have to convert others to their way of thinking. Whether that be the Bogleheads philosophy, “How can I convince my dad this is the way to invest?” or whether it's the latest crypto fad. Some people in the crypto community, particularly on Twitter, it's almost a religion for them. It's an entire way of viewing the world. How can we get along with others that have a different investing religion, if you will?
Rick Van Ness:
Right. It's sort of like, do you believe in science or do you believe in alternatives? And my science is things like modern portfolio theory, which isn't quite a science I know. But others like to believe that they can invest in individual companies because there's some joy in it. There's some understanding in it. It's the company they work for. It's maybe a company that they consume their products. They like that company.
Rick Van Ness:
Who am I to say? Fine. Fine, if they want to invest in individual securities. I got plenty of friends, most of my friends either have actively managed funds or individual stocks. And I guess the part that breaks my heart a little bit is if they think that that's the only alternative. People that are okay with their returns because they earn 7% and never realized that the market returns 10%, I sort of feel like they've lost some opportunity, but they're okay. So I'm okay.
Dr. Jim Dahle:
All right. Tell us about your latest project, financinglife.org.
Rick Van Ness:
Yeah. financinglife.org is actually my website. It's a not-for-profit educational website where I put videos and some courses. It's mostly free content. I'm working on a current course, which I have a small fee associate to cover my costs, but it's just an educational website.
Rick Van Ness:
I'm currently very fascinated by the idea of planning and do it yourself investment plans. If your audience is interested in that as a topic, head for my site, I'll put on the homepage some links to materials for you do it yourself planners, do it yourself investment plans.
Dr. Jim Dahle:
All right, let's do a hypothetical. Let's say you were made the retirement czar. You could change anything about the retirement system in our country. What would you change?
Rick Van Ness:
For most of my life, I thought the way it is, is the way it is and there's no other way possible. And then recently I picked up a book and it was eye-opening to me. The book is called “Rescuing Retirement” by Teresa Ghilarducci. And she and her co-author described the problems with our retirement system and proposed a solution. And I just thought it was so eye-opening.
Rick Van Ness:
The solution that they pose is instead of these defined contribution plans, which have a lot of problems, they're just problematic and they definitely favor the risk, all this discussion we've been talking about, deferring your taxes and getting deductions for those tax-advantage programs.
Rick Van Ness:
Plus, the big problem with the 401(k) type solutions is that they don't guarantee you a secure retirement for life. Instead, you have to play the game of probability that you probably are okay for life. And since in this arena, there's no investment pooling. For your fire insurance, you all pool your assets together and you don't individually have to save enough to pay for your house if it burns down. That's the advantage of insurance.
Rick Van Ness:
In this arena, we individually have to save enough for longevity. The idea of pooling that risk of longevity, it gets solved by solutions like annuities. Social security is the beautiful baseline solution to that, but it's not a solution for your retirement. It's a solution to keep people out of poverty during retirement.
Rick Van Ness:
The proposal that they make is that everybody have a portable account that stays with them. Their employers contributed into it the same way that they might have a matching 401(k). And you contribute a small amount into it, but it's a portable account that's yours. And if you die, it goes to your heirs.
Rick Van Ness:
And it's managed centrally. So, you get to choose your manager. But basically, they will invest in the stock market for high returns, low cost. It could be done with a non-profit. It could be done by the government, but the idea is capturing the market returns at low cost, high returns until you retire, and then converting that to an annuity.
Rick Van Ness:
There you've got your mandatory contributions, which we don't have now. That's one of the problems. A lot of people don't save, but this is a mandatory small contribution. So, it's affordable, it's small and it achieves that by efficiency. Invest in the stock market until you retire. Whenever you retire, it's always your money, your account stays with you, and then it gets annuitized so that you have that security for as long as you live. And boy, I just think that that deserves discussion and I don't hear anybody discussing it.
Dr. Jim Dahle:
Yeah. Another change I'd love to see is just get rid of the alphabet soup of retirement accounts.
Rick Van Ness:
Oh my God, yes.
Dr. Jim Dahle:
The fact that this is tied to your employer at all is just crazy. It's just unfortunate that depending on who you work for, you have different options to save for retirement. You might have terrible plan options and terrible fees or no plan at all, just because you chose one employer over another. It's just a crazy hodgepodge system.
Rick Van Ness:
Taxes and investment retirement planning. Those are both way too complicated.
Dr. Jim Dahle:
Yeah, I agree. All right. We're running short on time, but you've got the ear of 30,000 to 40,000 listeners to this podcast, mostly docs. But as we learned in our recent surveys, certainly not all docs. What have we not yet talked about that you think they should know?
Rick Van Ness:
I think we've covered everything I wanted to talk about. But if they are interested in my favorite topic these days of planning and do it yourself planning instead of hiring help, because nobody's going to know more about what you want than you. You know what's important to you, then I'll have some resources on my website, which is financinglife.org.
Dr. Jim Dahle:
All right. Well, we appreciate you doing that. We appreciate you coming on the podcast and sharing some of your wisdom, and being able to go back and cover these common-sense topics that maybe we don't talk about enough on here. So, thank you, Rick. This has been Rick Van Ness, financinglife.org. You can learn more about him. You can pick up his books, both the “Common Sense” one I mentioned earlier, as well as “Why Bother with Bonds” that I have reviewed before on the blog. And again, thank you Rick, for your time.
Rick Van Ness:
Thank you, Jim.
Dr. Jim Dahle:
I hope you enjoyed that interview. It's important to remember those basic principles behind investing. Investing really doesn't have to be complicated. We can get into the weeds all the time here about retirement accounts, about real estate, about taxes, whatever.
Dr. Jim Dahle:
But at the end of the day, if you get the basics right, it's kind of the Pareto principle. 20% of the effort gives you 80% of the results. Make sure you're getting that 20% right with the principles we talked about today.
Dr. Jim Dahle:
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Dr. Jim Dahle:
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Dr. Jim Dahle:
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Dr. Jim Dahle:
Thanks for those of you leaving us a five-star review and telling your friends about the podcast. Our most recent five-star review is titled, “Love the addition of Dr. Spath. It's great to hear a new voice and perspective and have enjoyed the evolution of the podcast. Thanks so much for great advice. Hope Disha stays on for good.” Thanks for that great review. We appreciate that.
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:
The host of the White Coat Investor podcast are not licensed accountants, attorneys, or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice related to your situation.
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