I Bonds, Asset Pricing, and Other Investing Questions

INTRODUCTION

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:
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All right, let's take your first question. Conveniently, this is about cash management.

VANGUARD CASH PLUS BANK SWEEP ACCOUNTS

Speaker:
Hello, Dr. Dahle. I'm curious to hear your thoughts on the Vanguard Cash Plus Bank Sweep accounts. The investments are FDIC insured, but Vanguard itself isn't a bank that can be insured. Are these accounts vulnerable, same way Yotta users weren't safe when its software provider Synapse went bankrupt? It's tempting to dump my high yield savings account bank savings and use Vanguard since they already have my IRA, but I'd like to fully understand the risks involved. Is it the same risk if Vanguard went under while my IRA is there? Thank you very much.

Dr. Jim Dahle:
Okay, great question. I'm having to learn about this Yotta debacle that apparently happened. I don't know a lot about this, but apparently last year, a high yield savings app had a big problem. It's kind of a fintech company. And I'm looking at this article from June of 2024, and it says “85,000 accounts locked in fintech meltdown: ‘We never imagined a scenario like this' For three weeks, 85,000 Yotta customers with a combined $112 million in savings have been locked out of their accounts, CEO and co-founder Adam Moelis told CNBC. The disruption caused by a dispute between fintech middleman Synapse and Tennessee-based Evolve Bank & Trust has upended lives.”

All right, sounds like maybe a bad thing if your money is not easily accessible. Here's the deal with cash. We all need some cash. Make sure you have enough cash in the places where you can get to it. After you've ensured that, try to earn something halfway decent on your cash. Those are kind of the two principles here.

The first principle is, kind of an emergency fund type discussion. You probably ought to have some cash in your wallet. You probably ought to have some cash in your home, maybe in a fire safe or something in your home. You ought to have some cash in your checking account. And hopefully, that involves a local bank or credit union that you can stop by and pull cash out the next day banks are open.

Beyond that sort of accessible cash, I try to earn something on my cash. And you have to pay attention because from time to time, every few years, there might be a better option. For example, when interest rates were really low a few years ago, and you couldn't make anything in a money market fund, you'd go to a high yield savings account and maybe make 1%. And 1% was better than no percent, which is what you were getting in your credit union, what you were getting in your checking account, what you were getting in a money market fund at that point. Maybe you're making 0.25%, but 1% was better than that.

For quite a while, the high yield savings accounts were actually a little higher than money market funds. But most of the time, the best rate on your cash is available in a money market fund. And frankly, I think the best ones are Vanguard. Comparable ones can be found at Fidelity and at Schwab.

Now your sweep account at Vanguard, if you don't do anything special, your sweep account is the federal money market fund, which is a perfectly reasonable money market fund. We use it a lot. And that's where most of our cash sits at the moment that I'm recording this.

At times we've used their municipal money market fund. When you're in a high tax bracket, it can make sense to use that. And your after-tax yield is actually a little bit higher, most of the time, when you are in a high tax bracket.

Now Vanguard came out with something a few years ago. It's a product they call the Vanguard Cash Plus account. And if you Google that, you'll come to a page on the Vanguard website that tells you a little bit more about it. It says you could earn more with the Vanguard Cash Plus account than with a traditional savings account, which pays 0.45% APY on average.

Like I said, anything good is better than the usual crap. And what you're getting at your local credit union or bank is the usual crap. So this is better than that. Better to earn 3.65% than to earn 0.45% or 0% in your checking account or 0.1% in your savings account. This is better. You need to pick something better.

This isn't the highest yield you can get on a high yield savings account though. There are plenty out there that offer 4% or 4.5% or even 5% or slightly more as I'm recording this. The funny thing about this is that there is a better option right at Vanguard. You can go to a Vanguard money market fund. If you look at the Vanguard Federal Money Market Fund, right today as I read this and I'm seeing their Vanguard Cash Plus account offering 3.65%, I can see that the Federal Money Market Fund pays 4.27%.

So you're going to get a higher yield just being in the Vanguard money market fund than you are in the Vanguard Cash Plus account. What are you getting at the Cash Plus account that would be worth a lower yield than you could earn just being in their money market fund? It's kind of the same place your money's at. You still look at it with your Vanguard accounts, et cetera.

But it's basically a savings account alternative. It allows you to keep your short-term cash and your long-term investments at Vanguard. Well, you can do that with the money market fund. So, that's not doing anything special for me. It says convenient cash management, next day bank transfers. Well, I can get that in the money market fund.

Direct deposit, I don't know if I can do that with the money market fund. I've never tried. I just do that in my checking account. Paying bills, I use my checking account. But apparently, if you want to do this at Vanguard, you could do this. You could pay bills. You can do mobile check deposit like you can at your bank, unlimited transactions and compatibility with apps like PayPal and Venmo.

So, what are they competing for here? They're not competing for your money market fund money. That's not as convenient as this is. They're competing for the money you have sitting in your checking account. If you can deal with this as your checking account, and it works for that, you can pay your bills and deposit your checks and all that sort of stuff, then this is going to be better. Then your checking account is paying you nothing. Now you're earning 3.65%.

But that's what you're comparing it to. And you have to decide, “Well, can this do everything my checking account is doing for me right now?” If so, then maybe you want to switch to this as your checking account. I have not done this, but it seems like a reasonable thing to try.

$0 to open an account, $0 minimum balance, $0 account service fees when you sign up for e-delivery of your statements, $0 to transfer money between Vanguard accounts to do electronic bank transfers and ACH transactions. Wires may have a low fee. Well, you got that even if you come out of a money market fund at Vanguard. So, it seems like a reasonable thing to try. I have not tried it yet, but it's not a bad thing to try.

Now, as far as FDIC insurance, Vanguard is not a bank. What do they do to get this money FDIC insured? They use a bank sweep program. There's a lot of people I heard doing this. I think SoFi does it. Basically what they're doing is the end of each day, they sweep your money out to banks. Overnight, your money sits at a bank that has FDIC insurance.

And it says they can do it up to $1.25 million. I think the FDIC amount, I'd have to look this up to be 100% sure, I think it's $250,000. So, it's probably going to five different banks. You get that $1.25 million. It says $2.5 million for joint accounts. Maybe $500,000 is the FDIC limit right now. I don't know. I'd have to look it up. That's probably what it is. So, it goes out to five different banks. And the next day the money comes back from the banks and it's at Vanguard. And that's how that works.

Now, does this have the same risk as Yotta? Well, I guess there can be an issue transferring money back and forth between the banks. It could get locked up. Something like that could happen. I think it's far more unlikely for that to happen at a household institutional name like Vanguard than it is from a new fintech app that names itself after a Jedi from the Star Wars movies. Okay, it's not spelled the same as that Yoda. It's a different Yotta.

But you get my point. You try something totally new and weird things can happen. So, I don't know that I'd put all your money in it or close your checking account yet, but I might try this thing out. I don't think it's crazy to try it out. But if I really do have my savings, my cash that's going to sit there for months, it's going in a money market fund. I don't worry about the fact that money market funds don't have FDIC insurance.

And the reason why is that you're not counting on Vanguard to give you your money back, like you're counting on a bank to give you your money back when you're in a high yield savings account. Vanguard takes the money and invests it in short-term securities.

With the federal money market fund, it's basically securities from the federal government. With the treasury money market fund, it's securities from the treasury only. With a muni money market fund, it's short-term securities from a bunch of state and municipal governments and those sorts of things, the people that issue municipal bonds.

And so, there's something behind it. It's not just the good faith and credit of the bank that's standing behind it and the FDIC insurance. There's something else there in a money market fund. And so, it's considered a very, very safe investment.

As far as money market funds breaking the buck and losing investors' principle, it very, very rarely happens. I don't know that it's ever happened to individual investors. I think the only money market fund I know of that it's actually happened at was basically an institutional money market fund for institutions. And I don't think they lost very much principle. It was like 1% or something. So I don't think that this is a big risk to invest in a money market fund instead of a bank. And that's what I prefer to do.

I hope that's helpful to you and answers your questions. If anybody out there has used the Cash Plus account and thinks it's the cat's meow, send us an email and we'll do an update in an upcoming episode and talk about how much you love it and how awesome it's been for you. Conversely, if you've had issues with it, send us an email about that as well. And we'll share that with the community.

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But most people signing up now are probably signing up virtually because they just can't arrange their clinical and personal schedules enough to come in person. And so, you can still do that. It's the same date, same times. You sign up at wcievents.com. If you want $100 off, VIRTUAL100 is the code to use. And we'd love to have you there.

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All right. Let's talk about treasury I bonds. Love me some I bonds. But I'm starting to wonder if maybe it's time for me to get rid of them as well. I don't think it's for the same reason as this Speak Pipe asker.

WERE I BONDS A GOOD INVESTMENT?

Speaker 2:
Hi, Dr. Dahle. Long-time listener with my wife and I as a dual physician household. I had a question. I recently updated my money tracking app using the Empower app. When I did this, I uploaded everything that I knew I had invested, including my treasury I bonds that I bought during COVID, which was a recommended item thing to do.

While I see all my other investments fluctuating up and down day to day, week to week, the I bonds, which I bought $10,000 worth times two, hasn't changed. Was this a good investment? Am I missing something regarding this? What's actually happening with this money? As I feel the money seems to have been better invested in the market or something other than just sitting where it currently is. What are my ramifications in changing anything at this point? Maybe just to catch up on these I bonds would be helpful for everyone who put their money into it at that time. Long-time listener, thank you for what you do. I appreciate all the advice.

Dr. Jim Dahle:
Okay, great question. First of all, you need to recognize that everybody that owns anything besides Bitcoin or Nvidia got to the end of 2024 and kicked themselves for not buying whatever went up the most. At least a whole bunch of US large cap growth stocks, the S&P 500 or total stock market fund.

The US stock market made 25% in 2024. It made 25% in 2023 as well. That makes you go, “Well, why am I invested in anything else?” Well, the reason why is because it doesn't do that every year. It doesn't go up 25% every year. In fact, if you look historically, the average is more like 10% a year. That's because there's lots of years where it doesn't even make 10%. It doesn't even have a positive return. Sometimes it loses 40%. And I'll tell you what, if the US stock market had lost 40% in 2024 and 40% in 2023, you would not be beating yourself up about having money in I bonds.

I bonds are a very safe investment. What are I bonds? I bonds are a savings bond issued by the US treasury. They're a savings bond. They basically don't go down in value. It's like a super, super safe investment. Now, super, super safe investments don't generally have high returns. You should not expect 25% a year returns out of savings bonds. That's not the way they work.

So if you're disappointed that he only made 1 or 2 or 3 or 4 or 5% or whatever in savings bonds, well, that's what savings bonds do. They don't make a high rate of return. And if you wanted something with a high rate of return, you should have invested in something much more risky.

There's two types of savings bonds. There are EE bonds that just pay you a nominal rate of interest. And there are I bonds. And I bonds pay you a real return. And after inflation return, they're adjusted for inflation each year. I bonds are a method of hedging against the biggest risk for bonds. The biggest risk for bonds is inflation. Inflation is very bad for bonds. If you take out a 30-year treasury that's paying you 4% and interest rates go to 9% and inflation's 9%, by the time they give you your principal back in 30 years, it's going to be worth a whole lot less than what you gave them 30 years prior.

That's a big risk with bonds. And the way you hedge against that is by not having all your money in bonds, number one, you put some in stocks or real estate or something expected in the long-term to outperform inflation. And by taking some, or even all of your bonds and indexing them to inflation.

There's two types of bonds really out there available that you can use to index against inflation. The first kind is TIPS, Treasury Inflation Protected Securities. The second type is I bonds, these types of very safe savings bonds that are also indexed to inflation.

Now you're looking at yours going, “I didn't make anything.” And I worry that they haven't added the interest yet. They don't put the interest in there every day. In fact, I don't know how often they do it. It might be four times a year. It might be twice a year. I can't remember really. It might be once a year. I don't know.

But the point is it's accumulating every day, even if it doesn't show up in your account. So you are making money with your I bonds. It might only be 2 or 3%. It's not the 25% in your US stocks made last year, but they are making money every day, even if you're not seeing it added there.

TIPS are kind of the same way. If you go to Treasury Direct, you open an account and you TIPS directly there, you might think for months they're not doing anything. And then all of a sudden, one day they have this really great return. Then the next day they don't make anything again. Well, that's just when the interest is paid out.

And so, don't read too much into looking at that and not seeing anything happening. I assure you, your I bonds are making money. They're just not making a lot of money. And why aren't they making a lot of money? Well, number one, because they pay a very low interest rate if you bought them in the middle of the pandemic. It might be 0% or 0.125%. That's the real interest rate on these things that you bought. That's all they pay is inflation plus 0% or inflation plus 0.125% or 0.25% or something like that. That's all you're getting out of them right now.

Now, the current I bond interest rate, if you bought a new I bond today, the fixed rate is 1.2%. So you get 1.2% plus inflation. Well, inflation is not very high right now either. Back in the pandemic, inflation made it such that I bonds at one point were paying like 9.2%. It was really good for like a year. And then inflation got controlled and the rate came down. Now they're basically paying 3.11%.

So, it's hard to get super excited about 3.11% when the money market fund's paying 4.75% or something like that. And so, a lot of people have gone, “Oh, well, I was just kind of going for I bonds because they were paying 9%. Now I think I'm going to get out of them.”

After you've owned them for a year, you can get out of them. Between one year and five years, I think you give up three months of interest when you get out of an I bond and move that money to something else and invest in something else.

So, you can do that if you're like, “I just don't like these things. I'm going to get out of them.” And after you've owned them for a year, you can do that. Or you can hold them long term. And if inflation goes back up, you're going to be really happy you own some I bonds as opposed to some other type of nominal fixed income investment like CDs or treasury bonds or whatever.

I hope that's helpful with regard to what you should do. I got a separate issue with I bonds. And we're actually thinking about dropping our I bonds. We've got, I don't know, we might have a low six figures in I bonds between the ones in Katie's account, the ones in my account, and the one in the trust account.

That's not a big percentage of our portfolio. We've been saving money for a long time. Our investments have done well. And we put a lot of money away. And we have a pretty big portfolio now. And this really doesn't move the needle. You're only allowed basically to buy $10,000 a year for you, $10,000 for your spouse. If you have some other entity, a trust or LLC, you can open an account for them and buy $10,000. That's it though.

So, if you need to put half a million dollars to work, I bonds aren't going to work for you. They're basically for people that don't make as much money as you, are not as wealthy as you, and they just don't move the needle. They act exactly the same. But at a certain point, you're just complicating your life.

I got these three extra treasury direct accounts that are complicating my life all so I can earn, right now, 3% on, I don't know, $100,000 or something like that. Well, maybe I ought to be just using TIPS instead. You can buy an unlimited amount of TIPS. And despite the fact that I like I bonds, I think I bonds have some cool features to them, I don't know that it's worth the hassle for me. And I think there's a lot of White Coat Investors in a similar situation.

You might drop your I bonds because of that issue, which is completely reasonable, but I don't think you should drop them just because, “Oh, they only pay 3% now.” Well, they're only supposed to pay 3% now. It's a very safe investment and inflation is low. I bonds are doing exactly what you should have expected them to do in an environment like this.

I have a feeling you're just not realizing that they only put the interest for the I bonds in the account every few months. They don't do it every day. So, it might seem like they're not doing anything. They might not be doing much, but they are doing something. I hope that's helpful.

Let's take another question.

ASC INVESTMENTS

Alex:
Hello, Jim. This is Alex. I'm a 39-year-old hospital-employed surgical subspecialist in the Northeast. Thanking your team for all that you do to educate healthcare professionals. I have a question regarding ASC investments and how to consider them in relation to overall investment strategy.

As a background, I make about $400,000 per year. We have $500,000 in various investment retirement accounts, $400,000 or so in Roth, $100,000 in pre-tax or brokerage. I have a $500,000 mortgage at 5.5% over 15 years that started this past year in 2024. I have $175,000 in a 529 for my older child, $80,000 in cash, and no student loans. I max out my 401(k) at work and backdoor Roth IRA for my wife and myself. After expenses, I'm anticipating an additional $25,000 to $50,000 per year to be able to invest.

Considering several options for this investment, I wanted to get your advice. Option one is making an ASC investment. This is a joint venture affiliated with my employer. I have the option of purchasing a range of amounts of shares. Distributions on a yearly basis amount to 20% to 25%. The center is established and profitable. I had a specialist accountant review their financials and give their support as well. I do cases out of the center and have been pleased so far.

Option two is funding a non-governmental 457. They have low costs. They've got a good Vanguard-based index funds available. Option three is to pay our mortgage. Option four is to fund a 529. Option five is a brokerage account. I'd love to hear your thoughts on how to balance these options and any additional thoughts on ASC investments. Thank you.

Dr. Jim Dahle:
Welcome to the dilemma that most docs in their early career have. You have a whole bunch of great options for your money and not enough money to do all of them. This happens to everybody when you come out of residency. You need to replace that beater, and you need to save up an emergency fund, and you need to start saving for your kid's college and pay off your own student loans and get into a house or pay off a mortgage. You got all these retirement accounts to max out. You can't do it all.

I recommend for the first two to five years out of training that you live like a resident so you can do as much of that as you can, but you still can never do it all. There's always going to be investments available out there that you can't buy, so you do the best you can.

You determine your priorities, and if you want to be done with student loans in three years, well, how much do you have to put toward them to be done in three years? We'll put that much towards student loans. If you want to be done with your mortgage in 12 years, maybe that's your goal, pay off your mortgage in 12 years. Well, how much do you have to put toward it to be done in 12 years? If you're okay paying it off at age 65, maybe you don't have to put that much toward your mortgage. It just depends on your goals.

Now, when you're saving for retirement, as a general rule, you want to save in at least your good retirement accounts before you save in a taxable account. We're talking your 401(k) or 403(b). We're talking backdoor Roth IRAs for you and your spouse, governmental 457(b)s and good non-governmental 457(b)s that are available too are also great ways to save for retirement.

My general recommendation for these sorts of things is 20% of your gross income ought to go toward retirement. Any amount you need to save for other goals, whether it's starting a business or whether it is saving for your kids' college or a second home, those sorts of things are above and beyond that 20%.

I think it's perfectly reasonable to be doing all those things. But your question is really, how does this other thing fit in? This ambulatory surgical center investment and how should you think about that and how should it interact with the rest of your portfolio?

Well, businesses like this, I view them as separate from my portfolio. They don't go into my asset allocation. My asset allocation is 60% stocks, 20% bonds, 20% real estate. That's our investment portfolio. I do not include the value of the White Coat Investor in that portfolio. I do not include the value of my home in that portfolio or my cars in that portfolio. They are not in that. They're totally separate. Likewise, when I had a mortgage, I didn't somehow blend the mortgage into that portfolio. That's my asset allocation for my long-term money and that's the way it sits.

Now, I love ownership. I like owning things. Not only stocks and real estate in my portfolio, but my home, my business, my job, those sorts of things. I like owning them. Owners in the long run, assuming things are managed well, usually come out ahead of non-owners.

I'm a big fan of docs owning stuff, whether that is a dialysis center, whether that is a radiology center, an urgent care center, an ambulatory surgical center. Whatever it is, many docs have told me over the years, these were their best investments. I encourage you to invest in them, especially if you've done the due diligence on them like you have. It's clearly a pretty darn good investment.

Is there a risk there? Yes. It's one company. Bad things could happen to it. Who knows what's going to happen? Don't put all your money into something like this. Have a regular portfolio as well. Should you put some money into this? Absolutely. You might want to put a little bit of money every year into it if they let you just keep buying more. A lot of times, they'll cap out how much the docs can own. Clearly, you don't want to own the whole thing. You want other people to own it and have ownership in it and bring their cases there and contribute to its success and all that sort of stuff.

I certainly wouldn't feel bad if you owned $100,000 of it or as your wealth grows, $500,000 or a $1 million or $2 million of this ambulatory surgical center. I think you are likely to consider that one of the best investments you ever made. Right now, it's paying the yield like 25%. Nobody else is doing that. That also tells you how risky it is. There's a fair amount of risk there, but it's something that not everybody has access to and you're being offered a little bit of special access there because they want you to bring your cases there. They want you to support it. You might as well take advantage of the investment benefit of doing that.

I would encourage you to invest in it. I would not try to fit it into your asset allocation somehow. Carve some money out above and beyond what you're saving for retirement. If you can only do 10% for retirement this year because you want to put a whole bunch of money into this ASC investment, I think that's fine for a year or two or three. I don't know that I would put half of my retirement savings every year for 20 years into this sort of an investment, but I think it's a good investment to make and I'd try to carve something out and put into it.

I wouldn't then try to put it in my spreadsheet and make it part of my asset allocation every year. It's going to be too weird. How are you going to rebalance into or out of this investment? You're not going to be able to very easily.

Treat it as something a little bit different, just like most people treat their practice and their home and any other businesses they may own as something a little bit different. If it makes sense to invest in it, invest in it.

Okay, next question.

HOW TO THINK ABOUT PRIVATE INVESTING IN YOUR ASSET ALLOCATION

Speaker 3:
Hello, Dr. Dahle. First, thank you for all that you do and praying for a quick recovery. I followed the blog for years and recently started listening to the podcast. We are not medical professionals, but still find the information engaging and relevant. The doctor stuff is at least interesting to learn about.

My wife and I are high-income business professionals, specifically management consulting at a couple of the famous firms. Because of this, our professional and personal networks give us insight and opportunity into a lot of private companies through the various flavors of private investing, PE, VC, venture debt, private credit, etc.

My question is how to think about this in our asset allocation. Should we think of these investments as a sub-allocation of stocks/company ownership, like how it works in real estate, where you have a mixture of public REITs, private syndications, and direct holdings? Or should they be considered their own asset class?

I also wonder if this is a distinction without a difference, as 10% of your portfolio is the same thing, whether you call it a sub-allocation of stocks or an investment class. Or am I thinking of the asset allocation process wrong? I would love to get your thoughts on this and I suspect this will be coming up more in the future, as big players like State Street have recently filed with the SEC to register ETFs in this space, which might make this investment more liquid, accessible, cheaper, and transparent to other people. Thanks again for all you do.

Dr. Jim Dahle:
All right, great question. How are you going to treat this? Well, if it's a business that you have significant impact and insight into, I would leave it out of your asset allocation. Like I mentioned with the previous question, I don't put the White Coat Investor into my asset allocation. It's something just different. And maybe you view these companies as something different, something you're going to own for two or three or four years while you're consulting with them and have this unique access to them and just treat it as something different, leave it outside of your asset allocation.

If you're saying, “You know what? 10% of all our savings every year is going to go toward this category. And when it gets too big because it's done well, we're going to pull some money out of that and put it toward our other categories. When it's done and doing poorly, we're going to rebalance toward it.” Then maybe you do want to include it in your asset allocation.

Would I make it a separate category? I probably would, I think, in that sort of a situation. Whatever you want to call it, private equity or something like that. I would put a cap on it, whether that's 5% or 10% or 20% of your portfolio or whatever.

I wouldn't put everything into it, even if you think that you really know what's going to happen and have all your money in just three or four companies. I think that's a bad idea. Diversification works and diversification matters. So I wouldn't do that. But I think it really depends on how big these chunks are and how liquid they are, whether you include them in your portfolio or not.

I hope that's helpful and answers your question. A little bit unique from the prior question where the doc is working at this surgical center and has significant insight into its success and significant impact on its success and failure. I think that's clearly something that stays out of your asset allocation. In your situation, I'm not 100% sure, and I don't know that it matters all that much anyway.

QUOTE OF THE DAY

Our quote of the day today comes from Alexa von Tobel, who said, “A good financial plan is a roadmap that shows us exactly how the choices we make today will affect our future.” I love that. So true.

Okay. Let's take a question off the Speak Pipe about buffer assets.

BUFFER ASSETS

Speaker 4:
Hi, Jim. I have a question about buffer assets. Some retirement experts have put forth the idea of using buffer assets as a way to mitigate sequence of return risk during retirement. The assets are supposed to be either the equity from a reverse mortgage or the cash value from a life insurance plan. From what I understand, the idea is that during a series of large market drawdowns, the retiree can take income from their buffer assets in order to protect their portfolio to recover.

What confuses me about this idea is that I thought a well-designed portfolio would already have a buffer contained within it. That is, I thought that the cash and high-grade bonds are already serving the purpose of a buffer. So then are the buffer assets kind of like a second safety net below the first safety net? They seem like a complex and expensive form of insurance to protect a portfolio, or maybe they're not. I appreciate your perspective. Thanks for what you do.

Dr. Jim Dahle:
Okay. Let's talk about buffer assets, not Buffett assets. This has nothing to do with Warren. This has a lot more to do with Wade Pfau, actually, who I think has popularized this concept of a buffer asset.

The idea of a buffer asset is that when your portfolio is down in value, this is something you can tap to give your portfolio time to come back up in value. What are some examples of buffer assets? Well, a home equity line of credit is a buffer asset. It allows you to spend your home equity and obviously take a loan out on your home equity instead of selling stocks while they're down 22% or something like that. That's the idea behind it.

Now, I fear that this term even is being used to sell whole life insurance out there. Because this is another buffer asset. If you had a whole life insurance policy that you could borrow against and the market's down and you need something to spend, you could borrow against the whole life insurance, cash value, and spend that while you're waiting for the market to come back. You're waiting for your real estate portfolio to be sellable again, or whatever. It gives you time. It gives you liquid money that doesn't go down in value.

There are other buffer assets. Anything you can borrow against is going to be a buffer asset. Technically, if you could sell it for full price, anything you could sell is a buffer asset. You could sell your second home. You could sell your fancy furniture. You could sell your Tesla, whatever. That's a buffer asset. This is the concept of buffer assets.

Now, cash is a buffer asset as well. If you got a whole bunch of money sitting in a money market fund making 4.75% right now, and the market tanks 40% and you don't want to sell your stocks, you can spend that cash. Cash is a great buffer asset. It works very well.

Yeah, if you carry a big cash buffer, you can do that. Lots of retirees do. They carry two or three or four or five years of spending in cash, which is not a bad move right now because you're getting paid well in cash. Cash is paying you 4.5%, 5%, whatever right now. It's not sitting there earning nothing, it's actually making money. It's not a bad buffer asset at all.

Bonds can function as kind of a buffer asset, but there are times that bonds go down. The most recent one everyone seems to be just noticing lately is 2022. Bonds tanked in 2022. It's like the worst year for bonds ever. Even a total bond market fund, I think was down 11% or 12% or 13% or something like that. Those are high quality, intermediate duration bonds. If you had long-term bonds or low quality bonds, they tanked even more. So, there are scenarios where bonds might not work as a buffer asset.

The other problem with buffer assets is it involves a little bit of market timing to use them. You've got to decide, “Okay, stocks are down, surely they're going to come back. I'm going to use my cash or my buffer asset or whatever.” Well, that's fine. Now you spend from your buffer asset for a year or two and now the buffer asset is gone.

And stocks are still down. We've just entered Great Depression II. Well, now what? Now you have to sell the stocks even lower than maybe you could have sold them a couple of years prior. That sort of a scenario could happen. You could run out a buffer. That's one issue using the buffer asset concept.

The other concept is when do you replenish the buffer asset? Okay, let's say stocks are down 20% so you spend from your cash or whatever. Now stocks have come up 10% the next year. Is it time to replenish the buffer asset? Should you still be spending from the buffer asset? Which one do you spend now? Well, that's not so clear anymore, is it?

What about when stocks get back to what they were worth? Is now the time? What if they go up 10% beyond that? Is now the time to replenish the buffer asset? When do you pay back that loan on your house or your whole life policy or whatever buffer asset you have? It's not as easy as you might think at first glance to decide how to use these buffer assets. That's one aspect that is concerning about them.

The other problem with buffer assets is long-term, they tend to not make very good money. This is the classic whole life insurance problem. If you go buy a whole life insurance policy because you want a buffer asset, well, for the first 5 or 10 or 15 years, you might be just breaking even on your investment there. Even after that, your long-term return on this thing could easily be only 3% or 4%.

While it's cool to have a buffered asset, you know what's even cooler? Having four times as much money because you earned a higher rate of return long-term. This is the argument the 100% stock folks use. They're like, well, I'd rather have 50% more money in retirement. Then if things go down 30% or 40%, I've still got more money, even if I don't have the bonds to tap in that sort of a situation.

That's a valid argument. It is an issue. If you spend all your money buying buffer assets, you may end up with nothing but buffer assets and not all that much of them. I ran into a doc not that long ago who's on the verge of retirement. He's been saving for 35 years or something. For some reason, early in his career, somebody talked him into buying a bunch of whole life insurance policies.

Now on the verge of retirement, 40% of his money is in whole life insurance policies. He's got to figure out, “Well, how do I get this money out? How does this work? I was told this was going to tax-free retirement income.” And I'm having to break the news to him that he could add twice as much money or three times as much money if he invested in something different, number one. Then number two, the options for getting the money out tax-free usually mean that you're going to pay interest on it.

Yeah, you can do partial surrenders up to the amount of basis. That's the cool tax break associated with whole life insurance. And after that, it's either you surrender it and pay taxes at ordinary income tax rates, or you pay interest on it. That's the way it works. That's why it's usually one of the last things you tap. It sits around being available as a buffer asset. If you run out of your other assets, or I guess if there's a big market downturn, you don't want to sell stocks low, then that is an option to tap. But it has its downsides. It's important to understand the downsides of using a buffer asset.

Let's take the next question. Another one off the Speak Pipe.

FACTOR INVESTING 

Seth:
Hi, Dr. Dahle. This is Seth, a current radiology resident and long-term follower of the blog and now podcast. I've read your post on asset pricing, which briefly mentioned the option of taking advantage of additional risk premiums with a small value tilt.

I've considered investing in a factory ETF and trying to decide on a reasonable approach. Do you have any opinion on VBR, accepting that this will only cover the US market versus some kind of international small value equity ETF versus a mix of both, or instead of a more actively managed fund from Dimensional or Avantis?

And side note, why are these so popular if they're quote unquote actively managed anyway, and how did they compare to say a Vanguard fund? Will this be discussed in any of the future podcast episodes? Thanks again for all that you do.

Dr. Jim Dahle:
Okay. This is where we run into problems because we have multiple different audiences. People who listen to the podcast don't necessarily read the blog. People who watch this on YouTube don't necessarily take the newsletter we have every month. And some things are better explained on a podcast and other things are better explained on a blog.

I have spent a great deal of time and effort discussing small value, factor investing, the various small value funds that are available out there. However, I have found that this topic is probably easiest covered in blog posts. So, I have all kinds of blog posts on this subject. And I would recommend if you're really interested in it, that you spend some time on the blog, you can search small value or factor investing or VBR or whatever. And you're going to come up with blog posts that talk about this subject extensively.

For those who are not aware, the idea of factor investing is to put some portion of your portfolio into stocks that you expect to have higher long-term returns for whatever reason. If you look at the long-term data, you see that small stocks and value stocks.

Value stocks are kind of the opposite of growth stocks. They're a good value when you buy them, you're able to buy a dollar of earnings for a much lower price than you can if you buy the fanciest stock that's in all the headlines, that's been growing rapidly lately. NVIDIA would be a growth stock right now. And I don't know, some sort of Kmart or something would be a value stock.

And it turns out in the long run, value stocks outperform growth stocks. Now, it's not entirely clear why. There's basically two schools of thought. The first school of thought is that they outperform because they're not sexy. It's a behavioral thing. People don't want to own Kmart, they want to own Walmart at least and preferably NVIDIA. And so, they buy those stocks preferentially, it's just a behavioral thing. And it's a free lunch essentially in that argument.

The other argument, which I tend to lean a little bit more toward, is that it's a risk argument. You get paid more for owning small value stocks because they're riskier than large growth stocks. You're taking on more risk, you should be paid more in the long run. Now, in the short run, there's no guarantee that anything's going to outperform anything else.

Now, obviously, the last few years, large growth techie US stocks have outperformed small value, non-tech, boring, and international stocks. But that pendulum is likely to swing at some point. No idea when, maybe it's 2025, maybe it's 2026, maybe it's 2027. It's probably not going to be 2048. It's not going to be that long before this pendulum swings back. And eventually, small value stocks are, again, going to outperform large growth tech stocks.

If you want to bet that this time is different and trees are going to grow to the sky, that's maybe not the wisest bet. The time to tilt your portfolio toward tech stocks is probably not after they've outperformed for the last two or three or five years or whatever. And so, heaven forbid, you'd be a market timer. If you're going to market time and try to predict what's going to do well in the next decade, I would probably lean toward these small value stocks. So, I don't think that's an unwise thing to do at all.

Now, once you decide to do that, you've got to decide how much of your portfolio you're going to put into these small value stocks. And there is no right answer to this question. I will tell you this, don't tilt more than you believe. If you're not very sure at all that small value is going to outperform the overall market, but you think it probably will, then maybe just tilt a little. If you're pretty darn sure, you could have a pretty sizable tilt.

I have what I consider a moderate tilt. For example, US stocks make up 40% of our portfolio. In our portfolio, 25% of it is in a total stock market fund, and 15% is in a small value fund. So that's a pretty substantial tilt, because I believe long-term that it probably is going to outperform.

Obviously, that hasn't been the case for the last 5, 10, or 15 years. A lot of us small value tilters are sitting there going, “Man, was that the wrong decision or what?” But if you really believe it's going to outperform in the long run, you're okay holding through these 5, 10, 15, 20, 30-year periods of underperformance in order to get that long-term outperformance.

It hasn't been that long since it outperformed. Starting in 2000 to 2010, that was a period of time when small value definitely beat large growth stocks. But it's been a while since 2010. Many of you weren't even investing in 2010, much less 2000. So it might be hard to remember that time period.

Now, what should you use to do it? Well, I can tell you this. For many years, I used VBR. This is Vanguard's small value index fund. As a tax loss harvesting partner, when I had to move this into taxable, I used their VIOV fund, which is another small value index fund they have.

However, I've been watching developments. I've liked DFA for many years, but DFA required you to pay basically a 1% asset under management fee to an advisor to use their mutual funds for a long time. And I was never convinced that they were 1% better than what I can just buy at Vanguard.

However, in the last four or five years, a bunch of people broke off of DFA and formed a company called Avantis, and basically came up with the DFA style small value ETF. Actually, they have a whole bunch of ETFs, but they have one of which is a small value US stock ETF called AVUV. In response, of course, DFA goes, “Okay, okay, we'll make ETFs, stop leaving the company.” They've also got a small value ETF that anybody can buy without hiring an advisor. That 1% fee you used to have to pay an advisor to get DFA access, you no longer have to pay.

I looked at this new fund, this AVUV fund and decided it's a little bit smaller and a little more valuey than the Vanguard versions, and I like what they're doing with it. We decided we're going to transition our small value tilt from these Vanguard ETFs to this Avantis ETF, and we've been doing that.

Because ours is in a taxable account, we can't do it instantaneously. There are tax consequences to doing that. We have gains in many of our shares of VBR, and I think the VBR is actually gone now, but we still have some in VIOV, the tax loss harvesting partner. We've been using those for our charitable contributions every year while buying more AVUV. It needed the tax loss harvest, the DFA tax loss harvesting partner.

I do think these new funds are a little bit better. They're certainly a little more small and a little more valuey. They are a little more expensive than the Vanguard versions, but I think the slightly higher expense ratios are probably worth paying for. No guarantee, of course, on that.

Are they actively managed? Well, not really. They're a passive fund with slightly more active implementation than what Vanguard is doing. There's actually a spectrum of what active means. Are they out there just trying to pick the good stocks and avoid the bad stocks? No, they're not, but they're doing a few things around the edges that somebody could call active management.

I think they're intelligent things to do, and DFA has been doing these things for the last 20-plus years. If you want to see the track record of what it looks like when you do these things, you can see them doing that.

But the main reason they outperform when small and valued as well is they're just smaller and more valuey than the Vanguard versions of these funds. The Vanguard versions tend to have more mid-caps than the Avantis and DFA ones have, for instance.

I hope that's helpful. I think that's about as deep as I can get into this in the podcast format. If you want more information, go read the blog posts on this. I have long blog posts talking about all the options of funds you can invest in for a small value tilt, whether you should have a small value tilt, et cetera.

It's not very popular right now because large growth tech stocks have done so well in the last few years, but if you're interested in doing this with your portfolio, there are plenty of people out there who are also doing this right alongside you.

Lots of people out there working hard today. Thanks for what you do. It's not easy work you do. That's why you get paid so well. If you're coming home from a hard shift, somebody died on you today, or you had to tell somebody they had cancer, or you had to break the news to a family that their child's not going to do well and maybe not have the long fruitful life they're hoping for or some other terrible thing, know that your work is appreciated, even though it's hard. Thanks for being there on the worst day of people's lives.

Okay. Let's take a question from a dental student. Let's talk more about stocks.

LONG-TERM STOCK PERFORMANCE

Speaker 5:
Hi, Dr. Dahle. Thank you for your wonderful podcast and for your books you write and your blogs. I've learned quite a bit. I'm a second year dental student and beginning my financial journey early. Last year, I was able to even read your White Coat Investor’s Guide for Students since we had a champion in our class procure this for us. Thank you for providing those.

I have a question about long-term stock performance. Since I'm quite young and plan to be in the stock market for a lot of years, I've seen recent news headlines talking about population pyramid inversing since birth rates are declining in many developed countries. I'm wondering if you think that'll impact long-term stock performance since there'll be less of a working class to support the growing and aging population in many developed countries, including the US. Thanks.

Dr. Jim Dahle:
Okay. Congratulations on getting financially literate so early in your career. This is going to pay big dividends for you. For those who have no idea what he's talking about with the White Coat Investor's Guide for Students, this is a book I wrote a few years ago, not really to sell. We do sell a few of them every year, but I primarily wrote this book to give it away. We give it away via what we call the WCI Champions program. You still have about a month that you can still register for this.

All it takes is a champion in a first year class of a medical school, dental school, other professional school. If you will volunteer as the champion, we will send you a book free of charge for everybody in your class if you will agree to pass it out to them. That's it. That's the champions program.

In fact, if you send us a picture of some of your classmates with the books, we'll even send you some swag, I don't know, a t-shirt or mug or something like that. I can't remember the exact details this year, but we're trying to get this into the hands of every medical student in the country.

We're doing a pretty good job getting it to medical and dental students. We're getting it to about 70%. We'd like to make that 100% and we'll even give this to other classes of high-income professionals that have a champion willing to pass them out. We think it's one of the best things we do here at the White Coat Investor, so please apply. If nobody's handed you this book yet this year and you're a first year, there's probably no champion in your class. You can sign up whitecoatinvestor.com/champion.

Okay, now your question. Your question is because developed nations have falling populations because nobody wants to have babies anymore, our stocks can be worth less in the future and thus you shouldn't invest in them and you should find something else to invest your money into.

Well, I guess because populations might fall, you should just put all your money in Bitcoin and leave it at that and go for it. Maybe that'll work out. Maybe it won't. I have no idea, but here's the deal. Don't spend too much time reading doom and gloom articles in the news.

What are you buying when you buy stocks? When you put your money into a stock index fund, you're buying a tiny little share of 4,000 US companies. If you're doing it with an international index fund, it might be 10,000 companies. You are now an owner of those companies. When they make money, you make money.

What are you buying when you buy a stock? You are buying an earning stream, a stream of this company earning money, whether it pays out as dividends or reinvested in the company and the company becomes more valuable, whatever, you're buying an earning stream. As long as that company keeps making money, you will keep making money.

Now, if you really think that all these companies are not going to make much money going forward because populations might fall, then sure, don't buy them. But that's a pretty big jump from looking at demographic data to saying these companies aren't going to make any money.

Now, if nobody wants to buy an iPhone in the US, guess where Apple is going to sell their iPhones? They're going to sell them in sub-Saharan Africa. What is the population of sub-Saharan Africa doing? It is booming. Same thing in a lot of areas of the lower hemisphere of our world. They are booming. Many of them are moving to develop countries, and they're developing their own countries.

This is not a reason why I would not invest in stocks. This is not a reason why I would expect dramatically lower long-term returns in the long run. The next 40, 50, 60, 80 years in this dental students' investing horizon. I would not expect dramatically lower returns because of these demographic changes.

Now, I have no idea what the next year or two or five or 10 hold for stock returns. My best guess is that we're not going to have as good returns for large cap growth techie US stocks as we've seen in the last 10 years. I think we'll probably be a little bit better for international and small and value kind of stocks. I suspect they're going to do better over the next 10 years, but there's no guarantee of that. It's entirely possible that this tech stock boom is going to continue for another 10 years. My crystal ball is totally cloudy with regard to that.

In the long run, these corporations are the most profitable corporations in the history of mankind. They're going to continue to make money. If they only make 8% or 9% instead of 10% or 11% on average per year over the next 60 years, it's still a smart place to invest your money.

If you're really worried about stock market returns, well, there are other things to invest in that can be intelligent. You can invest into small businesses that you control. You can invest into real estate, especially if you control that, but you have the same problems with those. They've still have to have a market to sell their products to. You've still got to have people that move into these homes that you're going to be renting out. You have the same issues.

You do the best you can. You have a diversified portfolio. And if the world changes in some significant way over the next 100 years, well, you're going to abide with that and adjust to it as you go along. And it'll work out. It's going to work out. Even if it doesn't work out as you hope, you're still going to be better off than those folks that aren't saving anything. Even if your investments only make 3% or 4% going forward, that's still a whole lot better than having nothing.

Is that the alternative, to not invest at all? No, you must invest. You need your money to grow. You're going to need some money to stop working eventually. You're not going to want to practice dentistry until you're 89, I promise. You're probably going to need some nest egg to live off of in retirement.

SPONSOR

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That's it for this episode. Leave a Speak Pipe question at whitecoatinvestor.com/speakpipe, and we'll get them answered as best we can.

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

DISCLAIMER

The hosts of the White Coat Investor 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 relating to your situation.

INTRODUCTION

This is the White Coat Investor podcast Milestones to Millionaire – Celebrating stories of success along the journey to financial freedom.

Dr. Jim Dahle:
This is Milestones to Millionaire podcast number 209 – OB-GYN takes five months off and still builds wealth.

With Weatherby Healthcare, you choose your own healthcare career path. Our locums experts then support you every step of the way, helping you find the right opportunities at the right times.

We understand your professional and personal goals and are experts at helping you achieve them. Let's keep your career interesting with new locations and settings and diverse patients and cases. And just importantly, let's make sure you get more free time for your hobbies or to just relax. We'll help you find that balance. With more jobs and more locations, Weatherby gets you where you want to go. Learn more at whitecoatinvestor.com/weatherby.

All right, welcome back to the podcast. This podcast is about you. We use your successes to inspire others to do the same. If you'd like to be a guest on this podcast, you can apply at whitecoatinvestor.com/milestones.

All right, for all of you medical and dental students out there, other professional students too, this probably applies, but it's specifically aimed at medical and dental students. We're going to talk about what you need to know about money. This is free information that can literally make a difference worth millions of dollars over the course of your career. You simply cannot afford to wait until the big paychecks start rolling in to learn about money. And you certainly don't want to do with lots of doctors before you have done, which is to wait until you're about wanting to retire before you start learning about money.

We're going to put together a webinar. This webinar is going to run February 12th, 06:00 P.M. Mountains. That's 05:00 Pacific. That's 08:00 P.M. on the East Coast. This is the presentation I would give to you if you were flying me out to speak at your medical or dental school. And just like I would if I was out there in person, you're going to stick around afterward and answer your questions.

We've done this before. It's been very successful. We've had hundreds and hundreds and hundreds of students on it. And we usually stick around for an hour or two afterward. I say we, because I'm going to bring Andrew Paulson on with me. Andrew might be the world's leading authority on physician student loan management. He's the principal behind studentloanadvice.com which is the student loan advice company we started four plus years ago now.

I think he's consulted on nearly a billion dollars in student loans already. And so he knows his stuff on that. And obviously, that's a big important topic to medical and dental students. A lot of you owe $200,000, $300,000, $400,000, $500,000 in student loans.

It's not the only topic we're going to cover, though. We're going to talk about why your patients need you to be financially literate. We're going to talk about the secret to being a financially successful doc. We're going to talk about how to not worry about student loans, how to save money during residency interviews, although they're a lot less expensive than they used to be, why buying a house during residency might not be a great idea, and more. Please join us. This is going to be February 12th at 06:00 P.M. Mountain. And you can sign up at whitecoatinvestor.com/studentwebinar.

Today, we've got a great interview. It's a new milestone, one we've never done on this podcast before. I always love doing cool new stuff you guys come up with that we can celebrate with you and use to inspire others.

But stick around afterward. We're going to talk about Treasury Direct. As the owner of three Treasury Direct accounts, I can tell you a lot about it and why you may or may not want to use it. So, stick around after the interview.

INTERVIEW

Our guest today on the Milestones podcast is Olivia. Olivia, welcome to the podcast.

Olivia:
Thank you for having me.

Dr. Jim Dahle:
Tell us what you do for a living, how far you are out of training, and what part of the country you live in.

Olivia:
Yeah, I'm an OB-GYN. I'm about two and a half years out of residency, and I live in California.

Dr. Jim Dahle:
Very cool. Now, we're celebrating a milestone today that I don't think we've ever celebrated before in 208 prior episodes. Tell us what you've accomplished.

Olivia:
Yeah, I took a five-month maternity leave.

Dr. Jim Dahle:
Yeah. Well, that by itself is not what I'm most impressed about. Granted, it's good for anybody to be able to take a five-month maternity leave. But there are some things financially that have to happen, especially in California, for you to take a five-month maternity leave. And it sounds to me like you actually were ahead financially after five months rather than being broke. Is that right?

Olivia:
Yes, yes. It is my husband and I, but yes, I took a five-month maternity leave, and somehow we continued to build wealth during that time.

Dr. Jim Dahle:
Okay, now you're a gynecologist. What does your husband do for a living?

Olivia:
He's a family medicine physician.

Dr. Jim Dahle:
Okay, he's a doc as well. Are you in a particularly expensive part of California, or are you in one of the really expensive but not terribly expensive places?

Olivia:
Yes, I'm in one of the more affordable parts of California, which is still probably a medium cost of living area compared to the rest of the country.

Dr. Jim Dahle:
Okay, now you took this five-month maternity leave in 2024, or what year was it?

Olivia:
Yeah, 2024.

Dr. Jim Dahle:
Okay. Were you both attendings for all of 2023?

Olivia:
Yes, yes.

Dr. Jim Dahle:
Okay. Approximately what was your 2023 combined income?

Olivia:
2023, we made about $550,000.

Dr. Jim Dahle:
Okay. How much did that drop in 2024 with you taking five months off? Did he take a paternity leave, or were you the only one who really took significant leave?

Olivia:
He took about six weeks total.

Dr. Jim Dahle:
Okay, so not insignificant.

Olivia:
Yeah.

Dr. Jim Dahle:
So he took six weeks off, you took five months off.

Olivia:
Yes.

Dr. Jim Dahle:
Was any of it paid? Any of the parental leave paid?

Olivia:
Some of it was paid. California does have some nice benefits. I got state disability for the time I was on pregnancy disability leave. And then we also have paid family leave for the state. It's less money than you would make as a doc, but it's not nothing. And then my group also had a temporary, like short-term disability policy, which I got for several weeks as well. When we calculated all those different state and through my group leave policy, it was about $50,000 between the both of us.

Dr. Jim Dahle:
Okay, I don't know, maybe you haven't added this up for 2024, but I'm curious how much your income dropped from 2023 to 2024 with all that leave.

Olivia:
Oh, yes. We were calculating this last night. We made about $470,000 for 2024.

Dr. Jim Dahle:
Okay, that's about an $80,000 drop. Some of that goes to taxes, obviously, but it's not terrible. That's not a terrible drop.

Olivia:
No, it actually wasn't too bad. Yeah.

Dr. Jim Dahle:
Was that smaller than you expected it would be going in? You're probably pregnant at the beginning of 2024, and you thought, “Oh boy, this is going to be a rough year.”

Olivia:
Yeah, yeah, exactly. Actually, we didn't think that it would be such a small drop. We thought it was going to be significantly more. Going into 2024, in 2023 we maxed out all of our retirement accounts early on. For 2024, we held back and saved up that money. I had the baby in March. I started maternity leave in early February. We really just waited to put any money into 401(k)s or anything else until after it kind of seemed how things were going to pan out.

Dr. Jim Dahle:
Yeah, kind of saved up a war chest.

Olivia:
Yeah.

Dr. Jim Dahle:
Yeah, because you never know what's going to happen. Crazy things can happen, as you know, as a gynecologist.

Olivia:
Yes, yes.

Dr. Jim Dahle:
Were you able to come back later in the year and catch up and max everything out that you typically do?

Olivia:
Yeah, we did. We did. And then actually, I really became financially literate during maternity leave. And I even discovered that.

Dr. Jim Dahle:
Good use of that time.

Olivia:
Yeah, yeah.

Dr. Jim Dahle:
It turns out that you can feed a baby and read stuff at the same time, huh?

Olivia:
Yeah, it was actually mainly a lot of podcasting. I got these bone conduction headphones. And then while I was holding the baby, my hands are busy, but I can listen to things. I just did a lot of listening to a lot of podcasts. And that's really how I learned. But even during that time, I discovered that my group actually had a mega backdoor Roth that I didn't even realize that we had. I'm sure they said it, but I just didn't process it. We were actually even able to max out that this year, too, for 2024.

Dr. Jim Dahle:
Did your wealth go up in 2024?

Olivia:
It did.

Dr. Jim Dahle:
What do you attribute that to? Obviously, the US stock market did really well in 2024. And you still saved a bunch of money, even if your income was lower. How much more do you think your wealth went up in 2024?

Olivia:
For 2024 specifically, I think it went up about $200,000.

Dr. Jim Dahle:
Okay, pretty cool. Pretty cool. You should have a baby every year. Here's another question for you. What did your expenses do this year? Obviously, there's some expenses associated with having a baby. And this is your first or do you have more?

Olivia:
This is our second. We had a toddler, a three-year-old and a baby. Yeah.

Dr. Jim Dahle:
You already had a bunch of stuff that you didn't need to buy again.

Olivia:
Yes.

Dr. Jim Dahle:
But I'm curious, this is a less interesting question going from one to two than it is going from zero to one. But I'm curious how your expenses changed. Did you spend less because it was harder to travel? It was harder to go out to eat? Or did you spend more because you had another person in the family?

Olivia:
Yeah, I think we spent less because with just one, we were still able to kind of do things, travel a little bit. But with two, especially when there's so little, it's pretty challenging to do anything. Our daycare spending obviously went up a little bit. But otherwise, I think our spending went down.

Dr. Jim Dahle:
Yeah. Well, in basketball parlance, you've gone from playing zone to playing man to man. I think the harder transition is not going from one to two, it's going from two to three when you go back to zone coverage, that becomes even harder.

Olivia:
That's what they say when they outnumber you.

Dr. Jim Dahle:
Yeah, for sure. Hopefully, the oldest one is a little more independent by the time that happens. But that's not always the case. I've met plenty of people with three or four kids under five.

Okay, what did you learn financially from this that you can help others? Maybe there's people that are starting 2025 pregnant or scared to have kids because they don't know how everything's going to work. What advice do you have for them?

Olivia:
My advice initially is just to ask a lot of questions of HR and to figure out what the options are. But even actually stepping back before that, when I was looking for jobs, I knew that I was going to have another baby soon.

That was actually what some of the questions that I was asking on my pro con list when I was looking at different jobs is, “What does maternity leave look like?” I had some groups that said kind of like, “Oh, we figure it out.” And that was a very unsatisfying response. I didn't like that.

The group that I picked, they had very clear policies in place and they followed kind of like, “I'm an employee.” They follow the guidelines that our state sets up, which allows pretty generous maternity leave. And they seem very flexible if I even need to take more time after that. That was a big factor.

And then after, when I'm actually planning the maternity leave, it was just talking to HR and really planning things out, trying to figure out how much money we would get from the state and from the group's disability policy and just planning that going forward. Just really asking those questions ahead of time and not feeling awkward about it. Before you even get pregnant, just ask the questions. It's important to have that information ahead of time.

Dr. Jim Dahle:
Yeah, for sure. In our group, we know when we hire a lady, they're coming out of training. And if they're an APC, they're a little bit younger. If they're a doc, they're a little bit older. And we know from experience that most of them in the first five years, they're working with us, they're going to have one or two kids. And it is an important thing. People talk about this when we're hiring. It's important to have clear policies. And if you want to have advantages over other employers who are in hiring, to have generous policies. It really does make a difference as you've demonstrated. It was a big part in your decision to work there instead of somewhere else.

Olivia:
Yeah.

Dr. Jim Dahle:
Yeah. Now, it sounds like some of the money came from the state and some of the money was state mandated coming from your employer and some maybe wasn't state mandated and came from the employer. How did you learn about all those state benefits?

Olivia:
Yeah. A little bit of it was that I had already taken a maternity leave in California for my first. I knew some of that, but otherwise it was talking to HR and then just looking things up online myself and trying to figure out how much money exactly you get and just timelining it out for myself. And then I actually made a little guide for people going forward in my group just so they wouldn't have to try to figure out all of that again.

Dr. Jim Dahle:
So super helpful. Thanks so much for sharing that. And in fact, if it'd be appropriate for more than just your group, heck, we could put a link to it or something on the show notes for this episode. It might be all employer specific though and maybe not so useful to everybody.

Going back to work after taking five months off. I took 10 weeks off this fall. I fell off a mountain, of course, and I took 10 weeks off practicing medicine. And those first couple of shifts back, maybe I was a little rusty mentally and just with speed kind of stuff. What did you find when you went back to work after five months?

Olivia:
Yeah. I knew that my group was going to do this. When I went back, they put me right back in. My first day back, I was on a 24-hour call.

Dr. Jim Dahle:
Welcome back.

Olivia:
Yeah, which is kind of part of why I took the maximum leave because I was like, “Oh, I don't think I can really ease back in. So I might as well maximize it.” But I feel like some things is just kind of like riding a bike, you're a little rusty, but then you catch back up like clinic. You'll stay a little bit late to finish your notes and things. But after I felt like two, three weeks, I was right back where I was before.

Dr. Jim Dahle:
You're up to speed after three weeks. Did you at any point feel like “I'm not the doctor my patients deserve going back?”

Olivia:
I think in contrast, this maternity leave, I did not ever feel like that. When I went back after my first maternity leave, I was still a resident. I went back after eight weeks and I felt severe brain fog fatigue. And I think in that case, I did feel a little bit like I wasn't fully present.

Dr. Jim Dahle:
Because you went back too early.

Olivia:
I went back too early the first time. Yeah.

Dr. Jim Dahle:
Interesting.

Olivia:
Yeah. I think having the full time off made a huge difference. I feel like, yes, I was a better doctor and able to fully provide for my patients after having a sufficient amount of time off for maternity leave.

Dr. Jim Dahle:
Yeah, there's probably a too early and there's probably a too late.

Olivia:
Yeah.

Dr. Jim Dahle:
You just been out there so long that you've forgotten things. And I think that varies by how long you've been practicing. It's like I tell a lot of people when you first come out, “Man, do what you can to work full time because you just really need to cement your skills and your knowledge base and all that stuff the first few years out of training.” 10 years out, I think you can probably take more time off without really affecting you. But it's hard to know exactly what the right amount is, I think. And I think lots of groups struggle with setting policies because of that.

What would you recommend to a group that's thinking about setting their paternity and maternity leave coverage? What would be your recommendation? If you're sitting at the table, you're one of the partners, you're done having kids, whatever. What should these policies look like? Ideally.

Olivia:
Such a hard question, because I feel like if you look at the U.S. compared to other countries, we're so much behind what other countries do. Some countries, people get one or two years off. I think from a physician perspective, your skills are probably going to atrophy if you took that long. For me personally, I went back when my baby was four months old. I think that was good. But I can see where some people are itching to go back sooner, and some people would have wanted more time. That's really challenging. I think it's a matter of being flexible and kind of like working with people.

Dr. Jim Dahle:
Yeah, and there's two sides to it, of course. As an employee, you're like, “Oh, more time, of course, is the right thing to do.” As an employer, sometimes you might go, “Well, if I don't need you for a year, I don't need you at all.” You're definitely weighing some competing interests there. Difficult thing for each group to decide. And I think that's why there's so much variation on it.

But obviously, if you're planning on having a kid or two in the first five years after you join a job, this ought to be pretty important in your interview process. They'll probably clue in on the fact that it's important to you, but this shouldn't be a huge surprise to people. When we have docs coming out of residency at 30 or 32 years old, it's now or never, biologically speaking, for lots of people. I don't think it should be a huge surprise.

All right. What are some of the financial moves you guys made this year that you think made a big difference in your lives? You became more financially literate. That's obviously a huge thing. But what else did you guys do that you think helped you to actually build wealth during the year in which you worked less and made less?

Olivia:
I think a lot of what we do, we actually didn't change much. We have always lived below our means. Going back from residency, we didn't grow too much into our income once we became attendings. Kind of like the same boring story that you recommend.

Dr. Jim Dahle:
I hate that it's boring, but it certainly is. It's not complicated.

Olivia:
Yeah. And then I guess another big thing is my husband is doing a loan forgiveness program. That definitely helped us a little bit. We get a check each year. We got our first check for that. That definitely helped us pay down some of his loans. That helped us build wealth as well.

Dr. Jim Dahle:
Very cool. What's the next financial goal you're working on?

Olivia:
Right now, we are saving up for a down payment.

Dr. Jim Dahle:
That's not insignificant in California.

Olivia:
No, it's a lot. It's probably going to take us a while.

Dr. Jim Dahle:
Let's talk about that for a second. What's your goal down payment? How much are you trying to save up?

Olivia:
Right now, we're still kind of iffy on are we really going to buy a house or not? We're still kind of thinking about that. We're planning on moving to a higher cost of living area. When the average house is like $1.52 million for just a house, not a mansion, nothing special. It's kind of like, “Do we really want to spend that much? Or are we going to just be renters?” And there's a lot of thoughts about that. But for now, we're like, “Okay, let's just save up. And then when we get there, we'll decide.” But if we're going to buy a house, we want a real down payment.

Dr. Jim Dahle:
Have you two had any discussions or thoughts about geographic arbitrage, leaving California and setting up practices in a medium-sized town in Indiana or something?

Olivia:
We've done a lot of thinking about what we want to do with our lives in that regard. And I think we're blessed in the fact that we're physicians and we make a lot of money. And we don't have big fancy likes and interests.

Even though it sounds ridiculous, yeah, sometimes even with a physician income you can just kind of barely make that American dream of buying a house and paying for a kids college and saving up for retirement. And that's fine. We're in a lot better financial position than a lot of people and we have our family here. We've never seriously considered leaving California. I know it makes a lot more sense financially, but it's our home. And there's a lot more to think about like day-to-day happiness.

Dr. Jim Dahle:
Yeah, for sure. Money is definitely not everything in life. Well, Olivia, congratulations to you on not only your growing family, but your growing wealth. And thank you so much for being willing to come on the Milestones podcast and sharing your success and inspiring others to do the same.

Olivia:
Thank you.

Dr. Jim Dahle:
Okay, I hope you enjoyed that. Real life story of a doc who took quite a long parental leave period, got paid during it and actually didn't get set back financially for having a kid, which is substantial. I don't think that happens most of the time, but I think there's a lot of important lessons to learn there. I'm grateful to Olivia for coming on and sharing her experience.

FINANCE 101: TREASURY DIRECT

All right, I told you at the beginning, we were going to talk about Treasury Direct. Now, what is Treasury Direct? Well, Treasury Direct is a website run by the U.S. government. If you go to treasurydirect.gov, you'll see all about it. And you can log into this and buy investments directly from the U.S. government.

What investments can you buy from the U.S. government? For the most part, we're talking about buying treasuries, whether they're nominal treasuries or Treasury Inflation Protected Securities, i.e. TIPS. You can buy them directly from the U.S. government there.

You can also buy savings bonds, whether they are the EE bonds or the inflation-linked I bonds. In fact, that's really the only way anybody's buying I bonds these days. It used to be you could buy them with tax return kind of money and with your refund, you can get some I bonds. People don't really do that anymore. So, if you want to buy I bonds, you go and open a Treasury Direct account.

What you need to recognize though, is that the U.S. government is not very customer service focused, I think is probably the nice way to put this. This is not an awesome website to use. This is not an awesome agency to deal with. I hear people complain about the customer service experience of Vanguard. They're like, “Oh, Fidelity treats me better or Schwab treats me better.” Well, if you want to make Vanguard look like a rock star, go open an account to Treasury Direct. People get locked out of these accounts for months because it's just relatively easy to screw things up. You put your password in there wrong and all of a sudden you got issues. So, it does have its issues.

The benefit is you can go there and you can buy not only securities like TIPS and nominal treasuries directly, as well as those savings bonds, but there's no expense. You can buy all this stuff with no expense ratio, no commissions, nothing. That's kind of the benefit of doing it.

We actually have three Treasury Direct accounts. We have one in my name, one in Katie's name, and then one in the name of our trust. And we bought I bonds in all of them. We also have treasuries in one of them. We bought some individual TIPS there.

As we've talked about the complexity of our financial situation, we've decided maybe this is not such a great idea to have three additional financial accounts, not to mention be buying TIPS in two different ways, both through an ETF. We typically use the Schwab ETF with ticker SCHP, but also to own them individually. Not necessarily a totally specified ladder, but we own some five to 10 year individual TIPS in there that we bought over the years.

The problem with I bonds is you can only buy $10,000 of them a year. Yeah, you can buy $10,000 for you and $10,000 for your spouse and $10,000 for your trust and $10,000 for whatever else you got, some partnership or family limited partnership or LLC or something like that. You can create more entities and buy more of these, but each one of them has a different account. It's only $10,000 per account that you can buy each year.

If you're already wealthy, you're not going to catch up and get your I bonds to be a significant portion of your portfolio. Now, if you start out when you don't have very much money and you're not investing that much each year, you might be able to buy enough I bonds every year to keep up and maintain it as, I don't know, 5 or 10 or 15% part of your portfolio. We cannot do that. It's just not a large enough portion of our portfolio at this time that it really makes a lot of sense.

So, we may be dropping our I bonds at some point here and transitioning those individual TIPS to a brokerage account. Now you can also buy individual TIPS, even at auction at Vanguard or Schwab or Fidelity in their brokerages. And you can actually transfer the TIPS you bought at Treasury Direct over to a Vanguard brokerage account or something like that. And you can sell them there or hold onto them until they mature, either one.

There is an exit from Treasury Direct, but not really for I bonds. You basically need to turn your I bonds in to do that. And you can't do that in the first year after you buy them. And for years one through five, you lose some interest when you turn them in. So, only the ones you've owned for at least five years, do you get all the interest. I think you lose three months of interest when you sell them back.

There are some downsides to simplification there, but you really just got to decide if you want to deal with the hassle of having additional accounts to keep track of and one in which it's particularly hassle. It's a hassle to deal with Treasury Direct. And they try, they're trying to make it easier to deal with. But even the login process takes me three times as long as it does with most of my financial accounts. And that's fine, I want it to be secure. But top-notch customer service is not what we're dealing with here.

All right, I hope that's helpful about Treasury Direct. Check that out if you want to buy I bonds, if that makes sense for your portfolio. Check it out if you want to build your own Treasury ladder with no commissions or any other fees or expense ratios or anything like that. But don't be surprised if you end up concluding the same as I do after a few years that maybe the hassle isn't quite worth it. You're not getting the bang for your buck maybe, like you hoped you would.

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Thanks so much for listening to the Milestones to Millionaire podcast. We appreciate you having you here. We're grateful you're in the WCI community and hope that it's been beneficial to you over the years and will continue to be so moving forward. See you next time.

DISCLAIMER

The hosts of the White Coat Investor 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 relating to your situation.