Is there such a thing as a recession-proof investment? Many listeners are wondering this and asking questions about what to do right now. We don’t like the phrase “recession-proof investment.” It implies you need a different investment strategy depending on what the market is doing. It shouldn't surprise any followers that we don't think this is true. Are we even in a recession? We dive into this question as well as answer your questions about what to do with your money with the current state of the economy: buy I bonds, savings bonds, pay off rental property mortgages? With our cloudy crystal ball, we try to answer your questions in this episode.
Are We in a Recession?
We received an email recently pointing out that we are not officially in a recession. It is commonly thought that a recession is called after two quarters of negative GDP growth. But it is actually a much more qualitative call made by the NBER (National Bureau of Economic Research) and takes into account four or five factors in addition to quarterly GDP.
There is no technical definition for a recession. It is literally called by a committee, the NBER committee. They say that the traditional definition is a significant decline in economic activity that is spread across the economy and lasts more than a few months. That's not a very hard and fast definition. It's apparently up to a vote of a handful of people.
Dr. Spath points out that it takes them a while to even get to that conclusion. Since they're looking backward, they don't declare a recession oftentimes until many months into the recession. For the last recession, it took them a whole year to announce that the US was, in fact, in the recession that started in December 2007, because they have to look at so many different factors like production, employment, real income—and not just the gross domestic product.
It makes sense that it would take them a while to declare. Most economists and people that follow finance use the two-quarter rule just because it's something that has a solid number and they can call it pretty quickly and they don't have to wait for the NBER's pronouncement.
Difference Between a Recession and Depression
What is the difference between depression and recession? Is there a technical definition or do we have another committee that decides that? Generally, a recession is a significant pervasive and persistent decline in economic activity. We are usually talking about a fall in GDP between 1.7%-3%. A depression is when the GDP declines greater than 10%. A much bigger drop but no real formal definition. This is just something we all come to an agreement on at some point.
It's really interesting when we talk about depressions. Almost all of us, our consciousness goes to the Great Depression. Which was really the only big one in the 1900s. We really haven't had one, really, unless you count the very brief thing we had with the pandemic, since the turn of the millennium.
But in the 1800s, this happened every 15-20 years. It was really, really cyclical. The economy just got hammered, every 15-20 years, all the way through the 1800s. Financial history in the US in the 1800s is absolutely fascinating. I highly recommend learning more about that and realizing just how stable it was in the 1900s by comparison. Check out the book, America's First Great Depression: Economic Crisis and Political Disorder After the Panic of 1837. If you like financial history, and if you're a do-it-yourself investor, we think you should like financial history. We highly recommend this book. It is very, very good.
More information here:
Inflation Is Soaring and a Recession Is Possible; What Should You Do If You’re About to Retire?
Recession-Proof Investments
“On a recent podcast with some of the real estate investment folks who you work with, they were talking about how real estate is a kind of recession-proof investment. And it got me thinking, wouldn't you describe just a general index-based stock investing strategy as recession proof as well? What I mean by that is that recessions are kind of a normal part of the economic cycle. And honestly, if you're investing in stock-based index funds—as you recommend—and I do for the long term, during a recession you're actually potentially kind of buying stocks on the cheap. So, to me, it seems a little strange to describe that strategy as anything but recession-proof when you understand the fact that recessions are normal. And that, for the long-term investor, they actually may be somewhat beneficial.”
We don’t like the phrase recession-proof investments. Real estate is obviously not. If you have lived through 2008-2009, we had a bit of a recession there and my recollection is real estate didn't hold up very well in 2008-2009. So, it is certainly not a recession proof investment.
Dr. Spath points out that people usually think of companies that are recession-proof companies as those with low debt, good cash flow and strong balance sheets—basically companies that can weather a storm. Investors themselves can make themselves recession-proof with a similar strategy: having low debt, not too much leverage, good cash flow, and a strong balance sheet so that they don't have to pull out their money in the middle of a recession.
She said this actually brings up a really good point in the difference between a recession and a bear market. If you think about recession, we just define it as either two negative quarters in GDP or when the NBER decides a year later that it was a recession, but a bear market is actually just defined by investor sentiment. If you can keep that mindset of “this is a normal economic activity, this is part of the normal economic cycle to have recession, ups and downs, and I'm going to keep investing in stocks,” you're actually keeping us from having a bear market.
This wisdom shows that people who make it through recessions, depression, etc, are those that are not highly leveraged people, cyclical people, speculative people. It's those with good cash flow, a strong balance sheet, low debt, and a good emergency fund. A recession does not equal a bear market. Remember. the stock market is generally considered a forward-looking indicator. It shows up early. Stocks drop, and the recession comes later. Sometimes stocks drop, and the recession never comes. You have to separate those two things. They're not the same thing. But we hate this concept, this whole idea of a recession-proof investment because when you hear this, you're like, “Oh, recession-proof investment. That means when a recession comes, I should change how I invest.”
Now you're going, “Well, I need a recession investment, and then I need a bull market investment. And I've got to know when to switch.” Well, that is really hard. If you think you know how to do that, we encourage you to keep an investment journal, write down all these great insights that you have and what's going to happen in the next few months, in the next few years. You'll probably have an experience similar to mine where you'll realize you don't really know and certainly not enough to bet your life savings on it.
That is what we are talking about when we are talking about trying to time the market. You are betting your life's savings on your ability to know more than the overall market does. That is a pretty risky thing to do.
Our approach to investing in a recession is exactly our approach to investing in a big bull market, in a big economic expansion. It's a static asset allocation. We rebalance once a year. When the market is doing awesome, we are buying more of whatever isn't doing well. When the market is not doing well, we are buying more stocks. When real estate gets hammered, we are buying more real estate. It always forces you to buy low and it doesn't require me to know what's going to happen in the future. It is a very easy method to teach others how to invest. And it clearly works.
Buy-and-hold investing works just fine over the decades. Are there times where if you had been able to time the market, you would have done better? Sure. But the fact is you probably can't do that reliably.
More information here:
Rebalancing Your Investment Portfolio
Risk Tolerance
“I'm a resident, and over six years, I have accumulated about $90,000 in my TSP but watched it decline to $75,000 without intervention this year. I plan on diversifying this year after I graduate, as I have more time to evaluate other methods of investing. However, if I wasn't, do you have any rules of thumb for when you may need to take more risk? I lost 16.7% of what I currently have invested and didn't stray from the course. Does that mean I can brave more bear markets? Or do you think this is a different story when you have an attending salary.”
It is a great sign that you did not budge and didn't sell your investments. It is hard to know how much of a loss you can take until you really get there. Base your overall risk strategy not on what's currently happening but what you wrote down in your investor policy statement when you started. Stick with that plan and just continue to invest and continue to put money in, even as you become an attending.
If you're not sure how much risk you can tolerate, how much volatility you can tolerate, how much you can watch money that you didn't spend on a kitchen remodel or a new Tesla in order to invest it for your future, disappear down the rat hole before you panic sell, you should err on the side of safety until you've been through a bear market or two.
If you think you can tolerate a 90% stock portfolio, maybe start at 80% and wait for your first bear market, see how it affects you. That is what this resident did but that doesn't mean you should take on more risk, though. There's no rule of thumb that says, well, you tolerated this, so you should take on more risk. But it does tell you that you're doing OK there.
The game really is the same when you become an attending. The numbers get bigger, you invest more each month, you have more to lose, but it's the same percentages. It's really the same game. We didn't find that as we accumulated more money that we became less risk tolerant. Our risk tolerance has been pretty similar over vast differences in wealth from the time we were a resident until now so we have a pretty similar portfolio to what we had 15 years ago. And it works.
When the market's doing great, we wish we were being more aggressive. When the market is doing poorly, we wish we were maybe not quite as aggressive but never so much as to sell out.
It is like the Price Is Right. You want to get as close as you can to your risk tolerance without going over. Because going over is a catastrophe. If you panic-sell just once, especially late in your career, that's a lot of wealth evaporating.
But as we go through bear market after bear market after bear market, we become more used to them. It feels more and more like we’ve seen this movie before and we know how it ends. We are not putting money that we need anytime soon into those sorts of investments.
Dr. Spath said her stock investing portfolio is pretty conservative, and she takes the risk on the real estate side. Her strategy is to not look when the market is falling. She just keeps her automated investments going. That is a good strategy to guard against panic-selling.
I Bonds
If there ever were a recession-proof investment, particularly this recession, it would be I bonds. A listener says,
“I bonds were not originally part of my investment plan, but now with inflation, I'm wondering, is it worth it to change the plan and update that to include I bonds?”
Dr. Spath shares some background on I bonds which are considered safe investments in this market because they protect your money from losing value due to inflation. The interest rate that they give you is actually based on inflation and goes up with inflation. You can put up to $10,000 per person into an I bond through the Treasury Direct website. In fact, you can actually also purchase another $5,000 with your tax refund. So, you can actually have up to $15,000 per person in I bonds. Recently it's been around 9%, guaranteed for the next six months.
The potential downside of I bonds is that you have to own them for at least a year. If you cash it out before the five years, you lose three months of the interest. But if you cash it out after five years, you get to hold onto all that interest. I bonds are state and local tax-exempt, but you do owe federal taxes on that money, taxed at your ordinary income rate. You don't have to pay payroll taxes, Social Security, or Medicare. You can get around the tax by using them for educational expenses but that option phases out if you are single with adjusted gross income over $98,000 or, if you're Married Filing Jointly, it's $155,000. Most doctors probably aren't going to get their AGI below that, especially if they're married to another person that's working.
We have always had a portion of our portfolio set up dedicated to inflation-indexed bonds. For the most part, that has been a TIPS fund, but I bonds in the last year have been dramatically more attractive than TIPS. When interest rates go up, the value of a bond like a TIPS goes down. So TIPS actually have a negative return on the year. Meanwhile, I bonds are earning 9%.
If we could have swapped all our TIPS for I bonds, that would've been a wonderful thing to do. But if you're investing primarily in retirement accounts, you can't put I bonds in there. They are bought through treasurydirect.com. They only let you buy $10,000 per entity; you can buy $10,000 for you, $10,000 for your spouse. If you have a trust, you can buy $10,000 there. You can get another $5,000 with your tax return. You can actually buy some for your kids, kind of an UTMA-like account within your account, $10,000 each there, if you really want to. So the amount you can buy is limited.
More information here:
How to Buy I Bonds at TreasuryDirect
Savings Bonds
“I have some EE bonds that expired in 2021 that were given to me from family members, maybe around $10,000. I was thinking of cashing and then buying I bonds as I don't have a ton of other cash around to buy this, I guess, investment vehicle, which is turning out to be good in the current market. I was wondering if you think that is a good idea, or if there are more tax-efficient ways to cash in these bonds as I don't have a current need for the money at this point.”
Dr. Spath explains the difference between EE and I Bonds. They are both sold at face value, and they both earn interest monthly that's compounded semi-annually for 30 years. Both EE and I bonds may be redeemed after 12 months. If cashed during the first five years, you forfeit three months of interest payments. Both are exempt from state and municipal taxes and are completely tax exempt if you're not phased out, if you use it for educational expenses.
But the difference is that the interest rates on EE bonds is fixed for life on the bond while I bonds offer rates that are adjusted to protect from inflation. So if it's looking like inflation is going to be high, I bonds will do better. Unfortunately, this kind of requires a crystal ball kind of calculation.
EE bonds do offer a guaranteed return that doubles your investment if held for 20 years. But there is no guarantee with I bonds. If inflation goes down, the I bonds are also going down. So, this is just all trying to predict the future call. If you decide to sell your EE bonds for I bonds right now, it seems like the right answer, but not sure if that's going to be the right answer in 20 years.
This listener mentions that her bonds are expiring. We don't know if that means that they've hit their 30-year mark. If you have any kind of savings bond that you have had for 30- plus years, yes, you need to cash them in because they're not making money anymore. Even if you just turn around and buy the exact same kind of bond, you should do that.
But without knowing their entire investing plan, we don't know if putting them into savings bonds is the right thing. Maybe you should be paying off your mortgage or paying off your student loans or paying off your credit cards or your car loan or maxing out your 401(k) or saving up to buy into your practice.
Just because the money is coming out of savings bonds, it doesn't mean it has to go back into savings bonds. Treat it like any other windfall, any other money you earned; it should go to your highest use for money right now, whatever that might be.
But we find I bonds a lot more attractive than EE bonds because of the inflation-protection component. When times like this come along, where inflation is really high, you get this huge bonus out of the I bonds and you don't get that out of the EE bonds. So, much bigger fan of I bonds than regular EE savings bonds, and don’t own any of those.
Paying Off Rental Property Mortgages
“My question is regarding paying off rental property mortgages at current high inflation. I have six rental properties with APR ranging from 3.8%-4.5%. I have some extra capital to invest, and I have maxed out my 401(k), HSA and Backdoor Roth IRA contributions for this year. Should I use this to pay off mortgages or buy more stocks and bonds or buy additional properties? With inflation being around 7%, does it make sense to pay 4.5% for the property mortgages?”
What are your goals, and how much risk do you want to take or do you need to take in order to reach them? Because what we're talking about here is how much leverage risk you want to run. The nice thing about paying off loans is you get a guaranteed return. If this loan is at 4.8% interest and you pay it off, you are earning 4.8% on that money guaranteed, no risk required. Now obviously if you take some risk, you leverage up, buy another property, there's a very good chance you could beat 4.8%. But you're going to have to take some risk in order to do that. And whether that's the right move for you or not, it depends on your risk tolerance and depends on your goals. So, that's about as specific as I can be on that one. If you just look at the numbers, it's always going to look better using as much leverage as you can in your life. But that doesn't take risk into account.
Dr. Spath recently changed her plans a bit after initially being in the mindset of doing one property a year and just building, building, building, and getting that big portfolio. But as we’ve talked about leverage risk, they actually decided to pay off some of their mortgage in order to decrease their leverage risk, starting with their primary home mortgage. Obviously, it does slow down your growth. If you're not leveraging as much, you're not expanding as fast, but it does give you a lot more of a stable base, a lot more stable financial foundation to have less leverage risk.
More information here:
6 Reasons The Rich Should Pay off Their Mortgage Early
Captive Insurance
“My accountant is telling me that I should start thinking of a captive insurance plan due to the very high tax rate that we're having and hopefully a very successful year. What are your thoughts for captive insurance, and is this something you think we should pursue?”
Dr. Spath explains that a captive insurance plan is fully owned and controlled by its insureds, a type of self-insurance. Basically, instead of paying commercial insurers money, the owner actually invests their own capital and resources and assumes a portion of the risk for the portfolio.
This is one of those things where the devil is in the details. Captive insurance plans can work really well for the right people. Sometimes they only insure some of the risk and they still pay an insurance company to take on the majority of the risk. Sometimes you're banded together with enough other docs, you're essentially self-insuring.
This isn't like whole life insurance, where it makes sense for so few people that there should be a general warning against it. That general warning doesn't exist for captive insurance. It's a little bit more like a real estate syndication. You have to look at it and do the due diligence. It's going to be right for some people; it's not going to be right for other people. Your particular one that you're looking at may or may not be a good deal. But for the right person, these things work out really well, especially if you end up not having very many claims, because you keep the difference and that's pretty beneficial. So, we would definitely look at it. If your accountant thinks it's a good idea, get some quotes, get some more details on it and then make a decision once you have all the information you need to make the decision. But we wouldn't necessarily just shy away from it like it's always a bad deal.
Sponsor
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Quote of the Day:
“Never change your long-term investment plan based on short-term results.”
That kind of encompasses what we've been talking about recently, the I bonds and long-term plans and when to change them, when not to change them.
Dr. Spath reminds us it is important to remember to not change your plan just because of short-term results. If you're going to change any investments, make sure you're keeping your long-term investment plan in mind, and that's how you're making your decision. That's probably when you'll be the happiest with the results. Investing is a marathon. It's not a sprint.
Milestone to Millionaire Episode
#81 — Orthodontist Pays Off $540,000 in Four Years
Dr. Spath interviews this orthodontist who paid off $540,000 in loans while living in a high cost of living area by refinancing to a lower rate and living below her means. It was easier than she thought it would be, turning it into a game. Having won that game, she now has the freedom to cut back at work or explore other opportunities if her heart desires.
Sponsor: DLP Capital Partners
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 278 – Recession proof investments.
Dr. Jim Dahle:
I'm your host, Dr. Jim Dahle, the founder of the White Coat Investor and I am here with my co-host, Dr. Disha Spath. Welcome back, I haven't seen you in a few weeks.
Dr. Disha Spath:
I know. It's been a while, Jim. I'm so happy to be back here.
Dr. Jim Dahle:
Yeah, let's start by telling them about our sponsor.
Dr. Disha Spath:
All right. This program is brought to you by the Laurel Road for doctors. Laurel Road is committed to serving the financial needs of doctors like you. You take care of us, it's time someone took care of you.
Dr. Disha Spath:
With Laurel Road’s physician mortgage, you may be eligible for a rate discount when you take out a new physician mortgage or refinance your existing mortgage. Specially designed for doctors, this physician mortgage has flexible financing options, and may have fewer restrictions than a conventional mortgage. That can mean lower monthly payments.
Dr. Disha Spath:
For terms and conditions please visit www.laurelroad.com/wci. Laurel Road is a brand of KeyBank NA, and an equal housing lender, NMLS number 399797.
Dr. Jim Dahle:
It's interesting. Laurel Road has actually been with us for a long, long time. They started working with the White Coat Investor in 2013. They were under a different name then. They were called Darien Rowayton Bank and they were one of the first companies to start doing student loan refinancing after the great recession.
Dr. Jim Dahle:
I actually had breakfast with their CEO in downtown Salt Lake. And that was kind of how the relationship kicked off and they've been working with us ever since. But lots of White Coat Investors have refinanced with them. They've moved into the mortgage space now. So, check out and if you're looking for those services.
Dr. Jim Dahle:
All right, for the rest of you, if no one said thanks for what you do, let us be the first because your job is hard. I just came off a shift this weekend. I had a patient that came in at 17 weeks pregnant, first pregnancy and said, “Ah, my water broke.” And those of you who work in the emergency department and L&D you know what this usually means, it usually means that this person just peed their pants, right? It usually isn't their water broke.
Dr. Jim Dahle:
And in this case, unfortunately it was her water had broken. And it was so depressing to have a live baby in there that just isn't going to make it. It's just a terrible, terrible sad situation. And I know you deal with those things all the time.
Dr. Jim Dahle:
Likewise, I have a good friend. I just found out, young, healthy person just had a stroke this last week. And I’m so grateful for the care that he's been able to get. And hopefully be back out adventuring with me soon. Luckily, he is not too severely affected, but sometimes we forget that our day-to-day work is the worst days of people's lives. And so, thanks for being there for him on those days.
Dr. Disha Spath:
Thank you.
Dr. Jim Dahle:
All right. What have you been up to Disha?
Dr. Disha Spath:
Let's see, speaking of people doing really well, my husband is completely recovered from his open-heart surgery now. So, he's just 100% good to go. And we've been just relaxing and enjoying his recovery.
Dr. Disha Spath:
I went down to the Physician Moms Group in Kiawah Island recently and took the kids with me. And that was just a wonderful experience for them and a beautiful speaking experience for me. It was really exciting to see women getting excited about managing their own finances. And I could just see all these people like, “Oh, I don't have to have a financial advisor?” It was really cool to see that.
Dr. Jim Dahle:
Awesome. Sounds like a great time.
Dr. Disha Spath:
How about you? What have you been up to?
Dr. Jim Dahle:
Mostly adventuring actually. Adventuring and working on this real estate course. The real estate course is going to be out here… Oh, well, it’ll be less than a week from the time you're hearing this podcast. It's awesome. We got a ton of people that have put a ton of work into this thing. Literally we've been working on this for 8 or 10 months. And it'll be out in a week.
Dr. Jim Dahle:
So, watch for that. We'll be talking about it next week on the podcast in a little bit more in depth. Watch the blog for the announcement. Like all courses we put out, at the beginning is the cheapest price you'll ever get on it. So, if you're interested in learning about real estate, you want to get in right during the introductory period.
Dr. Jim Dahle:
And like any course we put together, there's a no questions asked 100% money back guarantee. So, there's really no risk to check it out and see if it's something you'll be interested in if you've been thinking about getting into real estate investing.
Dr. Jim Dahle:
Aside from that, Katie's been working a ton on that as her leg recovers from her fracture. But other than that, we've been adventuring, floating rivers mostly this summer. We floated the Salmon River, floated the Green River, floated a little bit on the Colorado. So, lots of rafting and I’m looking forward to some climbing this week. We're headed up to the Wind Rivers and then some canyoneering next month. So, it should be a fun fall too.
Dr. Disha Spath:
Awesome. Is Katie going with you to climb with her leg?
Dr. Jim Dahle:
No, she can't yet. She's still in that period where she's weight bearing, but not everything.
Dr. Disha Spath:
I'm sorry to hear that.
Dr. Jim Dahle:
Plus, one of her legs is about two thirds of the circumference of the other one.
Dr. Disha Spath:
Oh, no.
Dr. Jim Dahle:
So, she's still got a little bit of muscle to get back so she can do something like that. She's working hard on that, but she's mostly trying to get back to playing soccer. She keeps trying to rush it. Thankfully, the orthopedic just told her the same thing I did, that she's got six more weeks before she can play soccer.
Dr. Disha Spath:
Oh, that sucks.
Dr. Jim Dahle:
All right. Let's talk about recessions today.
Dr. Disha Spath:
Onto happier topics.
Dr. Jim Dahle:
Yeah. An email in response to what… I don't know what I said. Maybe it was on this podcast. Maybe it was in a blog post. But he sends in this email. “We are not officially in a recession. Though it's commonly thought that a recession is called after two quarters of negative GDP growth” he says, which is what I thought. It's actually a much more qualitative call made by the NBER and takes into account four or five factors in addition to quarterly GDP. These include unemployment, which is currently negligible as well as salaries and a few others that I don't recall.
Dr. Jim Dahle:
So, this was interesting. I'm like, what are you talking about? I thought recession was just two quarters in a row of decreasing GDP, which the media talks about that a lot. It's a pretty important part of it.
Dr. Jim Dahle:
But he is right. The technical definition of recessions in this country, there is no technical definition. It's literally called by a committee, the NBER committee, which I thought was not only interesting, but very bizarre. And they say that the traditional definition is a significant decline in economic activity that is spread across the economy and lasts more than a few months. That's not a very hard and fast definition. It's apparently up to a vote. A vote of a handful of people of whether we're in a recession or not. I guess I don't care that much. What do you think, Disha?
Dr. Disha Spath:
Yeah. It takes them a while to even get to that conclusion. Since they're looking backwards, they don't declare a recession oftentimes many months into the recession. For the last recession, it took them a whole year to announce that the US was in fact in the recession that started in December, 2007. Because they have to look at so many different factors, like production, employment, real income, and they're not just looking at GDP or the gross domestic product.
Dr. Disha Spath:
So, it makes sense that it would take them a while to declare that I think most economists and people that follow finance use the two-quarter rule just because it's something that has a solid number and they can call it pretty quickly and they don't have to wait for the NBER's pronouncement. But yes, he's right about that.
Dr. Jim Dahle:
Yeah. So, what about depression? What's the difference between depression and recession? Is there a technical definition or do we got another committee that decides that?
Dr. Disha Spath:
Yeah, there's no actual formal definition, but generally recession is a significant pervasive and persistent decline in economic activity. And we're usually talking about a fall in GDP between 1.7% and 3%. A depression is when the GDP declines greater than 10%. So, we're talking a much bigger drop. But again, there's no real formal definition. This is just something we all come to an agreement on at some point.
Dr. Jim Dahle:
It's really interesting. When we talk about depressions, almost all of us, our consciousness goes to the great depression. Which was really the only big one in the 1900s. And we really haven't had one really, unless you count the very brief thing we had with the pandemic since the turn of the millennium.
Dr. Jim Dahle:
But in the 1800s, this happened every 15 to 20 years. It was really, really cyclical. And the economy just got hammered, every 15, 20 years, all the way through the 1800s. Financial history in the US in the 1800s is absolutely fascinating. I highly recommend learning more about that and realizing just how stable it was in the 1900s by comparison.
Dr. Disha Spath:
Is there a book, Jim?
Dr. Jim Dahle:
There is a book and I read one. I forgot what it was called though. So, let me see if I can find it.
Dr. Disha Spath:
We'll get back to you.
Dr. Jim Dahle:
Yeah. In the meantime, let's take a look at Matthew's question that he left on the Speak Pipe. He's asking about recession proof investments. Let's take a listen to that.
Matthew:
Hey, Jim. My name is Matt. I'm a longtime White Coat Investor and academic emergency physician in Nashville, Tennessee. I have asked questions on the podcast before.
Matthew:
On a recent podcast with some of the real estate investment folks who you work with, they were talking about how real estate is a kind of recession proof investment. And it got me thinking wouldn't you describe just a general index-based stock investing strategy as recession proof as well?
Matthew:
What I mean by that is that recessions are kind of a normal part of the economic cycle. And honestly, if you're investing in stock-based index funds, as you recommend, and I do for the long term, during a recession, you're actually potentially kind of buying stocks on the cheap.
Matthew:
So, to me, it seems a little strange to describe that strategy as anything but recession proof when you understand the fact that recessions are normal. And that as a matter of fact, for the long-term investor, they actually may be somewhat beneficial. I just wanted to hear your thoughts on this and understand if I wasn't thinking about this in a sophisticated enough manner. Thanks.
Dr. Jim Dahle:
All right. That's a great question. All right. While we were listening to that, I looked up the book. The book is “America's First Great Depression: Economic Crisis and Political Disorder After the Panic of 1837.” If you like financial history, and if you're a do-it-yourself investor, I think you should like financial history. I highly recommend this book. Very, very good.
Dr. Disha Spath:
Definitely putting that on my list.
Dr. Jim Dahle:
All right. Recession proof investments. Matthew does not like the term recession proof investments. I'm kind of with him. I'm not sure what guest we had on that described real estate is recession proof investment. It's obviously not. If you have lived through 2008/2009, we had a bit of a recession there and my recollection is real estate didn't hold up very well in 2008/2009. So, it's certainly not a recession proof investment. What are your thoughts on recession proof investments, Disha?
Dr. Disha Spath:
Yeah. I think the background or what people usually think of as companies that are recession proofer companies with low debt, good cash flow and strong balance sheets, basically companies that can weather a storm. And I feel like investors themselves can make themselves recession proof with a similar strategy, having low debt. Not too much leverage, good cash flow, strong balance sheet so that they don't have to pull out their money in the middle of a recession.
Dr. Disha Spath:
This actually brings up a really good point in the difference between a recession and a bear market. Because if you think about recession, we just define it as either two negative quarters in GDP or when the NBER decides a year later, that was a recession, right? But a bear market is actually just defined by investor sentiment. And if you can keep that mindset of this is a normal economic activity, this is part of the normal economic cycle to have recession ups and downs and I'm going to keep investing in stocks. You're actually keeping us from having a bear market. So, thank you.
Dr. Jim Dahle:
That's a lot of wisdom that you just said there, where the people that make it through recessions, depressions, et cetera, are those that are not highly leveraged people, cyclical people, speculative people. It's those with good cash flow, strong balance sheet, low debt, good emergency fund.
Dr. Jim Dahle:
I think that's a great insight there. And I agree with you. A recession does not equal a bear market. Remember the stock market is generally considered a forward-looking indicator. It shows up early. Stocks drop and the recession comes later. And sometimes stocks drop and the recession never comes. And so, you got to separate those two things. They're not the same thing.
Dr. Jim Dahle:
But I hate this concept, this whole idea of a recession proof investment. Because what that makes you think? You hear this, you're like, “Oh, recession proof investment. That means when a recession comes, I should change how I invest.”
Dr. Disha Spath:
Right.
Dr. Jim Dahle:
And that's where I think you can get into trouble.
Dr. Disha Spath:
Absolutely.
Dr. Jim Dahle:
Right. Because now you're going, “Well, I need a recession investment, and then I need a bull market investment. And I got to know when to switch.” Well, that's really hard. If you think you know how to do that, I encourage you to keep a journal, investment journal, a financial journal, whatever you want to call it.
Dr. Jim Dahle:
Write down all these great insights that you have and what's going to happen in the next few months, in the next few years. And I think you'll probably have an experience similar to mine where you'll realize you don't really know. You don't really know, and certainly not enough to bet your life savings on it.
Dr. Jim Dahle:
And that's what we're talking about when we're talking about trying to time the market. You are betting your life's savings on your ability to know more than the overall market does. And I think that's a pretty risky thing to do.
Dr. Disha Spath:
Yeah.
Dr. Jim Dahle:
So, my approach to investing in a recession is exactly my approach to investing in a big bull market, in a big economic expansion. It's a static asset allocation. I rebalance once a year. When the market is doing awesome, guess what? I'm buying more bonds. I'm buying more whatever wasn't doing well.
Dr. Jim Dahle:
When the market is not doing well, I'm buying more stocks. When real estate gets hammered, I'm buying more real estate. It always forces me to buy low. And it doesn't require me to know what's going to happen in the future. And so, I think it's a very easy method to teach others how to invest. And I think it's very easy to do for myself. And it clearly works.
Dr. Jim Dahle:
Buy and hold investing works just fine over the decades. Are there times where if you had been able to time the market would've done better? Sure. But the fact is you probably can't do that reliably. And if you can, why are you only managing your own money? Come manage mine, manage everybody's. You should be managing billions. You should be a hedge fund manager and be paid 2 and 20 on it. There's no way you should be investing your measly $2 million portfolio if you truly can time the market.
Dr. Disha Spath:
Yeah.
Dr. Jim Dahle:
Anyway, a bit of a rant, but that's kind of how I talk about switching.
Dr. Disha Spath:
That's a great point. That's a great point. And you're rebalancing with new investments so that you're always buying low. That's brilliant. Thank you, Jim.
Dr. Jim Dahle:
All right. Let's do this one that came in by email about risk tolerance. Do you want to read that email?
Dr. Disha Spath:
Yeah. Okay. “Thanks for all you do. I'm asking about risk tolerance. I'm a resident and over six years I have accumulated about $90,000 in my TSP, but watched a decline to $75,000 without intervention this year. I plan on diversifying this year after I graduate, as I have more time to evaluate other methods of investing.
Dr. Disha Spath:
However, if I wasn't, do you have any rules of thumb for when you may need to take more risk? I lost 16.7% of what I currently have invested and didn't stray from the course. Does that mean I can brave more bear markets? Or do you think this is a different story when you have an attending salary? Again, thanks for what you do.
Dr. Jim Dahle:
Oh, how would you answer that?
Dr. Disha Spath:
Well, yeah, I think it's a great sign that you did not budge and didn't sell your investments. So, I think that's really awesome. I think it's hard to know how much of a loss you can take until you really get there. So, I would base my overall risk strategy not on what's currently happening, but what you wrote down in your investor policy statement when you started, which is to stick with that plan and just continue to invest and continue to put money in, even as you become an attending. What do you think?
Dr. Jim Dahle:
Well, I've been telling people for years, right? If you're not sure how much risk you can tolerate, how much volatility you can tolerate, how much you can watch money that you didn't spend on a kitchen remodel or a new Tesla in order to invest it for your future, disappear down the rat hole before you panic sell, I think you should air on the side of safety until you've been through a bear market or two.
Dr. Jim Dahle:
If you think you can tolerate a 90% stock portfolio, maybe start at 80% and wait for your first bear market, see how it affects you. And I think that's what this investor is getting to. He's saying I had $90,000, I lost $15,000. That's a lot of money to a resident. $15,000 is a lot of money. I didn't panic. What does that mean?
Dr. Jim Dahle:
Well, I think it means that you're okay where you're at. That doesn't mean you should take on more risk though. There's no rule of thumb that says, well, you tolerated this, whatever that works out to be. What's that? 17% decline. So, you should take on more risk. But it does tell you that you're doing okay there. So, I don't think there's any need to decrease the level of risk you're taking.
Dr. Jim Dahle:
The game really is the same when you become an attending. The numbers get bigger, you invest more each month, you have more to lose, but it's the same percentages. It's really the same game. I didn't find that as I accumulated more money, that I became less risk tolerant. I feel like my risk tolerance has been pretty similar over vast differences in wealth from the time I was a resident until now. And so I actually have a pretty similar portfolio to what I had 15 years ago.
Dr. Jim Dahle:
I don't know. It seems to work for me now, it seemed to work for me then. When the market's doing great, I wish I was being more aggressive. When the market is doing poorly, I wish I was maybe not quite as aggressive, but never so much that I really feel like I got to sell out.
Dr. Jim Dahle:
But I can remember 2008/2009, I was pretty happy I didn't own any more in stock than I did at that point. Was I close to panic? I don't think I was close. But it's like the price is right. You want to get as close as you can to your risk tolerance without going over. Because going over is a catastrophe. If you panic sell just once, especially late in your career, that's a lot of wealth evaporating.
Dr. Jim Dahle:
How about you? What's your risk tolerance done as you've accumulated more, as you make more now than you used to? Has your risk tolerance changed? Do you think you're more risk tolerant, less risk tolerant? Where do you think you're at?
Dr. Disha Spath:
I'm pretty low risk tolerance personally. I reevaluate every once in a while. We're certainly leveraged for real estate, but yeah, I'm pretty low risk tolerance. My portfolio is pretty conservative for my age. And I know that, but that's okay with me. My stock investing portfolio is pretty conservative, but I guess I take the risk in the real estate side. I think in general that I would call myself pretty conservative.
Dr. Jim Dahle:
Yeah. Part of it for me is, when I look at my overall financial life, a ton of my financial life is tied up in some stupid little internet company. That’s a huge part of my net worth and financial life. And so, nothing else feels very risky compared to that.
Dr. Jim Dahle:
But it’s interesting. I actually carefully tracked my losses in 2008. We lost 33% of our money, our long-term investments in 2008. That was about $78,000. And so, now if we lost 33% of our wealth, that would be a seven-figure loss. It'd be a lot more money. But I think overall as I've become more experienced as an investor, right now, I've been through with real money invested, I've been through 2008, I've been through 2011. A lot of people don't even remember 2011, but that was a 19% decline in the stock market.
Dr. Jim Dahle:
I've been through December 2018. A lot of people don't remember that, because it was so short. I've been through the pandemic. Most people remember the pandemic, but again, very, very brief. I've been through this year. This was a 25% drop in the first six months of this year. A lot of it has come back at the time of recording.
Dr. Jim Dahle:
But as I go through these bear market after bear market, after bear market, I become more used to them. It feels more and more like I've seen this movie before and I know how it ends. And I'm not putting money that I need anytime soon into those sorts of investments. And so, I think it's easier to feel like it's play money, monopoly money, not real losses, even though it truly is.
Dr. Disha Spath:
Yeah. I just don't look. I don't do those calculations when the market is falling. I'm definitely the type that's just like, “I'm not even checking my net worth today or for the next three months. It's fine. I'll just keep doing what I'm doing.”
Dr. Jim Dahle:
A lot of people do that.
Dr. Disha Spath:
Yeah.
Dr. Jim Dahle:
Yeah. A lot of people don't open their statements in a bear market.
Dr. Disha Spath:
Yeah. Just don't care to know.
Dr. Jim Dahle:
Yeah. My problem is I got to invest money every month or two. And so, I kind of want to know where it should go. And so, that forces me to see where I'm at.
Dr. Disha Spath:
Right. Yeah. I have it automated.
Dr. Jim Dahle:
But it’s very interesting. After 2008, 2009, I totally lost interest in the markets. It was so boring after that. In 2008, 2009 once we were going up, up and down 5% and 10% a day. A day you'd lose that in a mutual fund.
Dr. Disha Spath:
Geez.
Dr. Jim Dahle:
And then, I'm sitting there in 2010 going “This is a yawner, this is totally boring. Why would you want to watch this market? It's not interesting at all.” Compared to the fall of 2008, that was really interesting where we thought the entire financial system was going to melt down.
Dr. Disha Spath:
Right. That was pretty scary.
Dr. Jim Dahle:
It's hard to get too excited about it after that.
Dr. Disha Spath:
Yeah. See, I don't trust myself enough.
Dr. Jim Dahle:
You're worried you'll panic sell.
Dr. Disha Spath:
Yeah. Yeah, exactly. I don't trust myself enough to go in and actually actively invest every month, especially now in this kind of an atmosphere. So, I just have everything automated and I still haven’t tax loss harvested because I don't want to turn off my automation because that keeps my psychology from affecting my portfolio. So, I'm just letting it ride at the moment.
Dr. Jim Dahle:
I get that question a lot.
Dr. Disha Spath:
Yeah. Yeah. We talked about it last time.
Dr. Jim Dahle:
Yeah. People are like, “Well, how can I tax loss harvest if I got everything automated?” And I'm like, it's kind of one or the other. There are advantages to doing both, but it's really hard to do both of them.
Dr. Disha Spath:
Yeah, absolutely.
Dr. Jim Dahle:
All right. Let's talk about another. If there ever were a recession proof investment, particularly this recession, it would be I bonds. And let's hear this question from Mark about I bonds on the Speak Pipe.
Mark:
Hi, this is Mark in Boston. My question is I bonds were not originally part of my investment plan, but now with inflation, I'm wondering, is it worth it to change the plan and update that to include I bonds?
Dr. Jim Dahle:
All right. Well, it's a good question, Mark. What do you think, Disha? Is it worth it? Is it worth changing your plan now that inflation is higher?
Dr. Disha Spath:
Yeah, I've been pondering this question myself quite a lot recently too. A little bit of background on I bonds first. I bonds are considered safe investments in this market because they protect your money from losing value due to inflation. The interest rate that they give you is actually based on inflation and goes up with inflation. So that's nice.
Dr. Disha Spath:
You can put up to $10,000 per person, into an I bond through the treasury direct website. In fact, you can actually also purchase another $5,000 with your tax refund. So, you can actually have up to $15,000 a person in I bonds. And recently it's been around 9%. And that 9% is guaranteed for the next six months. So that all sounds great.
Dr. Disha Spath:
The downsides, potential downsides of I bonds is that you have to own them for at least a year. So, the money is tied up for at least a year. If you cash it out before the five years, you lose three months of the interest. But if you cash it out after five years, you get to hold onto all that interest.
Dr. Disha Spath:
What's kept me from actually doing it so far is just the tax considerations and our general plan for the years. But the taxes owed on I bonds, they are state and local tax exempt, but you do owe federal taxes on that money. And I do believe that that federal tax bill is at your ordinary income rate. Is that right, Jim?
Dr. Jim Dahle:
Yeah. It's interest, so you got to pay ordinary taxes on it. It's ordinary income. I mean, you don't have to pay payroll taxes, no social security or Medicare, but it's interest, so, no long-term capital gains or qualified dividends.
Dr. Disha Spath:
Exactly. Yeah. The tax rate is pretty high on that. So, I guess it depends on how long you plan on holding onto it. And the one way to get around the tax is to actually use the money for educational expenses in which case you don't have to pay any taxes on it. So, if you have kids in college, this might be a really good investment for you. What do you think, Jim?
Dr. Jim Dahle:
Yeah, I think there's a phase out on it though. I think there's a phase out on that educational.
Dr. Disha Spath:
Oh yeah. Okay. I'll have to look that up.
Dr. Jim Dahle:
I’ll pull it up here. The problem with phase outs is doctors are almost always phased out.
Dr. Disha Spath:
Yes. That's true.
Dr. Jim Dahle:
Yeah. It looks like you can see it. It's form 8815. I think the phase out if your single is $98,000. If you're married filing jointly, it's $154,000. So, if you're adjusted gross income is over $155,000 married filing jointly, you're phased out of that cool feature of savings bonds. It's too bad. It is a cool feature.
Dr. Disha Spath:
Yeah.
Dr. Jim Dahle:
Most docs probably aren't going to get their AGI below that, especially if they're married to another person that's working.
Dr. Disha Spath:
Yeah.
Dr. Jim Dahle:
I don't know what the right answer is to this person's question. I can tell you this. I have always had a portion of my portfolio set up dedicated to inflation index bonds. And for the most part that has been a TIPS fund is what I've used for that or a TIPS ETF.
Dr. Jim Dahle:
But I bonds in the last year have been dramatically more attractive than TIPS, right? Because when interest rates go up, well, the value of a bond like a TIPS goes down. And so, TIPS actually have a negative return on the year. Meanwhile, I bonds are earning 9%, right? So, they're dramatically more attractive than TIPS.
Dr. Jim Dahle:
So, if I could’ve swapped all my TIPS for I bonds that would've been a wonderful thing to do. And I would've loved to do that. Two issues. One, if you're investing primarily in retirement accounts, you can't put I bonds in there.
Dr. Jim Dahle:
The way you buy I bonds is you go to treasurydirect.com. You open an account. And of course, it's like the government running an investment company. And so, it's super hassle. You can't even use your last pass putting your password. You literally have to type it in on this terrible keyboard on the screen, but you got to open another account to start with.
Dr. Jim Dahle:
And then because they only let you buy $10,000 per entity, you can buy $10,000 for you, $10,000 for your spouse. If you have a trust, you can buy $10,000 there. You can get another $5,000 with your tax return. You can actually buy some for your kids, kind of a UTMA like account within your account, $10,000 each there, if you really want to.
Dr. Jim Dahle:
But it's a limitation, right? That's fine if you want to put $10,000 into I bonds, but let's say you want to put a million dollars into I bonds. You just can't do it. You're not going to open hundred trusts in order to invest in I bonds. And so, there's kind of a limitation. Their savings bonds are kind of designed for the small guy and hopefully at a certain point, most White Coat Investors get to the point where it's more hassle than it's worth to add I bonds.
Dr. Jim Dahle:
But I did finally get around to adding I bonds. Right at the end of last year, we got $10,000 into an account for Katie and $10,000 more for me. And then after the first of the year, we put $10,000 each into it again and put $10,000 in for our trust. And so, we got… What's that add up to? $50,000 worth of I bonds, which was enough that I thought it was worth the hassle.
Dr. Jim Dahle:
And it's been making 9% this year. It's great, but I would've liked to put a whole lot more money in that. And if you don't have a significant taxable account, like we do, you're not going to put this in your 401(k). You're not going to put it in your Roth IRA. So, it's definitely for a unique person.
Dr. Disha Spath:
Yeah.
Dr. Jim Dahle:
All right. Yeah. More questions about savings bonds. I guess Cindy's done a nice job putting this podcast together for us. We're talking about all these recession proof investments.
Dr. Jim Dahle:
All right. Let's take a listen to this one. I don’t know who left this question. Hopefully they'll tell us here in a second.
Kay:
Hi, this is Kay. I’ve been listening to your podcast for a while. Thank you so much for all the financial advice that you are giving out. I had a question about savings bonds. I have some EE bonds that expired in 2021 that were given to me from family members, maybe around $10,000 which I was thinking of cashing and then buying I bonds as I don't have a ton of other cash around to buy this, I guess, investment vehicle, which is turning out to be good in the current market.
Kay:
I was wondering if you think that is a good idea, or if there are more tax efficient ways to cash in these bonds as I don't have a current need for the money at this point. Thank you so much.
Dr. Disha Spath:
So let me explain the difference between EE bonds and I bonds first. EE bonds and I bonds are all both sold at face value and they both earn interest monthly that's compounded semi-annually for 30 years. And both EE and I bonds may be redeemed after 12 months. If cashed during the first five years, you forfeit three months of interest payments like I said before. Both are exempt from state and municipal taxes and are completely tax exempt if you're not phased out if you use it for educational expenses.
Dr. Disha Spath:
But the difference is that the interest rates on EE bonds is fixed for life on the bond while I bonds offer rates that are adjusted to protect from inflation. So if it's looking like inflation is going to be high, I bonds will do better, but unfortunately this kind of requires a crystal ball kind of calculation.
Dr. Disha Spath:
EE bonds do offer a guaranteed return that doubles your investment if held for 20 years. But there's no guarantee with I bonds. If inflation goes down, the I bonds are also going down. So, this is just all trying to predict the future call. If you decide to sell your EE bonds for I bonds right now, it seems like the right answer, but I'm not sure if that's going to be the right answer in 20 years.
Dr. Jim Dahle:
Yeah. She mentions that her bonds are expiring. I don't know if that means that they've hit their 30-year mark. If you've got any kind of savings bond that you've had for 30 plus years, yes, you need to cash them in because they're not making money anymore.
Dr. Jim Dahle:
Even if you just turn around and you buy the exact same kind of bond, you should do that. But I don't know if you've had them for 30 years or not, but that's what it sounds like she's saying. If that's the case, yeah, you need to redeem them and move it into another investment.
Dr. Jim Dahle:
But without knowing your entire investing plan, I don't know if putting them into savings bonds is the right thing for you. Maybe you should be paying off your mortgage or paying off your student loans or paying off your credit cards or your card loan or maxing out your 401(k) or saving up to buy into your practice.
Dr. Jim Dahle:
I don't know what the best use for you for $10,000 is. It may not be to buy savings bonds. And just because the money is coming out of savings bonds, it doesn't mean it has to go back into savings bonds. So, treat it like any other windfall, any other money you earned, it should go to your highest use for money right now, whatever that might be.
Dr. Jim Dahle:
But I find I bonds a lot more attractive than EE bonds because of the inflation protection component. And when times like this come along, where inflation is really high, you get this huge bonus out of the I bonds and you don't get that out of the EE bonds. So, I'm a much bigger fan of I bonds than I am of the regular EE savings bonds. I don't own in any of those.
Dr. Jim Dahle:
It's very interesting. If you look at them right now, you know what they pay? You know what the interest rate is on EE bonds right now?
Dr. Disha Spath:
No, I don't.
Dr. Jim Dahle:
0.1%.
Dr. Disha Spath:
Ouch.
Dr. Jim Dahle:
That's it. Yeah. 0.1%. I mean, you go to Ally bank right now, high yield savings account it's paying 1.6% or something I think as we're recording this. 1.75%.
Dr. Disha Spath:
Yes. Yes.
Dr. Jim Dahle:
So, it's hard to get excited about something that ties your money up for a year, for which you got to give up three months of interest if you cash it out up to five years and it's only paying you 0.1%.
Dr. Jim Dahle:
But it has this really cool feature that should not be overlooked, which is that if you hold it for 20 years, 20 years, no matter what the interest rate is, whether it's 0.1% or 0.2% or 0.3% or whatever, they guarantee your money will double. And what does that work out to be if you run the numbers? It's like 3.5% for your money to double in 20 years. If you hold it for 20 years, you actually do a lot better than 0.1%, you get about 3.5% and that's a little more attractive, I think, for such a safe investment.
Dr. Jim Dahle:
But this is something you're buying to kind of hopefully keep up with inflation. You're not going to crush inflation with EE bonds. They're a pretty safe investment. But I don't think it makes sense to buy any right now unless you're going to hold it for 20 years. And even better after that point, if you can get the interest out tax free because you spend it on education. But that would require you to have an income below a certain amount obviously.
Dr. Jim Dahle:
Do you own any savings bonds at all, Disha?
Dr. Disha Spath:
No, I do not. No. I've been thinking about buying some I bonds, but I haven't done it yet.
Dr. Jim Dahle:
All right. Let's turn the page to a different thing some people do when times are bad. Paying off rental property mortgages. It’s a question from Shiva. Let's take a listen to this one.
Shiva:
Dear Dr. Dahle, I am Shiva Ratuapli, gastroenterologist physician from Phoenix, Arizona. Thank you for all the work you do and your education for physicians. My question is regarding paying off rental property mortgages at current high inflation.
Shiva:
I have six rental properties with APR ranging from 3.8% to 4.5%. I have some extra capital to invest and I have maxed out my 401(k), HSA and backdoor Roth IRA contributions for this year. Should I use this to pay off mortgages or buy more stocks and bonds or buy additional properties? With inflation being around 7%, does it make sense to pay 4.5% for the property mortgages? Thank you.
Dr. Jim Dahle:
All right. That's a great question. And you gave us a lot of information Sheva, but you did not give us information we need in order to give you advice on this topic. And what that information is, is what are your goals and how much risk do you want to take or do you need to take in order to reach them?
Dr. Jim Dahle:
Because what we're talking about here is how much leverage risk you want to run? Let's say for instance, your goal is to have 50 rental properties. That that's your financial goal is you want to have this real estate empire. And right now, you have six. Well, if that's your goal, you probably need to continue to use a significant amount of leverage. And so, you've got these loans that are 3%, 4%, 5%-ish and like you mentioned inflation is 7%, 8%, 9%, but more importantly, you need to go buy more properties.
Dr. Jim Dahle:
And so rather than using money to pay off the loans, you want to use that money to go buy more properties because that’s your goal. On the other hand, let’s say your goal is to have six paid off rental properties and you own six properties. And all that's keeping you from having six paid off rental properties is to pay them off. If that were the case, I'd say pay off the properties.
Dr. Jim Dahle:
The nice thing about paying off loans is you get a guaranteed return. If this loan is at 4.8% interest and you pay it off, you are earning 4.8% on that money guaranteed, no risk required. Now obviously if you take some risk, you leverage up, buy another property, there's a very good chance you could beat 4.8%, but you're going to have to take some risk in order to do that. And whether that's the right move for you or not, it depends on your risk tolerance and depends on your goals.
Dr. Jim Dahle:
So, that's about as specific as I can be on that one. If you just look at the numbers, it's always going to look better using as much leverage as you can in your life. But that doesn't take into account risk.
Dr. Disha Spath:
After talking to you and doing these podcasts with you, Jim, I have recently changed my plans a bit because initially I was in the mindset of doing one property a year and just building, building, building and getting that big portfolio. But as you've talked about leverage risk and how most people recommend about 30% of leverage risk and I looked at the leverage risk in our portfolio, we've actually decided to pay off some of our mortgage in order to decrease our leverage risk.
Dr. Disha Spath:
But first we're going to go after our primary home mortgage first because that's what I would like to own free and clear, first of all. And that really puts it in such a good perspective. Obviously, it does slow down your growth. If you're not leveraging as much, you're not expanding as fast, but it does give you a lot more of a stable base, a lot more stable financial foundation to have less leverage risk.
Dr. Disha Spath:
So, I guess it’s just like Jim said, it really depends on what you want to do, but you do have to realize every time you leverage that you are taking on more risk and every time you deleverage you are getting rid of a little bit of risk.
Dr. Jim Dahle:
Yeah, for sure. It's not an easy question. We all have this dilemma. I guess not all of us, but most docs have this dilemma. At any given time, they've got a debt they could pay down and they're having to choose between that and investing. Whether it's student loans, whether it's car loan, whether it's credit cards, whether it's a mortgage, whether it's a mortgage on a rental property.
Dr. Jim Dahle:
Unless you have no debt at all, you're going to struggle with this question and realize that's totally normal, that everybody else is struggling with it too. And that there's no right answer. There's only a right answer for you and realize that that answer may change as your financial life evolves.
Dr. Jim Dahle:
What's the answer for you when your net worth is $300,000 and you're a 36-year-old doctor might be totally different from what your answer might be when your net worth is $8 million and you're a 58-year-old doc and thinking about retiring. You may have a totally different answer at that point.
Dr. Jim Dahle:
And so, it's pretty impossible to give you a definitive answer. Dave Ramsey would, but I'm not going to give you a definitive answer because I don't think there is one. Both of them can be right. Leverage risk is a lot like taking on market risk. You want to take as much as you can handle without going over. Since you never know exactly how much you can handle, err on the conservative side.
Dr. Disha Spath:
That's a great answer. I'll lead us to the quote of the day. “Never change your long-term investment plan based on short term results.” That kind of encompasses what we've been talking about recently, the I bonds and long-term plans and when to change them, when not to change them.
Dr. Disha Spath:
I think it's important to remember to not change your plan just because of short-term results. If you're going to change any investments, make sure you're keeping your long-term investment plan in mind, and that's how you're making your decision. That's probably when you'll be the happiest with the results.
Dr. Jim Dahle:
Yeah, for sure. Investing is a marathon. Investing is the tour to France. It's not a sprint.
Dr. Disha Spath:
Yeah.
Dr. Jim Dahle:
All right. Let's talk about captive insurance. We got a short Speak Pipe question asking about it. So, let's take a listen.
Dr. Disha Spath:
Okay.
Speaker:
Hi, Jim. My accountant is telling me that I should start thinking of a captive insurance plan due to the very high tax rate that we're having and hopefully a very successful year. What are your thoughts for captive insurance and is this something you think we should pursue? Thanks so much for everything you do.
Dr. Disha Spath:
Okay. I'm going to define captive insurance plans and let Jim take this away then. A captive insurance plan is fully owned and controlled by its insureds. So, it's the type of self-insurance. Basically, instead of paying commercial insurers money, the owner actually invests their own capital and resources and assumes a portion of the risk for the portfolio. Okay. So, Jim, is this something you should do or not?
Dr. Jim Dahle:
Ah, this is one of those things where the devil is in the details. Captive insurance plans can work really well for the right people. And sometimes they only ensure some of the risk and they still pay an insurance company to take on the majority of the risk. Sometimes you're banded together with enough other docs. You're essentially self-insuring.
Dr. Jim Dahle:
For example, my physician group now is, I don't know, 300 or 400 docs or something. And at that sort of size, you start thinking about, “Well, what if we just self-insure? Everyone put their money. Instead of let's pay an insurance company and letting them take their cut for their expenses and their profits, what if we just took all of our premiums, put them into a pot, used them to pay out whatever claims came in and kept the difference?” And you're still pooling risk with other people, but you start going, “What happens if we cut the insurance company out?” And there's a few tax benefits to it as well.
Dr. Jim Dahle:
So, this does make sense for a lot of people. This isn't like whole life insurance, where it makes sense for so few people that there should be a general warning against it. That general warning doesn't exist for captive insurance.
Dr. Jim Dahle:
It's a little bit more like a real estate syndication. You've got to look at it. You've got to do the due diligence. It's going to be right for some people, it's not going to be right for other people. Your particular one that you're looking at may or may not be a good deal. But for the right person, these things work out really well, especially if you end up not having very many claims, because you keep the difference and that's pretty beneficial.
Dr. Jim Dahle:
So, I would definitely look at it. If your accountant thinks it's a good idea, get some quotes, get some more details on it and then make a decision once you have all the information you need to make the decision, but I wouldn't necessarily just shy away from it like it's always a bad deal. This isn't whole life insurance. This isn't a reverse mortgage where they're just not right for almost anybody. It does work out for some docs. So, it's worth looking at.
Dr. Jim Dahle:
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Dr. Jim Dahle:
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Dr. Jim Dahle:
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Dr. Jim Dahle:
All right, reminders. It's September. If you're excited about real estate, we are going to have the WCI real estate course out. It's called “No Hype Real Estate Investing.” It's going to be out in about a week from the time this podcast drops. So, watch for more information next week about that.
Dr. Jim Dahle:
Thanks for those of you who are leaving us five-star reviews in the podcast and you're telling your friends about it. WCI still grows primarily by word of mouth. And so, we appreciate you sharing that with people. Disha, do you want to share our most recent review we got?
Dr. Disha Spath:
Absolutely. “Dr. Dahle, your podcast is truly amazing! I am not an MD, but I listen to your podcast with great enjoyment. It is easy to follow and you cover so many different cases. I love that you have wonderful guests who share great advice. Financial literacy is so important and the earlier you start the better off you will be. Thank you!” Great review. Thank you so much for leaving that.
Dr. Jim Dahle:
All right. I guess we've come to an end of our time. It's been great being with you again, Disha. It's been great being with you, the listener to this podcast. Without you, this podcast doesn't exist.
Dr. Jim Dahle:
We are always looking for better ways to serve you. If you have feedback on the podcast, we love to hear positive feedback publicly, we want the negative feedback privately. So, feel free to email us, send it to me, editor@whitecoatinvestor.com. And we're constantly making changes with this podcast to try to serve you better.
Dr. Jim Dahle:
Until next week, keep your head up, shoulders back. You've got this and we can help. We'll see you next time.
Disclaimer:
The hosts 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 relating to your situation.
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