HSAs, 529s, and Donor Advised Funds
Today's podcast is hosted by both Dr. Dahle and Dr. Spath. They tackle your questions around HSAs—specifically the reimbursement process and if you can reimburse yourself for past expenses before the HSA is open. Hint: You cannot! They also get into opening 529 accounts for family members that are not your children. They talk about charitable giving and the fees that are often associated with that as well as donor advised funds and asset allocation inside of those. They answer a few different asset allocation questions, which is always interesting because determining asset allocation in any category is always personal and the answer to every question is, “It depends.” They also answer questions about TIPS, captive insurance, and more.
HSA Reimbursement Process
“Hi, Dr. Dahle. I appreciate all the work you've done for all of us financially naive folks. I want to ask some questions about how the HSA reimbursement process works. I couldn't find any specifics online. I know as of now you can reimburse yourself at a later date for any previous qualified purchases. Can I only reimburse things purchased during that time when I had a qualified HSA plan? Also, from what I could find, I can reimburse myself for qualified spending of afford dependence, even if they are not covered by the high deductible plan. Does that mean I should have my fiancé keep track of all our pre or prior and upcoming medical expenses in preparation of when we get married? Thanks again.”
Dr. Disha Spath:
The IRS actually has some good information on this in publication 969 on Health Savings Accounts. You cannot reimburse yourself for expenses incurred before the HSA was established. You can reimburse yourself for expenses incurred for you, your spouse, or your dependents once the HSA has been established. That is the rule, and it's published on the irs.gov site. What was the next question?
Dr. Jim Dahle:
He sounds like he's about to get married.
Dr. Disha Spath:
Right. I believe the way you claim HSA reimbursement is you are looking at the end of the year, whoever your dependents are, whoever your beneficiary is, your spouse at the end of the year, and that's how you file your taxes. I think the person would have to be your spouse by the end of the year, right, Jim?
Dr. Jim Dahle:
I think that's right. That's how I'd interpret that rule. It’s not entirely clear; they don't use that as an example. Andy didn't mention his actual wedding date, but I think if it's this year, I think he's OK claiming expenses from those kids from earlier in the year.
Dr. Disha Spath:
Make sure you are actually claiming them as dependents that year, then yes. You can claim dependents if they are living with you. As far as your fiancé goes, as long as she's your spouse by the end of the year, I think you'll be OK. But that is a bit of a gray area.
Dr. Jim Dahle:
I always think you should call the gray areas in your favor. The truth is, 90% of the time you don't get audited. When you do, sometimes you win. And even when you don't win, you can go to tax court and sometimes you win there or you get at least a draw, something better than the auditor gave you. When it is grey, it's okay to call in your favor. A lot of people just aren't aggressive enough on their taxes. I mean, if it's black and white, yes, follow the rules. If it's not black and white and you can make a reasonable argument, go ahead and make a reasonable argument and call it in your favor. That's the way I see taxes.
Dr. Disha Spath:
I am super afraid of the IRS, on the other hand. I super play it safe no matter what. I'm sure I've made some mistakes in the past but thankfully haven't been audited yet. Knock on wood.
More information here:
What Is an HSA Account, and How Do They Work?
HSA Reimbursement for Events Prior to Opening HSA
“Hi, Dr. Dahle. This is Matt from Florida. I had a question about HSA accounts. I understand that you could use HSA accounts to basically reimburse yourself for healthcare expenditures. But I had a question about the timing of this. If I keep track of all my healthcare expenditures now but do not currently have an HSA, if I open an HSA in the future, let's say 5-10 years from now and keep track of all of my funding and all of my receipts, will I be able to reimburse myself for healthcare expenditures that I had prior to opening the HSA?”
Dr. Disha Spath:
Same question and same answer. No, you can't, unfortunately. The HSA has to be open. You can deduct your medical expenses—if it's past a certain threshold if you're having a lot of medical expenses—just from your taxes if you don't have an HSA. But that depends on whether you're itemizing or not.
Dr. Jim Dahle:
You have to have a lot of expenses when you're a doc, right? Because there's a floor, it's 7.5% of your adjusted gross income; 7.5% of your adjusted gross income as a physician is typically more than your maximum out-of-pocket. I mean, it's $15,000, $30,000, right? It's a lot of medical expenses. So, you've got to have something that your insurance doesn't cover really for that to work out as a physician.
More information here:
7 Reasons an HSA Should Be Your Favorite Investing Account
Opening 529 Accounts for People That Are Not Your Children
“Hey Jim, thanks for what you do. My husband and I are a couple of DINKWADs—double income, no kids with a dog out in Nevada—with no state income tax. We're already taking care of ourselves and funding our retirement accounts in order to reach our goals. We have no plans for kids of our own. You've mentioned in the past how you have several 529 accounts for nieces and nephews, and that's something we're thinking about as well. But I've never opened a 529 account before, so I'm a little in the dark about some of the logistics.
For example, do we have to contact our separate HR departments at our employers and get funds deducted from our paychecks and then divvy the accounts up from there? Do we open different accounts at Vanguard and then contribute post-tax money and then later ask for deductions when filing taxes? We do have an accountant that helps with our taxes, so I'd have to make sure to get them the right forms. Do we open the accounts in our names and then transfer partial funds or funds in whole when the kids do start college? Lastly, can this ever be done as a surprise for our family members, or do we really need to know specific information like Social Security numbers and birthdays with, of course, blessings and buy-in from the parents as well? I really appreciate your help as I'm a little bit in the dark about 529 accounts. Thanks so much.”
Dr. Jim Dahle:
This is not as complicated as you think it is. A 529 is really easy, but you have to remember that you have 50 choices, 50-plus choices, when it comes to a 529. 529s are state specific. You want to make sure you're opening the right 529 for you to get the maximum benefits out of it. You need to look up your state. In Nevada, you're not going to get a state tax break. So, you can use any plan you want. You can use the Nevada one, which is fine. Vanguard administers that, or you can use something like in Utah. I think when I reviewed 529s this year, Michigan came out on top. You could open one in Michigan. New York’s tends to usually be pretty good. Ohio's tends to usually be pretty good. But you can open one anywhere. You just go there, and you go to the 529 program. You open an account there. You need to go to the Nevada 529. It's run through Vanguard, but you don't just go to your regular Vanguard account, I don't think, and open that one. You've got to go through the 529 platform.
Here's the deal. It's still your money, technically. It's fine to not put your name as the beneficiary. You can put your nieces and nephews as the beneficiaries. You don't have to use your name and then transfer it to them unless you're trying to make this a huge surprise. But you're going to need information to open it. You're going to need a Social Security number. You're going to need a birth date in order to open this. Without that information, you can't designate them as a beneficiary. You could keep it a secret from the kid, but you're going to have a hard time keeping it a secret from the parents. If you truly want to keep it a secret from everybody, you have to make yourself the beneficiary and you can get the information later when you bust this secret open. But what I would do is I would just open one in the name of each niece and nephew. I speak from experience. This is what I do. I have one for each of my nieces and nephews, and then you can put as much money in there each year as you desire—up to I think $16,000 a year is the limitation. Then, you choose the investments inside the account. It's as easy as that. It's just like opening an IRA; it's no harder than that, opening up each of these accounts. Now you will have a bunch of accounts. If you have six nieces and nephews, you're going to have six accounts to keep track of. But it's not terrible.
Dr. Disha Spath:
You have to remember there's no federal tax deduction for contributing to a 529. So, there's no reason to have your employer deduct it pre-tax or anything. But they do grow tax-free, and they aren't taxed at withdrawal. That's the tax benefit of 529s. If you do have a state tax benefit, you can do that at the end of the year, but, unfortunately, Nevada doesn't. But I think that's a great idea and what a kind gesture to do for your family members. You really must be commended for even thinking about it. It's lovely.
Dr. Jim Dahle:
Absolutely, super kind. But 529s are like IRAs. They're things you do individually. They have nothing to do with your employer. You can run HSA contributions through an employer or you can do them yourself. That one can go either way. A 401(k) is always through your employer, but IRAs and 529s have nothing to do with your employer. Don't try to go to your employer and do this.
More information here:
Charitable Giving and Fees
“You've covered the issue of tax efficient and religiously ethical giving many times on your podcast and blog, which I appreciate. When trying to donate to a charity this month, I tried donating online. Traditionally, I have avoided using credit cards, because I heard they have a fee associated with them favoring direct transfers, debit cards, and PayPal instead. However, I'm realizing now with a little research that the latter two may also have fees associated with them. The charity's only getting 98 cents on the dollar donated. Additionally, some charities don't do direct transfers anymore. I'm a resident, so I don't have the good fortune of giving from a donor advised fund or donating appreciated shares offsetting with tax-loss harvesting. So, what is the most efficient way to make sure this charity gets every dollar intended for them? Do I have to throw a paper check in the mail, slap a stamp on it, and send it to them? Or just swallow the fees, pay the difference so the charity gets how much I'm trying to give them and roll my eyes at the middle man?”
Dr. Jim Dahle:
There's a lot that goes into efficiency, right? What are you trying to save? Are you trying to save the charity that 2%? Now that matters if you're giving them $10,000; 2% of $10,000 is $200. Two percent of $25 is almost nothing. If you're going to spend more on the stamp and they're going to spend more on somebody opening the envelope and going to the bank and depositing your check, then maybe you're better off just paying the 2% via PayPal, Venmo, credit card, debit card, or whatever.
If it's a huge amount, maybe it's worth the effort to send a check. There's also the risk to you of sending a check. Someone could open the check at some point in transit and steal your identity, that sort of a thing. So, there's some risk there, as well. You have to keep that in mind when you're also trying to be efficient. I don’t know, what would you do, Disha? What would you do if you're trying to give money to charity and trying to make sure the charity gets as much of it as possible?
Dr. Disha Spath:
The fees suck. Most of the time, I just end up rolling my eyes and giving as much as I have budgeted for. I look at it as the cost of transaction. There is a reason the fees are there. It's because it costs money to move things around, and these companies have people they need to pay. I generally just give what I had planned on giving and don't account for the fees.
Dr. Jim Dahle:
Do you give it on a credit card or with a physical check?
Dr. Disha Spath:
It depends on what I'm giving to. Most of the time, I do write a check, honestly. But there have been times where I've signed up through a site, if it's a charitable event or something like that. Those are usually through PayPal or a credit card. But I don't have a donor advised fund either.
Dr. Jim Dahle:
Ours are all through donor advised funds, but in the end, somebody's got to process it. I don't know how much you're saving. The reason charities take credit cards is the same reason we take credit cards for WCICON or if you go to the WCI store. It is just convenient. It saves you time; saves them time. And of course, there's a price for that. Charities also know that you're more likely to give more if you're using a credit card because it's not as painful as giving the green stuff. It's not as painful as writing a check. They're not going to stop taking credit cards even though it costs them. Honestly, it's probably more than 2%; it's probably 2.9% or 3% to 4% on their credit card fees. It's expensive to take credit cards as a business. Taking credit cards is a major business expense of The White Coat Investor.
Investing in a Donor Advised Fund
“Hi Jim. I'm a long-time listener and reader, but a first-time caller. My wife and I are turning 40 next year, but we have met most of our financial goals. We set an inflation-adjusted net worth cap for ourselves of $4.5 million and an inflation-adjusted consumption cap of $140,000 a year. We plan to give the rest of our money away. My question is, if you could give us some thoughts on asset allocation inside of a donor advised fund. We're likely going to be contributing something near $500,000 a year into the DAF. And we already have another $500,000 in the DAF. We're currently dispersing about $250,000 a year to charities. That will hopefully grow as we find charities that are doing good work, as we don't want to pile up a huge amount of funds in the DAF. We do intend for whatever's left in the DAF to get split between our kids as part of their inheritance, but we would rather give while we're living. Currently I have the DAF split into one-third total US, one-third total international, and one-third bonds with Fidelity Charitable. I'm not sure if I'm thinking about this correctly, but if the market is down, I give out of the bond side. If the market is up, I give out of the equity side, and if everything is down, I give out of incoming cash that we're contributing to the DAF. Do you have any thoughts on our approach? I appreciate your insight.”
Dr. Jim Dahle:
On an asset allocation question, the answer is always, “It depends.” It depends on you and your risk tolerance and so on and so forth. But we should talk a little bit about DAFs and some of their advantages and give you some food for thought as you consider that. The first thing to consider is that this is a tax-protected account, just like your 401(k), just like your IRA, just like a 529. What does that mean? It means you can change anytime you want. There are no tax consequences. You're not going to have to pay capital gains taxes. You can change from one thing to another and no big deal. You can change your asset allocation as needed. I believe when you designate a gift to a charity out of the DAF, or the donor advised fund, you don't choose which fund it comes out of. It comes out of all of them equally with most of these DAFs is the way I understand them.
You can get around that because there's no cost to change asset allocations. If you want to give it out of bonds, for instance, because the market is down, you could simply change the asset allocation so it's more aggressive on the same day you designate the gift. If you have $300,000 in there—$100,000 in US stocks, $100,000 in international stocks, and $100,000 in bonds—and you're going to give $100,000, well, you designate the gift for $100,000 and you change the asset allocation to 50% US stocks, 50% international stocks. That's the way you could do that. But you can't technically say just give the bonds. You've got to make those adjustments as you go.
That's not a bad way to do it. If you're going to give the money soon, I think you ought to just keep it in cash. That's what I've done most of the time with the DAF. I put the stocks in there, sell them, and give them as cash within a week or so. But if you're actually going to keep money in there and build it up and build a foundation-like DAF, then you've got to actually think about asset allocation. I think it's one of those things you can be pretty aggressive about. The goal is to give as much charity as you can. You can invest it pretty aggressively. It's not going to break your heart if the market fluctuates, because it's not really your money anymore. Just like I'm aggressive in the 529s, I feel like in that situation you can be pretty aggressive in the DAF, especially if you're willing to just say, “Well, I'll just give out cash this year and let that money continue to ride in a downturn.” Disha, what are your thoughts on how to invest in a DAF?
Dr. Disha Spath:
I agree with you. If you have all the time in the world and you're 40, and you plan on contributing to this account and it sounds like you have significant amounts of funds, you could take significant risk with a lot of it and give cash and still make really meaningful contributions every year not dependent on what the market's doing. The DAF functions more like you as an investor on its own in having a high-cash cushion so that it can withstand the market forces. I agree with you, Jim.
Dr. Jim Dahle:
This is a good time to tell you about one of our new partners. We have a new affiliate partner. As the disclosure, we get paid if you use them through this link. But we think this is a great company. They are called Charityvest. And if I was opening a new DAF today, this is who I'd open it with. Our affiliate link is whitecoatinvestor.com/charityvest if you want to help support the site when you open an account.
With Charityvest, there are no fees to open an account. There's also no minimum balance. There's no minimum contribution. This is the big beef people have with Vanguard. You have to open the account with $25,000. You also have to make grants; I think the minimum grant of Vanguard is like $500. Fidelity’s amounts are lower, but Charityvest is even lower. If you want to invest your balance, you can do that in an efficient ETF portfolio. The expense ratio is 0.05%-0.11%, just like what you'd get at Vanguard, just like what you get at the best of Fidelity.
When you do a grant, there are zero transaction fees. All of your money goes to charity. This is a no brainer DAF. I think this is the best DAF out there. It might not be quite as slick if all your stuff's at Vanguard to use Vanguard or if all your stuff's at Fidelity to use Fidelity. But I think it's pretty darn close. If you're interested in opening a DAF and especially if you don't want to have a bunch of real high minimum contributions—minimum amounts that you can grant to the charities—I think Charityvest is a great choice. Check that out at whitecoatinvestor.com/charityvest.
More information here:
Should You Use a Donor Advised Fund?
Captive Insurance
“I just listened to podcast No. 278, which concluded with a question about captive insurance. The listener was pitched some captive insurance program by their accountant with the primary stated goal of tax reduction. Your answer that captive insurance can make sense in some situations was correct. But I worry you may not be aware that captive insurance or micro captive insurance is also a tax-evasion strategy pitched by promoters who I'm sure take handsome fees for setting it up.”
Dr. Jim Dahle:
Remember, tax evasion is bad. Tax evasion is a crime. Tax avoidance is legal. But tax evasion is bad.
“I have no personal experience with it, but from what I've read online, the idea is to set up a captive insurance company with the right elections such that underwriting profits are taxed as long-term capital gains. Then, the parent business pays as much deductible insurance premium as possible. In some cases, barely under the $2.2 million per year limit based on ensuring fake and/or grossly exaggerated risks.
The IRS has been cracking down with harsh penalties and made micro captive insurance a transaction of interest in 2016, which I believe means it's required to be reported on Form 8886. Not to be confused with 8606. There have also been some recent tax court cases that have not gone well for the perpetrators of this strategy. I thought you should be aware of this, if you were not already. My first response to the listener would've been a warning not to be lured into a tax evasion trap, if that's what's being pitched to him.”
Dr. Jim Dahle:
I think this is a good warning. You should be aware of this. There are a lot of scammers in this space. This is a lot like conservation easements in that pigs get rich, hogs get slaughtered. With the conservation easement, the problem is people start saying their land is worth tons more than it actually is worth. It becomes a listed transaction. The IRS looks at it very closely. Just like that, captive insurance is looked at very closely. That doesn't mean you can't do it. It just means you have to follow the rules. It has to actually be the cost of insurance. You can't inflate it. If someone is telling you about a situation where the tax savings seems ridiculously high, it probably is. Get a second opinion. Talk to your attorney. Talk to your accountant. Is this legit? Are we going too far with it? You don't want to get involved in these sorts of scams.
But there is savings there. Captive insurance works for lots of groups. The bigger the group, the better it tends to work. If you look at it like a state university, this is what they're doing. They're a captive insurance company. They're basically self-insured by the state, by the taxpayers of the state. Your state university isn't going out and buying malpractice insurance like I am with my private group. They are self-insuring. In a lot of ways, that's what captive insurance is. And you can ensure all of the risk. You can ensure part of the risk. It just depends.
More information here:
Tax Avoidance vs. Tax Evasion — What’s the Difference?
Asset Allocation
“Hi Jim, this is Joseph from the Northeast. Two questions came to mind after listening to podcast 280 on asset allocation. No. 1, are you aware of any data as to whether there's a higher percentage of investments being in index funds now vs. individual stocks compared to 10, 20 years ago? If this is the case and there's a large shift to index investing compared to individual stocks, would this affect future returns? For example, say half the investments in the US were now into VTSAX, Vanguard's Total US Stock Market Fund. How would this theoretically affect performance? Bill Bernstein's idea of skating to where the puck was comes to mind. If the benefits of index investing become so well known that everyone is doing it, will it still work?
Question 2: regarding including international exposure to one's portfolio, one argument I've heard from people who only invest in US equities is that with globalization nowadays, you have enough exposure to international companies with a total US market fund. I’m curious to hear your thoughts on this.”
Dr. Disha Spath:
What if everyone is doing index investing? Would it work less? I've thought about this before, and honestly, I can't see a world where everyone is investing in index funds. They're basically investing in all of the companies in the United States. Would that hurt the stock market? Would that hurt my returns? I don't think so. I'm a long-term holder of investments. As long as the companies do well, as long as the economy is sustained and our country is alive and as long as our companies continue to produce goods of value, I think we'll be just fine. Even if everyone is investing in index funds. Honestly, everyone is investing in index funds. Even people that are just automatically investing in their target date funds and their retirement accounts, most of those are index funds. We've done just fine because people are saving and investing and giving their money to companies to help them grow. I don't think that's a losing scenario.
Dr. Jim Dahle:
If you go back 50 or 60 years ago, the majority of stocks were owned by mom-and-pop investors, mostly directly. We're talking like 1960, right? If you go back that far, that's how they were owned. Probably only 10% were owned by institutions. That statistic has reversed. These days, 90% of the stocks are owned by institutions. Whether they're pension funds, whether they're mutual funds, hedge funds, whatever. The market has changed in that respect. Index funds have also become dramatically more popular since they popped up in 1975. A lot more money is going to index funds than into actively managed funds. The way I usually hear this question is, “What if everyone is putting everything into index funds? Just kind of blind, know nothing, not caring about valuations of the company. Is that going to distort the market?” I don't know what the percentage is. It might be as high as something like 30% now going into index funds.
But the point is that you only need a few people concerned about valuations who are actually going, “Well, maybe we shouldn't put as much money into index funds as we should into Apple.” You only need a relatively small amount of money from people that are actually trying to figure out which companies are more valuable in order to set the prices. I think it'd be fine if 90% of the money invested in the market was invested in index funds. We're nowhere near 90%. We're much less than that as index funds. When it starts to be more than that, I would worry about the market not being as efficient as it should be. Because it's true. Index fund investors are piggybacking on the active investors. The active investors are trying to figure out what things are worth and only buy the things that are undervalued and so on and so forth.
The index fund investors are just taking advantage of the work being done by the active investors who are doing that price discovery process. I think we're a long way from it really being a problem. But could it be a problem if everybody did it? I guess it would be because we'd be buying stock in a company that's totally worthless if nobody's paying attention to what the company's actually worth. But I agree with you. In the long run, what you're going to earn is what those companies are earning. The speculative component of investing in the stock market drops out over the long run. And all you're left with is the dividends and the increase in earnings per share that you're seeing from it.
The second question is about international stocks. I'm getting this question a lot. Why are we getting this question a lot? We're getting this question a lot because US stocks have outperformed international stocks by so much over the last 10 years that people are trying to justify not owning international stocks anymore. If that is you, if that is the reason you're asking this question, if that's why you're thinking about dropping international stocks, be careful about performance chasing. The pendulum swings back and forth. Sometimes US stocks outperform, sometimes international stocks outperform. If you're always chasing performance, you're going to underperform. If you just pick a ratio—and I don't care what the ratio is, I don't care if 5% of your money is international, I don't care if 50% of your money is international—in the long run, you're probably going to do about the same. But you have to stick with your plan. That's really important. I think that's the first point that should be made anytime people ask this question.
Now, should you put zero in there? That's not crazy, right? US companies do make money from overseas transactions. It's not crazy to be all US. Jack Bogle was a big fan of being all US. I don't buy it. I think it's worthwhile owning these other companies. I think you get additional diversification. If you only invest in the US, look at all the great companies you're not owning. You're not owning BP, you're not owning Nestle, you're not owning Toyota. Even though these companies also sell stuff in the US, you are not owning them. I think you can be more diversified by having some sort of allocation to international stocks. I think it's also important to recognize why US stocks have outperformed so much in the last few years, and there are really two factors. They really don't have a lot to do with where the company is located.
The first one is currency. The dollar has strengthened a lot in the last few years. In fact, a dollar is worth almost as much as both a euro and a British pound sterling, which is very different from the way it's been in the last few years. This tailwind that US stocks have had is simply from currency exchange rate fluctuations. If you know anything about currency exchange rates, they fluctuate. They go both ways. When they go back the other way, international stocks are going to have a tailwind, and they're going to look a little bit better. The other thing you have to know about international stocks is a lot more of them are what you would consider value stocks. They are smaller than US companies. They are more value than US companies. Over the last decade, large and growth has outperformed small and value. Those two factors explain most of the underperformance of international stocks over the last decade. As you know, on all of those factors, the pendulum swings.
I think bailing out of international stocks now is probably not a great idea. Obviously, if you go back 10 years with your time machine and bail out of them and only invest in US stocks for the last 10 years, you would do that. But that's not your option. That's not the decision you have to make. You have to make a decision going forward. How much do you have in international stocks, Disha?
Dr. Disha Spath:
I have allocated 20% of my stock allocation to internationals, I believe.
Dr. Jim Dahle:
I've allocated 33% of my stock allocation. That works out to be 20% of my portfolio. That's what I have overseas. I think it's a reasonable amount. I rebalance back to it every year. Think of it this way. Right now, when you're buying international stocks, you're buying them at a discount. I don't know what the PE ratios are right now, but for international, it's like 10 or 12; for the US, it's like 17 or 19. You're getting a lot more earnings for your dollar that you're buying in international stocks right now. It's kind of a value play in that respect.
More information here:
Happy Anniversary to the Index Fund—Which, by the Way, Was NOT Invented by Jack Bogle
My Favorite Mutual Fund is VTSAX
TIPS
“Is buying individual TIPS bonds an alternative to consider rather than TIPS funds since they can't lose value? TIPS fund losses will all come out in a wash for long-term investors, but recent experience seems to disqualify them for being a short-term hedge against unexpected inflation, particularly while in retirement. If you start early and invest in I bonds, even when they aren't yielding much, I suppose you could amass half a million in pretty good inflation protection. Maybe inflation protection is a central goal of all investing generally and shouldn't be chased specifically. I guess what I'm asking is if unexpected inflation hits in 30 years when I'm in retirement, what lessons do you think I should have learned during this current inflationary period to be prepared?”
Dr. Jim Dahle:
What advice would you give them about inflation?
Dr. Disha Spath:
I think, in general, inflation will happen, and that's why we do invest. I think you're right in that general investing is inflation protection. In that you are not letting your money sit and deflate in your cash accounts. Should you be chasing inflation returns? That's the question that most people have been asking with these I bonds recently. Is it worth it? Should I be changing my asset allocation just because of the current market conditions? I've decided not to personally. I'm not chasing the inflation returns and putting things into bonds that I had not otherwise planned on.
As far as what lessons should we learn in this current inflationary period to be prepared, I think generally people that had cash reserves, people that had a financial plan, people that have good jobs that will continue to pay the rent and pay the mortgage are sitting better. People that were highly leveraged were at more risk during this current downturn and inflationary period. Generally, frugal habits, I think, pay off in the long term, and saving pays off in the long term. That would be my very overly simplistic idea. What about you, Jim? Give us some answers here.
Dr. Jim Dahle:
I think that's the key. Let's be simple. Inflation is a big deal. You have to understand as an investor that inflation is a big deal. But you know what? Inflation was a big deal 10 years ago. Not because inflation was high, but because the risk was there. The risk didn't show up until 2021/2022. The risk has been there, and you should as an investor be concerned about inflation. It is a problem when inflation goes to 10%, when inflation goes to 20%, even at 5%. It is eroding the value of what you have. You’ve got to keep up with inflation.
An investor has really three big enemies. The fees and expenses of investing, especially if you're not wise and Wall Street is ripping you off and charging you way too much. That's a big issue. Taxes are a big issue. You’ve got to be aware of taxes and their effect on slowing down the growth of your investments. But you've got to outpace inflation. It's probably bigger than both of those. It acts as a tax, right? This is how we get rid of federal debt. We make it easier to pay it back. We get all this federal debt at low-interest rates, and all of a sudden, now you have more money to pay it back with because of inflation. You've got to position your portfolio against inflation. Bill Bernstein talks about the four deep risks: inflation, deflation, confiscation, and devastation. Guess which one's most common? Inflation. Historical record shows that inflation is most common. Your whole portfolio needs to be designed to not only keep up with but best inflation. How do you do that? You do that by taking risk most of the time with stocks. With stock, you own a company. What does a company do in inflationary times? It charges more for its products, for its goods and services. In the long run, stocks tend to keep up with inflation. In the short run, there's no guarantees of anything.
Real estate tends to be leveraged often with fixed low-interest rate debt. That's a great thing when inflation starts making it easier to pay back that debt. Plus, you own this hard asset that is appreciating in value. Just like any other company, you can increase the price for the goods and services you charge. In this case, housing. Essentially, you're raising rents in inflationary periods, and so that helps you to keep up. I think real estate is particularly good at keeping up with inflation, again, in the long run. Bonds tend not to be awesome in inflation in general. But over the last 20 years, we've come up with a few types of bonds that are better about inflation than traditional nominal bonds have been. These are both TIPS and I bonds. They're both inflation-indexed bonds. I have an allocation in my portfolio I have for many, many years to inflation-indexed bonds. It's 10% of my portfolio. Twenty percent of my portfolio is in bonds; 10% of that—or half of it—is in inflation-indexed bonds. I have this asset class. I've had it for many years to protect against unexpected inflation.
The bummer this year is that the fact that they are bonds seems to be more than the effect from the increase in inflation. As interest rates go up, because they're bonds, that also depresses their price despite the fact that you're getting a higher benefit from the inflation. TIPS are actually down on the year, but if you look at them compared to nominal bonds, they are doing better than nominal bonds. I looked up bonds last night, and they're down like 15% on the year, the US bond market. But if you look up TIPS specifically, they're doing better than that. I'll look it up right now as we're talking. Year to date, they're down about 11%, 12%. It is better than nominal bonds. And that's just with a longer duration but still not awesome. It's hard to get really excited about having something you thought was going to protect you from inflation. Inflation shows up, and you're down 12%.
On the other hand, I bonds have been awesome. You never lose value in I bonds, and they're paying more than 9% right now. They're a pretty darn good investment this year. It's just that you can only buy $10,000 a year; $10,000 for you, $10,000 for your spouse, $10,000 for your kids, $10,000 for your businesses, $10,000 for your trust. There are ways to get around the $10,000 limit, including $5,000 with your tax return, but you're limited if you want to go dump in a half-million dollars into I bonds, it just doesn't work very well. I bonds are pretty awesome right now, but you're right that you have to have been buying them as you go along.
What was his other question? He asked about individual TIPS vs. TIPS funds. Both have their advantages. I've bought TIPS in both ways. I use a fund in my tax-protected accounts for ease of use. As I'm moving TIPS, unfortunately, into taxable, because I'm running out of tax-protected space, I'm actually buying individual TIPS at TreasuryDirect. I bought both. They both have their advantages. With an individual TIPS, you're going to get all the principal back. With the TIPS fund, you get a little bit more diversification, more liquidity, more convenience. You have to weigh those factors against each other. I wouldn't necessarily say one is bad and one is good. I think both are fine. It's really up to you and how you want to implement TIPS in your portfolio.
Correction — Episode 279
We got an email from a reader with a correction to episode 279 that said,
“8:56 of the Roth episode number 279, Dr. Dahle talked about estate tax implications of Roth and standard retirement plan options and stated that a Roth conversion could save on estate taxes in some situations, because the stupid IRS, they look at a dollar in a Roth account as exactly the same as a dollar in a tax deferred account. I believe that statement may be incorrect. More specifically, while the statement may be technically true, I believe the beneficiary of a tax-deferred account can reverse the effect of estate taxes due on the value of the tax-deferred account with the application of internal revenue code 691(c). Page 12 of publication 559 says, ‘Income that the decedent had a right to receive is included in the decedent's gross estate and is subject to estate tax. This income in respect of a decedent is also taxed when received by the recipient (estate or beneficiary).'”
And this is the important part.
“However, an income tax deduction is allowed to the recipient for the estate tax paid on the income.”
I didn't know that. That was news to me. I didn't realize that you could get a deduction for estate taxes paid due to having it in a tax-deferred account. Apparently, a Roth conversion is not quite as good of an estate tax move as I thought it was beforehand. There's a great Michael Kitces article on it called “The IRD Deduction That Inherited IRA Beneficiaries Often Miss.” Check that out for more information.
Sponsor
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WCICON23
Registration for WCICON23 is now open! Be sure to register early so you are assured to get a ticket! We expect this amazing event to sell out this year. Plus, if you register early, you get the early bird price of $1,699. That is a $300 savings. We have incredible speakers lined up as well as tons of wellness activities like golf, tennis, and pickleball. Plus, who doesn't love sunny Phoenix in the winter? Don't miss out on this incredible experience! Register today at www.wcievents.com.
Quote of the Day
Dr. William Bernstein said,
“As an investing adult, you can take solace in the knowledge that the overwhelming majority of investors aren't adults. You're almost certainly running faster than your cohorts being chased by the demographic and capital returns bears, so you likely won't be caught and eaten by them.”
Milestone to Millionaire
#87 — Flight Surgeon Building Wealth
You can still build wealth with a low six-figure income. You will have to be a lot more deliberate about your finances, but this doctor demonstrates how this can be done.
Sponsor: DLP Capital
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. Disha Spath:
Welcome back to another episode of the White Coat Investor podcast. I'm your host, Dr. Disha Spath, and I'm here with Dr. Jim Dahle. Today's episode is number 284 – HSAs, 529s and donor advised funds.
Dr. Disha Spath:
We're so grateful for you for being here and we're asking for you to record a Speak Pipe for us about what you're grateful for, for our Thanksgiving episode. So please take a second and record us a gratitude Speak Pipe, and we'd be happy to include it in our Thanksgiving episode.
Dr. Disha Spath:
Today's episode is sponsored by Laurel Road. Laurel Road is committed to serving the financial needs of doctors, including helping you manage medical student debt. When you open a Laurel Road checking account during student loan refinancing, you can get an additional rate discount with qualifying direct deposits plus White Coat Investor readers get a special cash bonus when they refinance with Laurel Road. With no application or origination fees, check your personalized rate options in only a few minutes.
Dr. Disha Spath:
For terms and conditions please use www.laurelroad.com/wci. Laurel Road is a brand of KeyBank N.A. Member FDIC, and an equal housing lender, NMLS #399797.
Dr. Disha Spath:
So, Jim, what have you been up to recently?
Dr. Jim Dahle:
I actually just got back. I just got back from LA last night. I was at PIMDCON, which is Peter Kim's conference for Passive Income MD. He does a conference every fall, just like we do a conference every spring. And this was the first time since before the pandemic in 2019 that we got together in person out there. And it was awesome. You forget how cool it is just to be at a conference in person after all these virtual conferences.
Dr. Disha Spath:
I saw the pictures. They looked awesome. You had Brandon Turner over there.
Dr. Jim Dahle:
Yeah, Brandon Turner was one of the keynote speakers. So, that was fun.
Dr. Disha Spath:
Amazing.
Dr. Jim Dahle:
And he talked a lot about the levels of leadership and basically said the ideals to get to this highest level where you just provide the energy for the company and everybody else does the work. And I'm like, “Oh, that sounds pretty good. I'm just going to provide energy from now on.”
Dr. Disha Spath:
I love it. We love your energy, so please stay around and make sure that's here.
Dr. Jim Dahle:
Yeah, unfortunately I haven't figured out how to do quite what he's doing, which is working less than five hours a week. I haven't figured out how to do that in WCI yet, but maybe someday.
Dr. Disha Spath:
In Hawaii.
Dr. Jim Dahle:
Yeah, exactly. But the interesting thing is we also have a conference. WCICON is coming up. In fact, three days ago, registration opened and we're recording this on September 26th. So, it's entirely possible the conference is already sold out by the time you hear this. I hope not. I hope it takes more than an hour to sell out because then a lot of people that really wanted to come will get to come. But it's entirely possible to sell out this year.
Dr. Jim Dahle:
Last time we opened the conference, it was the exact same prices as today. We haven't increased the price with inflation or anything. And last time we were enrolling registration during Omicron. So, now that we're kind of more or less past the pandemic, at least in the eyes of most people, we expect registration to go a lot faster and we're probably going to be a lot more full at the conference.
Dr. Jim Dahle:
So if you want to come, early bird registration is currently open. You may have already actually registered, but if not, remember this year's WCICON has been preapproved 17 CME and Dental CE credits are available.
Dr. Jim Dahle:
So, you can use your CME funds for this. If you are self-employed, you can write this off as a business expense. This really is the conference you want to be at to give you the tools, the time and the networking to help you create a mindset and habits for overcoming burnout and strengthening your wellness as a physician.
Dr. Jim Dahle:
With the financial literacy tracks as well, this conference will help you take the next steps for your financial goals. We've heard from so many that this is really the best physician wellness conference out there, so we hope you'll come and be with us in person.
Dr. Jim Dahle:
And if you can't make it in person this year, we're again going to have virtual options. You can sign up for those now as well. But now is really the time for those who want to come in person, to make sure you get to come. Go register, wcievents.com is where you do it. You get all the details about the different types of registrations and levels of registration and to get all the details.
Dr. Jim Dahle:
Early bird registration, if this thing isn't selling out, ends November 7th at midnight. So, you have a couple of weeks if it's not selling out, but no promises, this thing might be full by the time you're hearing this even.
Dr. Jim Dahle:
So, if you want to come, I would register early. There's really not much downside to registering early. You ensure you're going to go. You get the best price. It's great. All good.
Dr. Disha Spath:
Yeah, I'm telling all my friends to register right now because this conference is amazing and it's also really good not only for really advanced people where we have a lot of content for advanced finance folks, we also have content for beginners.
Dr. Disha Spath:
So, if you have any friends that you really wish would just read the book but won't, invite them out, invite them out to the White Coat Investor conference in Phoenix. It's going to be in March. Weather is going to be beautiful. And we have the beginner track where they can learn all the basics that they need to know and then come have fun with us. We'll play golf, we'll play tennis, we'll play pickleball. You could take on Jim, or you could take on me in tennis and we will have a great time. So please come.
Dr. Jim Dahle:
We've got a new employee at WCI. And their family is totally into tennis, so we got new tennis people too. So, tennis is going to be bigger.
Dr. Disha Spath:
Yes. I love it.
Dr. Jim Dahle:
Tell them what you're going to be doing at the conference, Disha.
Dr. Disha Spath:
I am going to be your host. And now we are also hosting a women's track, women's two-hour breakout session where we're going to be talking only about women issues, finance issues that apply to women.
Dr. Disha Spath:
Speaking of, we just had a wonderful happy hour, Jim, where many of the White Coat Investor women showed up and shared their journeys, shared their insights. We talked about everything from traveling and getting pick pocketed in Florence and keeping our money safe there to investing for kids and being the sandwich generation, taking care of our elders and our children at the same time.
Dr. Disha Spath:
And so, we're going to try to make this a monthly thing. So, we will have details coming out soon about the next one. I hope if you're a woman listening, that you come in and just help us create a sense of community for the WCI women community, and get to know each other, hang out, have a drink, and have some fun.
Dr. Jim Dahle:
Awesome. All right, here's my least favorite part of the episode. We got to do a correction. Here's the fun part about doing this. The audience is big enough that when I screw something up, we hear about it and that's good because we can fix it.
Dr. Disha Spath:
Yes. Peer reviewed.
Dr. Jim Dahle:
Yeah. Peer reviewed, that's right. With a blog post, I can often fix it before you even notice. That actually happens a lot, believe it or not. But with the podcast it's a lot more obvious when we're doing a correction. We don't usually go back and correct the episode. We just announce it in the future episode.
Dr. Jim Dahle:
At any rate, I get this email from someone who says that “856 of the Roth episode number 279, Dr. Dahle talked about estate tax implications of Roth and standard retirement plan options, and stated that a Roth conversion could save on estate taxes in some situations, because the stupid IRS, they look at a dollar in a Roth account as exactly the same as a dollar in a tax deferred account.”
Dr. Jim Dahle:
I believe that statement may be incorrect. More specifically, while the statement may be technically true, I believe the beneficiary of a tax deferred account can reverse the effect of estate tax is due on the value of the tax deferred account with the application of internal revenue code 691(c).
Dr. Jim Dahle:
And he includes a citation from page 12 of publication 559, which says “Income that the decedent had a right to receive is included in the decedent's gross estate and is subject to estate tax. This income in respect of a decedent is also taxed when received by the recipient (estate or beneficiary).” And this is the important part. “However, an income tax deduction is allowed to the recipient for the estate tax paid on the income.”
Dr. Jim Dahle:
I didn't know that. That was news to me. I didn't realize that you could get a deduction for estate taxes paid due to having it in a tax deferred account. So apparently a Roth conversion is not quite as good of an estate tax move as I thought it was beforehand.
Dr. Jim Dahle:
You can get more information on that. There's a great Michael Kitces article on it called “The IRD Deduction That Inherited IRA Beneficiaries Often Miss.” So, you can check that out. We'll put a link to it in the show notes.
Dr. Disha Spath:
Awesome. Well, it takes a strong man to admit when he's wrong, Jim.
Dr. Jim Dahle:
Well, the interesting thing is it feels like over the years this podcast has gotten more and more into the weeds. This is a pretty far out there question. Most people getting into personal finance don't think about stuff like this. And when you get out there, there's a lot to know and a lot to learn and stuff that changes and nobody can really know it all. So, when I do make a mistake, we do want to hear from you privately please. Don't blast me on social media, just send me an email, we'll get it corrected.
Dr. Disha Spath:
Absolutely.
Dr. Jim Dahle:
All right. Let's try to be better today. Let's take some questions and see if we can get them right the first time.
Dr. Jim Dahle:
All right, our first one is about HSA reimbursement process. Let's take a listen to Andy's question.
Andy:
Hi, Dr. Dahle. I appreciate all the work you've done for all of us financially naive folks. I want to ask some questions about how the HSA reimbursement process works. I couldn't find any specifics online.
Andy:
I know as of now you can reimburse yourself at a later date for any previous qualified purchases. Can I only reimburse things purchased during that time when I had a qualified HSA plan?
Andy:
Also, from what I could find, I can reimburse myself for qualified spending of afford dependence, even if they are not covered by the high deductible plan. Does that mean I should have my fiancé keep track of all our pre or prior and upcoming medical expenses in preparation of when we get married? Thanks again.
Dr. Disha Spath:
Okay, Andy, great question. The IRS actually has some good information on this, in publication 969 on health savings accounts. You cannot reimburse yourself for expenses incurred before the HSA was established. You can reimburse yourself for expenses incurred for you, your spouse or your dependents once the HSA has been established. So that is the rule and it's published on the irs.gov site. What was the next question?
Dr. Jim Dahle:
He sounds like he's about to get married.
Dr. Disha Spath:
Right. I believe the way you claim HSA reimbursement is you are looking at the end of the year, whoever your dependents are, whoever your beneficiary is, your spouse at the end of the year, and that's how you file your taxes. So, I think the person would have to be your spouse by the end of the year, right, Jim?
Dr. Jim Dahle:
I think that's right. That's how I'd interpret that rule. It’s not entirely clear, they don't use that as an example, but Andy didn't mention his actual wedding date, but I think if it's this year, I think he's okay claiming expenses from those kids from earlier in the year.
Dr. Disha Spath:
Right. Right. Yeah. But make sure if you are actually claiming them as dependents that year, then yes. And you can claim de dependence if they are living with you. As far as your fiancé goes, as long as she's your spouse by the end of the year, I think you'll be okay. But that is a bit of a gray area.
Dr. Jim Dahle:
And I always think you should call the gray areas in your favor. The truth is, 90% of the time you don't get audited. And when you do, sometimes you win. And even when you don't win, you can go to tax court and sometimes you win there or you get at least a draw, something better than the auditor gave you. So, when it is grey, it's okay to call in your favor.
Dr. Jim Dahle:
A lot of people just aren't aggressive enough on their taxes. I mean, if it's black and white, yes, follow the rules. If it's not black and white, and you can make a reasonable argument, go ahead and make a reasonable argument and call it in your favor. That's the way I see taxes.
Dr. Disha Spath:
I am super afraid of the IRS on the other hand. I super play it safe no matter what. I'm sure I've made some mistakes in the past, but thankfully haven't been audited yet. Knock on wood.
Dr. Disha Spath:
So, what's our next question? I think it looks like another HSA question.
Dr. Jim Dahle:
Yeah. Let's do another HSA question here. This one, I don’t know who it is from. Let's take a listen to it.
Matt:
Hi, Dr. Dahle. This is Matt from Florida. I had a question about HSA accounts. I understand that you could use HSA accounts to basically reimburse yourself for healthcare expenditures. But I had a question about the timing of this.
Matt:
If I keep track of all my healthcare expenditures now, however, do not currently have an HSA. If I open an HSA in the future, let's say five to 10 years from now, and keep track of all of my funding and all of my receipts, will I be able to reimburse myself for healthcare expenditures that I had prior to opening the HSA? Thank you.
Dr. Disha Spath:
Yeah. Same question and same answer. No, you can't, unfortunately. The HSA has to be open. You can deduct your medical expenses if it's passed a certain threshold if you're having a lot of medical expenses just from your taxes, if you don't have an HSA. But that depends on whether you're itemizing or not.
Dr. Jim Dahle:
Yeah, you got to have a lot of expenses when you're a doc, right? Because there's a floor, it's 7.5% of your adjusted gross income. And 7.5% of your adjusted gross income as a physician is typically more than your maximum out of pocket.
Dr. Disha Spath:
It's a lot.
Dr. Jim Dahle:
I mean, it's $15,000, $30,000, right? It's a lot of medical expenses. So, you've got to have something that your insurance doesn't cover really for that to work out as a physician.
Dr. Disha Spath:
Right.
Dr. Jim Dahle:
All right, let's do our quote of the day. This one comes from Dr. William Bernstein, who says, “As an investing adult, you can take solace in the knowledge that the overwhelming majority of investors aren't adults. You're almost certainly running faster than your cohorts being chased by the demographic and capital returns bears, so you likely won't be caught and eaten by them.”
Dr. Jim Dahle:
I like that quote. The truth is, it’s kind of all relative, right? If you're doing better than most people, you're going to do better than most people. And it's interesting. I had this discussion with my daughter last night and my daughter kind of came out of the closet last night. No, not that closet. She just informed me that she's not pre-med anymore. So, she's in her third week of college, fourth week of college, something like that. And she's now going to be a business major.
Dr. Jim Dahle:
I'm a little bit sad because I was so looking forward to having somebody in the family that I had something in common with, that we'd share. But obviously, I'm a big fan of if there's anything else you want to do besides medicine, you should probably do that. And if you can be talked out of it, you should be talked out of it.
Dr. Jim Dahle:
But with my kids, I've always been totally neutral. I'm like, “If you want to do medicine, we're very supportive. If you don't want to do medicine, we're very supportive.” But it's a little sad for me for somebody who's been talking about being a doc for years and years and years to see that only lasted like many people who go to college a few weeks after enrolling in chemistry and calculus.
Dr. Disha Spath:
But Jim, you're a businessman too. I mean, you've got this little side gig over here. She could help with that.
Dr. Jim Dahle:
Yeah. And we had a great discussion. Yeah, we had a great discussion last night. We talked about this idea that came from Kiyosaki, the cash flow quadrant, and went over that. We went over how taxes work.
Dr. Disha Spath:
Nice.
Dr. Jim Dahle:
I talked to her about the importance of if you're going to be an entrepreneur, which is what she wants to do, that you solve problems. You solve problems that are pervasive and persistent and painful. We'll talk about business. It would be great. We'll have something in common, but it is a little bit sad.
Dr. Jim Dahle:
My next two kids don't have much interest in medicine. And the seven-year-old, you never know yet. So, maybe there's still hope with the seven-year-old, but I hope I’ll be able to share that experience with somebody. But it doesn't sound like it's going to happen with my oldest.
Dr. Disha Spath:
Aw, well, I'm sure you guys will. It sounds like you already have plenty to talk about and bond over.
Dr. Jim Dahle:
Yeah. The other thing we realized last night is we probably have way too much money in her 529.
Dr. Disha Spath:
Oh, that’s good.
Dr. Jim Dahle:
Which has to do with our next question.
Dr. Disha Spath:
Yeah.
Dr. Jim Dahle:
So, let's take the next question.
Dr. Disha Spath:
Okay.
Speaker:
Hey Jim, thanks for what you do. My husband and I are a couple of DINKWADs, double income, no kids with a dog out in Nevada with no state income tax. We're already taking care of ourselves and funding our retirement accounts in order to reach our goals. We have no plans for kids of our own.
Speaker:
You've mentioned in the past how you have several 529 accounts for nieces and nephews, and that's something we're thinking about as well. But I've never opened a 529 account before, so I'm a little in the dark about some of the logistics.
Speaker:
For example, do we have to contact our separate HR departments at our employers and get funds deducted from our paychecks and then divvy the accounts up from there? Do we open different accounts at Vanguard and then contribute post tax money and then later ask for deductions when filing taxes? We do have an accountant that helps with our taxes, so I'd have to make sure to get them the right forms.
Speaker:
Do we open the accounts in our names and then transfer partial funds or funds in whole when the kids do start college? Lastly, can this ever be done as a surprise for our family members or do we really need to know specific information like social security numbers, birthdays, of course, blessings and buying from the parents as well. I really appreciate your help as I'm a little bit in the dark about 529 accounts. Thanks so much.
Dr. Disha Spath:
Yes. I just had to urban dictionary DINKWAD. It means double income, no kids.
Dr. Jim Dahle:
Yeah. DINKWAD is new to me. I've never heard DINKWAD.
Dr. Disha Spath:
Yeah. With a dog.
Dr. Jim Dahle:
Yeah. DINK is not new to me. DINKWAD is new to me. That's cool to laugh at it. But here's the deal.
Dr. Disha Spath:
We're staying hip with the kids.
Dr. Jim Dahle:
Yeah, exactly. This is not as complicated as you think it is. 529 is really easy, but you got to remember that you have 50 choices, 50 plus choices when it comes to a 529. 529s are state specific. So, you want to make sure you're opening the right 529 for you to get the maximum benefits out of it. So, you need to look up your state. You didn't mention your state, or I would've looked it up for you. I've got an article on the website. If you Google it, we'll put that in the show notes.
Dr. Disha Spath:
He's in Nevada.
Dr. Jim Dahle:
Nevada. Oh, you're in Nevada. So, you're not going to get a state tax break.
Dr. Disha Spath:
Yeah.
Dr. Jim Dahle:
So, you can use any plan you want. You can use the Nevada one, which is fine. The Vanguard administers that, you can use something like in Utah. I think when I reviewed 529s this year, I think actually Michigan came out on top. You could open one in Michigan. New York’s tends to usually be pretty good. Ohio's tends to be usually be pretty good. But you can open one anywhere.
Dr. Jim Dahle:
And so, you just go there and you go to the 529 program. You open an account there. So, you need to go to the Nevada 529. It's run through Vanguard, but you don't just go to your regular Vanguard account, I don't think, and open that one. You got to go through the 529 platform, the 529 window, etc.
Dr. Jim Dahle:
But here's the deal. It's still your money technically. So, it's fine to not put your name as the beneficiary. You can put your nieces and nephews as the beneficiaries. You don't have to use your name and then transfer it to them unless you're trying to make this a huge surprise. But you're going to need information to open it. You're going to need a social security number. You're going to need a birth date in order to open this. Without that information, you can't designate them as a beneficiary.
Dr. Jim Dahle:
And so, you could keep it a secret from the kid, but you're going to have a hard time keeping it a secret from the parents. You really don't want to be snooping around getting your nieces and nephews social security numbers, right? I mean, come on. You don't want to be doing that.
Dr. Jim Dahle:
So, if you truly want to keep it a secret from everybody, you got to make yourself the beneficiary and you can get the information later when you bust this secret open. But what I would do is I would just open one in the name of each niece and nephew. And I speak from experience. This is what I do. I have one for each of my nieces and nephews, and then you can put as much money in there each year as you desire, up to, I think $16,000 a year is the limitation.
Dr. Jim Dahle:
And then you choose the investments inside the account and as long as they're young before you start withdrawing, it's as easy as that. It's just like opening an IRA, it's no harder than that, opening up each of these accounts. Now you will have a bunch of accounts. If you got six nieces and nephews, you're going to have six accounts to keep track of. But it's not terrible.
Dr. Disha Spath:
Yeah. You got to remember there's no federal tax deduction for contributing to a 529. So, there's no reason to have your employer deduct it pre-tax or anything. But they do grow tax free and they aren't taxed at withdrawal. So, that's the tax benefit of 529s. And if you do have a state tax benefit, you can do that at the end of the year, but unfortunately Nevada doesn't. But I think that's a great idea and what a kind gesture to do for your family members. I mean, you really must be commended for even thinking about it. It's lovely.
Dr. Jim Dahle:
Yeah, absolutely. Super kind. But 529s are like IRAs. They're things you do individually. They have nothing to do with your employer. And you can run HSA contributions through an employer or you can do them yourself. So that one can go either way. A 401(k) is always through your employer, but IRAs and 529s have nothing to do with your employer. So, don't try to go to your employer and do this.
Dr. Jim Dahle:
All right. Our next question comes out of the email box. Do you want to read that one, Disha?
Dr. Disha Spath:
Sure. This question is on charitable giving. “You've covered the issue of tax efficient and religiously ethical giving many times on your podcast and blog, which I appreciate. When trying to donate to a charity this month, I tried donating online. Traditionally, I have avoided using credit cards because I heard they have a fee associated with them favoring direct transfers, debit cards, and PayPal instead.
Dr. Disha Spath:
However, I'm realizing now with a little research that the latter two may also have fees associated with them. The charity's only getting 98 cents on the dollar donated. Additionally, some charities don't do direct transfers anymore. I'm a resident, so I don't have the good fortune of giving from a donor advised fund or donating appreciated shares offsetting with tax loss harvesting.
Dr. Disha Spath:
So, what is the most efficient way to make sure this charity gets every dollar intended for them? Do I have to throw a paper check in the mail, slap a stamp on it and send it to them? Or just swallow the fees, pay the difference so the charity gets how much I'm trying to give them and roll my eyes at the middle man?”
Dr. Jim Dahle:
Efficiency. Well, there's a lot that goes into efficiency, right? What are you trying to save? Are you trying to save the charity that 2%? Now that matters if you're giving them $10,000. 2% of $10,000 is $200. 2% of $25 is almost nothing. What is that? A quarter, right? Is that right? I don’t know if I'm doing the math right. But it's less than a dollar.
Dr. Jim Dahle:
And the point is if you're going to spend more on the stamp and they're going to spend more on somebody opening the envelope and going to the bank and depositing your check, then maybe you're better off just paying the 2% via PayPal, Venmo, credit card, debit card, whatever.
Dr. Jim Dahle:
If it's a huge amount, maybe it's worth the effort to send a check. There's also the risk to you of sending a check. Someone could open the check some point in transit, in mail and steal your identity, that sort of a thing. So, there's some risk there as well. And you got to keep that in mind when you're also trying to be efficient.
Dr. Jim Dahle:
I don’t know, what would you do, Disha? What would you do if you're trying to give money to charity and trying to make sure the charity gets as much of it as possible?
Dr. Disha Spath:
Well, first of all, can I correct you on your math there just so you don't get a correction email? 2% of a dollar is 2 cents.
Dr. Jim Dahle:
Yeah.
Dr. Disha Spath:
2 cents. Anyway, Yeah, I know, the fees suck. And most of the time, I just end up rolling my eyes and giving as much as I want to, as I've budgeted for. And looking at it as the cost of transaction, there is a reason the fees are there. It's because it costs money to move things around and these companies have people they need to pay. So yeah, I generally just give what I had planned on giving and don't account for the fees.
Dr. Jim Dahle:
Do you give it as like a credit card? Physically, how do you do it?
Dr. Disha Spath:
Physically? It depends on what I'm giving to. Most of the time I do write a check, honestly. But there have been times where I've signed up through a site, if it's like a charitable event or something. And then it is through I think PayPal or credit card is what I've done in the past. But no, I don't have a donor advised fund either.
Dr. Jim Dahle:
Yeah, ours are all through donor advised funds, but in the end, still, somebody's got to process it and all that. So, I don't know how much you're saving. The reason charities take credit cards is the same reason we take credit cards for WCICON or if you go to the WCI store. It is just convenient. It's a convenient card to use. It saves you time, saves them time. And of course, there's a price for that.
Dr. Jim Dahle:
And of course, charities also know that you're more likely to give more if you're using a credit card because it's not as painful as given the green stuff. It's not as painful as writing a check. So, they're not going to stop taking credit cards even though it costs them. And it's probably honestly more than 2%, it's probably 2.9% or 3% to 4% is what they're actually paying on their credit card fees. It's expensive to take credit cards as a business. It's a major business expense of the White Coat Investors credit card fees.
Dr. Disha Spath:
I've got to say I've never used a credit card to donate, although I'd have to do the math. Most of the time when I do the math, I like to play the credit card point game and that would be one way to sort of have a win-win for both parties. But most of the time those fees are more than the points that you're going to get. So, usually doesn't make sense.
Dr. Jim Dahle:
Yeah. All right. Let's take our next question off the Speak Pipe. This one is about donor advised funds and how to invest them.
Speaker:
Hi Jim. I'm a long-time listener and reader, but a first-time caller. My wife and I are turning 40 next year, but we have met most of our financial goals. We set an inflation adjusted net worth cap for ourselves of $4.5 million and an inflation adjusted consumption cap of $140,000 a year. We plan to give the rest of our money away.
Speaker:
My question is, if you could give us some thoughts on asset allocation inside of a donor advised fund. We're likely going to be contributing something near $500,000 a year into the DAF. And we already have another $500,000 in the DAF. We're currently dispersing about $250,000 a year to charities. That will hopefully grow as we find charities that are doing good work, as we don't want to pile up a huge amount of funds in the DAF. We do intend for whatever's left in the DAF to get split between our kids as part of their inheritance, but we would rather give while we're living.
Speaker:
Currently I have the DAF split into a third, total US a third, total international on the third, bonds with Fidelity Charitable. I'm not sure if I'm thinking about this correctly, but if the market is down, I give out of the bond side. If the market is up, I give out of the equity side, and if everything is down, I give out of incoming cash that we're contributing to the DAF. Do you have any thoughts on our approach? I appreciate your insight.
Dr. Jim Dahle:
Okay, great question. On an asset allocation question, the answer is always “It depends.” It's always it depends. It depends on you and your risk tolerance and so on and so forth. But we should talk a little bit about DAFs and some of their advantages and give you some food for thought as you consider that.
Dr. Jim Dahle:
The first thing to consider is that this is a tax protected account, just like your 401(k), just like your IRA, just like a 529. What does that mean? It means you can change anytime you want. There are no tax consequences. You're not going to have to pay capital gains taxes. So, you can change from one thing to another and no big deal. You can change your asset allocation as needed.
Dr. Jim Dahle:
Now, typically, I believe when you designate a gift to a charity out of the DAF, out of the DAF, out of the donor advised fund, whatever you want to call it. You don't choose which fund that comes out of. It comes out of all of them equally with most of these DAFs is the way I understand them.
Dr. Jim Dahle:
Now, that's okay, you can get around that because there's no cost to change asset allocations. If you want to give it out of bonds, for instance, because the market is down, you could simply change the asset allocation so it's more aggressive on the same day you designate the gift.
Dr. Jim Dahle:
So, if you have $300,000 in there, $100,000 in US stocks, $100,000 in international stocks and $100,000 in bonds, and you're going to give $100,000, well, you designate the gift for $100,000 and you change the asset allocation to 50% US stocks, 50% international stocks. So, that's the way you could do that. But you can't technically say just give the bonds. You've got to make those adjustments as you go.
Dr. Jim Dahle:
But that's not a bad way to do it. If you're going to give the money soon, I think you ought to just keep it in cash. That's what I've done most of the time with the DAF. I put the stocks in there, I sell them and give them as cash within a week or so. But if you're actually going to keep money in there and build it up and build a foundation like DAF, then you've got to actually think about asset allocation.
Dr. Jim Dahle:
And I think it's one of those things you can be pretty aggressive about. The goal is to give as much charity as you can. You can invest it pretty aggressively. It's not going to break your heart if the market fluctuates because it's not really your money anymore. So, just like I'm aggressive in the 529s, I feel like in that situation you can be pretty aggressive in the DAF, especially if you're willing to just say, “Well, I'll just give out cash this year and let that money continue to ride in a downturn.” What are your thoughts on how to invest in DAF?
Dr. Disha Spath:
I agree with you. If you have all the time in the world and you're 40, and you plan on contributing to this account and it sounds like you have significant amounts of funds, you could take significant risk with a lot of it and give cash and still make really meaningful contributions every year not dependent on what the market's doing. And this is basically the DAF functions more like you as an investor on its own in having a high cash cushion so that it can withstand the market forces. So yeah, I agree with you, Jim.
Dr. Jim Dahle:
All right. This is a good time to tell you about one of our new partners. We have a new affiliate partner. That means we get paid if you use them. As the disclosure, we get paid if you use them through this link. But we think this is a great company.
Dr. Jim Dahle:
They are called Charityvest. And if I was opening a new DAF today, this is who I'd open it with. Charityvest, you can look them up. Our affiliate link is whitecoatinvestor.com/charityvest. If you want to help support the site when you open an account.
Dr. Jim Dahle:
But with Charityvest, there are no fees to open an account. There's also no minimum balance. There's no minimum contribution. This is the big beef people have with Vanguard. You got to open the account with $25,000. You also have to make grants that I think the minimum grant of Vanguard is like $500. Fidelity’s amounts are lower, but Charityvest is even lower.
Dr. Jim Dahle:
So, if you want to invest your balance, you can do that in an efficient ETF portfolio. The expense ratio is 0.05% to 0.11%. Just like what you'd get at Vanguard, just like what you get at the best of Fidelity.
Dr. Jim Dahle:
When you do a grant there are zero transaction fees. So, all of your money goes to charity. This is a no brainer DAF. I think this is the best DAF out there. It might not be quite as slick if all your stuff's at Vanguard to use Vanguard or if all your stuff's at Fidelity to use Fidelity. But I think it's pretty darn close. So, if you're interested in opening a DAF, and especially if you don't want to have a bunch of real high minimum contributions, minimum amounts that you can grant to the charities, I think Charityvest is a great choice. So, check that out at whitecoatinvestor.com/charityvest.
Dr. Jim Dahle:
All right, let's take our next question. This one is on captive insurance. All right, let's listen to this.
Dr. Jim Dahle:
“I just listened to your latest podcast number 278, which concluded with a question about captive insurance. The listener was pitched some captive insurance program by their accountant with the primary stated goal of tax reduction. Your answer that captive insurance can make sense in some situations was correct.” All right, well that's good. I don't have to do a correction, right?
Dr. Jim Dahle:
“But I worry you may not be aware that captive insurance or micro captive insurance is also a tax evasion strategy pitched by promoters who I'm sure take handsome fees for setting it up.” Remember, tax evasion is bad. Tax evasion is crime. Tax avoidance is legal, okay? But tax evasion is bad.
Dr. Jim Dahle:
“I have no personal experience with it”, the emailer writes. “But from what I've read online, the idea is to set up a captive insurance company with the right elections such that underwriting profits are taxed as long-term capital gains. Then the parent business pays as much deductible insurance premium as possible. In some cases, barely under the $2.2 million per year limit based on ensuring fake and or grossly exaggerated risks.
Dr. Jim Dahle:
The IRS has been cracking down with harsh penalties and made micro captive insurance a transaction of interest in 2016, which I believe means it's required to be reported in form 8886. Not to be confused with 8606. There have also been some recent tax court cases that have not gone well for the perpetrators of this strategy. I thought you should be aware of, if you were not already. My first response to the listener it would've been a warning not to be lured into tax evasions trap, if that's what's being pitched to him.”
Dr. Jim Dahle:
And in a lot of ways, I think this is a good warning. You should be aware of this. There are a lot of scammers in this space. This is a lot like conservation easements in that pigs get rich, hogs get slaughtered. But with the conservation easement, the problem is people start saying their land is worth tons more than it actually is worth. And so, it becomes a listed transaction. The IRS looks at it very closely. So just like that, captive insurance is looked at very closely. That doesn't mean you can't do it. It just means you got to follow the rules. It has to actually be the cost of insurance. You can't inflate it.
Dr. Jim Dahle:
So, if someone is telling you about a situation where the tax savings seems ridiculously high, it probably is. Get a second opinion. Talk to your attorney. Talk to your accountant. Is this legit? Are we going too far with it? Because you don't want to get involved in these sorts of scams.
Dr. Jim Dahle:
But there is savings there. Captive insurance works for lots of groups. The bigger the group, the better it tends to work. But if you look at it like a state university, this is what they're doing. They're a captive insurance company. They're basically self-insured by the state, by the taxpayers of the state. Your state university isn't going out and buying malpractice insurance like I am with my private group. They are self-insuring. In a lot of ways, that's what captive insurance is. And you can ensure all of the risk. You can ensure part of the risk. It just depends.
Dr. Disha Spath:
Well, thank you so much to that listener. It's good information.
Dr. Jim Dahle:
Yeah. Speaking of thanking listener, thanks everybody for what you're doing out there.
Dr. Disha Spath:
Yeah.
Dr. Jim Dahle:
It's interesting. I went to this conference this weekend. I went to PIMDCON, Friday, Saturday, Sunday. Thursday, I worked a shift, got killed on the shift. Metaphorically, not literally. It was just super busy shift. The day after returning from the conference, I'm back in the ED.
Dr. Jim Dahle:
And I know that's what all of you are doing. When you are going on vacations, you're working right up until the day you leave. You're starting to work right when you get back. And that's assuming you're not doing charts on vacation. Same when you go to a CME conference. You're working hard and this is a hard profession, that's why it pays so well. But if nobody's told you thanks today, let us be the first.
Dr. Disha Spath:
Thank you.
Dr. Jim Dahle:
All right. We've got another asset allocation question. Let's take a look to it. I can tell them right now though the answer is it depends. Because that's the answer to all asset allocation questions.
Joseph:
Hi Jim, this is Joseph from the Northeast. Two questions came to mind after listening to last week's podcast, podcast 280 on asset allocation. Number one, are you aware of any data as to whether there's a higher percentage of investments being in index funds now versus individual stocks compared to 10, 20 years ago? If this is the case and there's a large shift to index investing compared to individual stocks, would this affect future returns?
Joseph:
For example, say half the investments in the US were now into VTSAX, Vanguard's total US stock market fund. How would this theoretically affect performance? Bill Bernstein's idea of skating to where the puck was comes to mind. If the benefits of index investing become so well known that everyone is doing it, will it still work?
Joseph:
Question two. Regarding including international exposure to one's portfolio, one argument I've heard from people who only invest in US equities is that with globalization nowadays, you have enough exposure to international companies with a total US market fund. I’m curious to your thoughts on this. Thank you.
Dr. Disha Spath:
Yeah. So, let me do the first one. What if everyone is doing index investing? Would it work less? And I've thought about this before and honestly, I can't see a world where everyone is investing in index funds. They're basically investing in all of the companies in the United States. Would that hurt the stock market? Would that hurt my returns? I don't think so.
Dr. Disha Spath:
I'm a long-term holder of investments. So as long as the companies do well, as long as the economy is sustained and our country is alive and well, those companies, and as long as our companies continue to produce goods of value, I think we'll be just fine. Even if everyone is investing in index funds.
Dr. Disha Spath:
And honestly, everyone is investing in index funds. Even people that are just automatically investing in their target date funds and their retirement accounts, most of those are index funds. And we've done just fine because people are saving and investing and giving their money to companies to help them grow. So, I don't think that's a losing scenario.
Dr. Jim Dahle:
Yeah. If you go back 50 or 60 years ago, the majority of stocks were owned by mom-and-pop investors, mostly directly. We're talking like 1960, right? If you go back that far, that's how they were owned. And probably only 10% were owned by institutions. And that statistic has reversed. These days 90% of the stocks are owned by institutions. Whether they're pension funds, whether they're mutual funds, hedge funds, whatever. And so, the market has changed in that respect.
Dr. Jim Dahle:
Index funds have also become dramatically more popular since they popped up in 1975. A lot more money is going to index funds than interactively manage funds. So, the way I usually hear this question is, “What if everyone is putting everything into index funds? Just kind of blind, know nothing, not caring about valuations of the company. Is that going to distort the market?” And I don't know what the percentage is. It might be as high as something like 30% now is going into index funds.
Dr. Jim Dahle:
But the point is that, you only need a little bit of people concerned about valuations who are actually going, “Well, maybe we shouldn't put as much money into index funds as we should into Apple or whatever.” You only need a relatively small amount of money from people that are actually trying to figure out which companies are more valuable in order to set the prices.
Dr. Jim Dahle:
So, I think it'd be fine if 90% of the money invested in the market was invested in index funds. And we're nowhere near 90%. We're much less than that as index funds. When it starts to be more than that, I would worry about the market not being as efficient as it should be. Because it's true. Index fund investors are piggybacking on the active investors. The active investors are trying to figure out what things are worth and only buy the things that are undervalued and so on and so forth. And the index fund investors are just taking advantage of the work being done by the active investors who are doing that price discovery process.
Dr. Jim Dahle:
I think we're a long way from it really being a problem. But could it be a problem if everybody did it? I guess it would be because we'd be buying stock in a company that's totally worthless if nobody's paying attention to what the company's actually worth.
Dr. Jim Dahle:
But I agree with you. In the long run, what you're going to earn is what those companies are earning. The speculative component of investing in the stock market drops out over the long run. And all you're left with is the dividends and the increase in earnings per share that you're seeing from it.
Dr. Jim Dahle:
All right. Now I've forgotten the second question. What was the second question?
Dr. Disha Spath:
The second question. Now I've gotten lost too. Let's listen to it again.
Joseph:
Question two. Regarding including international exposure to one's portfolio, one argument I've heard from people who only invest in US equities is that with globalization nowadays, you have enough exposure to international companies with a total US market fund. I’m curious to your thoughts on this.
Dr. Jim Dahle:
All right, the second question is about international stocks. And I'm getting this question a lot. Why are we getting this question a lot? Oh, we're getting this question a lot because US stocks have outperformed international stocks by so much over the last 10 years that people are trying to justify not owning international stocks anymore.
Dr. Jim Dahle:
So, if that is you, if that is the reason you're asking this question, if that's why you're thinking about dropping international stocks, be careful about performance chasing. The pendulum swings back and forth. Sometimes US stocks outperform, sometimes international stocks outperform. And if you're always chasing performance, you're going to underperform.
Dr. Jim Dahle:
Then if you just pick a ratio, and I don't care what the ratio is, I don't care if 5% of your money is international, I don't care if 50% of your money is international, in the long run, you're probably going to do about the same. But you got to stick with your plan. That's really important. So, I think that's the first point that should be made anytime people ask this question.
Dr. Jim Dahle:
Now, should you put none in there? That's not crazy, right? I mean, US companies do make money from overseas transactions. So, it's not crazy to be all US. Jack Bogle was a big fan of being all US. And that was his argument.
Dr. Jim Dahle:
I don't buy it. I think it's worthwhile owning these other companies. I think you get additional diversification. If you only invest in the US, look at all the great companies you're not owning. You're not owning BP, you're not owning Nestle, you're not owning Toyota. Even though these companies also sell stuff in the US, you are not owning them. So, I think you can be more diversified by having some sort of allocation to international stocks.
Dr. Jim Dahle:
But I think it's also important to recognize why US stocks have outperformed so much in the last few years, and there's really two factors. They really don't have a lot to do with where the company is located.
Dr. Jim Dahle:
The first one is currency. The dollar has strengthened a lot in the last few years. In fact, a dollar is worth almost as much as both a euro and a pound sterling, a British pound sterling, which is very different from the way it's been in the last few years.
Dr. Jim Dahle:
So, this tailwind that US stocks have had is simply from currency exchange rate fluctuations. And if you know anything about currency exchange rates, they fluctuate. They go both ways. And so, when they go back the other way, international stocks are going to have a tailwind and they're going to look a little bit better.
Dr. Jim Dahle:
The other thing you got to know about international stocks is a lot of more of them are what you would consider value stocks. They are smaller than US companies. They are more value than US companies. And over the last decade, large and growth has outperformed small and value. So those two factors explain most of the underperformance of international stocks over the last decade. And as you know, on all of those factors, the pendulum swings.
Dr. Jim Dahle:
And so, I think bailing out of international stocks now is probably not a great idea. Now, obviously, if you go back 10 years with your time machine and bail out of them and only invest in US stocks for the last 10 years, you would do that. But that's not your option. That's not the decision you have to make. You have to make a decision going forward. So, how much do you have in international stocks, Disha?
Dr. Disha Spath:
I have allocated 20% of my stock allocation to internationals I believe.
Dr. Jim Dahle:
20% of your stock allocation, I've allocated 33% of my stock allocation. So, that works out to be 20% of my portfolio. That's what I have overseas. I think it's a reasonable amount. I rebalance back to it every year.
Dr. Jim Dahle:
Think of it this way. Right now, when you're buying international stocks, you're buying them at a discount. I don't know what the PE ratios are right now, but for international it's like 10 or 12, and for US it's like 17 or 19. So you're getting a lot more earnings for your dollar that you're buying in international stocks right now. So, it's kind of a value play in that respect.
Dr. Jim Dahle:
All right, let's take this question about TIPS. Let's do this TIPS question. This one is by email. Do you want to read this one, Disha?
Dr. Disha Spath:
Yes. “TIPS. Is buying individual TIPS bonds an alternative to consider rather than TIPS funds since they can't lose value? TIPS fund losses will all come out in a wash for long-term investors, but recent experience seems to disqualify them for being a short-term hedge against unexpected inflation, particularly while in retirement.
Dr. Disha Spath:
If you start early and invest in I bonds, even when they aren't yielding much, I suppose you could amass half a million in pretty good inflation protection. Maybe inflation protection is a central goal of all investing generally and shouldn't be chased specifically.
Dr. Disha Spath:
I guess what I'm asking is if unexpected inflation hits in 30 years when I'm in retirement, what lessons do you think I should have learned during this current inflationary period to be prepared?
Dr. Jim Dahle:
Inflation? What advice would you give them about inflation?
Dr. Disha Spath:
Well, I think in general, inflation will happen, and that's why we do invest. I think you're right in that general investing is inflation protection. In that you are not letting your money sit and deflate in your cash accounts. Should you be chasing inflation returns? That's the question that most people have been asking with these I bonds recently. Is it worth it? Should I be changing my asset allocation just because of the current market conditions? I've decided not to personally. So, I'm not chasing the inflation returns and putting things into bonds that I had not otherwise planned on.
Dr. Disha Spath:
As far as what lessons should we learn in this current inflationary period to be prepared, I think generally people that had cash reserves, people that had a financial plan, people that have good jobs that will continue to pay the rent and pay the mortgage are sitting better. People that were highly leveraged were at more at risk during this current downturn and inflationary period. So, generally, frugal habits I think payoff in the long term and saving payoff in the long term. That would be my very overly simplistic idea. What about you, Jim? Give us some answers here.
Dr. Jim Dahle:
Yeah. I think that's the key. Let's be simple. Let's be simple about it. Inflation is a big deal. You got to understand as an investor that inflation is a big deal. But you know what? Inflation was a big deal 10 years ago. Not because inflation was high, but because the risk was there. The risk didn't show up until 2021/2022.
Dr. Jim Dahle:
But the risk has been there, and you should as an investor be concerned about inflation. It is a problem when inflation goes to 10%, when inflation goes to 20%, even at 5%. It is eroding the value of what you have. You’ve got to keep up with inflation.
Dr. Jim Dahle:
An investor has really three big enemies. The fees and expenses of investing, especially if you're not wise and Wall Street is ripping you off and charging you way too much. That's a big issue.
Dr. Jim Dahle:
Taxes are a big issue. You’ve got to be aware of taxes and their effect on slowing down the growth of your investments. But you've got to outpace inflation. It's probably bigger than both of those. It acts as a tax, right? This is how we get rid of federal debt. We make it easier to pay it back. We get all this federal debt at low interest rates and all of a sudden now you got more money to pay it back with because of inflation. And so, you've got to position your portfolio against inflation.
Dr. Jim Dahle:
Bill Bernstein talks about the four deep risks. Inflation, deflation, confiscation, and devastation. Well, guess which one's most common? Inflation. Historical record shows that inflation is most common. So, your whole portfolio needs to be designed to not only keep up with but best inflation.
Dr. Jim Dahle:
So how do you do that? Well, you do that by taking risk most of the time. Stocks. With stock, you own a company. And what does a company do in inflationary times? Well, it charges more for its products, for its goods and services. So, in the long run, stocks tend to keep up with inflation. In the short run, there's no guarantees of anything.
Dr. Jim Dahle:
Real estate. Real estate tends to be leveraged often with fixed low interest rate debt. That's a great thing when inflation starts making it easier to pay back that debt. Plus, you own this hard asset that is appreciating in value. Just like any other company, you can increase the price for the goods and services you charge. In this case, housing. Essentially, you're raising rents in inflationary periods, and so that helps you to keep up. I think real estate is particularly good at keeping up with inflation, again, in the long run.
Dr. Jim Dahle:
Bonds tend not to be awesome in inflation in general. But over the last 20 years, we've come up with a few types of bonds that are better about inflation than traditional nominal bonds have been. And these are both TIPS and I bonds. They're both inflation index bonds.
Dr. Jim Dahle:
And I have an allocation in my portfolio I have for many, many years two inflation index bonds. It's 10% of my portfolio. 20% of my portfolio is in bonds, 10% of that, or half of it is in inflation index bonds. So yeah, I have this asset class. I've had it for many years to protect against unexpected inflation.
Dr. Jim Dahle:
The bummer this year is that the effect of the fact that they are bonds seems to be more than the effect from the increase in inflation. So as interest rates go up, because they're bonds that also depresses their price despite the fact that you're getting a higher benefit from the inflation. So, TIPS are actually down on the year, but if you look at them compared to nominal bonds, they are doing better than nominal bonds.
Dr. Jim Dahle:
I think last night I looked up bonds, and they're down like 15% on the year, the US bond market. But if you look up TIPS specifically, they're doing better than that. So, let's see how much better they're doing. I'll look it up right now as we're talking. Year to date, they're down about 11%, 12%. So better than nominal bonds. And that's just with a longer duration, but still not awesome. It's hard to get really excited about having something you thought was going to protect you from inflation. Inflation shows up and you're down 12%.
Dr. Jim Dahle:
On the other hand, I bonds have been awesome. You never lose value in I bonds, and they're paying more than 9% right now. They're pretty darn good investment this year. It's just that you can only buy $10,000 a year. $10,000 for you, $10,000 for your spouse, $10,000 for your kids, $10,000 for your businesses, $10,000 for your trust.
Dr. Jim Dahle:
There are ways to get around the $10,000 limit, including $5,000 with your tax return, but you're limited if you want to go dump in half a million dollars into I bonds, it just doesn't work very well. I bonds are pretty awesome right now, but you're right that you have to been buying them as you go along.
Dr. Jim Dahle:
What was his other question? He asked about individual TIPS versus TIPS funds. Both have their advantages. I've bought TIPS in both ways. I use a fund in my tax protected accounts for ease of use as I'm moving TIPS unfortunately into taxable because I'm running out of tax protected space. I'm actually buying individual TIPS at TreasuryDirect.
Dr. Jim Dahle:
So, I bought both. They both have their advantages. With an individual TIPS, you're going to get all the principle back. With the TIPS fund, you get a little bit more diversification, more liquidity, more convenience. You have to weigh those factors against each other. I wouldn't necessarily say one is bad and one is good. I think both are fine. It's really up to you and how you want to implement TIPS in your portfolio.
Dr. Disha Spath:
Cool. All right. Is that all the questions?
Dr. Jim Dahle:
I think we're through our questions.
Dr. Disha Spath:
Yeah, I think that's it.
Dr. Jim Dahle:
I think we're getting to the end of our episode. Well, we hope you folks have been having a great week. I hope you have a great week coming up.
Dr. Jim Dahle:
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Dr. Jim Dahle:
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Dr. Jim Dahle:
Don't forget it's time to be signing up for WCICON. If you want to come to the Physician Wellness and Financial Literacy Conference, now is when you sign up. wcievents.com. You're getting early bird pricing right now. That ends November 7th at midnight.
Dr. Jim Dahle:
Thank you for those who are leaving reviews for us. That does help other people to find the podcast. Five-star reviews are what podcasts live on, just like Airbnb’s live on them. So, thanks for leaving five-star reviews. Thanks for telling your friends about the podcast.
Dr. Jim Dahle:
Don't forget, the Thanksgiving episode is coming up. We want you to tell us what you're grateful for. The easiest way is to leave a short, you don't have to use the whole minute and a half, a short Speak Pipe. whitecoatinvestor.com/speakpipe. Record what you're grateful for, and we'll include some of those in an upcoming episode.
Dr. Jim Dahle:
All right. Anything else we should tell them before we sign off, Disha?
Dr. Disha Spath:
Oh, I think we should definitely end with the fact that what you do is difficult. Thank you. Head up, shoulders back. You've got this and we can help at the White Coat Investor.
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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