Jim Dahle, the creator of White Coat Investor, joined us on the podcast to discuss how to build your net worth.
Jim Dahle, MD, is a board-certified emergency physician practicing full-time in the Salt Lake City area. He became interested in personal finance and investing after becoming disillusioned with the way he was treated by several unscrupulous financial professionals. In an effort to help his fellow physicians and other high-income professionals avoid the same errors, he started The White Coat Investor website in 2011. It rapidly grew into the most widely-read, physician-specific personal finance and investing website in the world.
His first book, The White Coat Investor: A Doctor’s Guide to Personal Finance and Investing, has remained an Amazon top-seller since publication in February 2014. His work has also been featured in Forbes, The New York Times, CNN, Medical Economics, Physician Money Digest, ACEP NOW, and Physician Practice.
Tyler Stewart - All opinions expressed by Adam, Tyler, and podcast guests are solely their own opinions and do not reflect the opinion of RealCrowd. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. To gain a better understanding of the risks associated with commercial real estate investing, please consult your advisors. Hey listeners, Tyler here. Before we start today's episode, I wanted to quickly remind you to head to realcrowduniversity.com to enroll into our free six-week course
Adam Hooper - on the fundamentals behind commercial real estate investing. That's realcrowduniversity.com. Thanks. Hey, Tyler.
Tyler Stewart - Hey, Adam, how are you today?
Adam Hooper - Tyler, it's another good one. Another good day.
Tyler Stewart - Why another good day?
Adam Hooper - Well, we had another interesting guest on the podcast today, I think some good information.
Tyler Stewart - If you're a listener who... You're a high-income earner and you're just starting to figure out personal finance and how to invest, we have Jim Dahle, who comes a very interesting background.
Adam Hooper - Jim Dahle is a practicing emergency physician and also the founder of White Coat Investor, which is an online personal finance resource and blog geared towards initially medical professionals, but now as we talk on the episode, more geared towards any high-income earner, and to help trying to set up some of those foundational steps to generate net worth from that income.
Tyler Stewart - Exactly. Jim spent 10 years of his life going to school to learn how to be a medical practitioner, and he understands that when you're in school you spend so much of your time studying your profession that you don't have time to really learn about personal finance and investing. He started White Coat Investor to really help listeners in a similar situation, where they've spent a majority of their life working towards a profession, but they haven't really had time to focus on their personal finance goals.
Adam Hooper - We talked about a lot of good stuff. I think one of the biggest takeaways is net worth is what matters. Live to your net worth, not your income was another good tidbit. We talked about different investments, setting up investment plans, how he looks at real estate investing, and some other really good topics in there. Should be a really good resource. We'll have links in the show notes to his resource at White Coat Investor, and also be on the lookout for a follow-on episode to this where we had members of the White Coat Investor submit a bunch of questions as it relates to real estate, and we're going to be back with a show right on the heels of this one with Paul Kaseburg to answer those questions and hopefully go through some of the more common questions out there as it comes to looking at real estate as an asset class, maybe for the first time.
Tyler Stewart - It's always fun to bring on investor questions on the podcast, and if you're a listener out there and you have questions for future episodes, Adam, where can those investors send those questions?
Adam Hooper - Well, they can send them to us at firstname.lastname@example.org. Also, don't be afraid to rate us, leave comments, reviews on iTunes, Google Play, SoundCloud, Spotify now. Anywhere you listen to us, let us know, and we love those ratings and comments. That's enough of us talking, and with that, Tyler, let's get to it.
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Adam Hooper - Alright, Jim, well thanks for joining us today. Where are you coming to us from today?
Jim Dahle - I'm coming to you from just south of Salt Lake City, where I live and practice medicine.
Adam Hooper - Perfect, I love it out there. Beautiful part of the country, up in the mountains there. It's gorgeous. Do you fly fish at all? Do you do anything exciting out there in the wilderness?
Jim Dahle - I just spend a lot of time outdoors. Not a lot of fly fishing. I do a lot of rock climbing, mountain biking, skiing, hiking, camping, canyoneering, that kind of stuff most of the time.
Adam Hooper - Good.
Jim Dahle - Did some fly fishing growing up in Alaska, but I haven't done much since. There is some nice fly fishing here in Utah, though, for sure.
Adam Hooper - There is, there's some good spots out that way. Beautiful part of the country. But we thank you for joining us today. Little different episode today from what we typically do, heavy on the real estate side. Today we'll cover your background and how you got into White Coat Investor. Why don't we start a little bit back and tell us how you got into doing what you do today, I guess starting with the medical profession and then going into what you do now with White Coat.
Jim Dahle - Sure. In high school and college and even medical school, I really didn't have much interest in any finance or business or any of those kinds of topics. I was a molecular biology major and I was pretty set on premed. I was going to medical school and was going to be a doctor. I got into medical school, went to the University of Utah, graduated from there in 2003, and went on to an emergency medicine residency in Tucson. Spent three years there learning emergency medicine, and about halfway through that residency, I realized that I was kind of being taken advantage of over and over again by the financial services industry. By that point I'd kind of been ripped off by just about every kind of financial professional there was. Recruiter, an appraiser, a mortgage lender, insurance agent, a financial advisor. Pretty much you name it, and I'd had a bad interaction with them at that point. I decided I needed to start learning this stuff myself. Luckily, I lived next to a used book store. I went over there and pretty much read every financial book they had. I read a lot of terrible financial books, but then I read a few good ones. I realized after a while that the good ones were all saying the same thing, that this stuff wasn't that hard, it was far easier to learn than medicine, and realized that just taking a few steps early in my career, especially given the typical income of a physician, would set me up for financial success for the rest of my life. I started applying those in our lives
Jim Dahle - and started sharing that on internet forums and blogs and that sort of thing for a few years while I spent some time in the military from 2006 to 2010. Shortly after getting out in May of 2011, got sick of typing the same thing over and over again into the internet. I decided, I'll just start a blog and then I can just post a link to where I've answered that question before. Because doctors all have the same 30 financial questions. So I decided I'd just put a link there, and that's how the White Coat Investor was born. It was a desire to just quit typing the same thing into internet forums.
Adam Hooper - Efficiency, that's a good approach.
Jim Dahle - I had some idea of getting some passive income from it. Eventually I did have significant income from the White Coat Investor, but it was never really passive. It's been a lot of work over the years, but it's been pretty gratifying to be able to help a lot of doctors just to get a fair shake on Wall Street and to understand the basics of personal finance and investing that don't get taught in medical school and residency.
Adam Hooper - As you look back at some of those earlier books, do any of them stand out as ones you might recommend that were worth the read and not the less-than-stellar books that you ended up reading?
Jim Dahle - I've actually got a whole list of recommended books on my website at WhiteCoatInvestor.com, but I think one of the early ones that I read was probably by William Bernstein, maybe The Four Pillars of Investing, was probably what it was. That one particularly spoke to me, not only because he was a physician by training, but also just because of the no-nonsense way he laid out the things you really have to understand to be successful as an investor of any kind.
Adam Hooper - We'll put a link to that book list here in the show notes so anyone that's listening, we can get you right there so you can see that list of books. This was really from, as most good successes come, from your own personal pain and journey through that and wanting to help others get there. Is White Coat Investor purely for medical professionals, or can others learn from it as well?
Jim Dahle - No, it's really designed for the high-income professionals. Doctors all think they're special. The truth of the matter is they're not. Almost everything we talk about is far more income-specific than it is medical-specific. 95% of personal finance and investing is the same for everyone. There's a few unique things for doctors. We tend to have some wacky retirement account options, and we have a pretty high student loan burden, and maybe a few unique asset protection issues, but for the most part it's the same for anything. The blog's really aimed at physicians, dentists, attorneys, any sort of tech professional that's got a six-figure income. Then you're going to find stuff on there that definitely applies to you. Sometimes you go to these personal finance forums or blogs and you mention you have a six-figure income, and all of a sudden they're just like, "Oh, like you have any financial problems." You're almost ostracized from the group, just for being a high-income professional. That won't happen to you at the White Coat Investor. There's people there making $100,000 a year and there's people there making $2 million a year. It's just a place where you can talk about the unique issues that high-income professionals have.
Adam Hooper - There's so much on the internet it's hard to find good sources of information. There's a lot of these get rich quick stuff that aren't just about the fundamentals, but trying to ride on certain fads or different ways that are trying, again, to take advantage of folks out there. You've kept that pure on just the fundamentals and trying to help people educate themselves to set up for that financial success.
Jim Dahle - Well, that's the great thing about having a nice income. You're 90% of the way there. It's like that Super Bowl a few years ago where they're on the three-yard line and decided to throw the ball. All you got to do is run it into the end zone if you're already making $200,000 a year. That's what I teach people how to do, is run the ball into the end zone from the three-yard line. You really only have to know the basics of personal finance and investing to be successful once you have a high income.
Adam Hooper - High level, what are the basics? Maybe we can just spend a few minutes on that, and then we'll get into more of the specifics and the income versus wealth issue, but what would you say some of those basics are, running from the three-yard line?
Jim Dahle - Sure. If you really look at how you get rich, far too many people are focused on the investment, where the truth of the matter is the way you get wealthy is you make a lot of money, you don't spend a lot of money, you make sure that your wealth, your money, is working as hard as you do, and you insure against financial catastrophes. That's really how you get rich. If you've got an income of $20,000 a year, chances are you're never going to be very wealthy. You've got to put all those pieces together in order to get there. It's important to understand the basics. The other thing that a lot of people run into, particularly in my field, is they just become way too comfortable with debt. And it's not that debt can't be a tool. Particularly, you guys know this very well from real estate investing. Almost every real estate investment uses at least some leverage. But the problem is these doctors become so numb to debt while they're going through medical or dental school that they just get overwhelmed with it and they spend all of their income, wherever it might come from, just servicing the debt. For example, a dentist might have a half million dollars in student loans, and then come out of school and buy a half-million-dollar house on a mortgage with nothing down, and then take out a half-million-dollar practice loan, all the while only having an income of $150,000. That just isn't going to work, to have one $1.5 million in debt and an income of $150,000. You've got to get your debt taken care of relatively early in your career,
Jim Dahle - and at least get it down to a reasonable amount, particularly something like student loans, where you just took out a mortgage on your brain and you're hoping nobody forecloses on you.
Adam Hooper - That's a good way to look at that.
Jim Dahle - Debt management's a big deal, particularly for high-income professionals. Because most of them have significant student loans. Other basics are just realizing that costs matter in investing. Every dollar you pay is a dollar that comes out of your pocket and comes out of your return. I think it was Jack Bogle that said that in investing, you get what you don't pay for. It's not that you can't get more by paying more sometimes. It's that you got to be very careful about all your expenses, whether they're taxes or whether they're investment costs or vacancies or whatever they might be. Those expenses matter, and when you pay attention to those, that's when you become successful.
Adam Hooper - Good. Boiling it down to the approach, for listeners out there that may be, they're high-income earners, maybe early in their career, maybe just getting started, when should someone start putting together a financial plan? Is it once they get debt figured out, or is it just as soon as you get that first job post-residency or your first high-income employment? When do you start looking at financial planning?
Jim Dahle - Right now. Today is the day you need a financial plan. I don't care if you're still in school, if you're in residency. I don't care if you're just coming out of training, or whether you're 25 years out of training. If you don't have a financial plan, you need a financial plan. It's not so much that the plan will never change. It's that the process of making the plan, actually writing it down, is what makes you successful. You realize what you don't know, you realize what you're not doing, you realize where the holes are, and if you need help, you can go hire someone to fill those holes. But financial planning is a process that is just critical to be successful. I saw a billboard yesterday that said something like 57% of Americans don't have a budget. They don't even know where their money's going every month. Imagine trying to run a business where you don't know what's coming in and what's going out. That's what a budget is. Your family's a business. If you don't know what's on your income statement, there's no way you're going to be successful. Getting a financial plan in place as early as possible is helpful, becoming financially literate as early as possible is helpful. Financial literacy is so rare in our society that it's like a superpower.
Adam Hooper - Along with common sense.
Jim Dahle - You have this huge advantage over everybody else because people don't understand how compound interest works and how retirement accounts work. They just don't understand this stuff, and so if you do, you're at a huge advantage in life.
Adam Hooper - What are some ways that, again, you obviously got in and started reading every book you could find. With tools and more access out there to information, White Coat Investor being one of those resources, what are some other areas or some resources that people might be able to start getting into this and looking at how to create their own financial plan and go through that process?
Jim Dahle - Everybody learns a little bit differently. Some people prefer a podcast like this one, other people like reading blogs or emailed newsletters. Some prefer reading books, which I think is an excellent source of information. But some people just can't bring themselves to read a financial book because they're boring. But however you like to learn this stuff, in a Facebook group or an internet forum or on Twitter or YouTube videos, whatever, those resources are out there in the format you prefer. The White Coat Investor, we basically got resources now in all of those categories, including an online course. However you like to learn this stuff, we're trying to get it to you in that format. Whereas I think 10 or even 15 years ago, you really had to search this stuff out and maybe even hire a professional to get it. Now there's such a robust online personal finance and investing community that you can pretty much learn everything you want to know from Google.
Tyler Stewart - You said the best time to start a financial plan is today. What are those first steps you would do today to put together that plan?
Jim Dahle - You've got to have a plan that addresses each of the aspects of your financial life. This online course that I put together, I provocatively titled it Fire Your Financial Advisor, and in reality the first section is just talking to you about how to work with a financial advisor if you choose to. That was just kind of a marketing title. But each section of that goes through a portion of what should be in your financial plan. That includes an investing plan, which everybody thinks about, right? That's the sexy part of personal finance, is investing. But you also need a housing plan, how you're going to pay for your house, how big of a house you're going to live in, how long you're going to spend paying off a mortgage. You need to have a spending plan. A lot of people think of that as a budget, but in reality what it does is just makes sure you're spending your money on the stuff you care about the most. You need an insurance plan. You want to make sure you have the kinds of insurance that you need to protect against financial catastrophe without buying the kinds of insurance you don't need that are just wasting your money. Eventually you're going to need some sort of an estate plan and an asset protection plan, so there's a lot of different aspects to financial planning, and just getting started with any of them I think is better than doing nothing. A great place to start for someone who's done nothing is just to sit down and calculate out your net worth. Everything you own minus everything you owe.
Jim Dahle - And list them out. List out your debts by the amount you owe and the interest rate, and actually put it on paper. I'm amazed how many people can't actually tell you how much money they owe. Then of course write down your assets on the other side of the ledger and what you own minus what you owe is your net worth. That's the score card in personal finance. It's not that you're comparing yourself to others, it's that you're comparing yourself to yourself a year ago or a year from now or comparing to your financial goals. Investing's really a one-player game, and all you have to do is beat your own goals and you win.
Adam Hooper - Like you said before, too, so much can be learned just from the process of going through that and not necessarily that the outcome or the plan that you end up with, that's not going to be a static thing. That's going to change over time. But just the process of that awareness and actually checking in with that can be incredibly insightful, just to go through that exercise alone, right?
Jim Dahle - I think that's exactly right.
Adam Hooper - What are some pitfalls or mistakes that you might have made early on or some of your harder lessons learned when you were starting this for yourself and where you've come to today that you'd maybe caution people to have heads up for out there?
Jim Dahle - I made all the mistakes. It sure feels like it sometimes. The good news is I made them all early in my career with small amounts of money. They say fail early and often. I think there's a lot of wisdom there. But our first two houses we bought we shouldn't have bought. We bought a condo in medical school. We were only going to be there for four years. It's really tough to come out ahead after transaction costs when you only own something three or four or five years. Basically repeated that mistake while I was in the military. Bought a house in 2006, had to sell it in 2010, and anybody who's done any sort of real estate investing in that time period knows exactly why I couldn't sell it in 2010 for any sort of reasonable price. I made the mistake of refinancing. It was a no-cost refinance, but we were really only going down a quarter point or half a point or something like that, from 8% to 7.5%, and basically just resetting the interest clock. We lowered our payments by some trivial amount and went from a 28-year mortgage to a 30-year mortgage. In reality it wasn't even worth the hassle to do. I almost got hosed there. The lender was slipping in a prepayment penalty, which I knew I was moving in a couple of years. Luckily I caught that by actually reading the paperwork. But I bought whole life insurance, which was a terrible, terrible policy, sold to me completely inappropriately. I bought loaded mutual funds, which are really, there's no reason to ever pay a load on a mutual fund.
Jim Dahle - It seems like just about every interaction you can have with a financial professional we've done wrong at least once. Instead of buying a 30-year term life policy, we bought a five-year term life policy and then had to renew it and had some trouble doing that, just because of some of the hobbies that we have. Just mistakes like that, the stuff that everybody does. But the good news is I made them early and I made them with small amounts of money, so it's interesting, the amount of money I lost that irritated me enough to start the White Coat Investor, was probably only a few hundred dollars. But the principle of it really bothered me, and at the time, that was a lot of money to me.
Adam Hooper - And that was a good learning, too, right? I think that's something that hopefully we can learn through that pain, however small or large it may be. There should be some kind of takeaway from that that hopefully you won't get in that same position again going forward, right?
Jim Dahle - That's exactly right.
Adam Hooper - You've been there, done that on some of these challenges. How about some of the successes? What were some of those things that you did early on that helped set you up for success and maybe taking that process and what you ended up with and going forward with that to set up that future success?
Jim Dahle - The best thing we did is when I was a resident and my wife and I, we sat down and came up with a written financial plan, basically an investing policy statement is what we called it. It involved an asset allocation, what we were going to invest our money in, but also talked about how much money we were going to save and how we weren't going to sell out in bear markets and those kinds of things. We wrote that down before we ever started making the big money. When I got out of residency and went from making, I think I was making $40,000 a year when I graduated residency to a six-figure income, we basically hit the ground running. And in those first four years, we saved anywhere from 26% to 63% of our income and just put it towards investments and just invested, invested, invested, invested. I call that period, to my readers, I call it live like a resident. Basically you start making that attending physician money while still living on a resident kind of salary. You take the difference between those two and use it to build wealth. And honestly, that's all a doctor's got to do to be financially successful. If you do that for two to five years at the beginning of your career, you can pay off all your student loans, you can save up a down payment for your dream house, you can catch up to your college roommates with your retirement savings, and basically you can screw up almost anything else the rest of your life and still be successful. It's really the key to being rich as a doc.
Adam Hooper - Lifestyle creep, right? You get the raise and you get the income, and then all of a sudden next thing you know, your mortgage increases, maybe a new car payment, maybe a boat, and you're still living just like you were in residency, but you don't have the benefit of that higher income anymore.
Jim Dahle - Yeah, exactly.
Tyler Stewart - How did the conversation with your wife go? Were you both on the same page? How did you approach the conversation? When you're trying to go through the nitty gritty of the financials, there can be some emotion there. How do you work through that?
Jim Dahle - That is a great question. I'm not sure I've ever been asked that, but we have been, for the most part, on the same page for our entire financial life. I recognize that that is the case for many people out there. I think there were a few keys to that. One, we both come from very much a middle class background. We're both one of six. She got some help with college, I had basically none. I was donating plasma in college to get food money, quite literally. Coming from that background, it was important to us to be financially successful and to not have those sorts of financial concerns in the long run. We were willing to make those sacrifices in the short run to get to that position. That was part of it, is we could take the long-term view and realize, okay, we're going to not spend all our money now because we want to have all kinds of financial freedom in five or 10 years. That perspective, I think, helped a lot. The other thing that helped a lot is quite literally from the first month we got married, we had a written budget and basically a monthly financial planning meeting, where we sat down and talked about what we spent our money on, what we want to spend our money on, etc.
Jim Dahle - Basically we're completely open and transparent with each other, and on the same page from day one. We've now been married 19 years--
Adam Hooper - Congratulations.
Jim Dahle - And I've still got an Excel file for every month of those 19 years of what we spent our money on.
Adam Hooper - Wow.
Jim Dahle - It's hilarious to pull the ones out from 17, 18 years ago and see that we were paying long-distance fees. A lot of the young people probably don't even realize that you ever used to pay a long-distance bill. But I had a $25 long-distance bill that month, you know? It's kind of fun to pull that stuff out and look at it, but honestly, that really is a key to our success. I don't think you have to be necessarily on the same page with your spouse or partner, but you got to at least be reading from the same book.
Adam Hooper - You've mentioned before, and kind of one of the things you look at is income is not wealth. High income does not necessarily equate to, it's not an automatic for wealth. Why not? What is the difference in your mind between high income and wealth?
Jim Dahle - Well, I think the way to look at it is to consider the bum living under the aqueduct down the street. He's got nothing. He's got a net worth of zero. And then take a doctor coming out of residency. What's his net worth? Well, it might be -$400,000 in student loans. A graduating resident is quite literally the poorest person on the planet. If you take that mindset and realize that net worth is the figure that matters, not so much income, then I think that puts you in the right place
Tyler Stewart - for how much consumption you ought to be doing, how much spending you ought to be doing. I encourage people to live their net worth rather than their income. That's because income is so fleeting, particularly when it's earned income from a professional practice. This is the reason why doctors have to buy disability insurance, because they've invested so much time into earning that income that if anything happens to it, they're basically sunk financially. It's important just to recognize
Jim Dahle - that wealth is really a net worth, not so much an income. Don't get me wrong. It's a whole lot easier to build net worth if you've got an income of $300,000, even if you owe $400,000 in student loans. Don't get me wrong, I'm not stupid about it. But I think far too many doctors and other high-income professionals just assume that they should be living their income despite a terrible net worth, and then they get to the end of a 30-year career where they've been making $200,000 or $300,000 a year for 30 years and quite literally have a net worth of half a million dollars to show for it. Which I think is terrible. But if you actually look at the surveys, when they survey docs in their 60s, 25% of them have a net worth under a million dollars. About 12% have a net worth under half a million dollars. That's everything. That's their home equity, retirement accounts, everything. Under half a million dollars after 30 years. I think that's pathetic.
Adam Hooper - What do you attribute that to? I don't think the medical profession is singular in that kind of a statistic. Is that just a lack of financial literacy across the board?
Jim Dahle - Some of it is lack of knowledge, yeah, it's a lack of financial literacy, some is lack of discipline, but most of it is just getting into the bad habits early on and sticking with them, thinking it's normal to have a car payment and a boat payment and a big mortgage and to spend 25 years paying off your student loans and to go on these fancy vacations. Maybe they throw a little bit of money every year toward their retirement accounts, but they've never calculated out a savings rate of about how much they need to save to retire. And so they're not saving adequately, they're spending too much money, and they've got too many debt payments. After a while you just get boxed into that place, and if you never look up you're just in that rut until you get to retirement and you realize you never built any wealth despite having a high income your whole career.
Adam Hooper - And so then the key of turning, again, obviously a lot easier to generate net worth with the higher income, but what are some of the keys of... Getting that income generating into net worth? Obviously we've talked about the financial plan, a simple budget. Are there some other keys that you look at in terms of turning that high income into wealth?
Jim Dahle - I don't think it is any more complicated than it sounds. It's quite literally carving out a portion of that income and using it to build wealth. As long as you invest it in some reasonable manner, invest it in real estate, invest it in index mutual funds, take advantage of the benefits of your retirement accounts, that sort of a thing, I think that's fine. But the key is you've just got to carve it out of your income. There's no other source of money. Barring some inheritance or some very successful business, there's no other source of money for you to use to build wealth. It has to come from your income. And the only way you can get that money is by not spending your income.
Tyler Stewart - For some people, that can be a huge lifestyle change. Are there some baby steps to take when you're starting to take your income and parse it out into retirement accounts, investment accounts? What are some easy ways to get over those initial humps?
Jim Dahle - Everybody wants an easy way. I don't think there is an easy way. The easiest way is to never grow into that income in the first place. That's why I love to catch doctors while they're still in training and just tell them, "Hey, you're living on 50 grand right now. Give yourself a 50% raise. Live on 75,000 a year and save the rest." If you can keep from ever growing into your income, I think that's the easiest way, because it's much harder to cut back on your lifestyle once you've established it. I can't even imagine now moving to a smaller house than I live in. I can't even imagine having to say I can't go on a vacation because I can't afford it. I think that sort of cutting back is very, very difficult to do psychologically. If you're already in that situation, you're spending most or all of your income and you realize that this isn't going to take you where you want to go financially, I think there's a few things you can do. One is to save your raises. Any time you have an increase in income, designate all or most of that to go toward building wealth. And I think you can also make small changes, like increasing your savings rate by 1% a year. If you calculate it out and you're only saving 6% of your income, well, try to make it 7% next year. And 8% the year after that. Maybe if you do it more gradually, it won't be quite so painful. But the truth is, the ability to make a dramatic change in your spending is really very, very powerful as far as a way to build wealth. The other thing a lot of people don't consider
Jim Dahle - is increasing your income is easier than a lot of people realize. There's a lot of things you can do to increase your income. Working overtime, taking a second job, asking for a raise, really working hard at your job and trying to get promoted, switching jobs, taking up an entirely different career, starting an online website or entrepreneurship gig. There's lots of things that people can do to increase their income and I think a lot of times we assume our income's going to be static. That is definitely not the case. I think almost anyone can do something to increase their income if it's really a priority for them. And of course, that makes it a lot easier because you don't have to cut your lifestyle, but you still have extra money you can use to build wealth.
Adam Hooper - Now someone has gone through this, they've maybe allocated some of that recent raise towards investing in their future. How did you start developing this investing plan, and obviously you started it early with your wife, but someone getting into this, what are some resources or tools, or what's the process look like to start that investing plan? Is it with a financial advisor, or is it kind of going your own, or a little bit of both?
Jim Dahle - Well, you can do it with a financial advisor. That's probably the most expensive way. Maybe the second-most expensive way is to take a course, like my online course, the Fire Your Financial Advisor course, which basically walks you through making a financial plan. You can also do this yourself, though. That's what I did. You read blogs, spend some time on internet forums, or read good books, and you realize that it's not that hard to do this stuff. Basically a financial plan starts with your goals. For example, if you have a goal that I want to have $80,000 of income in 20 years, then you can kind of work your way backward from there to how much you need to save each year and how much your investment return needs to be each year to get to that goal. I think that's the first place you start. It just doesn't make any sense to start with picking a mutual fund or picking a real estate property or whatever. It doesn't make sense to start there. You got to start with your goals. And then once you have the goal, for each goal, whether it's college or retirement or whatever it is, you develop an asset allocation, a mix of different types of investments that you think is likely to give you the return you need to make that goal, assuming you fund the goal adequately by carving that money out of your income. And so an asset allocation can be as simple as putting 1/3 of your investments into a total stock market mutual fund, 1/3 of it into a total international stock market index fund, and 1/3 of it into a total bond market index fund. That's an asset allocation.
Jim Dahle - That's a reasonable mix of investments that you could do. And then when you go to pick investments, you decided you're going to be 1/3 US stocks, 1/3 international stocks, and 1/3 bonds, all you got to do is pick a mutual fund that invests in those things and voila! You've basically got a written investing plan. Now, a lot of people listening to this podcast are obviously going to mix in some real estate into that sort of an asset allocation. Some people are going to be 80% real estate and some people are going to be 20% real estate, and that's fine. But I'd encourage you to set a percentage there and keep it there throughout your career, throughout your investing career, and rebalance to that percentage. Because some years, real estate's going to do great, in some years stocks are going to do great, in some years bonds are going to do great, and basically at the end of each year, you just rebalance back to your original percentages and that basically forces you to sell high and buy low, and leads to success over the long run.
Adam Hooper - And then the discipline factor, right? So much of success comes from the discipline of sticking to that plan and not veering from it too far. A lot of financial advisors we talk to say the bulk of their job is to help people from diverging from their plans and keep them sane in crazy markets and really stick to that. How much does discipline play into this, do you think, once you have that plan set?
Jim Dahle - Well, I think it plays a big part. The plan's obviously got to be reasonable. If you got some crazy plan that's 90% gold and 10% whole life insurance, that's not a reasonable plan you want to stick with. If you've got a crappy plan, change the plan. But assuming you have some sort of reasonable plan, I think discipline is key. You've got to stick with it. One of the worst financial catastrophes you can do is to sell all your stocks, for instance, in the bottom of a bear market. I've got three partners in my physician partnership who basically sold all their stocks in the fall of 2008, when they were all low. If you're late in your career when you do that, you might have just added five or 10 years to how long you've got to work. You've got to be disciplined. It helps to have some perspective on market history. If you know what the markets have done in the past, it gives you a reasonably good idea of some of the things that markets can do in the future. And when you realize that a bear market comes along about once every three years, a 20% drop in stocks, and a correction comes along, a 10% drop in stocks, about every year or so, then it's not a surprise when it comes along. You're planning to invest for 30 years while you're working and maybe 30 years in retirement. You're expecting 20 bear markets. You should have a plan for them. You know what you're going to do in a bear market before it ever hits. It shouldn't be this surprise, that you're running around like a chicken with its head cut off,
Jim Dahle - trying to figure out what you're going to do about it. You already wrote down what you're going to do about it. And hopefully that involves rebalancing your portfolio and continuing to invest. Because those shares you bought at the depths of the bear market are going to be some of the best investments you ever bought in your entire life. The same thing applies with real estate. Once every, I don't know, 10 years or so, you can really get some sweet deals on real estate. And that's the time to be buying, not selling.
Adam Hooper - There was a tremendous amount of wealth created from people that had access to capital and were buying assets in the '09-'10 timeframe. There was a lot of wealth created for those that stuck to it and had the ability and the access to capital to acquire assets in that timeframe. You're not panic-selling when it's down. Having a plan is certainly a good route. Are there any places that people should avoid getting information from out there? Again, the internet is a very vast expanse of information, both good and bad. Any red flags or anything out there that investors should be wary of or maybe avoid entirely out there in the internet?
Jim Dahle - You do have to be careful where you get your information from, the sources of the information. If you're on some forum that's all about hot tips and plugging odd investments, et cetera, you've got to be a little bit wary about that. There are some good real estate investing forums. There are some good mutual fund-focused investing forums. Places like bogleheads.org is exceptionally good for a mutual fund or index fund type of investor. But there's a lot of dark corners of the internet you can wander into that have all kinds of conspiracy theories and unusual economic forecasts that you might want to be a little bit careful what you believe there. You got to be pretty careful on TV, too. There's almost no redeeming investing information on TV that's worth listening to. So I'd be pretty careful about that. I'd also be careful about anybody that just emails you out of the blue. Chances are that's far more likely to be a scam than it to be any sort of reliable investing information.
Adam Hooper - And that's one of the reasons we do this podcast and we'll give our shameless self-plug here for RealCrowd University, but trying to give people information to have access to that education, to be able to make smarter decisions, that's near and dear to our hearts and good to hear that there's some other good resources out there, too.
Jim Dahle - Once you're financially literate, it's easy to look at a new source and say this is reliable or this isn't reliable. But until you get that initial financial education, it can be difficult to separate the noise from the signal.
Adam Hooper - Getting on to real estate, where does that fit into your portfolio? For high-income earners, is real estate more attractive or less attractive, depending on income or net worth ratios? Where does that fit into your plans?
Jim Dahle - I get a really huge kick out of these debates people have where they debate stocks versus real estate. I've always looked at it and said, why not do both? They both have huge pluses and minuses, and I think it's great to just take advantage of what you can from both sides of this debate. For a very busy high-income professional, there's something to be said for index fund investing, because it is just set it and forget it. You can do it in just a few minutes and literally forget about it for years at a time. There's something to be said for that, and I think that's very beneficial, particularly because it's so easy to invest in index funds inside of retirement accounts. Inside your 401k, inside your Roth IRA, those sorts of things. That ease of investment, as well as knowing that over the long run you're going to outperform 80% to 90% of stock pickers and active mutual fund managers just by sticking with the simple, low-cost, broadly-diversified index portfolio, is pretty reassuring. Particularly if you're really busy. If you're working 80 hours a week, that's a very attractive way to invest. The benefits of real estate, however, are that it is a far less efficient market than the stock market is. There's not really a great way, other than buying real estate-flavored stock, these REITs, publicly-traded REITs on the stock market, to really buy an index fund of real estate. You really just can't do it. Which has its advantages and disadvantages. It's a bit of a second job, in some respects, but it's also someplace where you can add value.
Jim Dahle - If you are good at picking of properties, if you are good at managing properties, if you're good at upgrading properties, you can add a lot of value in real estate that you really can't add by buying Apple stock. You're not going to add much value to Apple by being a shareholder. But if you buy a property by yourself or with partners, chances are that you can really add value to it if you know what you're doing. The downside of that: if you don't know what you're doing, you can lose a lot of money in a hurry. But the upside is you can actually add value. It's also a little bit safer, I think, to leverage up your investment in real estate than it is to have a margin account in stocks. The stock market can be so volatile. When it drops and you've got a margin account and you've got a margin call, you can really lose a lot of money in a hurry. Whereas typically the leverage you have in a real estate investment is a mortgage that's 10 or 15 or 30 years, and you can ride out some of the market drops if you can just stick with it long enough and keep the thing cash flowing. Then you can ride out a lot of the downturns that you can't do if you're highly leveraged in the stock market. There's advantages both ways. In our case I'd probably focus a little bit more on stock and bond index funds, but we still have 20% of our portfolio in real estate. We have 5% in just the Vanguard REIT Index Fund, which gives us access to all those publicly-traded REITs. Then about 10% in individual equity deals or funds and 5% into debt deals and funds.
Jim Dahle - And so that's kind of the way we've looked at it, is to put 20% in real estate, 60% in stocks, and 20% in bonds.
Adam Hooper - And then of that, I guess that would be the 10% in funds or deals on the equity side. Is that property that you're buying yourself outright, or partnering with other professional managers as an LP? Or both?
Jim Dahle - What we have decided is that we really don't like owning the properties individually. We've done that, we didn't enjoy it. We didn't think it was fun. The one we owned wasn't in our state. It was the place we used to live in. We're trying to manage out of state. It wasn't necessarily bought as an investment property from the beginning, and we lost a lot of money on it. But aside from just the sour taste from losing money on it, we also realized it just wasn't someplace where we could add a lot of value. We weren't that good at that, we weren't that interested in it, and decided to go elsewhere with the time we have to try add value to our investments. I figure I can add more value with my White Coat Investor business than I can in real estate investments. We've chosen basically to outsource that management, and we've done that through both crowdfunded websites that you can pick the individual deals and you become a limited partner in there, as well as through some of the funds for accredited investors and going directly to syndicators and buying into the deals that way. That's where most of that equity real estate is at this point, is in those syndicated deals where we're basically a limited partner and we're along for the ride. It costs us some fees, for sure, and I don't think the tax benefits are quite as awesome as when you own the property directly, but the hassle factor is dramatically less, and that's really what we were looking for. I've got a busy medical practice
Jim Dahle - and I've got this other business that's even busier than that. I don't need to spend my time fixing toilets and filling vacancies and that sort of stuff. It's just not a good use of my time at this point in my life. I'm really not that interested in it. Nothing wrong with people who are. I think that's a great way to invest if you're into it. It's a great second job, in some respects, combined with an investment, but it just wasn't for us, so we've chosen not to go quite that far on the do-it-yourself spectrum.
Tyler Stewart - Sure, and then when you're looking at a syndicator, on our site we call them sponsors, but when you're looking at a syndicator, what do you look for? What questions are you asking?
Jim Dahle - Well, I think there's a few things you need to look at. Number one, you might care what state they're in and where the deal is. If the deal's in a state that you're going to have to file another tax return, you might not be interested in that investment. It's just straight off there, so I only look at limited states to start with, and if the deal isn't in the right state I'm just not interested because I don't want to file any more tax returns than I'm already filing. But as far as looking at the sponsor or the syndicator, What you're really looking for is experience. You want somebody that has done it before, preferably been round trip a number of times in deals so you can look at their record. And the record I'm most interested in isn't so much, did they make a killing because it was a particularly good period of time for real estate investing, I'm looking for how they projected returns and what the returns actually ended up being. And that gives me a sense for whether they're aggressive with their projections or whether they're conservative with their projections. And that gives you a sense for just how good they are. Obviously honesty and integrity, you don't want someone that's, if you Google their name and 20 scams pop up, that's not somebody you want to be investing your money with. Just basic background check kind of stuff.
Adam Hooper - And so what are some red flags in conversations you had or things that you look out for that are non-starters when you're talking to a sponsor and manager like that?
Jim Dahle - Someone that hasn't really ever been round trip with it is a problem. I think if you look at their track record and they're not making money with most of their investments if they've been round trip, I think that's a problem. I think if they're bouncing around from one company to another frequently, basically to hide their past record, I think that's a problem as well. I think if they don't pay much attention to their fees, or they're just trying to blow over the fees and try to make it sound like the fees aren't significant, I think that's a red flag because the fees on these investments are not insignificant and they do make a difference. I like for somebody that's paying attention to that and saying, we think we're earning this and this is why and this is what we provide for it and this is how we compare with the industry, that they're not afraid to talk about their fees, for instance. That's a really good sign when it comes to either a fund manager or a syndicator. Those are probably the main things that I'm looking for when I'm talking to them. I want experience. I want them to have a fiduciary kind of mindset where they realize that they're managing my retirement money. They're not just out there doing nothing, or this isn't Monopoly money that's coming to them, it's real life money that I sent to them rather than updating the kitchen or rather than taking my kids to Mexico, and that they will care for it as well as I'd care for it. I think that fiduciary mentality you can really get a sense for
Jim Dahle - when you're actually talking to them. Because there's no reason that they can't make good money and still take good care of my money.
Adam Hooper - At the end of the day, is that sponsor someone that you can trust who's going to make the right decisions by you for your money when the cycle does start to get a little bit more challenged? It's been a really good market the last handful of years, and hopefully it will continue, but seeing that track record, seeing their experience and how they performed specifically in down markets can be very revealing of how they act on behalf of their investors.
Jim Dahle - Right.
Adam Hooper - What's next in your world of financial mastery? Have you got it all, or are you still learning?
Jim Dahle - I don't think anybody ever has it all. I'm always surprised how little things there are that I never realized and I'm still learning, even after all these years of answering questions for doctors and those kinds of things. Definitely I'm paying a little bit more attention to legacy these days and to estate planning and to business structures, I think, maybe than I have in past years. There's really only so much you can learn about the expense ratios for mutual funds. After a while you've got that down. And when you're outsourcing a lot of your real estate investment management, it's mostly focused on the due diligence up front and then you're along for the ride. These investments you're typically with for, the debt ones maybe only a year, but most of the equity ones, five to 10 years. And it's very difficult to get off that train anytime after it's left the station until it gets to the next station. And so there's not a lot you can do there once you've picked the investment you're stuck with it. But I think those are probably the areas where I'm really focusing my learning these days, just because I'm trying to run a business and at this point, as we move into financial independence at this point, it's about, how am I going to teach my kids about money, and how am I going to make sure they can be successful in life that they don't end up with a silver spoon in their mouth. Not a problem that I ever had, but one that I worry about for my kids.
Adam Hooper - When do you think, again, I've got young kids myself. When do you think that time is to start that conversation, that learning process with kids?
Jim Dahle - Oh, I start them very young. When they're six years old they can tell you that interest is something that we earn, not pay. It's pretty funny. I put on a financial podcast and they all groan and say, not again, but you know what? They're learning stuff from it. I'm always surprised how much they pick up. My daughter, she's 14 this summer, she basically started a business. She ran a soccer camp for the neighborhood kids. And she learned all kinds of things. She learned the importance of contracting. With her partner, she ended up having some problems with that. And she learned the importance of really figuring out what her services were worth and pricing them appropriately because she dramatically undercharged what she should have charged. Even for just babysitting she was undercharging. She learned a lot from that experience, and it's good to see them get that sort of financial experience early in life. They've got all investing accounts. My kids have all got a Roth IRA for their earned money. They've got a 529 for their college savings. They've got a UTMA account for what I call their 20s fund, which is when I think you can really appreciate money from your parents is in that 20s, when you have all those expenses between housing down payments and marriages and honeymoons and all those kinds of problems. Money's a lot more useful to inherit in your 20s than it is in your 60s. I've helped put that fund together for them for that purpose. But I'm trying to use all these accounts
Jim Dahle - to teach them about investing as they go along as well.
Adam Hooper - Good. And then what's next for White Coat Investor? What can we see from there in the next six months to a year?
Jim Dahle - Well, this next week we're putting in both a subreddit, so we've got a White Coat Investor subreddit that just started, and we've got a White Coat Investors private Facebook group, which is a place you can go in and ask your questions to other White Coat Investors and really get those answered. I'm probably going to also get another book or two published before the end of the year, so lots of good stuff coming out.
Adam Hooper - Nice. And we'll put links to your website and the new subreddit as well in our show notes here so everyone can go join those communities.
Jim Dahle - Thank you, I appreciate you doing that.
Adam Hooper - Perfect. Well, Jim, I think that's all we've got for today. We really appreciate your time. Is there anything else that you want to touch on that we didn't cover, anything you want to ask us?
Jim Dahle - I think we've pretty much covered it all. I just want to say to the listeners out there, you can do this stuff, it's not that hard. You can figure it out. Thousands of people before you have, and if you put in the time, you can be financially successful as well, whether you choose to invest in stocks or real estate or some combination of the above. But you can do this, and there are people out there who want to help you and there are communities that will help you to do that.
Adam Hooper - Perfect, that wraps us up nicely. Thanks again, Jim, for your time today, and listeners out there, as always, if you have any questions or comments, please send us an email to email@example.com. And with that, we'll catch you on the next one.
Tyler Stewart - Hey listeners, if you enjoyed this episode, be sure to enroll in our free six-week course on the fundamentals of commercial real estate investing. Head to realcrowduniversity.com to enroll for free today. In RealCrowd University, real estate experts will teach you the important fundamentals like the start with risk approach, how to evaluate real estate sponsors, what to look for in the legal documents, and much more. Head to realcrowduniversity.com to enroll for free today. Hope to see you there.
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