Dare to be Dull with Allan Roth - Podcast #113 | White Coat Investor (2024)

IntroI: 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. Here's your host, Dr Jim Dahle.

WCI: Welcome to White Coat Investor Podcast number 113, Dare to be Dull with Allan Roth. If you’re like most doctors, nobody taught you anything about personal finance or investing during your undergrad, professional school, or residency.And even though your family – and perhaps even your business – rely on you to be the Chief Financial Officer, you have never been given the tools to succeed. Enroll in WCI Financial Boot Camp, a FREE educational email series, and learn to convert your high income to wealth. You will learn the basics of investing, saving, insurance, and more. Your high income alone will not lead to financial success, but as always, we want to help you on your financial journey. Go to whitecoatinvestor.com/financialbootcamp to sign up today!You can do this and The White Coat Investor can help.

WCI: Welcome back to the podcast. It's interesting that we batched these podcasts, and so I may record two, or three, or four at a time, and so this is the first one of the next batch. I actually just came in on a plane from Honduras last night. I've been down there for about eight days doing some medical missionary work. There'll be podcast come up all about that. I'm sure you'll loved to hear about it. We're not doing that today, but it's interesting always to come back into town after being incommunicado for awhile, and finding 500 emails waiting for you. So I'll be catching up for the next few days here, but today we're recording a bunch of podcasts.

WCI: Don't forget, next Monday at 7:00 PM Mountain Time, this is July 8th, 7:00 PM Mountain Time, we're going to open up signups for WCI Con 20. That's a physician, wellness, and financial literacy conference. It's going to take place in Las Vegas at the Paris hotel, in March, 2020. Is the 12th through the 14th, is when the actual classes are. We're going to have a reception the night before, and some people are going to fly home that Sunday the 15th, but that's when the conference is going to be. It's going to be awesome. We've got a star-studded lineup of speakers, we've got some awesome panels planned. Everybody who's anybody is coming as far as the physician financial world goes, and it's going to be a really great experience.

WCI: I don't know how quickly it's going to fill up, last time we sold out in six days. My readership is now twice as big, and we have a 22,000 member Facebook group and a podcast that are both new since the last conference, and so I expect it's going to fill very quickly. Probably within days, but it's possible it fills within hours or even minutes. If this is something you really want to come to, be sure you get on there at seven o'clock Mountain Time on July 8th. That's next Monday.

WCI: All right. Thanks for those of you following us on social media, whether it's on our subreddit, our Facebook group, or just our regular feeds on Instagram, and Pinterest, and Twitter, and Facebook. It's great to interact with you there, it's great to see the message being spread to people who otherwise would not get it. It's absolutely critical. It's interesting, one of the docs I was on this trip to Honduras with is coming out of residency with $600,000 in student loans. I tell you what, there are people out there who really need this financial literacy message, and it would be great if we could get it to them before they end up in a hole quite that large.

WCI: Today we have a very special guest on the White Coat Investor Podcast. We have Allan S. Roth, CFP, CPA, MBA, here. He is the founder of Wealth Logic LLC that can be found at daretobedull.com. He is also the author of How a Second Grader Beats Wall Street. His writing has been featured all over the place in Financial Planning Magazine, in the Wall Street Journal, in the AARP, et cetera. He's well known for his writings, and particularly, his emphasis on simplicity. Allan, welcome to the show.

Allan Roth: Thank you, Jim. I'm thrilled to be here.

WCI: Good. I know you want to focus most of your show on our listeners and their needs, but I wanted them to get to know you a little bit better as well. Can we start a little bit, just kind of at the beginning, a little bit about your upbringing and how that influenced your views on money?

Allan Roth: Okay, sure. I grew up in South Florida, in middle-upper class family, never really wanting for anything. My parents were always relatively frugal. I'm incredibly frugal. There's actually very little correlation between being frugal from parents and the child. Often children of millionaires blow it all. The best research shows that it's a piece of the brain called the insula that influences whether we're frugal or not. But yeah, that was my boring middle-class background. I went on to University of Colorado because it was number one in my field at the time. It was the number one party school in the country.

WCI: That was your field there, partying?

Allan Roth: Yup. And I think I had a successful four years there. Somehow I got a degree in accounting, and did public accounting for a couple of years at what was then a Big 8 firm. It was only two years, it seems like 20, but it was only two. It was not my calling in life. Accounting was recording numbers, and I wanted to create finance. I went back to Grad School, got an MBA at Kellogg School, which is Northwestern University, in corporate finance. Yeah, that was my educational career, and then I can talk about my corporate finance career if you'd like.

WCI: Sure. Let's go through it briefly just so people know the background you're coming from.

Allan Roth: Sure. I did consulting with McKinsey & Company, traveled all over the country and world. Then I did corporate finance for companies like Exxon, and one of the Baby Bells, Pacific Telesis Group, and then in healthcare, Kaiser Permanente and what's now Anthem. I had a lot of fun there, I did things like stock buybacks back in the 80's, shareholder value long before buybacks became very popular.

Allan Roth: Then at age 40, my son was born, and I had my midlife crisis. What I found in my corporate career is that I was a great analyst, and had a lot of fun doing analysis. But as I got promoted to being officer, is I got to do less and less analysis and more and more people management and politics, which was not my calling in life. I decided to get off the corporate finance career, and I wanted to work on a couple of different things. The two problems that fascinated me the most were healthcare financing, how we spent so much more than any other country, and then investing, because indexing was fairly small back then. Quite frankly, I couldn't solve the healthcare one. It was too political, so I picked the investing. Why I chose hourly? It was the easiest choice in my life. Every profession on earth is fee-for-service. Even the oldest profession on earth is fee-for-service. There was really no other choice in my mind besides hourly.

WCI: It's really interesting. You've been running an hourly rate fee only advisory service for a long time, which is fairly unique in this space. Most people, well, at least used to be on a commission model, and I would say the majority now, even of good advisors, are on AUM model. What lessons have you learned from running an hourly fee only practice for so many years?

Allan Roth: Yeah, well it is getting more popular, and I'm thrilled that Rick Ferri, by the way, is now an hourly advisor. But even when I started, there was the Garrett Financial Network. And I think the world of Sheryl Garrett and those advisors, I'm not part of their network, but I think the world of them, and I've been their keynote speaker, but it's the same sort of thing as medicine. If I show up in your emergency room, you're going to fix me up and I'm going to be very grateful. I'm going to thank you, I'm going to pay you. You probably going to write a great review about you, but I'm not going to keep paying you forever and ever and ever. It's the same sort of thing for financial planning, investment advisory. I think helping the person get to where they need to be, giving rules going forward. You might tell me to quit smoking, I don't smoke. It's that same sort of model.

WCI: I mean, some people, do they get sticker shock when they come in and you tell them you're going to charge them $400 or $500 an hour to get advice. Do they get sticker shock from that?

Allan Roth: Well, usually they know that before they come to me, because I don't solicit clients. They have to submit a profile, and then I'll schedule 20 minutes. So they usually understand that. Quite frankly, I sold out. I started this to help the small investor, and I still do that with my writings. But at my hourly rate, I can only help fairly large portfolios and fairly wealthy people. I'm not particularly proud of that, but it's still … I would argue what I do probably in the first year, because I tried to do a one-time plan and get fired, typically is less than 0.1, 0.15% of their assets.

WCI: Which is obviously dramatically less than they would be paying under an AUM fee.

Allan Roth: Correct. Then it's a one-time fee.

WCI: So, do you think an investor paying an AUM fee is probably making a mistake?

Allan Roth: In my opinion, yes. Now, clearly, the less they pay, the less of a mistake that it is. I think the absolute world of Bill Bernstein, who was one of the first people I got to meet along with Jack Bogle when I started this business. But I do think more than 1% of the people can handled their own portfolio. Just a simple target date retirement fund is what most people could do. It harnesses that power of inertia, it rebalances it, it does everything. I do think that it's a mistake. Now, clearly, Robo-advisors, Vanguard Personal Advisory Services, those are all good things, paying less than that 1% is much better, or at least less bad.

WCI: You mentioned earlier that your goal's to get your clients to fire you. What percentage of your clients over the years do you think have fired you and gone on to do this themselves?
Allan Roth: The vast majority, I'm only for do-it-yourself advisor for somebody that really understands investing. I would argue that most of my clients know more about investing then let's say 95% of investment advisors, admittedly, two thirds of those are strictly insurance salespeople, but it's the same sort of thing. I get fired maybe three, four, or five years later, they inherit some money, something changes, they come back to me. It's the same sort of thing that I want to fire you if I get out of your emergency room. I hope you'll treat me again if I come back.

WCI: Yup, exactly. All right. Let's talk a bit about your book, How a Second Grader Beats Wall Street. You published it in 2009 originally. What is the message of that book?
Allan Roth: Well, I think there's two messages. Simplicity, just simple things that we've all learned by year eight, such as, don't put all your eggs in one basket, understanding arithmetic. If the market earns 10%, the more we pay in fees, the less we're going to earn. But there was also a second message, and that was, when we're eight years old, money doesn't mean much to us. So, duh, of course we're going to buy when it's on sale and sell when the price is high. But the older we get, the more money means to us, and the more mental mistakes we make. Greed and fear, repeat till broke, et cetera.

WCI: How old is that second grader of yours now?

Allan Roth: He is 21 years old. He's between his junior and senior year, Chemical Engineer major at Colorado School of Mines. He aced organic chemistry as a freshman. I so wanted him to go pre-med but I have failed in that. So, Jim, I'm going to ask you to give him a call and give it one more try.

WCI: We'll see what we can do. So, is he still just as successful of an investor as he was at eight?

Allan Roth: He is. It has worked brilliantly. I think if you look at the, I haven't looked recently, but MarketWatch Lazy Portfolios, it is in first place over the 10 years. It's one of the eight lazy portfolios along with people like Paul Merriman and Bill Bernstein.

WCI: That's wonderful to hear. So this message of simplicity that you preach, and you have good company, Jack Bogle and Rick Ferri, for instance, are really big on keeping things simple. Why do you think that is so important for an investor?

Allan Roth: Well, I think, the more complex we make things, the more we tend to outsmart ourselves. If you own the entire market at the lowest cost, you're guaranteed to beat most investors in US stocks, or most investors in international stocks, et cetera. And the more complex we make things, like buying various insurance products, like going for 500 different factors, et cetera, the more we tend to outsmart ourselves. Then we have a lot of people that want to sell us complexity because, let's face it, how can I charge you 1% by putting you in a handful of index funds and telling you to do nothing? I can't.

WCI: Why is it so difficult for us to stick with simple portfolios, to stick with simple investing, and other financial plans? Why is that hard for us to do as people?
Allan Roth: Because we want outsmart ourselves. I have to fight that all of the time, and mistakes that I've made that now have tax ramifications that I can't get into as simple as I would like. Like I said, we've got so many people pushing complexity on us. Whether it's the TV, whatever media, sales people, et cetera. We always want to outsmart ourselves.

WCI: Now, let's talk just for a minute about advisors and credentials. You have some fairly impressive credentials for an advisory. You have a CFP certification, you've got a CPA, and you even went and got an MBA. What credentials do you think are the minimum necessary to pay someone for advice? If someone has an advisor and they are saying, “I don't have any of those credentials.” He doesn't have any of those credentials. Is that okay or is that not okay?

Allan Roth: I think it's okay. I've seen people with lots of credentials do some very ugly things to people. I've seen people that don't have all that much in the way of credentials, by the way, that work for big brokerage firms, do a very decent job with people. Quite frankly, I've been very, very critical of the CFP board in enforcing a lower standard than, let's say, other regulators. I think it's less about credentials. I think talking to any advisor, you want to trust them enough to listen, but not enough that you would follow blindly. I'm not a fan of having a bunch of credentials. I think it's great if the person has credentials, but most important is that you understand the philosophy, that you're asking questions. Like I said, that you understand the advice that they're giving, in fact, that you could even explain it to any eight year old what that advisor is doing for you.

WCI: I find it interesting. I've followed your work over the years, and a lot of your articles, many of your best articles, are written for the AARP, which is, let's see, the American Association of Retired Persons or something like that. Why do you write for them?

Allan Roth: Well, I think it's my most important audience. I think seniors, and by the way, I'm turning 62, darn it. So I'm one now. But I think seniors are most often abused. And by the way, I don't just mean scammed illegally, I also mean still things legal, that are complete trickery.

WCI: So, a lot of your articles as well have a bit of an investigative journalism feel to them. That you've gone out and you've caught somebody red handed a little bit. Do you consider yourself an investigative journalist?

Allan Roth: I don't consider myself a journalist. I just kind of accidentally got into this all. I blame Jason Zweig for that one. But yeah, it's almost therapy for me. When I see an article, an award-winning article in the Journal of Financial Planning, the Emperor Exposed, the emperor of being Jack Bogle, who is my mentor, proving that active funds as a whole have bested index funds. Going into it and discovering the flaws on something like that, it gives me a lot of reward. It's almost therapy for me. It's righting a wrong sort of thing.

WCI: What are some of your other favorite articles of that type that you've written besides that one about the active funds?

Allan Roth: Yeah, I've done a couple of … Because 10 years later, the Journal of Financial Planning published another article trying to prove the same thing. But I think some of my favorites are the, and I don't mean to pick on the insurance industry, and I'd probably try to sell you an annuity if it meant paying my kid's college tuition. But a lot of the Bank On Yourself or LEAP, a lot of the insurance types of things have been a lot of fun and taken a lot of time to go through the logic, et cetera. I get threatened to be sued many times, but so far not yet actually followed through.

WCI: It's interesting, you talk about simplicity and the most complex products I've ever seen have come out of the insurance industry it's amazing how many bells, and whistles, and different methods of extracting fees can all be incorporated into one product.

Allan Roth: Yeah, absolutely. One of the chapters in the Second Grader book is don't play a game if you don't understand the rules. And trust me, those very long disclosure documents that you signed and said you understood everything aren't written by the actuaries and attorneys to protect you. It's to protect the insurance company and the agent selling them.

WCI: You mentioned earlier that you'd made lots of mistakes. Let's talk about some of your biggest mistakes and what you learned from them.

Allan Roth: Okay. Well, I wrote a piece for AARP on some of these mistakes. I would argue my big two were, first of all, with money my parents gave me when I graduated college. Gold had just taken a fallback from I think about 850 to $664, and I was sure it was about to be worth many thousands of dollars an ounce because, my gosh, the deficits were running high, et cetera. For currency, paper currency was going to become worthless, so I bought gold. I bought 10 ounces of gold, $6,684, and over 30 years, it has doubled in price, meaning that it hasn't come close to keeping up with inflation. Had I actually heard of Jack Bogle and the S&P 500 Index fund, in the $6,000 I made, any guess on how much I would have made had I invested in his index fund?

WCI: I imagine it's got to be at least 8X at this point.

Allan Roth: It would have been about an extra $370,000 instead of 6,000.

WCI: Wow.

Allan Roth: That was my single biggest. My second biggest was, I got my MBA, I had learned about Burton Malkiel low cost et cetera. I must've been sleeping under a bridge, I'd never heard of John Bogle or this company called Vanguard. So my first index funds were actually through Dreyfus and Fidelity. And Fidelity did the right thing, they lowered fees, Dreyfus actually increased fees, trapping money in, meaning that I would have to pay capital gains tax to get out of it. That was probably my second biggest mistake. And by the way, markets work. Dreyfus at the time was one of the lion, was one of the big mutual fund companies. Today they're, gosh, I don't know. Are they ranked 40th or something like that? And Bank of New York Mellon, which bought Dreyfus is now changing the name away from Dreyfus or its mutual funds, not money market funds but mutual funds.

WCI: No longer has a great reputation it seems.

Allan Roth: Yeah. And I own those mistakes. I absolutely own those mistakes.

WCI: Speaking of that second mistake, what advice do you have for somebody that's in a less than ideal investment, but would face capital gains taxes to change? How can they weigh those two expenses and decide on the right course of action?

Allan Roth: Yeah, that's part of the analysis that I do for people. Is that I look at what taxes would have to be paid, and I think, for instance, an unrealized gain as an interest free loan, and then I impute an interest rate on that. I also look at as the fund generating capital gains. You wouldn't think that an S&P 500 Index fund would generate capital gains, but the Dreyfus S&P 500 Index fund is passing through lots of gains as people sell to get out. So that's the analysis that I do. We also look at other things. Do they have a tax loss carryforward they can use? Do they have other assets that they could sell as a loss to offset them? What's their life expectancy? I know it sounds morbid, but do we look at the possibility of the step-up, meaning that after they die, the kids can inherit that and no taxes will have to be paid? I've always said investing is simple, I never said taxes were.

WCI: Lots of moving parts there obviously in that question.

Allan Roth: Yeah. And that's why, by the way, why I think I don't feel any threat whatsoever from a Robo-advisor, because a Robo-advisor isn't going to get into that level of detail and the like, nor are they going to recommend products, or paying off the mortgage, or things like that that aren't in their best interests.
WCI: Not to mention just dealing with all the different types of retirement accounts a lot of doctors have, as well as trying to sort out their student loans. Those are some of the areas. A lot of people ask me about Robo-advisors all the time. I'm like, well, it's fine if you just need your Roth IRA and your taxable account managed, but you've got six other investing accounts to manage and they're not going to touch those.

Allan Roth: Yeah. Or they're not going to look at a variable universal life that the doctor bought 25 years ago that's suddenly collapsing because the cost of the death benefit has skyrocketed as we get older, obviously. Our mortality likelihood goes up.

WCI: Yeah. It's amazing how financial planning is the most difficult thing to deliver, most expensive thing to deliver, and yet probably the most valuable part of your interaction with a financial advisor.

Allan Roth: Yeah, absolutely. The investing, like I said, is incredibly simple. And an incredibly simple plan, by the way, is when somebody comes to me and they've sold their business, they suddenly have $50 million in cash, and by the way, sometimes they're in their 20's or 30's. That's a really simple plan because they don't have the legacy of mistakes that most of us have made, that I've made, that take a lot of analysis to fix.

WCI: Let's talk about some of the more controversial topics in the financial space now. We'll move through them one by one, see if we can cover some stuff that'll be interesting for the listeners. Is there ever a role for whole life insurance? And if so, what is it?

Allan Roth: Well, I think very, very rarely. Remember when we used to book a flight with our travel agent and the hotel through our travel agent because they had access to the information, and along came the internet and they got disintermediated. I'm a big believer in buying insurance to protect our wealth, to protect our human capital, and doing our investing directly. Whole life, there's many things worse than whole life, such as variable universal life, et cetera. But that is mixing the two, and the insurance company, even if it's a mutual, needs to make good profit. So the odds are you're going to lose.

Allan Roth: Now, occasionally, there can be something like the client has a big illiquid asset, let's say a farm, a ranch, or something like that, that they want to keep in the family, and they're going to have to pay very large estate taxes. So that could be a reason to have something like that. But generally, I'm a fan of investing directly and disintermediating the insurance company, buying insurance for insurance.

WCI: So you don't need to buy whole life insurance just because you're a doctor?

Allan Roth: Well, why do you think doctors … I'm sure you know the reason doctors are targeted. Doctors are targeted for the same reason that bank robbers, rob banks. You've got the money, you've got the income to support the premium payments and the like. As I mentioned, I would disintermediate the insurance company, buy insurance through the insurance company and invest directly.

WCI: All right, so same question about annuities. Is there ever a role for an annuity? Is there a good one out there, and if so, who should consider buying it?

Allan Roth: Yeah, absolutely. There's two annuities I strongly recommend. The first is a government-backed inflation adjusted annuity called social security. And by delaying social security, it is by far the best annuity you can buy on the planet. Probably depending upon situations, 30 to 50% discount over what you could buy over the open market. The second one is, roughly 75% of the time I do the analysis of someone's corporate pension, I recommend taking out some sort of payment either with or without a survivor benefit versus taking the lump sum enrolling into the IRA. Those are two annuities I typically recommend to people on. Neither pays a commission, of course, and that's a good thing. That's why it is a better deal. Is that it's a low cost direct sort of thing.

Allan Roth: Other annuities like SPIA, Single Premium Immediate Annuities, that's where you pay a certain amount, $100,000, and they pay you $6,000 a year for the rest of your life. They call that income, but of course it's not income because most of it is just return of your own principle because when you're dead, you don't have the money. It's different than a CD paying 3% . Those aren't horrible products, but it's still an indirect investment. It's an investment at a time when interest rates are nil and all time low. It's essentially a bond investment, indirect bond investment with a duration for the rest of your life. So it's better than many other types of annuities, but I still typically do not recommend those.

WCI: All right. Let's talk about factors. What do you think about tilting a portfolio to small value, momentum, quality, all these other factors, these smart beta out there? Is it just data mining or is there actually something real there?

Allan Roth: I think factors are a viable active strategy if low costs, but you're working against arithmetic. I'm generally not a fan of factor investing. When Fama and French popularized the Three-Factor Model, the small cap and value tilting, they never said it was a free lunch. And I give DFA all the credit in the world for agreeing that it's not a free lunch, it's compensation for taking on more risks. I think that five years ago, I couldn't be at a conference and go more than 30 seconds without hearing smart beta, factor tilting, et cetera. And I think that was a sign that even something that had some very good academic support, was about to take a fall. I just looked before this podcast, large cap growth has outperformed small cap value by nearly 10 percentage points a year for the last five years. So we want to try to avoid any fad even if there is some academic support for it.

WCI: It's hard to say there's a small value bubble, but from that description of returns, it almost sounds like it, doesn't it?

Allan Roth: Yeah, it does. I wrote a piece five years ago, why I'm sticking with dumb beta, meaning a cap-weighted portfolio. And the wonderful thing about a cap-weighted portfolio, is you're guaranteed, if you have a cap-weighted ultra low cost index fund, you're guaranteed to beat most people in that asset class. With factor tilting, you're not.

WCI: Yeah, certainly a bit of a gamble there. The thing that I always worry about I suppose, is that the dataset on which these factors are based is very limited. I mean, this sort of science, if you will, these calculations, would never hold up in physics. They wouldn't even hold up in medicine, which is a far least exact science.

Allan Roth: Of course not. I mean, have you ever seen a new fund being launched that didn't work on a backtested basis?

WCI: Of course not. They wouldn't launch it.

Allan Roth: Yeah. I wrote a piece, part sarcasm, parts serious for Financial Planning Magazine. My new ETF with the symbol fail, F-A-I-L. This was finding a strategy that you think should work, backtesting it and finding out it didn't work because then it might regress to the mean. The way we typically launch a new fund is, we do backtesting, find something that worked, explain why we think it worked, and then of course what happens it regresses back to the mean and does poorly.

WCI: Let's talk for a little bit, since most of my audience is accredited investors, and in this space, private real estate funds and particularly syndicated real estate, 100 investors going and buying an apartment building, has become very popular since the JOBS Act passed in 2012. A lot of people argue that this is not only an opportunity to use leverage in a smart way, but also gives you a chance to operate in a less efficient market. What do you think of these types of investments for listeners like doctors that listen to this podcast?

Allan Roth: I think if we're going to make a direct real estate investing and you know something about it, I think that is absolutely wonderful. But if you're investing in a syndicate, first understand that the best deals are going to go to those that have a few 100 million to invest. When you hear on the radio, great investing syndicate, that means it's not easy to sell, so you're not getting the better deals. In general, I recommend against them, and I see many people come to me and they've had bad experiences with that. Maybe I'm getting a biased sample since people that are doing really well in investing probably don't need to come see me to fix their problems.

Allan Roth: But again, if somebody calls you up blindly and says they have a wonderful deal for you, look at their motive. Why are they coming to you? Why aren't they coming to somebody that has at least $15, $20 million to invest. So generally speaking, I would be very, very careful, especially when you're being solicited by somebody that you don't know. Then if your friends are talking about how much money they're making, et cetera, get some proof.

WCI: All right. Let's talk about another more controversial topic. Long-term care insurance. Who should buy it and who shouldn't?

Allan Roth: Yeah. Boy, I've got opinions on everything. This one, I'm on the fence on. Long-term care is pure insurance, and I think that is a wonderful thing. But what happened is, when it was launched, the industry underpriced, they tried to capture market share. And then as people age and started going into long-term care facilities, they've learned that they underpriced it. So now you can't buy long-term care that doesn't have the ability to escalate costs. I'm having many people come to me, they'd been paying a premium for 10 years and suddenly it's gone up by 50, 100, 120%, and they're 10 years closer to needing it.

Allan Roth: In general, I recommend against long-term care, especially for guys because us guys, we don't live very long in long-term care facilities, women live much longer. There are hybrid policies, a combination of whole life and long-term care, but those are every bit as bad in that you're adding the cost of the whole life insurance in there. So the real reason to buy long-term care, if you don't have a lot of money, you don't need it. If you have a lot of money, then I say self-insure. Somewhere in the middle, the real reason to buy it is to protect your heirs so that they inherit something in the unlikely event that you go into long-term care and stay there for many, many years. And in my opinion, the primary purpose of money is to support yourself. Giving it to the heirs is an important secondary goal, but the key word there is, secondary.

Allan Roth: So I'd be very skeptical about buying long-term care insurance. If you're going to buy it, I recommend buying something that has the longer waiting period, that maybe doesn't even have an inflation adjustment in there, so that you're partially self-insuring.

WCI: All right. Let's talk a little bit about ETFs and traditional mutual funds. A lot of investors, particularly newer investors, wonder which one they should be using. Does it matter? And does it matter if they're investing in a taxable account or a tax-protected account of some kind? What do you tell investors when they ask you this question?
Allan Roth: Well, the tax efficiency is incredibly important, especially for Vanguard since they're just different share classes, the ETFs and the mutual funds. I don't think it's an incredibly important decision. You want to make sure that it's very tax efficient. Anything that is tax efficient, I think belongs in your taxable account. Don't get wrong. First, set the overall asset allocation, don't let tax efficiency drive your portfolio.

WCI: Let's talk about withdrawing money from your portfolio in retirement. The 4% rule has been around now for a couple of decades. It's received a lot of criticism. But what do you think about that rule? What should people be thinking about when they're trying to decide how much of their money to spend each year in retirement?

Allan Roth: Yeah, I'm one of those critics of the 4% rule, which means, for instance, if you have $1 million, you can spend $40,000 the first year and increase it each year with inflation. I think the modeling that I've done, and Bill Bernstein is 100% right. If you're 80 years old, the 4% rule is probably too low. If you're 50 years old, it's way too high. But the modeling that I've done shows that playing a perfect game of ultra low cost, rebalancing tax efficiency of a 50-50 portfolio, meaning 50% stocks, 50% fixed income, has a 90% likelihood of lasting 25 years. And of course, the cost of running out of money is a whole lot higher than the cost of dying with money.

Allan Roth: Now, two things come into play. One, it assumes a perfect game, and most of us don't play a perfect game. I don't play a perfect game of rebalancing. I've made mistakes in paying higher fees than I'd like on that Dreyfus fund, even though I've sold a good chunk of it. But on the other hand, that modeling also assumes that you're going to blindly spend that $40,000 a year no matter what. Let's face it, if things are going bad, you might decide to defer that vacation, et cetera. So there are some things that you can do to cut costs. I recommend somebody going into retirement, set a budget of what they'd like, and then what they will cut if the portfolio performs poorly.

WCI: What do you think about carrying a mortgage into retirement?

Allan Roth: I think one should try to pay off a mortgage. When I look at a client, let's say, you have $600,000 in bonds and a $300,000 mortgage, I consider that mortgage the inverse of a bond. And I would put your net position in bonds at 300,000, if that makes sense. The simple rule is, don't lend money out at lower rate than you're borrowing money from. That was always the case, but this new tax law makes it even more important. That's because, if you think about it, let's say, you're a really high income earner in a state like California with high income taxes. In many cases, I have clients that have 120,000 worth of state and local real estate and income taxes, property and state income taxes. And now suddenly, they can only deduct $10,000. So that means the next 14,000 to get you to that 24,000 standard deduction is providing no benefit at all.

Allan Roth: So often times, I tell the client they're getting a risk free for 4, 4.5% tax free return. Not only that, but don't forget, high income earners, I would imagine the vast majority of the people listening to this podcast who are physicians are paying that 3.8% on earned income tax, otherwise known as the Medicare tax. Meaning that, if you don't pay off the mortgage, then you've got that invested somehow, and the dividends, the interest, et cetera, is being taxed at that extra 3.8%.

WCI: Yeah, for sure. If it's not deductible, you don't get to adjust it. A lot of people were surprised, I think this last year, when they did their taxes and realized that they're actually better off with the standard deduction and their mortgages really aren't deductible anymore for them.

Allan Roth: Yeah. Or what people also don't realize is, let's say, even if you had $25,000 worth of deductions, then only that last $1,000 provided any benefits. A lot of people think, “Oh, no. I itemized, so I got the full benefit from it.” That's often not the case.

WCI: I think a lot of people were surprised to hear I took the standard deduction last year. I did that because I bunched all my charitable contributions into 2017 and 2019, but last year, on a very high income, we took the standard deduction just because of that change.

Allan Roth: That bunching is a great idea. Another great idea in my opinion, is a donor-advised fund. Rather than donating, let's say, $15,000 a year or whatever, bunch it, put 75,000 in a donor-advised fund, and then divvy it out over the next five years.

WCI: All right. Changing subjects, Fidelity, this last year came out with a 0% expense ratio index fund. Several of them actually. I think the goal here is to be able to say, “Our expense ratios are lower than Vanguard's.” What do you think of these new funds?

Allan Roth: I think they're great. I've written a couple pieces on them, and I'm all for lower costs, et cetera. I don't think people are going to be shocked to know that Fidelity did it as the loss leader to try to compete with Vanguard, which has been once described as this great big asset sucking machine. They are self-indexed, so you don't have something like standard , or MSEI, or FTSE driving the index. I think whether you use Vanguard or Fidelity, zeros, they're good. I looked at a few other things such as, the broadness of the indexes, the performance after security lending, Vanguard, it rebates all of its profits from the securities lending to the shareholders. I once wrote a piece creating alpha with beta funds and it was how Vanguard's small cap index, out performed the index, and that's because they made more money on securities lending and trading practices than the cost.

Allan Roth: I think both are good, I'm just going to be very frank. I like Fidelity a whole lot. I have some money at Fidelity, and as I mentioned, it was my first index fund. And unlike Dreyfus, they did the right thing by lowering fees to match Vanguard. Actually, I think the bigger story with the Zeros are that when Fidelity launched the Zeros, they also lowered the expense ratio of their existing index funds below Vanguard. So I like the fact that Fidelity did all that. I've got to say that even though Fidelity doesn't have publicly held shareholders, they do have a profit motive and if some time down the road they decide to increase fees, they've said they're not, that could be a risk.

WCI: Now, I have a lot of people come to me that are interested in investing in municipal bonds. They say, “Why would I buy a Vanguard municipal bond fund that's paying me 1.5 or 2%, when I can go buy individual bonds paying me 4%?” You have written about this in the past, you called it the muni bond illusion. Can you talk about what that illusion is, and what people ought to consider when they're looking at a bond fund versus individual municipal bonds.

Allan Roth: Sure. You've described that very well. And it's typically done by the broker saying, “Hey, we can go out and buy bonds at a much better deal than Vanguard, which has to go out and buy tens of millions of each of these bonds.” The way the trick works is, let's say you buy the bond at 110, and it's going to mature or be called four years later at 100. What that means, if you take that 10 differential and divide it by those four years, $2.50 cents is just return of your own principle. I've been advocating against that, I've spent two hours meeting with Lynnette Kelly, who's the Executive Director of the regulator, the Municipal Securities Rulemaking Board. How is that any different than me telling you I'm charging you 1% and really I'm taking 3% out? Ethically, morally, it shouldn't be allowed. Mutual funds can't do that trickery.

Allan Roth: I just looked at a portfolio of a client who's statement was showing he was getting $108,000 of tax-free muni income. After I went through how much of it was return of their own principal plus the 0.7% that the advisor was charging, they were getting only about 26,000 of true income. That's the trickery. I own some of the Vanguard intermediate muni bond fund, but I don't let clients have more than 20% of their fixed income in munis. That's because munis have close to $2 trillion worth of unfunded pension and healthcare liabilities. That's what the actuary's assuming about a 7.5% return on the entire pension portfolio. So that if stocks do very poorly, or not even great over the next decade, as baby boomers retire and those payments are going out, there could be some systemic risk on munis.

WCI: You mean the default rate could go up dramatically?

Allan Roth: Dramatically, and across the board. Not just lower rated, high yield munis. But across the board, I think there is that risk. And that while there's not been a great correlation between munis and the stock market in the past, things are different now. And that is a risk. It's not a prediction, it's not a Meredith Whitney CBS 60 Minutes prediction that munis are going to default over the next six months. It's just a risk we want to understand. And munis represent about 10% of investment grade fixed income, and I don't allow my clients to go more than 20%, which is double the market cap.

WCI: Speaking of bonds, and particularly bonds in taxable accounts, what do you think about investors holding bonds in their taxable account if they have space in tax-protected accounts to place them? Do you think with rates having gone up a little bit in the last couple of years, that there's a clear cut answer to where bonds ought to be put?

Allan Roth: I think that lower interest rates certainly make the asset location less important. But I still say, you don't want to … Again, first you set your asset allocation, and if you have all your money of course in tax-deferred accounts, then you want to have stocks in the tax-deferred accounts. But all things being equal, you would rather have the stock index funds in your taxable account because, A, they're very tax efficient and, B, later on we may be able to pay those taxes at a lower rate, either, I forgot, it's somewhere around $75,000 in retirement, you're at the 0% long-term capital gains tax rate. Or again, the step-up basis. So I still think that it's important to get the asset location correct, and that I would rather have the bonds be in the tax-deferred accounts, Roths get a little bit more complex and dependent upon individual situations.

WCI: Now, you mentioned one of your big mistakes was buying gold. Do you think there's a place for gold in a portfolio at all, or do you think it's something just best avoided?

Allan Roth: I think Bill Bernstein has it right. That probably no more than 1 to 2% of the population should own gold. I happen to think, I think Bill Bernstein would agree with this, owning a precious medals and mining fund is better than the medal itself. That's because there's leverage, there's more volatility, and the volatility happens to be a very, very good thing. But most people don't have the stomach to stay there, and it should be a very, very small proportion of the portfolio. I did my precious medals and mining with the Vanguard fund, and I was a bit disappointed that they changed the name and the scope of that fund.

WCI: Yeah. It's not the same fund it used to be, is it?

Allan Roth: It is not. It's only 20% precious medals now.

WCI: Now, as I recall, you wrote an article a few years ago about Bitcoin, that you actually bought a little bit of Bitcoin. What are your thoughts on cryptocurrencies like Bitcoin?
Allan Roth: Yeah. Rick Ferri had to embarrass me at the last Bogleheads meeting at Vanguard. I bought Bitcoin only to write an article about it. I was asked to write an article for AARP on Bitcoin, and it was so new to me and so complex that I actually felt I had to go out and buy a whole $200 worth of Bitcoin. But I've got to admit, that after doing that article, I walked away with more respect for Bitcoin than I thought. If you think about it, it disintermediates the banks. Even when I buy something from the largest retailer on the planet, Amazon, my Fidelity Visa card is giving me 2% cash-back. So you got to figure there are more costs to Amazon and the like that they're paying to go through the bank to clear the credit cards.

Allan Roth: The wonderful thing about cryptocurrency is that it can disintermediate the banks and do it for a whole heck of a lot less. I liked the fact that Bitcoin only has a certain quantity of coins out there that can be found. I happen to think that's a great thing. What do I think Bitcoin will be worth in 10 years? Probably zero. Why can't I launch Rothcoin? Again, anyone can launch their own crypto currency. But I do think there are some good things about the cryptocurrencies, but I suspect that it's going to be worthless.

WCI: It sounds like you really liked the technology and the technology's due to change the world in a lot of ways, but you still don't recommend anybody to buy it.

Allan Roth: Yeah. You summarized it much better than I just did, thank you.

WCI: Well, our time's getting short now, but I want to give you an opportunity. You have the ear of 20,000 or 30,000 physicians and other high-income professionals that will eventually download this podcast. Some are quite advanced investors, others are just beginning their journey toward financial security. What else should they know that we haven't talked about?
Allan Roth: Well, I never take on a physician client without saying that, I think your profession on average makes the worst investors as a whole. I think Bill Bernstein has it right, that sometimes you don't think of it as the same science as medicine. But I also think that overconfidence comes into play. That's because you've already beaten the odds. You've gotten into Med school, you've gotten through Med school, you've done the residency, the incredibly long hours for little pay, et cetera. When you make a reservation at a restaurant, it's a reservation for Dr. Roth, please. So you are almost treated as gods, and I think that that overconfidence leads to bad investing.

Allan Roth: Always ask yourself, where can your portfolio go wrong? And if you can't come up with lots of different reasons, you probably are too overconfident on it. The second thing that I would say is, I want everyone to have an exciting, fun, thrilling life, I just don't want you to get it from your investments. If you're getting entertainment, if you're enjoying it, you're probably doing something very, very wrong. Your investing should be, as my slogan says, Dare to be Dull, should be very, very boring. I wish all of your listeners a very boring investment portfolio.

WCI: Thank you so much for being on the show. For those who didn't catch it at the beginning, Allan Roth is the author of How a Second grader Beats Wall Street. He's the founder of Wealth Logic that can be found at daretobedull.com, and now that you've heard him, I'm sure you'll start seeing his work all over the place. Allan, thank you so much for coming on the White Coat Investor Podcast.

Allan Roth: What a pleasure, Jim. Thank you for having me, and thank you for doing all that you do for so many different people.

WCI: All right. That was a ton of fun, having Allan on here. I've known Allan for a long time. I met him in person at a Bogleheads conference. I think probably the second one I went to out in Philadelphia. He's just one of the good people out there in the industry. It's interesting that he says, “Hey, I sold out, and I only take high-net-worth clients.” I think that's how the vast majority of the industry works actually, because it's very difficult to serve these clients that are making 20, or 30, or $50,000 a year and actually make a living. You just cannot quite charge them enough money to stay in business. Unfortunate, but it's the honest truth about the financial services industry. The good news is, as a physician, you have enough income to actually pay for good advice. Just make sure you're not overpaying for good advice.

WCI: Also, be sure you don't forget to sign up for White Coat Investor Con 20. This is next March, is when the conference is. March 12th through 14th, so be sure you block it out on your clinical schedule, and be sure to come on the site on July 8th, that's next Monday, to sign up for it. At 7:00 PM, the signup will go live. We'll have all kinds of information published in a blog post earlier that day, everything you'll ever want to know about it, and I'll be answering questions about it all day, and then the signups will go live at 7:00 PM. I'm telling everybody this time, just so nobody can say, “I didn't know signups were open.” We've been telling you for a month, you're going to know when signups are open, but everybody else knows too. So if you want to come, make sure you get on there that evening and get yourself signed up.

WCI: If you’re like most doctors, nobody taught you anything about personal finance or investing during your undergrad, professional school, or residency.And even though your family – and perhaps even your business – rely on you to be the Chief Financial Officer, you have never been given the tools to succeed. Enroll in WCI Financial Boot Camp, a FREE educational email series, and learn to convert your high income to wealth. You will learn the basics of investing, saving, insurance, and more. Your high income alone will not lead to financial success, but as always, we want to help you on your financial journey. Go to whitecoatinvestor.com/financialbootcamp to sign up today!You can do this and The White Coat Investor can help.

WCI: Head up, shoulders back, you've got this and we can help. Thank you for what you do and we'll see you next time on the White Coat Investor Podcast.
Disclaimer: My Dad, your host, Dr Dahle, is a practicing emergency physician, blogger, author, and podcaster. He is not a licensed accountant, attorney or financial advisor. This podcast is for your entertainment and information only, and should not be considered official personalized financial advice.