Book review: the white coat investor part II

Chapter 8 and 9: The motorway and getting off the motorway

And chapter 5 residency and your wealth

The author calls the default investing strategy that he thinks you should use “the motorway “to Dublin, based on a saying in the Bogleheads guide to investing. Meaning there are many roads to A place but some roads are faster and more reliable. The fastest and most reliable way is low-cost index fund investing, with annual rebalancing. An example he gives is 40% US stocks, 20% international stocks in 40% bonds but he gives a link to his blog for many other reasonable investing portfolios http://whitecoatinvestor.com/150-portfolios-better-than-yours/

There are five investing factors within your control, risk, diversification, investing expenses, tax efficiency and behavior. Again, there are many factors outside of your control in investing but focusing on these factors will keep you on track on the motorway. 

The two main risks are market risk and The risk of not meeting in that your investing goals. (there is volatility which you can overcome by waiting it out, thus only invest the money that you don’t need in the next few years. Another market risk is that there’s such a significant decline that your money never recovers. That is a risk that keeps many investors up at night, and cannot just be waited out. Diversification is a great way to decrease risk particularly of the deep risk. You can diversified between asset classes such as stocks, bonds and real estate and also within those classes for example by having a mutual fund you own hundreds of individual stocks so if one stock does poorly it will not affect your portfolio too much overall.

By investing in passively managed funds you can lower your investment expenses, which can add up over a long period of time, for example an investor with an expenses of 0.10% versus 2%, will have 70% more after 30 years. 

Taxes on investing are best managed by maxing out tax advantage to accounts such as 401(k), 403b, 457, and Roth IRAs. Most positions will make too much money to be able to put money into a conventional Roth IRA, but can go to the back door route by putting money into a traditional nondeductible IRA and then converting to a Roth IRA. You need to be very careful though not to have any other money in any other sort of IRA (whether it’s a SEP IRA, SIMPLE IRA, rollover IRA or any other account that says IRA on it, to prevent the pro rata calculation which will result in additional taxes, notifying the benefit for converting into a backdoor Roth IRA. A solution for this is to roll over your IRA into a 401(k) or 403b, before you do the back door Roth. 

You can also minimize your taxes within a taxable account by investing in index funds with a low turnover rate and municipal bond funds. Here you can also do tax loss harvesting, and make donations out of this account, like into a donor advised fund (DAF)  to help lower your tax bill overall

Studies show that investors make the same mistakes over and over, and end up buying high and selling low due to investing with their emotions and chasing performance. Other behaviors which can be hurtful are herd behavior (following the crowd) or paralysis by analysis, not doing anything because there are too many choices. Having an investment plan as well as financial education and experience and sticking to it can help avoid behaviors due to emotions and reactions to short term events.

All you really need to be successful is listed above (broadly diversified mutual funds and bonds) but there are other things that you may want to “get off the highway for “. Real estate is a viable option to diversified and boost returns, but realize that it may be like a second job. You should regard your personal residence not as an investment but as an item of consumption and ideally should not be over two times your income. Private investments in real estate or other businesses like the surgical center or imaging center or other possibilities. He cautions against Insurance or annuity as fees and commissions on these are very high. There’s also a statistic that 80% of those who buy these products get rid of it before death. If you want to invest in more exotic things like bitcoin, private equity funds, hedge funds, options are covered calls, try to limit this to less than 5 to 10% of your portfolio. 

For residents: what is recommended start living on a budget and to practice the technique that even many millionaires use, pay yourself first and then spend the rest. Try not to buy a house. Buy as large of a high quality, specialty specific, or occupation, individual disability insurance policy as you can. it is least expensive and most important while you are a resident. consider a term life insurance policy if you have dependents. Create an emergency fund for 3 to 6 months worth of your living expenses, to last as long as your disability insurance waiting period. Put as much money into a Roth as you can, including if you have a Roth 403B/401(k)at work as well as a personal Roth IRA. Try to read one book on personal finance or investing each year to learn more about finances.