By Dr. Jim Dahle, WCI Founder
2024 marks the 20-year anniversary of my first real investments that I made late in my intern year. I’m older and hopefully a little wiser. I wanted to share with you some of the things I’ve learned.
Timeless Wisdom
I knew many of these things 20 years ago, but they are just as true now as they were then. I have had the opportunity to spend two decades having them reinforced to me. All successful investors should internalize these bits of timeless wisdom. These lessons include:
- There are many roads to Dublin. There are hundreds of reasonable ways to invest. Just pick one and stay with it.
- Index funds work because they must. It’s just math, and it always works. It doesn’t work because the market is efficient (although it is efficient enough that the right move is to act as if it is perfectly efficient). It works because costs matter.
- Stay the course. Investing can be simple, but it’s not easy. It’s not easy because it takes time and you have to stick with your plan no matter what happens. That’s hard for humans.
- Diversify. Diversification protects you from what you don’t know and what you can’t know. Being diversified means always being unhappy with something in your portfolio.
- Earning and saving matters. In fact, it matters more than your investments. Most of America (and the world) has an income problem. People dramatically overestimate the difficulty of doubling their income. People also suck at saving money. The secret to having large investment accounts is putting a lot of money in there.
- Individual stock investing is a bad idea. If professional active fund managers can’t beat the market before their costs and taxes, what makes you think you can? Don’t you have something better to do with your time than lose your hard-earned savings by picking stocks?
- Avoid speculative investments. If it doesn’t pay interest, have earnings, or generate rents, it is, by definition, speculative. That doesn’t mean you can’t make money with it, but it’s far closer to gambling than investing. If you can’t resist it all together, at least limit how much you put into these “investments.”
- Market timing doesn’t work long-term. If it was as easy as you think it is, everyone would be doing it successfully. It turns out that everyone’s crystal ball is cloudy.
More information here:
Best Investment Portfolios – 150 Portfolios Better Than Yours
The 1 Portfolio Better Than Yours
What I’ve Learned
I don’t want to spend too much time on that stuff today. Hopefully, you already know all of that. Today, I want to talk about what I didn’t necessarily know 20 years ago but am sure about today.
Your 30s Are the Best Time for Doctors to Get Rich
This one surprised me. I didn’t really see why one decade should be better than any others. As a general rule, people make more in their 50s than in any other decade. I came out of residency at 31 with one child and another on the way. Our net worth at the end of 2005 (when I was 30) was $17,084.38. Essentially, we were broke. That’s pretty good for doctors, most of whom have a negative net worth upon completing training.
Ten years later, at the end of 2015, we had four kids and our net worth was $2.16 million. We had gone from broke to being multi-millionaires. We weren’t yet financially independent, but it was rapidly approaching. We had built a family and we had built wealth. What happened in those 10 years? We paid for my expensive education (in our case with time, not money). We bought one house and then upgraded to a nicer one. We lived like a resident for a few years. I made partner in a financially successful physician group. We started and built a successful side business (WCI made $378,000 that year). We earned a lot and saved a whole bunch. Our savings rate in that decade was as high as 63%, but it generally ranged from 25%-45%. We specialized much more than we do now; Katie mostly took care of the home and I mostly built the career and business. It worked. We got rich in our 30s, and I’m super grateful we put such a big focus on it during that decade.
The problem with your 20s is that you don’t make much money. You don’t know anything or know how to do anything that anyone is willing to pay all that much for. This is generally true whether or not you’re in medicine. Those who get rich in their 20s are either extraordinary or just lucky. The problem with your 40s is that you lose interest. Your career is no longer new and cool. Work-life balance becomes important. Your family gets old enough that missing out on opportunities with them becomes increasingly painful. I know very few doctors in their 40s who don’t want to cut back on call, unpleasant shifts, or how much they work. My informal surveys show that most doctors want to implement burnout-reducing options in their 40s and to retire at some point in their 50s. That leaves your 30s to get rich.
I’ve been telling people to live like a resident for 2-5 years after training for the entire time WCI has existed. I get a fair amount of pushback. Yes, it’s true that a doctor can be financially successful without doing that—just like a doctor can make enough that they can do dumb things, like lease expensive cars, and still be OK eventually. But few who actually do it look back in their 40s or 50s and express regret about having done so. People coming out of training feel like they’ve been deferring gratification for so long that now they need to go hog wild. Inherent in that belief is a false idea—that they will care more about spendable income and free time in their 30s than they will in their 40s and 50s. It just isn’t true for the vast majority. If you’re not excited about practicing at 35, you’re probably going to hate it at 45.
Simplify
Thoreau famously said, “Simplify, simplify, simplify.” I suppose I knew this 20 years ago, but I didn’t REALLY know it. If I did, I wouldn’t have had a five-figure portfolio with 10 asset classes. Frankly, it’s pretty silly to have a five-figure retirement account portfolio invested in anything but a life strategy or a target retirement date fund.
Most doctors are investing across multiple types of accounts already, and when you multiply that by a multi-asset class portfolio, it can get nuts. Between Katie and I, we’re investing in 15 different accounts for retirement. That doesn’t include four UTMAs, four custodial Roths, more than 30 529s, and a double-digit number of real estate investments. Even our business is really six or seven businesses, and we own multiple trusts. We get more than 20 K-1s and file taxes in a dozen or more states. We simplified our portfolio after a few years—and it’s still super complex. We’re always looking for ways to reduce the number of K-1s we get and the number of states where we have to file.
If you build wealth as you should, your financial life is going to be complicated enough. Don’t make it any worse than you must. Make sure you have a very good reason every time you add complexity, and don’t be afraid to leave some money on the table in order to simplify.
The Passivity of Income Is a Continuum
One of the reasons I started WCI as a business in 2011 was because I got all excited about “passive income.” It didn’t turn out to be all that passive, and for a few years, there wasn’t much income either. While the IRS has a very clear definition of what passive and active income is, the truth is that some passive income is more passive than other passive income. You want to know what’s really passive? Mutual fund dividends. On a monthly, quarterly, or annual basis, they hit my account (and are often automatically reinvested) without me doing squat. Everything else is more active than that. Don’t get me wrong; I’m a big fan of passive income. It’s pretty cool to come home from vacation richer than when you left. But just because something is more passive than your regular job doesn’t mean it’s better.
Trees Don’t Grow to the Sky, But You Might Be Surprised What Happens to Them
Economist Herbert Stein said, “If something cannot go on forever, it will stop.” What Stein didn’t comment on, however, is how it will stop. I’ve been surprised multiple times by how some of these things that cannot go on forever change. In my first book, for example, I had a chapter called “The Big Squeeze” that talked about how doctors had downward pressure on their incomes and upward pressure on the cost of becoming a doctor. That chapter was written shortly after subsidized medical school loans went away, and tuition and debt levels were rising rapidly. That squeeze could not have gone on forever. So, what happened to “The Big Squeeze?” Doctor incomes went up, but the relative cost of education mostly went down. Average student loan debt flatlined. Some medical schools became free. PSLF became increasingly generous and easier and easier to get. IDRs went from ICR to IBR to PAYE to REPAYE to SAVE. Now, medical school loans don’t even grow during residency, and students don’t even take out private loans. Didn’t see most of that coming 15 years ago.
Crypto and NFTs came along and bubbled up. The NFT bubble basically imploded, never to return. Nobody talks about them anymore. Meanwhile, Bitcoin and Ethereum ended up with their own ETFs and plenty of loyal disciples. Meme stocks and the Wall Street Bets phenomenon ended about where we all expected they would, but the pathway to get there surprised many. Interest rate movements over the last decade have been anything but predictable, too. Strange times we live in, but it turns out that all times are strange.
Insurance Is Expensive for a Reason
I hate buying insurance as much as the next person. It feels like you’re just throwing money away, but you’d prefer to do that than to actually make a claim. If a given type of insurance is expensive, it’s probably because it gets used frequently. Docs get disabled all the time: in residency, in early career, in mid career, and in late career. I have a friend in her 30s with a terminal breast cancer diagnosis. I’ve had multiple colleagues die long before retirement age. Houses burn down. You run your boat aground, and kids wreck your cars. People get sick and hurt. We haven’t had a lot of insurance claims, but a lot of that has just been sheer luck. Insurance against financial catastrophes might be the most important part of financial planning.
Investing Is the Easy Part
Speaking of financial planning, you know which is the easiest of the financial tasks? Investment management. One of the most amazing parts of the financial services industry is how reluctant people are to pay for financial planning while being so willing to ridiculously overpay for investment management.
Tax prep can be hard. Estate planning can be hard. Over the years, we’ve paid pros a lot of money to help with those tasks. But investment management? Even more so than college and cars, investment management costs what you’re willing to pay. There is no better-paying hobby/side gig than managing your own investments, and it pays you more and more each year.
You Get Richer Every Month
Another sign that you’re living your financial life correctly is that you get richer every month. While there are occasional exceptions (big bear markets and with big expenses), your net worth graph mostly plods along upward and to the right. For most people, that process even continues after you stop working. If you’re worried that maybe you can’t quite afford something, give it a few months. You can probably get it then. Delaying expenses is almost the same thing as avoiding them completely. Things I never could have justified at 30 made sense at 35 and were trivial at 40. If you’re still fighting with your spouse about $100 purchases at 50, you’ve really screwed up this wealth-building process.
What do you think? What lessons have you learned in your investing career? Comment below!
