The Reason You Should Treat Your Investment Portfolio Like a Dental Practice – Episode 94

What if you looked at your investment portfolio the same way you looked at your practice? Would it change the way you approached financial markets? In this episode of Dentist Money™, Reese and Ryan explain how the same principles used to build your practice can be applied to capture more value with your investment portfolio.

Show notes:
Vanguard Study: Lump Sum Investing vs Dollar Cost Averaging
https://personal.vanguard.com/pdf/s315.pdf

Dentist Money™: Should You Invest Your Extra Cash All at Once? -Episode 77
http://dentistadvisors.com/podcast/extra-cash/

Podcast Transcript:

Speaker: Consult an advisor or conduct your own due diligence when making financial decisions. General principles discussed during this program do not constitute personal advice. This program is furnished by Dentist Advisers, a registered investment advisor. This is Dentist Money. Now here’s your host Reese Harper.

Reese Harper: Welcome to the Dentist Money Show, where we help dentists make smart financial decisions. I’m your host, Reese Harper, here with my trusty old co-host, Sir Ryan Isaac, and Q in the studio.

Ryan Isaac: Good morning everybody.

Reese Harper: Sir, today we’re going to talk about treating your portfolio like a dental practice.

Ryan Isaac: Hmm.

Reese Harper: And what the implications of that really are.

Ryan Isaac: What does that even mean?

Reese Harper: I like this subject because I think there’s a lot of stir in the air right now because we are approaching the 10 year anniversary-

Ryan Isaac: The mighty 10.

Reese Harper: -of the great recession.

Ryan Isaac: The deca-n.

Reese Harper: And it was a great recession. If you think of that-

Ryan Isaac: It was a great.

Reese Harper: -if you think back about how great it was, I mean, I just remember being like-

Ryan Isaac: I think they intended that way.

Reese Harper: -starting a business in financial management at the beginning of the great recession and being like, “Capital markets work,” and it was interesting, and you’d be like, “Negative 800 today on the Dow. Cool, let’s go raise some money. Let’s see who wants to manage a portfolio.”

Ryan Isaac: The precise-

Reese Harper: Who wants to-

Ryan Isaac: -The truth is the people who actually started investing during that period of time have the highest returns of any of our clients right now.

Reese Harper: And it truly was the great recession for them.

Ryan Isaac: Yeah. But it just didn’t feel like it for them. And for about three years they wanted to quit investing too. But-

Reese Harper: Yep.

Ryan Isaac: -by continuing to invest month after month, during that period of time, as your buddy Warren Buffet said-

Reese Harper: Ah, so close.

Ryan Isaac: “They get great returns.”

Reese Harper: Yeah.

Ryan Isaac: Well the-

Reese Harper: Buy things on sale.

Ryan Isaac: Exactly. So the question of today to start it out is what if you knew before you even started dental school, what if you knew, actually all the ups and downs and the uncertainties and the difficulties that were ahead of you in owning a Dental Practice?

Ryan Isaac: I mean, let’s talk about some of these for a minute. Like, what are some of the difficulties that happen over the course of owning a Dental practice that sometimes are, I mean, you just can’t plan on them. [crosstalk 00:02:16].

Reese Harper: So let’s talk about real examples.

Ryan Isaac: Yes.

Reese Harper: A wild white-tailed deer crashing through your office-

Ryan Isaac: There’s a video of this by the way.

Reese Harper: -and destroying your equipment. Yeah. That is-

Ryan Isaac: That happened.

Reese Harper: -an unexpected event.

Ryan Isaac: Crashes-

Reese Harper: And a true story-

Ryan Isaac: Yeah.

Reese Harper: -burst through the front window kicks everything to pieces, I think the Dentist, the main owner of that, he was like a cattle guy.

Ryan Isaac: Oh, really?

Reese Harper: He roped him up. I think he got him and hogtied him and ruffed roped him up.

Ryan Isaac: Yeah.

Reese Harper: Yeah, of course. That’s what you would do. [crosstalk 00:02:47]-

Ryan Isaac: Of course, you just-

Reese Harper: -Yeah. You have your hand piece and everything close, you also have-

Ryan Isaac: A rope.

Reese Harper: -a nice big long piece of Lafayette rope tied in nylon-

Ryan Isaac: Okay.

Reese Harper: -that you just are ready to use at a moment’s notice. You could hogtie anyone in your office or a deer. It depends on who-

Ryan Isaac: Slight, okay.

Reese Harper: -crosses your path that day.

Ryan Isaac: Slightly more common.

Reese Harper: What if you’re a pedo, and the government slashes the funding to your main insurance provider completely, completely and overhauls at like every few years without much notice. For those of you not catching that, that’s Medicare.

Ryan Isaac: Mm-hmm (affirmative).

Reese Harper: Okay? Your main insurance provider being Medicare-

Ryan Isaac: Just changes?

Reese Harper: Yup.

Ryan Isaac: And they just say, “We’re not going to pay as much money.”

Reese Harper: What about you have a $850,000 in AR pending and all your computer systems crash, and you have no history of who owes you any money and everything’s gone. Your hard drives are gone. Your records are gone, and you just decide to start from scratch and pick it up from there and hope that people will just be… remember what you-

Ryan Isaac: Walk in and be like, “Hey, I think I you owed you $1,000. Should I pay you now?”

Reese Harper: Yeah.

Ryan Isaac: What do you do?

Reese Harper: You send out letters.

Ryan Isaac: Yeah.

Reese Harper: We don’t know, “Pay us.”

Ryan Isaac: What about-

Reese Harper: What about people-

Ryan Isaac: -Okay.

Reese Harper: -leaving you? You train an associate for like three years hoping that he’ll buy into your practice with you.

Ryan Isaac: And you’re in a remote location. It’s hard to find associates and you found the guy and he’s like, he committed.

Reese Harper: Yeah.

Ryan Isaac: He promised you he was going to be there.

Reese Harper: Yep.

Ryan Isaac: And then gone overnight.

Reese Harper: Yeah.

Ryan Isaac: And he got offered 36% of collections instead of 35 and relocated to a new state. Yeah.

Reese Harper: How about you own a building and eight air conditioning units got stolen one night on the outside of the building?

Ryan Isaac: Yeah.

Reese Harper: They’re like 2,500 bucks a pop, and it overheated your office and ruined all of your fruit snacks that you love to eat. These aren’t hypotheticals. These are all real things.

Ryan Isaac: The biggest problem was the fruit snacks. Okay.

Reese Harper: That was the biggest problem [crosstalk 00:04:55].

Ryan Isaac: Let’s not forget, okay? Embezzlement. The time where you get $600,000 stolen from you, from a best friend, confidant, office manager who’s been there for-

Reese Harper: Slash-

Ryan Isaac: -a very, very-

Reese Harper: -almost-

Ryan Isaac: -time.

Reese Harper: -family now.

Ryan Isaac: Almost family and multiple hundreds of thousands of dollars are stolen.

Reese Harper: Yep.

Ryan Isaac: Oh, and then they go to jail and then get out and then do it again-

Reese Harper: Do it again.

Ryan Isaac: -with someone else under a different name.

Reese Harper: Was it a different name-

Ryan Isaac: Yes.

Reese Harper: -or they keep the same name?

Ryan Isaac: Different name.

Reese Harper: Different name. So same person in embezzles two people in a lifetime.

Ryan Isaac: Yeah.

Reese Harper: I mean, all of you who heard these stories, you probably know who we’re talking about and we’re sorry for you.

Ryan Isaac: Yeah.

Reese Harper: Well, our heart goes out to you. These are painful [crosstalk 00:05:39].

Ryan Isaac: The point of these is that none of these things were foreseeable when someone started dental school and they got the practice and none of these things… I mean, a lot of them weren’t avoidable. You can’t avoid that deer.

Reese Harper: No.

Ryan Isaac: But I think that if you look back and say all of the, you knew all of these things might happ, if you knew these things were happening-

Reese Harper: Well, these are just kind of the crazy things. I mean, what about normal stuff like equipment breaks or you just have to move to a different space and get another half a million dollar loan?

Ryan Isaac: Yep.

Reese Harper: Or a competition moves in when they weren’t in your town for a decade, and you were the only show in town and now great practices have moved in and they’re stealing patients and-

Ryan Isaac: Hey, you moved into a multi-tenant building that didn’t have a dentist in it and the landlord said he wouldn’t put a dentist in-

Reese Harper: Never did.

Ryan Isaac: -but then he put four more in there, all general dentists-

Reese Harper: Yeah.

Ryan Isaac: -on top of you. I mean, your collections decline. You struggle with reimbursements, you have staff turnover, like normal, just normal hard-

Reese Harper: You’ve got to go hire people you never thought you had to hire before to manage things you didn’t think you had to manage.

Ryan Isaac: I think ultimately what we’re saying here is, there’s a lot of things that come with going into a Dental Practice. You kind of knew some of these things might happen. Some of them you didn’t know. There’s the normal stuff and the stuff that was a little bit abnormal-

Reese Harper: Hard to predict.

Ryan Isaac: -Yeah. And even if you knew it was coming, you really couldn’t avoid it though.

Reese Harper: Yeah.

Ryan Isaac: I mean, a lot of this stuff. Similar to a Dental Practice, markets go down a lot more than people think they do.

Reese Harper: Mm-hmm (affirmative).

Ryan Isaac: But owning them in the right way, over long periods of time, give you a lot more benefits than costs.

Reese Harper: Well, it’s like the dental practice, those two things are similar and that’s what we’re talking about today. How, just like the dental practice that you’re going to go through these times, some are abnormal, some are normal, most are kind of unavoidable, but you go through them anyway.

Reese Harper: And similar to that in a portfolio, in public markets, the same things happen. But those downtimes happen a lot more, we talk about this, that they happen a lot more frequently than people think. Let’s take a look at how often the market declines and at what percentage it declines.

Ryan Isaac: Yeah. Absolutely.

Reese Harper: Let’s start with 5%.

Ryan Isaac: Okay.

Reese Harper: Okay? How often does the market decline 5%? This is a question for Sir Ryan, I think.

Ryan Isaac: Yes. Well, I have a cheat sheet here-

Reese Harper: Okay.

Ryan Isaac: -which I hope it’s allowed. Well, so the data, it’s since the 1920s, and this is just the US markets. A decline of 5% has happened on average since the 1920s about three times a year. I don’t think most people would-

Reese Harper: [crosstalk 00:08:20].

Ryan Isaac: -think it was that frequent. If you asked the average per, yeah-

Reese Harper: Yeah.

Ryan Isaac: -how often do you think the market declines 5%? They wouldn’t say three times a year. They’d probably say once a year-

Reese Harper: Yeah.

Ryan Isaac: -once every couple of years.

Reese Harper: How often does the market decline 10%? Well, the market declines 10% once a year. Now that one’s kind of like… I mean, no one would guess that.

Ryan Isaac: Yeah.

Reese Harper: I think that’s much more frequent than people would realize.

Ryan Isaac: Yeah. And that’s a significant amount of money. If you’ve got 1 million bucks, you’d-

Reese Harper: It moves down-

Ryan Isaac: -see it decline-

Reese Harper: -$100,000.

Ryan Isaac: Yeah.

Reese Harper: Yeah. Now-

Ryan Isaac: Urgh! That’s a gut check.

Reese Harper: -how often does the US stock market decline 15%?

Ryan Isaac: Once every two years.

Reese Harper: That’s right. And you do have a cheat sheet?

Ryan Isaac: I do have-

Reese Harper: But I do-

Ryan Isaac: -a cheat sheet.

Reese Harper: -think it’s awesome that you’re getting the right answer.

Ryan Isaac: What if I got it wrong?

Reese Harper: Once every two years, the market loses 15%.

Ryan Isaac: Declines.

Reese Harper: I guess that’s a good clarification.

Ryan Isaac: Yes. And we’re not losing-

Reese Harper: And you said it on purpose so that we could make this point.

Ryan Isaac: I did. Thank you.

Reese Harper: Really, what happens is you’re not losing money when the market declines, but it feels like it.

Ryan Isaac: Mm-hmm (affirmative).

Reese Harper: Just like if your house went down in value this month and your realtor told you that it was, the housing market was down 12%, you didn’t actually lose the money because that’s not money that you really ever had.

Ryan Isaac: You didn’t lock it in.

Reese Harper: Yeah. You didn’t don’t lock in-

Ryan Isaac: Don’t lock it in.

Reese Harper: -the price. But that’s, it’s pretty, I don’t think anyone would guess that basically every other year the market will decline 15%.

Ryan Isaac: Yeah.

Reese Harper: What about 20% loss? So 20% is the official bear market, right? If a market declines 20% that’s an official bear market.

Ryan Isaac: Yep.

Reese Harper: And that happens once every three to four years.

Ryan Isaac: Yeah.

Reese Harper: It’s pretty significant, and that’s kind of the… That’s what signified the Great Recession being called The Recession, is by the time we got into that… Well, a recession’s deeper-

Ryan Isaac: GDP.

Reese Harper: -A recessions even deeper than-

Ryan Isaac: Yeah.

Reese Harper: -It’s a larger scale issue in a recession, but recession and a bear market at the same time did it happen at that point?

Ryan Isaac: Yeah. Sometimes you’ll have them happen independently of one another, but in this case, we had both. We’ve had bear markets without recessions.

Reese Harper: Mm-hmm (affirmative).

Ryan Isaac: I think it’s just really imp… The reason why we bring this up, and then in context of thinking about how often things go, you don’t want to say it’s wrong, like how often things… you just have volatility in a Dental Practice is, as you invest money in public markets, you can’t feel something is terribly, horribly wrong when you have declines of 10, 15, or 20%. It doesn’t feel good.

Reese Harper: Yeah.

Ryan Isaac: I mean, it’s not like you shouldn’t have an emotional reaction to it. Please be emotional. Call Reese and be extremely emotional.

Reese Harper: Yes, I appreciate those calls. I do like going through them with you.

Ryan Isaac: Yeah. But it’s just healthy to know so that it doesn’t feel like, “Oh, this is it. This is the prediction of the end of the world that everyone talks about. This has never happened before.” When it’s like, no, this happens on average a lot more frequently than you’d expect it to.

Reese Harper: I think the difference is that when you own a Dental Practice and you know all these things are going to happen, you know there’s going to be down, you know there’s going to be declines in your value, there’s going to be declines in your collections, declines in your income-

Ryan Isaac: Tax flow. Yeah.

Reese Harper: -but you know that the long-term benefit of owning the Dental Practice, which is your income’s going to increase and your cash flow is going to get better and you’re going to have higher disposable income and you’ll have the ability to sell that asset one day, that you know that you’re going to be able to push through those hard times and that those difficult times are going to occur less frequently, but you know that they’re going to happen-

Ryan Isaac: Mm-hmm (affirmative).

Reese Harper: -but you to go through them to get to that long-term success.

Ryan Isaac: Yeah.

Reese Harper: And, but many investors in the market, they don’t behave the same way with their investments portfolio-

Ryan Isaac: That’s the difference. Yeah.

Reese Harper: -during those difficult times and, therefore-

Ryan Isaac: Though that seems broken [crosstalk 00:12:04].

Reese Harper: -Yeah. They never get to see the long-term benefits of what they’re going to… what they could achieve if they just stuck around to wait.

Reese Harper: So this concept, this is the first thing we’re going talk about today. This concept, why does a dentist hold on to his practice during all these rough times, the deer crashing through the window or the office manager leaving, or competition.

Reese Harper: I think one is, I mean, you have a lot of skin in the game by that time.

Ryan Isaac: Yeah.

Reese Harper: I mean, that’s fair to say that, but another reason is a term called expected return. So a dentist who goes through dental school, goes through all the hassle and time and sacrifice and cost of dental school, goes through all of it that it takes to get a practice and run it. They have an expected return.

Reese Harper: They’re expecting something to happen from all this ownership and all the sacrifice, which is income and cash flow and an asset that they can sell one day. That’s part of their balance sheets.

Reese Harper: So we’re going to talk about this concept of expected return. You talk about this a lot and you say that sometimes people don’t think about expected returns the right way. You want to kind of talk about that for a minute?

Ryan Isaac: Well, I think… I mean, expected return is the amount of growth that you anticipate on an investment based on all of the historical returns that that investment has given you. So when you’re calculating an expected return, what you want to do is you want to look at the historical returns of an investment that, of a type of investment that you’re in.

Ryan Isaac: Let’s take CDs, for example. Let’s say I’m going to invest in CDs and I know that I’m going to do that my entire life. But I know that maybe right now the return of CDs might only be like 1.5%, so it’s a little bit lower than it might normally be in the future.

Ryan Isaac: But if you look over like 20 to 25 years of CD returns and you say, “What’s the average return over that whole period of time?” You could say the average CD return might be like in the mid threes or the low threes. It’s closer to the inflation rate.

Ryan Isaac: So when you invest in CDs, kind of the way to look at it, is say, “Well, I’m investing in something that has an expected return of 3%. Even though today I might be getting one and a half, it’s just my strategy is that if I keep doing it for a long time-”

Reese Harper: For a long enough period of time.

Ryan Isaac: “-some years, I’m going to get 5% and 6% because their interest rates are going to be really high and sometimes I’m going to get one or zero, but I’m probably going to average three.”

Reese Harper: Mm-hmm (affirmative).

Ryan Isaac: So that helps you kind of have an idea of what kind of return you should expect from that kind of strategy. And that during certain periods of time, you might be happy, and certain periods of time, you might not be quite as ecstatic, because-

Reese Harper: Which is the key, right? It’s, that length of time is really the key.

Ryan Isaac: Yeah.

Reese Harper: You can’t measure… We were talking about this the other day. You can’t look at a quarters worth of investment returns and say, “Oh, they went down and my student loans are 5%, therefore, I should take my money and pay off my 5% student loans.”

Ryan Isaac: Yeah.

Reese Harper: Because it’s quarter [crosstalk 00:14:58].

Ryan Isaac: Well, you see, it’s harder to think about when you compare a more complex investment, like a stock portfolio.

Reese Harper: Mm-hmm (affirmative).

Ryan Isaac: A CD’s a little bit easier because-

Reese Harper: [crosstalk 00:15:07].

Ryan Isaac: -the returns are more stable.

Reese Harper: Yeah.

Ryan Isaac: They don’t move as much. But when you look at stock market returns, there is an expected return for each market and each type of… There is an expected return for the overall US stock market, and there’s an expected return for the overall global stock market.

Ryan Isaac: And those returns, in the United States stock market, the top 500 companies in the market, the expected return from that portfolio is around 10% a year.

Reese Harper: Mm-hmm (affirmative).

Ryan Isaac: So you take the S&P 500 is the 500 of largest companies in the US and you say, “What’s the average of that since 1926?” It’s going to be right at around 10%. I think it’s slightly above right now. Like 10.1.

Reese Harper: Yeah.

Ryan Isaac: And so if you have that as your expected return, you know that you’re never going to get that in any given-

Reese Harper: Perfectly.

Ryan Isaac: -perfect, in any one calendar year because it’s an average of returns. And it’s not a guaranteed return, and it’s not something that you can expect every calendar year, but if you allow yourself to invest in that security for about 11 years to 12 years every year, then you’ll reach that, what we call expected return over that period of time. And your return, if you looked back over 11 or 12 years, you’d have a really high probability of hitting that average.

Reese Harper: Right.

Ryan Isaac: Just like in your CD portfolio that I was talking about, the return’s lower in that, right? You only have a expected return of three. And so maybe in any given one year you might be between 1% and 5%. You’re going to float around. It’s not quite as scary, but it’s still not ever going to be precisely at three.

Ryan Isaac: And if you were investing in the stock market, you’ve got that same issue. You’re going to have some years where you’ve got a positive 38 to 40% to an 80% return.

Reese Harper: Mm-hmm (affirmative).

Ryan Isaac: You can see years where, like in 2008 and ’09, you’ll see periods of time where the market recovered a little bit, and 2010, 2009 to 2010 the market recovered a lot.

Reese Harper: Yep, quickly.

Ryan Isaac: And so you have a big return in those periods of time from the bottom to the top. But you didn’t make up for all the losses that you just had the previous year, you have to wait a longer period of time.

Reese Harper: Mm-hmm (affirmative).

Ryan Isaac: So the thing to think about with expected returns is, it’s pretty simple. When you invest in something, you should treat it as if it’s going to give you that return and think about it as if it will give you that return, but just make sure that your timeframe is long enough to where you can stick around to earn it.

Reese Harper: Mm-hmm (affirmative).

Ryan Isaac: And an investment that pays a low return, you don’t have to have as long of a timeframe as an investment that pays a higher return. And so there’s ways to get even higher returns than the overall S&P 500, but that involves having even a longer time frame, right?

Reese Harper: Yeah.

Ryan Isaac: And you’ve got to go 13 years or 14 years or-

Reese Harper: And volatility will be different [crosstalk 00:18:01].

Ryan Isaac: You’ll have a higher up and down movement.

Reese Harper: Yeah.

Ryan Isaac: You’ll have deeper losses like we talked about earlier.

Reese Harper: Yep.

Ryan Isaac: And so I think it’s important to just understand what expected return means because you have an expected return in your Dental Practice that you’re kind of thinking about-

Reese Harper: Mm-hmm (affirmative).

Ryan Isaac: -but they probably never… I mean, expected returns is a very common term in financing and investments and portfolios, but I don’t think many dentists think about it that way with their practice. But that’s exactly how they treat it. I mean, they fully expect, “Okay, I went through all this because I’m going to make money and I’m going to be able to sell this at one point despite the fact that there will be some problems that happen. Someone might embezzle, the insurance companies might change on me, I’m going to have to spend more money, it’s going to cost me money.” you know?

Reese Harper: Yeah.

Ryan Isaac: They do fully expect it. And the same concept totally applies to a portfolio.

Reese Harper: We need to talk about this. I just think it’s important to sort of understand the concept and not just skip over it, because it’s really easy for people to just assume that, well, they just lost money or they’re going to lose money, or the markets went down so they lost money. It’s not, this isn’t a speculative like rat race, a mouse running around the wheel.

Ryan Isaac: You’re not gambling.

Reese Harper: You’re not gambling on this. You’re just buying an asset-

Ryan Isaac: That has an expected return for a reason.

Reese Harper: -that has an expected positive return.

Ryan Isaac: Yeah.

Reese Harper: And it can be calculated.

Ryan Isaac: It’s mathematical. Yeah.

Reese Harper: It’s just, if you don’t hold it long enough, you won’t earn it.

Ryan Isaac: Mm-hmm (affirmative).

Reese Harper: So I really like to reinforce that, and we’ve probably taken a lot of time to discuss this in the past and hopefully, it’s sticking with some people that are listening because I think that’s the reason people are struggling with a good investment return.

Reese Harper: They’re willing to hold onto a house, and they’re willing to hold on to a dental practice, and they’re willing to hold on to a car, right? And it’s even going down in value.

Ryan Isaac: They keep… You’ve got a water pump and some new tires.

Reese Harper: Yeah. But assets, financial assets, like stocks and bonds that have a positive expected return, we’re not willing to hold on to them when they go down in value.

Ryan Isaac: Yeah.

Reese Harper: We just want to get rid of them.

Ryan Isaac: Yeah.

Reese Harper: And I think that’s really just an impo… You’re never going to succeed as an investor if that’s your attitude, because you’re going to get to the point where you just don’t ever stick around to earn the returns from any of your financial assets.

Ryan Isaac: Mm-hmm (affirmative).

Reese Harper: And by financial assets, we mean stocks and bonds and cash and mutual funds and those kinds of things.

Ryan Isaac: Yeah.

Reese Harper: But somehow with real assets, like real estate and dental practices and gold coins-

Ryan Isaac: Well, it’s harder to get rid of. It’s harder to get rid of.

Reese Harper: -they’re just physical property that you-

Ryan Isaac: [crosstalk 00:20:37] more emotional.

Reese Harper: -Yeah. You feel good about them so.

Ryan Isaac: Yeah.

Reese Harper: So let’s take a quick commercial break-

Ryan Isaac: Yeah, it’s a good time.

Reese Harper: -and we’ll come back and we’re going to talk about how you create long-term value during bear markets, during downtimes.

Reese Harper: Hi, this is Reese Harper. I’m the host of the Dentist Money Show and CEO of dentistadvisors.com. I want to take just a minute and explain why dentistadvisors.com is different than your average team of financial advisors. We help you plan, invest and retire better using a unique set of tools you won’t find anywhere else.

Reese Harper: First, we use our proprietary methodology called elements to assess your financial health. The elements’ framework enables us to give you data driven objective advice based on a comprehensive picture of your personal and practice finances. We maintain that picture in a custom dashboard that tracks all your assets, debts, and accounts, so you know what you’re worth anytime and anywhere.

Reese Harper: And because we work with dentists and specialists, we can leverage our industry expertise to weigh your progress against your peers. We are the premier wealth management firm for dentists and specialists, and we’re ready to put you on a more predictable path to financial independence.

Reese Harper: Start now by booking your free consultation today at dentistadvisors.com. Thanks again for listening. Now let’s get back to the show.

Ryan Isaac: Welcome back, everybody.

Reese Harper: Thank you.

Ryan Isaac: [crosstalk 00:22:02].

Reese Harper: I finally feel welcome.

Ryan Isaac: Do you feel welcome? Do you feel refreshed?

Reese Harper: I feel like we need to jump right into our next subject because I’m excited about it.

Ryan Isaac: Yeah, it’s all you could talk about during the whole commercial. And I was just like, “Wait Reese, wait until we get back from break. We still need to hear it.”

Reese Harper: So here’s what we’re going to talk about. Item two on our list, that you make your money in the stock market during the downtime, you make your money during the stock market during the time things are on sale, you make it while prices are down. I shop for my Belgian chocolate milk at Whole Foods when it is on sale.

Ryan Isaac: Isn’t everything on sale now that Amazon purchased Whole Foods? And then like, and immediate in the next week, it was like price declines.

Reese Harper: Whole Foods is the only asset that Amazon owns that making any money so, or that will make money, that they will own. It’s not official yet.

Ryan Isaac: Yeah, it’s not official.

Reese Harper: So-

Ryan Isaac: Okay.

Reese Harper: -let’s jump right in and talk about how this applies to people. Think of sticking to your investment allocation during bear markets, like holding onto your practice during the difficult times. Think of it that way. You’re going to hold on to your practice, and you’re going to continue to invest in it even though it’s declining, and you’re having problems, and AR’s getting out there, and you just lost a hygienist, and you’ve got some more competition coming in. You’re not just going to bail on it and sell it because things are tough.

Ryan Isaac: Yeah.

Reese Harper: You’re going to continue to invest in it, you’re going to stick with it and you’re going to make some effort at trying to make the right decisions. So think about the couple of scenarios.

Ryan Isaac: Yeah, well, I mean, the point is that it’s usually during those times that you become the real business owner anyway, right? That you create the, so the example, Justin and I were talking about this, he was saying, it’s not uncommon where you’ll have a seasoned office manager, and an office just kind of just run things for a while. Maybe that person’s been through a couple transitions, and a couple of doctors.

Ryan Isaac: That person knows every process, every patient, every spreadsheet, they have everything in their head, while the doctors just kind of doing their work. Right?

Reese Harper: Yeah.

Ryan Isaac: And the problem happens when that stuff is just in the person’s head and then they leave the company. It’s 20 years, they’ve ran the whole process and the whole front office and the insurance and the reek, everything happens because that office manager knows how to run it all. It’s all in her head. Right? But then if they leave and that process isn’t actually there for someone else to follow, to pick up on, that’s when problems can happen.

Ryan Isaac: And so we were talking about… And that’s common that that happens. And it’s during that time when of course the dentist doesn’t just sell his business and walk off. You don’t just leave.

Reese Harper: Yeah.

Ryan Isaac: What do you do? Well, you got to hire someone new, but now you’re going to create, you’re going to become better. You’re going to become a better business owner, right? I mean, think, we’ve been through this too with-

Reese Harper: Yeah.

Ryan Isaac: -systems and processes were kind of trial and error. You learn how to implement things with technology or just other systems so employees can follow and if someone has to leave the company or chooses to, then it’s not this detrimental thing, you know?

Reese Harper: Yeah. Yeah.

Ryan Isaac: So the point is that, it’s during those times that, they become a better business owner. They become stronger and smarter and there’ll be better for it in the future.

Reese Harper: Yeah.

Ryan Isaac: I think that the thing that’s kind of hard for people to realize is the same thing happens when the stock market declines, okay? When the market is going down, you should approach it the same way.

Reese Harper: Mm-hmm (affirmative).

Ryan Isaac: And just like your dental practice, there are going to be things that make the market goes down. I mean, usually, you can’t tell right in the moment what’s causing it to go down. You can look in hindsight-

Reese Harper: Oh, yeah. Hindsight.

Ryan Isaac: -and see it-

Reese Harper: Yeah.

Ryan Isaac: -but because markets are, they respond really quickly to new information, and it’s new information daily that makes a market reprice.

Reese Harper: And honestly, it’s hard to say what new information is going to…. I mean, lately there’s been plenty of scary things that happen around the world, but markets don’t really care right now.

Ryan Isaac: No, but you can see that sometimes the market movements are based on factors that… Markets generally move because of long-term trends and medium-term trends just like a practice. A dental practice will not increase in value unless collections increase.

Reese Harper: Yeah.

Ryan Isaac: You’re not going to see a dental practice go up in value if collections are declining.

Reese Harper: Yep.

Ryan Isaac: And the same thing with the public market. If companies are doing more sales, if they’re doing more collections, then you’ll see the market rise.

Reese Harper: Mm-hmm (affirmative).

Ryan Isaac: Sometimes you’ll see the market move in ways that doesn’t have to do with that. But that isn’t a sustainable-

Reese Harper: Yeah, those are the short-term-

Ryan Isaac: -thing.

Reese Harper: -blips.

Ryan Isaac: Just like if your dental practice was on an exchange, let’s say every dental practice in the world was on an exchange and everyone saw every piece of data.

Reese Harper: In exchange, meaning what?

Ryan Isaac: Let’s say you-

Reese Harper: Q’s wondering that in his head that his microphone is so hot right now I can hear his thoughts, his thoughts, yeah.

Ryan Isaac: Let’s say every dental practice in the world’s on a website-

Reese Harper: Okay.

Ryan Isaac: -and the website was connected to every part of your practice. It pumped out your Dentrix data, your Eaglesoft data. It made it public. Every time someone visited paid-

Reese Harper: Dental [crosstalk 00:27:00].

Ryan Isaac: -how are they paid the… And then every person in your office also had to be on public record, who your employees were, the experience that they had, the competency that they had, the education level that they had-

Reese Harper: Their pay and their income-

Ryan Isaac: -their pay-

Reese Harper: -benefits.

Ryan Isaac: -if all that stuff was public, you’d see your dental, and let’s say if all that was public and then in one, and one day your office manager said something kind of like crazy to one patient. Like she just totally laid into a patient because the patient was being unreasonable, and your office manager was really frustrated and kind of vented.

Reese Harper: Yeah.

Ryan Isaac: And everyone in the world saw that and knew about it and saw that moment-

Reese Harper: And it got pumped out to the website.

Ryan Isaac: And it got pumped out to the website and everyone watched the video of her doing that.

Reese Harper: Oh, no.

Ryan Isaac: Like what would happen to your Dental Practice? It would probably move down a little bit.

Reese Harper: Yeah.

Ryan Isaac: Okay? That’s not good news.

Reese Harper: Yeah.

Ryan Isaac: That’s negative news.

Reese Harper: Yeah.

Ryan Isaac: But what if your collections went up that month?

Reese Harper: Right.

Ryan Isaac: By the end of the month it’s likely that the practice value would be back where it was, if not higher, even though there was this-

Reese Harper: That’s a good example.

Ryan Isaac: -yelling moment-

Reese Harper: Yeah.

Ryan Isaac: -in front of your staff to the patient. And I think if you think about companies that way, there’s a lot of little things that will freak people out momentarily, and maybe cause them to say, “I don’t really want to own that company. I don’t want to be a part of it.”

Reese Harper: Mm-hmm (affirmative).

Ryan Isaac: But if the underlying collections or underlying revenue of your practice continue to grow, then you can have confidence that the price of your practice is going to be higher at the end of the month or the end of the year.

Ryan Isaac: The public market works very, in a very similar way where there’s a lot of short term movement that sometimes people attribute to. They say, “Oh, man, the market’s really finicky. It always goes up and down, and it’s crazy. There’s no rhyme or reason to it.”

Reese Harper: Yeah.

Ryan Isaac: Well, it goes through little adjustments every day based on short-term news as well-

Reese Harper: Yeah.

Ryan Isaac: -but if… There’s 13,000 companies approximately. Well, let’s just say take the US. There’s 3,600 to 3,700 companies, and all those companies have collections data just like Dental Practice. And they public, and they show it every three months. And you can have confidence that all of those companies combined are going to want to grow their collections.

Reese Harper: Yeah.

Ryan Isaac: Right? It’d be like 3,600 dental practices as opposed to investing in one, right?

Reese Harper: Yeah. Yeah. They’re all trying to grow just like you are.

Ryan Isaac: They’re all trying to grow and that’s where this expected return comes from that we talked about. That’s why the market average of the US market of 3,600 companies is around 10% for the last 100 and change years because all of these people are just working really hard every day to try to make sure their collections grow just like yours.

Reese Harper: Mm-hmm (affirmative). Yep.

Ryan Isaac: But if you see little daily movements or short-term movements because of any variety of factors, natural disasters, political issues, wars, I mean, you can see it happen from big negative news stories about one big company. Like if a really public company like Apple or Google or-

Reese Harper: Something bad happens, yeah.

Ryan Isaac: -Facebook, something really bad happened, that could affect the market.

Reese Harper: Yep.

Ryan Isaac: But like over a month or over three months, it might not affect anything at all.

Reese Harper: Yeah.

Ryan Isaac: So you’ll see cases where natural disasters have a big impact on a market. And maybe it’s because collections aren’t that strong right now, or it’s because these companies collections, they’re just not that strong. And so things like a natural disaster could really make people get worried. But if collections are great and growing like crazy and there’s a natural disaster, you might not see the movement like we have in the last.

Reese Harper: Yeah, exactly.

Ryan Isaac: It’s been like one of the most crazy periods of time of natural disasters in like the last 30 years, and we just haven’t seen a lot of volatility.

Reese Harper: Yep.

Ryan Isaac: But we did see that kind of volatility in the Japanese tsunami, and we saw that during the 2012, 2013 cycle, because the market wasn’t moving quite as heavily, and some of those natural disasters caused more volatility, more downs, downward pressure. And so I think, it’s just really important to know that that’s how the market works-

Reese Harper: Yeah.

Ryan Isaac: -and it’s not that different from your Dental Practice.

Reese Harper: Well, it’s not. And so the point of that is, and like we talked about in the beginning of the Podcast, it goes down more frequently than people think it does. And so those are the times when the real money’s made.

Reese Harper: I mean, you could take, you could go back during any period of time and look at the times when the market was declining, right? And if you were a consistent investor during those times, that’s where the bulk of your returns are going to come from because you’re just, the same amount of money is just buying more shares.

Ryan Isaac: I was talking to a client about this actually yesterday because the big debate for a lot of people is, “I’m sitting on a big pile of cash right now. I haven’t been an investor for a while. I’ve been kind of sitting on the sidelines. Is the market expensive right now? Should I lump sum throw this at the market or should I just kind of layer it in slowly? What’s my approach?”

Ryan Isaac: There’s a great research paper from Vanguard on this called, I think it’s called The Risks of a Dollar Cost Averaging. I think that’s the name of it.

Reese Harper: Yeah.

Ryan Isaac: But it basically talks about, they call it lump sum investing or LSI-

Reese Harper: LSI versus-

Ryan Isaac: I think called LSI versus DCA or cost average.

Reese Harper: There’s a title for the paper that’s more deliberate.

Ryan Isaac: Okay.

Reese Harper: But they are-

Justin Copier: You can put it in the show notes, won’t you? Just in?

Reese Harper: Yeah. We’ll put that in the show notes.

Justin Copier: Yeah.

Ryan Isaac: Thanks Justin.

Justin Copier: Yeah. Looking sharp.

Ryan Isaac: Yeah.

Reese Harper: Ultimately, what they concluded was that if you, it’s basically that putting your money to work as soon as possible gives you a higher probability of return than waiting and kind of-

Ryan Isaac: Slowly.

Reese Harper: -figuring it out slowly later. Because all you’re doing by layering it in, is you’re saying, “It’s probably going to be better in the future. And I think that I know in the future when it’s going to be better.”

Ryan Isaac: Mm-hmm (affirmative).

Reese Harper: Where the person that puts it in today just says, “I’m not really sure when it’s going to get better or when it’s cheaper-”

Ryan Isaac: It will be.

Reese Harper: “-but I’ll start now. And the longer I have it invested, the probability of my return’s greater.” We talked about this in a previous Podcasts.

Ryan Isaac: Yeah. There was another show and on this.

Reese Harper: And Warren Buffett talks about this, and he just says, “Look, if you’re going to be a saver over the next five years, if you’re going to save more money than spend,” he says net saver-

Ryan Isaac: Yeah. [crosstalk 00:33:20]-

Reese Harper: -but really what that means-

Ryan Isaac: – you’re going to save money.

Reese Harper: -is, you’re going to save money more than you’ll spend it. So you have leftover money.

Ryan Isaac: Yeah.

Reese Harper: Should you hope for a higher return or, sorry, hope for a higher or lower stock market during that period?

Ryan Isaac: Yeah.

Reese Harper: Like would you want the stock market to be going down or would you want it to be going up if you’re going to be a saver? Like if you know that you’re not going to be spending the money, and of course he says, “Many investors get this one wrong. Even though they’re going to be buyers or savers, right? For many years to come,”

Ryan Isaac: A long time, yeah.

Reese Harper: “they’re,”

Ryan Isaac: They want every year to just go up and up and up.

Reese Harper: Yeah. They’re super excited when prices rise, and they’re really depressed when prices fall. And if you’ve got a lot of time ahead of you to still save, then you really should look forward to extended periods of time when prices are low.

Ryan Isaac: Mm-hmm (affirmative).

Reese Harper: And right now, investors right now who, I mean, it’s been… The last 10 years have not been pretty for people who started 10 years ago. They’re just barely starting to get to be pretty, right?

Ryan Isaac: Yeah.

Reese Harper: It’s like, think about, think if you’re a client of ours, started in 2007, and you put a lump sum of money into the market.

Ryan Isaac: Mm-hmm (affirmative).

Reese Harper: I mean, you… And someone else sat around and just held cash.

Ryan Isaac: Yep.

Reese Harper: Okay? The person that held cash saw the market decline, and they were all pointing at that they got it right-

Ryan Isaac: And they felt good.

Reese Harper: And that they knew it was coming because they weren’t in the market.

Ryan Isaac: Yeah.

Reese Harper: And the other person put their money in and it just crashed, and they saw-

Ryan Isaac: They were mad for a year.

Reese Harper: -a three year period where they were just like, “I’m barely getting back to a breakeven.”

Ryan Isaac: Yeah.

Reese Harper: The other person who waited during that crash, in most cases that I saw, they never really started investing.

Ryan Isaac: Yeah.

Reese Harper: I mean, it was such a traumatic thing financially.

Ryan Isaac: Yeah.

Reese Harper: I mean, you don’t just go, “Yeah, we lost 50%. I think it’s time.” And the news was still awful. Everyone was still really negative about everything-

Ryan Isaac: Everything.

Reese Harper: -the whole world. And we still didn’t even know how to unwind this big crisis that had happened in our markets. And so it’s not like people were like rationally thinking, “That was a 50-50 client. I’m ready.”

Ryan Isaac: No. For years after the market declined, no one was investing.

Reese Harper: [crosstalk 00:35:34]. Yeah.

Ryan Isaac: There was waiting.

Reese Harper: They saw it go up.

Ryan Isaac: They saw it go up a little more. I mean, you got to 2012, 2013, 2014 and then some people started thinking, “Well, maybe-”

Reese Harper: Maybe it’s time.

Ryan Isaac: “-maybe it’s time.” But the people who started ’07-

Reese Harper: Had already got a return.

Ryan Isaac: And they had been investing consistently.

Reese Harper: Yeah.

Ryan Isaac: They kept saving because their dividends and their interest income that they got paid. Even if you didn’t have any new savings to deposit, it was just a big lump sum.

Reese Harper: Yeah.

Ryan Isaac: I mean, you kept buying stocks as they went down because you kept getting paid to have your money sit there. I mean, the stock market is paying you two to two and a half percent, sometimes as much as 3% a year just to sit on it in dividends and interest.

Reese Harper: Mm-hmm (affirmative).

Ryan Isaac: And so you’re sitting there just earning money and reinvesting it and it’s just a lot easier. Like looking back right now from 2017 to 2007, a lot of those people are in great shape right now.

Reese Harper: Yeah. Uh-huh (affirmative).

Ryan Isaac: But it’s been a long road and there’s other people that started maybe precisely at the bottom of ’09.

Reese Harper: Don’t take any credit for that if you’re that person please.

Ryan Isaac: Yeah. Some people might’ve started like bottom of ’09, just happened to be the time when they decided to start investing, and their rally right now looks really good because they were-

Reese Harper: They missed it.

Ryan Isaac: -they missed the decline and they started at the bottom and now they got to the top and-

Reese Harper: That’s what Drake said, “Started at the bottom.”

Ryan Isaac: Yeah.

Reese Harper: “-now they’re here.”

Ryan Isaac: But if you look back over 15 years or 18 years of those two people-

Reese Harper: Pretty average.

Ryan Isaac: -the differences between their two experiences won’t be that traumatic.

Reese Harper: Mm-hmm (affirmative).

Ryan Isaac: But it… I mean, it’s just, I think it’s more important to sort of get your plan right by saying, “How much money am I going to invest? For what purpose?” Like, “This amount of money’s for this time in my life, and this amount of monies for this time in my life, and this amount of money’s for this debt, and this is for my emergency fund, and this is for my retirement when I hit-”

Reese Harper: This is for 20 years from now, yep.

Ryan Isaac: “-70, and this is what I’m going to spend when I get to 55, this is what I’m going to spend when I get to 65,” and pair those goals, those timeframes up with the right buckets of money and just get going. Because sitting around on cash and just waiting for the perfect time is never going to be an easy-

Reese Harper: Well-

Ryan Isaac: -it’s just always a gamble and it’s a hard game to play.

Reese Harper: Yeah. Well, and the longer you wait, the harder it will get. I mean, emotionally it’ll just get so much harder. Even if the client you were talking to this week was right and the market’s really expensive and we see a huge decline soon, I mean, when does he get in then?

Ryan Isaac: Yeah.

Reese Harper: It’s not like he’s going to be like, “Ah, that was 10% down. Let’s just do it now.” Because then if it goes down another 10% I pull it back out.

Ryan Isaac: Yep.

Reese Harper: I mean, it’s just gets harder and harder to sit and wait. And if you know you’ve got the timeframe, then don’t wait on it.

Justin Copier: So the episode that we did on dollar cost averaging versus lump sum investing was episode number 77..

Reese Harper: Oh, cool.

Justin Copier: And I’ll put this in the show notes too, but it was called, Should You Invest Your Extra Cash All at Once?

Reese Harper: Okay. So episode 77, dentistadvisors.com/listen. You can just go find episode 77. All right, so let’s wrap up. Just kind of conclude here with… Let’s recap what we talked about. First was, what is an expected return? An expected return is the reason why you hold the Dental Practice even though it’s very expensive at times, and there’s downtimes and unexpected problems that happen because you fully expect to earn more money, have cashflow, disposable income, and have an asset.

Reese Harper: And that same principle completely applies to a public market, a portfolio of an expected return. There’s mathematical real life reasons why there is an expectation to have a rational return in the future if you hold it for a long enough period of time. So that was the first one.

Ryan Isaac: Yeah.

Reese Harper: Second one is that the real returns that you earn, whether it’s in your Dental Practice or in your portfolio, come during the difficult times. That’s where you really separate-

Ryan Isaac: Where you shine.

Reese Harper: -the people that succeed or fail.

Ryan Isaac: Mm-hmm (affirmative).

Reese Harper: And it’s who behaves differently during those challenging times in the dental practice, who responds well to the struggle, and in the portfolio management investment world, that’s who consistently buys and continues to invest during the time where everyone else is just like, “I’m not-”

Ryan Isaac: Done.

Reese Harper: “-I’m done.”

Ryan Isaac: Yep.

Reese Harper: “I’m waiting until we get done with this.”

Ryan Isaac: Yep.

Reese Harper: I like it.

Ryan Isaac: Yeah.

Reese Harper: What do we-

Ryan Isaac: Reach out to us.

Reese Harper: You can call us. Okay? You can call us on this fancy phone number. That is 833-DDS-Plan. And if you’d like to have a conversation with us and kind of schedule a consultation, if you go to our website, dentistadvisors.com, at the top there’s a link where you click on it, it’ll pull up a calendar, you can pick the time of day that is most convenient for you.

Reese Harper: What’ll happen is we’ll set up just an initial conversation. We’ll talk about your situation, the questions you have, the concerns you have, the things you’re trying to work on, and figure out, and try to point you in a good direction and see if there’s something we can help with. And if you want to find any of these episodes online, you can go to dentistadvisors.com/listen.

Reese Harper: For almost 100 episodes, if you’ve heard us in your ears and you’ve always thought to yourself, for almost 100 episodes, you’ve been thinking, “I wish I could just watch this happen. I wish I could see this happen.” You can go to our YouTube channel, Dennis Money show on YouTube. Now you can watch it happen too, and search through them and listen to any episode you like.

Reese Harper: Thanks everyone for listening. We’ll see you next time. Carry on.

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