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What do sharks, snakes, surfing, and mosquitoes have in common? In this episode of Dentist Money™ you’ll find out as Reese and Ryan talk about scary things that make you worry at the expense of other things you should be more concerned about. Of course the focus is on investing and how your fears might affect your future, but there’s nothing like a great analogy to get a good discussion rolling. Take a closer look at your financial fears, you may be obsessing about the wrong thing.
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 trust old Senior Advisor and co-host, Sir Ryan Isaac.
Ryan Isaac: New title alert! New title alert.
Reese Harper: Coming in hot today! I’m kind of excited about this topic, because you have been freaking out for like five years about your worst fears on earth, and one of them was when you learned to surf in California, which is coming up soon. Dr. Rich has promised to take you out on the ocean.
Ryan Isaac: Yeah. I will trade financial planning services for surf lessons. That is out there now.
Reese Harper: Um, actually the firm will have to do that, and so you will have to pay—
Ryan Isaac: (laughs) oh yeah. I’ll pay you to trade my time for surf lessons. Still on the table.
Reese Harper: That offer is still good! We just had to clarify the offer (laughs).
Ryan Isaac: It doesn’t matter. They don’t care.
Reese Harper: So Ryan’s real concern here though is while he is getting surf lessons, he is a little worried that the Megalodon shark from prehistoric times will come back to life.
Ryan Isaac: Hey, the ocean is only, like, 20% explored. Maybe like 10% explored.
Reese Harper: He is not just worried that it is going to eat him, though, either. He is also worried that it might inconvenience the other surfers that are surfing in San Clemente. And there might be an earthquake at the same time!
Ryan Isaac: And then I’ll be late for my plane back home.
Reese Harper: (laughs) and then you will be stuck in a line at the airport.
Ryan Isaac: Oh, inconveniencing strangers, earthquake, shark, late for a plane.
Reese Harper: You are not worried about being eaten by the shark, it is that the shark attack could inconvenience—
Ryan Isaac: And hurt—
Reese Harper: Strangers.
Ryan Isaac: And then I could inconvenience people with my blood, they will shut down the beach, they will look at me…
Reese Harper: For people who don’t know, Sir Ryan Isaac is a very conscientious person, one of the nicest people you will ever meet—
Ryan Isaac: One of.
Reese Harper: But there are a lot of nice people out there, so that is not saying much.
Ryan Isaac: Yeah, it’s not, no. “He’s a nice guy.”
Reese Harper: But he is one of the nicest people you will ever meet out of the millions of nice people out there (laughs). So he is one of the nicest people you will ever meet, but he is worried about inconveniencing strangers, he is worried about earthquakes, and sometimes, there is a worry about sharks.
Ryan Isaac: And being late for airplanes. Anyway.
Reese Harper: And so we had this conversation, and we felt like—
Ryan Isaac: I’m excited to do a whole podcast on this now.
Reese Harper: This podcast is surprisingly interesting for me, which is why there are things in our lives and things in our finances that we really think are critically important, and even sometimes we think that they are likely to happen to us.
Ryan Isaac: Yeah, urgent, important, scariest things.
Reese Harper: And I think you can see how sharks might tie in to this, but I won’t give it away, and I will let Ryan kind of tell the story.
Ryan Isaac: Yeah, well I mean, I think my list of fears could suffice, but in the last couple weeks, it was the annual Shark Week, Discovery Channel Shark Week. Have you ever watched that?
Reese Harper: I only watched very limited things right now.
Ryan Isaac: It is getting a little lame recently, but Shark Week is cool. I follow this guy on Twitter, this really smart guy whose name is Conrad Hackett. He works for Pew Research, and he always tweets out demographic stats that are just kind of interesting. So during Shark Week, he put out this cool demographic. It was this graphic that shows—
Justin (Q): Infographic.
Ryan Isaac: Infographic, that is the word I’m looking for. Thanks Q in the studio. Infographic. It was during Shark Week, and so he said, “you know it’s interesting that we have this entire media spectacle and all this advertising and money around this week showcasing sharks, mostly just because we are scared of them, not because they are actually like a very deadly predator.” And he put up this infographic showing the actual world’s deadliest animals, and it is this scale. On the smallest end is the shark, and number of people killed by sharks per year is ten.
Reese Harper: Okay, we are going to tweet this or put this out on social so you can see it. We will post it, okay?
Ryan Isaac: Yeah, I’ll just repost his tweet. Conrad Hackett, Pew Research. People killed by sharks: 10. Wolf? About the same, 10. Hippopotamus kills 500 people a year.
Reese Harper: An elephant kills 100. I rode an elephant in Thailand, and can’t imagine why it would have killed someone. I guess it could just step on them on accident?
Ryan Isaac: Yeah, they are just huge! Tapeworms kill 2,000 people a year; shoutout to tapeworms. An assassin bug—
Reese Harper: My son loves assassin bugs.
Ryan Isaac: That is a real thing? I mean, I assume it is, but you know about it.
Reese Harper: Yeah, it is not a real thing.
Ryan Isaac: Okay. Assassin bugs, I don’t know what they are, they kill 10,000 people per year. This one is a little sad for me, dogs— I just got a new puppy— dogs kill 25,000 people per year.
Reese Harper: Really??
Ryan Isaac: (laughs) yeah! Crazy.
Reese Harper: I was attacked by a dog when I was two years old, so… and I am still suffering the facial reconstruction problems from that.
Ryan Isaac: Okay, snakes. I think this is a worth fear. 50,000 people per year. That is a worth fear.
Reese Harper: Dang, Gina!
Ryan Isaac: People. Humans kill other humans at a rate of 475,000 deaths per year.
Reese Harper: That is probably like car wrecks and everything.
Ryan Isaac: That is the second most deadly animal, the human. The most deadly animal on the planet is a mosquito. 725,000 deaths every year. People get killed by mosquitos, and malaria.
Reese Harper: That is my most— like, I am a rational fear person, because I knew this stat, but I didn’t really know it to this point today that you are explaining it. But like, I’m always afraid of mosquitos; I’m constantly putting on mosquito repellent everywhere.
Ryan Isaac: Really? I don’t think I have ever worn mosquito repellent in my life.
Reese Harper: Because it is legit statistically. In the state you live in, sir, right now, we are talking like, not 1,000 deaths, but it is high hundreds.
Ryan Isaac: Geez. I should be worried about mosquitos. But legitimately, when I go walk in the mountains, I am more worried about a wolf than a mosquito. Anyway. So yeah, let’s repost this. I think part of this too, though, this went on Bill Gates, because they do a lot of charitable work for malaria, right? And so this was part of awareness for that, but he called it mosquito week. So anyway, the point of this was, we run the whole Shark Week, there is no mosquito week on tv (laughs), there is Shark Week because we are terrified and they are really scary things, but statistically, we shouldn’t be scared of them.
Reese Harper: Okay, so we are going to play a little game today. I haven’t looked at all these answers that Ryan has written down, but Ryan has a list of things that he feels like dentists or our clients or non-clients or people in the forums that we are interacting with worry about that are not statistically relevant worries, right?
Ryan Isaac: I would word it like this: I would say that there are things that people worry about that are fine worries. They are legitimate, but what happens is they take the place of more important worries. So they will worry about one thing at the expense of the other, and they should be worried about the other.
Reese Harper: So what you are saying is, because they are worrying about this thing, it causes them to actually miss out on doing a more important thing.
Ryan Isaac: Yeah, like when I finally learn how to surf— calling all Southern California dentists, okay? I should probably be on the lookout for a shark, but I should probably be more concerned with my ability to swim. I am sure drowning deaths are a lot higher.
Reese Harper: Let me give you a more relevant example than that one. You should be concerned about the tide and the reefs that you are close to, because you will friggin’ break your ankles when you fall off a surfboard. Has that happened to me? Yes it has. And was I lamed and maimed for multiple weeks? Yeah, but when I first started surfing, no one told me you couldn’t ride the surfboard in past a certain point in the break.
Ryan Isaac: (laughs) you have to bail?
Reese Harper: Yeah. Like, I am kind of used to snowboarding or skiing where you go all the way down and on to the lift, people! You ride it, and you just sit on the lift; you don’t even stop, you just go! And I was like, just chilling, you know? I’m learning how to surf, I’m finally getting up… all of a sudden, my brother-in-law is waving at me from the beach with his arms above his head, just like, “bro!!! Whoooa!” I’m like, “yeah, I’m awesome, thanks! Yeah, I’m doing great!” I’m just thinking they are cheering me on. Next thing I know, the board is stuck behind me like twenty feet and I am in midair launching and looking down, and there is a crab like looking up at me with his little pinchers just kind of clapping, and he is like, “hey! It is going to hurt, bro!” And I just freakin’ rake my face along a coral reef, you know? My ankles, me knees, my thighs, quads, tris, bis…
Ryan Isaac: It is because your professional SoCal brother-in-law took you surfing (laughs).
Reese Harper: Well, this is a legit sketchy beach, you know? So it took me a little bit of time to recover before I learn how to manage the reefs!
Ryan Isaac: It felt like when you guys took me downhill mountain biking for the first time.
Reese Harper: That is a rational issue, but people don’t think about that as much as they will—
Ryan Isaac: They are more worried about looking out for the shark the whole time rather than the reef.
Reese Harper: I just wanted to bring that home. A personal example for the audience.
Ryan Isaac: That did feel pretty personal; that got real really fast. Okay, the game you wanted to play though: did you want to guess some of the things?
Reese Harper: Well no, I want you to just say something, and I will say something. And I want to see if the thing I’m thinking of is on your list or not, okay? So you pick one, and I will pick one, and then you can say, “that wasn’t on my list.” I kind of want to think of as many items as I can. We will go through a lightning round of them.
Ryan Isaac: Lightning round? Let’s go lightning round. Okay, you start?
Reese Harper: No you start! Well, I’ll pick one. Okay, by number one item that I’m thinking of today is off the top of my head—
Ryan Isaac: Hold on, are you going to say the thing they should be worried about in its place?
Reese Harper: Yes.
Ryan Isaac: Okay, cool.
Reese Harper: Let’s say, the thing that they are worried about, and then the thing I wish they would worry about more.
Ryan Isaac: If it is on my list, we are going to talk about it, okay? And if it is not, then you talk about it.
Reese Harper: Yeah. The thing that I feel like is often worried about— now, these are going to be a lot of investing topics today, okay? A lot of investing topics. There is not one thing to worry about with investing, but the one that is on top of mine today is dentists are often worried about whether they are picking the right investments themselves, like the actual investments that they own, and I would worry about if they are actually diversified properly to begin with. It would worry me.
Ryan Isaac: Okay. I like that.
Reese Harper: So, that is one fear. Probably not the most common, but one I would have about investing.
Ryan Isaac: And it is top of mine. So the second part of what you just said was actually on my list, but I had a different worry that people concentrate on.
Reese Harper: Okay, what’s that?
Ryan Isaac: And again, these are recent discussions you are having, so these are recent discussions I have been having. Expense ratios! And we see this in the forums, and questions from people all the time. We are obsessed with expense ratios, as investors, you know? Like, “how low can I get this thing? I have a .05 ETF right now, but can I get it for .03?” Or, “can it go from .04 to zero,” you know?
Reese Harper: (laughs) yeah. This happens a lot in different industries where price becomes the focus.
Ryan Isaac: Well, it feels like it is a sleight of hand by the industry. I feel like— now, legitimately, does price and cost matter in your investment? Yes! It matters a lot. I would say on average, we are probably helping one new dentist somewhere in the country lower his investment costs and build a better portfolio as they become clients. I mean, it is a big deal, but there does become a point where it feels like the industry is like the magician, and they are like, “look over here, not over here,” you know? It is like a big marketing thing. Because at some point, it doesn’t— I mean, if you are going to get something cheaper that you are going to buy anyway, great. That’s great. But at some point, it is not making a mountain of difference to you future net worth.
Reese Harper: Yeah, and here is my argument. For those of you who know us well, you know that we are not a hardcore, passive only shop, okay? We are not like an investment shop or an investment advisory firm that says, “we only believe in index funds.” Like, I don’t only believe in index funds. I mean, there is evidence all over the world happening every day that different companies grow more or perform better than others. As a general rule, though, we prefer index funds over active investments, right? But there is a point where— I worry that people are becoming so singular-focused around the expense ratio that they don’t really even know what they own. They don’t even know what they own. And sometimes, the cheapest thing to own is not the best performer.
Ryan Isaac: Well how often do you hear this argument when someone is saying, “no I’m good! Like, I have build a good portfolio. My expense ratios are like, almost nothing.” And I’m like, that’s the whole—
Reese Harper: That’s the whole point! Let me give you an example. Growing up in Idaho, my uncle—
Ryan Isaac: Is this post dog attack?
Reese Harper: He ran a Les Schwab tire shop, and I really liked going to the Les Schwab tire shop and looking at the tires. I would take the tires off of the rack, kind of roll them around, pretend like I worked there, check out the treads, look at the rims… that was a good day for me, because I lived like 40 minutes from the town.
Ryan Isaac: (laughs) it was a big entertainment center.
Reese Harper: Yeah! They had a soda machine and some candy. So I would put a quarter in, and get myself some Mike and Ikes, or some fundamentals. Sometimes, they had popcorn. So, I went to this place, and I started noticing that on the tires, there was a distance meter, and it would say, “this has a warranty or a rating of up to 50,000 miles.This has 80,000 miles,” or 30,000 miles. And what I learned is Michelin tires actually, after a while, they—
Ryan Isaac: Are we officially supporting a tire company?
Reese Harper: They are not a sponsor. This is free money to them right now.
Ryan Isaac: Hey Michelin, you are welcome.
Reese Harper: We have a successful dental audience that is highly interested in tire purchases, so… shoutout to Michelin.
Justin (Q): What’s riding on your tires?
Ryan Isaac: (laughs)
Reese Harper: So, this tire company stopped doing pricing based on price. Like, they stopped doing, “this tire is a hundred bucks. This tire is 140 bucks.” What they started doing is price per mile. So, they started reflecting the price as a cents per mile that you would eventually pay one you arrived at the tire’s longevity. So a 100,000-mile tire cost less per mile than— it was a $400 tire, but it costs less than the $100 tire cost.
Ryan Isaac: Per mile.
Reese Harper: And they started changing the public’s view of costs of tires, and they were kind of the first company to start reflecting price based on that factor. And in the mutual fund industry, I think that this would go a long way right now, because people have become so obsessed with expense ratios that they are not realizing what they actually own. Let me give you a very specific, concrete example here. The Vanguard VTI index is a very inexpensive US stock market index, okay? It is constructed in a way that basically— let’s just take that index and say, this index covers a specific number of stocks in the United States, it does it based on their size, and it tries to rebalance them as infrequently as possible to keep the costs low. So it has what is called very little tracking error, and it is going to give you the performance of the index that is underlying it, which I won’t go into in detail. But there is another mutual fund, take DFQTX, it is an index fund that is constructed a little bit differently than VTI. They are both index funds, but but it is more expensive. It might be 20 basis points now. I don’t know where it is at, .2, or .18. Well at face value, look at both of these and go, “well, I’m gonna go with the cheaper one. What idiot would pay more? Stupid freak shows that are going to pay for—”
Ryan Isaac: “I found the secret to investing.”
Reese Harper: And face value, you are the genius that got the cheaper index, right? But if you look at a ten-year index performance comparison between those two indexes, you will find that DFQTX had a significantly higher performance than the Vanguard underlying at different time intervals. This other index I am describing is built in a way where it doesn’t just buy the same stocks in a market, it buys and emphasizes a little bit different mix. So it emphasizes the stocks that are value stocks, and it emphasizes the stocks that are smaller in the index. Still giving you exposure to the whole index, but just saying, “look, this costs a little bit more to do this tricky thing, but your tires are going to last a little longer on this one.” If you are holding this thing for 20 years, the data is definitely going to show that emphasizing these two index features is going to give you a better return. But guess what? It is not cheap to do, because it requires some manual labor, and it requires a filter, and it requires someone to kick out some of the stocks out of the index and rebalance it more frequently. They are both index funds; these are both tires; they will both feel good. And if you buy the cheap one, maybe that is where you are at right now. Like, maybe that is your budget. Maybe you are just putting 50 bucks a month in, and you don’t want to pay any trading costs, and you are like, “you know what? I just don’t have a lot of money. This is for my kids’ college plan, and this is going to be fine. And the cost savings on both the trades and the expense ratio, it is worth it, because I only have like three years to invest.” Well, in some cases, that might be a perfectly good reason to buy the VTI index. But if you have a fifteen-year time horizon, and you don’t mind paying a six-dollar trade cost once in a while, and you feel like that difference in expense ratio might be worth the additional maybe as much as 1%-1.5% or 2% more in additional return because of the type of index you are buying… but you just don’t know any better, right? Because you have made the discussion be so simple and cost-focused that you are going to buy a tire that has a warranty for 30,000 miles, which might be perfectly fine for one type of account, but it is not okay for another account where you might be investing for a much longer time period, and you want a hire return, and don’t mind paying a little bit higher expense. Now that doesn’t mean go out and buy an actively-managed mutual fund that is paying 2% a year in fees, right? And trading your stocks in a very unpredictable way and according to a manager’s preferences and forecasting.
Ryan Isaac: Yeah like 300% turnover every year.
Reese Harper: Yeah. We are not saying that, but we are just saying that indexes are not created equal, alright? The last comment— I would like you to make a comment about what happened this week with Fidelity and a few other firms, and where our expense ratio is now, officially.
Ryan Isaac: Well they have gone from the high cost of .04%, four basis points, down to zero. So, it started with Fidelity; they have their own proprietary funds that they “don’t charge for.” Those were air quotes, for those listening. They are free, and now Vanguard has followed suit. And so, we have been getting some emails and questions about that. Like, “this is super exciting. Who is going to follow suit? Who is next?” And that was my first thought when I started seeing these questions and started seeing the advertisement for it was like, “okay. I mean, if it’s something I’m gonna by anyway.. If it is good for my anway, if I can get it cheaper– “ like, I’m glad when milk is cheaper when I go to the store, or gas is cheaper, that is great. But that is not the whole issue, and going from, you know, as cheap as funds are today down to zero is not— like, here is my point. Low cost funds, it is not like they are just brand new to this year or the last couple years, right? That is recency bias if we just started investing over the last several years. Low cost funds have been around for quite a long time, or lower costs have been, anyway, but people aren’t retiring better or sooner than before they started. The average dentist retirement date is still taking up every time the data gets released, despite the fact that it is easier than ever to buy cheap stuff. So, that is the whole thing in my mind. That is good, that is part of it, but it is not all of it. Because it is clearly not helping the retirement problem.
Reese Harper: And here is the deal. How are mutual fund expense rates charging you a 0% expense ratio??
Ryan Isaac: They don’t want to earn any money (laughs).
Reese Harper: Yes. No. That is not the answer.
Ryan Isaac: They don’t care! It is philanthropic.
Reese Harper: Here is the thing. It wasn’t making them a lot of money anyways at one or two basis points. Fidelity estimates that by doing this, they are going to save their clients like 40 million annually, which is basically nothing to them. That is like a marketing budget for a month for Fidelity, okay?
Ryan Isaac: It is what they spend on billboards in Iowa.
Reese Harper: Yeah, on a Tuesday. So, you are going to save basically more money than they would make by charging you. I mean, in the last year— we knew this was coming, okay? The race to zero expense ratios. That has been the big topic of the last couple years. “When is someone going to go to zero?” Well as soon as they realize they are making no money on that, which is like, the day they were at four basis point.
Ryan Isaac: So they should get more assets by just being at zero.
Reese Harper: Yeah. They can get more assets by just being at zero. How do they make money? Well, just like every other bank. How much money does a bank pay you to sit on your money right now? Nothing. So, how much do you think Fidelity is going to pay you in your interest-bearing cash portion of your account if you are not paying them anything to manage the money? Well, it is going to get worse than what it was before, which is already nothing in interest on your cash, right? Banks lend your money, and security organizations lend your money out, and they make money on loans! And they make money on margin loans.
Ryan Isaac: And how many people have no idea that like 30% of their account is just sitting in cash making money for Fidelity? While they are like, “I got free index funds!” (laughs)
Reese Harper: Yeah (laughs), here is what Fidelity knows about you. You are going to give them your money, and you are going to feel great that it is sitting there. You are going to forget to rebalance, and you are going to have cash drag throughout your entire life where your money is sitting in a worthless money market account making nothing, and you are going to feel great because you got a zero expense ratio. Good for you!
Ryan Isaac: And they are making like, 7% on lending your money (laughs).
Reese Harper: And they are making like 8% on your money, because you are not even investing it. Good for you though.
Ryan Isaac: (laughs)
Reese Harper: Anyway. So here is what happens: you have to keep your money invested properly, alright? Proper fund selection. Proper diversification. Not cost reduction to zero. I mean, that is just not—
Ryan Isaac: If you are paying 1% or more, you should reduce your cost. You can cut those things by 75%.
Reese Harper: But here is what I am also saying. I feel like there are several— like active management. The costs of active management have come down so much in the last ten years that there are actually in some cases— you can argue this point— that there is some real value being provided by active managers. I mean, some managers are now really competent people with very well-constructed portfolios and are at 30, 40, 50 basis points, and they are offering a real value. Like, a different type of diversification, and exposure to an asset class you could never get.
Ryan Isaac: And if you align with that philosophy, then you can access it for a reasonable cost now.
Reese Harper: Reasonable cost! So it has been good that the industry’s race to zero has pushed— it has basically taken people that were fee gauging, and it is now putting them in a place where they have to be realistic in order to attract assets. But there will be a point where active management gets cheap enough… because, I mean, think about it! It the past, what was happening is there were people saying, “well there is 2% in fees that are getting charged from active managers, and if indexes are at five basis points and active managers are only able to outperform by like 50 or 60 basis points, then why are we doing this?
Ryan Isaac: Yeah, no question.
Reese Harper: 50 or 60 basis points are like .5 or .6%. So like, if someone has a ten-year track record and they are only able to outperform by .5 or .6, why am I going to pay them 2%? But if they are willing to charge me .2 or .25 and they are outperforming by .5 or .6, and they have done it for ten years, and I know the manager, and he is 50 years old, and it is his own fund, and he is like, “I’m gonna be here for another fifteen years. Like, I am going to be around, and I am getting better at what I do, and this is my strategy,” then you—
Ryan Isaac: You are not saying go do that, but you are saying, look. It is getting to a point where you can respect the math of it.
Reese Harper: Yeah! And I am saying, I don’t have a problem if you are saying, “you know what? I would rather have active management in this sleeve in my portfolio for 30 basis points, because I just want to have something different!” Okay, well I mean it doesn’t really matter if you do that or if you have a value index. The expense obsession is just causing people to do things that make them underperform. Not all cheap indexes are the right solution, and there is a big difference in performance between even a zero basis point fund and a one basis point fund and a two basis point fund and a three basis point fund. And it depends on how they are constructed. And you should be more concerned about how your index is constructed than the expense ratio anyway.
Ryan Isaac: Yeah, I like that. That was a good first segment!
Reese Harper: That was a long segment, but we like it. The race to zero is a big topic; I’m glad we got to hit it today.
Ryan Isaac: Yeah. Are you going to guess another one?
Reese Harper: Uh, how about you tell us one, because I just talked a lot about yours (laughs).
Ryan Isaac: I already wrote this stuff down. Okay, how about this one? This is pretty common. The wrong obsession, the wrong worry, is about rate of return. People get obsessed about, “what is my rate of return on investment,” okay? Or, “I want just the highest possible rate of return that I can get out of any of my investments.” They do that at the expense— well do you want to guess? What do they do that at the expense of? Like, “I’ll do anything. I just want the highest rate of return.” At the expense of—
Reese Harper: The risk.
Ryan Isaac: Yeah, proper risk.
Reese Harper: I got this email in this morning, and it said, “my friend is getting 8-10% a month,” and the person who emailed this in wasn’t necessarily saying this was the write approach, they were just saying, “hey, what is the story with what I’m hearing?”
Ryan Isaac: Your friend is literally going to be the richest man on earth in sixteen months at that rate of return (laughs).
Reese Harper: If he keeps going at that pace. So, the rate of return here, $10,000 dollars into the investment of 150 was 6.6% per month. Which, times that by twelve, 80% per year?
Ryan Isaac: Yeah. I mean you are going to be in that pall park (laughs).
Reese Harper: So, if that were the case… if that could happen, okay? And this was a legitimate question! Like, someone is getting 80% per year…
Ryan Isaac: They will hit like a trillion dollar net worth in the next few years.
Reese Harper: (laughs) No, it is not that bad, okay? But you will be a billionaire really soon. And for all I know, it is a dental student trading during dental school, okay? But I am just saying, think about the logic of this. The post asked me the question. And I am not trying to— like, we have to use examples that come in, people. I hope you don’t ever feel singled out and made fun of, because I am not trying to do that. I am trying to highlight the important issues here.
Ryan Isaac: Well this is human nature, to hear something better than what you currently have and go, “could I have that too? Is that legit?” And we do this in all areas of our life; that is very normal.
Reese Harper: Yeah. And I mean, the context was like, “why isn’t everyone else doing this? Like, why isn’t this happening?” And I think the post even mentioned, “why doesn’t this guy just quit his day job and do this?” It was a dentist or someone in the dental industry, from what I could tell. So, the rationale is, because of one simple reason why he doesn’t do this, because it is incredibly risky!
Ryan Isaac: Even if those numbers are right, which, in my experience, the secondhand related stories from my buddy, my buddy’s CPA, you know, my buddy has a thing that he does… like, most of the time, it is not even correct.
Reese Harper: It is extremely exaggerated, in most cases. I’m not saying that this post was exaggerated, this is probably what this person was told, but the person who told it to them definitely exaggerated. For sure.
Ryan Isaac: (laughs) he had one month of that return, and it was paper.
Reese Harper: And you know he said, “I’ve been doing this for a long time. I’ve got this thing dialed in.” Bottom line is, it was a type of trading strategy using options that is very speculative. You could do a google search on this strategy, and you will see a hundred articles saying, “man. I was killing it with this strategy, and then one month hit, the market moved, and it wiped out my entire three years of gains,” you know? And there is a lot history to why investments get certain returns, and why speculation results in certain losses, but this is today, people! A legitimate question from someone on one of our forums saying, “I don’t know why everyone else isn’t doing this.” And when I was in college, I can remember being in my early twenties and being in college and seeing some of my friends doing this same thing—
Ryan Isaac: Why are you looking at me?
Reese Harper: And I was worried about like, “why am I the idiot? What am I doing? Like, I can’t believe that is actually happening!” And feeling dumb, and like I don’t know what I’m doing.
Ryan Isaac: I could do like 60 seconds worth of trades in the morning and make like $10,000 a day?
Reese Harper: Yeah, and like, “I don’t know what I’m doing. I’ve gotta read this stuff. I’ve gotta take a course! I’m gonna go sign up for—”
Ryan Isaac: By the time you found the book to read, the whole market had crashed, and everyone was out anyway (laughs). They strategy had broken.
Reese Harper: The strategy broke; the market got efficient. And that is what worries me: people focusing on return, but they do not understand risk. Like, this person doesn’t understand that options strategy, or what risks come with it. I’m not saying— the person who posted it might, but the person that had told them about it definitely doesn’t. If this is their first time trading options, and they have had a good run for three to six months, and they are starting to feel confident to the point where they are bragging about it to friends, that is not a sophisticated investor, okay? You have to have— anyone who has traded options, and I have, you get beat up fairly regularly and fairly quickly to the point where you have an understanding of how fragile capital markets really can be. You are basically playing with insurance and you are making— the more return you want to earn, and the higher the return you want to get, the more you have to speculate in order to be able to get a payoff that is much greater than the risk you took.
Ryan Isaac: Yeah, I mean, google “options trading strategies.” How many companies do you think you would find on google that you think are teaching secret options trading strategies?
Reese Harper: Hundreds. There might be a thousand.
Ryan Isaac: In this state alone, there are probably like 50 companies within ten miles that do that, you know? I mean… anyway. But the principle, though, is this obsession with like, what is the highest return at the expense of ignoring what it takes to actually get that. Asking questions like, “do I even need that rate of return?” I mean, how many people have actually sat down and thought, “what rate of return do I actually need for my net worth to be high enough to sustain my spending indefinitely?” Would it work at 6? Work it work at 10? I mean—
Reese Harper: Yeah. At some point, you get enough wealth and it has been hard enough to earn it that you are just going, “what can I get?”
Ryan Isaac: “I am only going to take enough risk to get the minimum return I need. That’s it. Nothing more.”
Reese Harper: Like, “I just don’t want to deal with this thing going down a lot.” Now, that is not necessarily the right approach. If you have a diversified portfolio and it is a nice mix, there is probably not— if you are independently wealthy, and you have enough assets to retire, there is probably never a reason to be like, 100% conservative in a guaranteed 3% rate of return account. You don’t have to do that. But right now, that is possible, but that is about as much as you could guarantee yourself.
Ryan Isaac: But those are the questions you need to be asking. You have given presentations, Reese, recently, to a few groups on what you have called “building the right mix of assets,” where you are looking at— and this isn’t just the risk of return I’m getting in investment accounts. As a dentist, you have to look at your whole mix of assets that you own all together, which include liquid assets, retirement plan assets, practice and privately-owned business assets, and real estate assets. And you have to take those all into context and know the risk you are taking in all of these areas. Because what if you are being really conservative in your investment accounts, but you are taking huge amounts of risk with big bets in real estate? I mean, your whole picture has to be looked at. And you can see what I’m talking about. If you go to our website, dentistadvisors.com, click on services, and then Elements®, you will see the whole bottom row of our elements table that we track are these other asset classes in a dentist’s life, because that is the big picture of risk, and return, and liquidity, or illiquidity, that you have to pay attention to to make the right call. Like, “how much risk should I be taking, and how much return should I be chasing?” So…
Reese Harper: I think that is great. Alright, let’s hit our next topic right now. I want to throw one out there that comes to the top of my mind. I want to break away from investing a little bit, because I am sure you have a bunch more on investing. The one I was thinking of is, why dentists, instead of focusing on compensating their most important and most valuable employees like properly, they really nickel and dime a lot around small increments of wages and hourly rates, and they lose good people because of it.
Ryan Isaac: Okay, so their focus gets put on a worry of, “I’ve gotta keep overhead down, and I can’t increase wages or bonus too much.” That is the wrong worry. The right worry should be—
Reese Harper: “Do I have the right people, and are they getting paid properly to stay? And do they have the right incentives to stick around and be happy in their job?”
Ryan Isaac: And to keep growing, and to learn more, and…
Reese Harper: Yeah, like, if someone is really not happy with their income, it is probably the wrong person for the job. Like, if someone is just like, “man,” and they are always asking you to make more, it is like, “dude, there is no way I could possibly pay this person enough to ever have them be happy with their job.” But if they are asking for reasonable increases to compensation, or if you are not compensating them with reasonable increases, and you are always focused on cost reduction, you are going to end up having high staff turnover, and I feel like turnover is way worse than a little bit more—
Ryan Isaac: Or incentivizing them to want to do their job better, or learn a different skill, or increase in their capacity so they could move up to be able to do more in the company, and to be able to help out more.
Reese Harper: Yeah, and I would say that that is one that kind of stands out to me. It is kind of like the thing we talked about with expense ratios; people get obsessed with cost reduction at the expense of a higher quality product.
Ryan Isaac: Now, these are legitimate concerns. I mean, should you be concerned about your overhead and your profitability? For sure!
Reese Harper: Yeah, and you shouldn’t be paying your hygienist 50% of production (laughs) alright?
Ryan Isaac: You’re getting 30.
Reese Harper: So ultimately, I have seen hygienists in mid six-figure incomes, right? Because there is just no— a dentist is not managing overhead properly.
Ryan Isaac: So, legitimate concern, but the bigger concern should be, “do I have the right people? Are they incentivized to continue to progress and be happy?” Okay. What about loans? We get these questions all the time. And actually, I think this next coming month is our element of debt rate; we will be measuring all the loans and financing our clients have. We get these questions all the time when people are deciding on financing if they should take the lowest possible interest rate offer. Like, “this loan is 5%, but this bank is gonna give me like 2.9!”
Reese Harper: The holy grail is if you have the lowest interest rate with the right terms. That would be the holy grail!
Ryan Isaac: But the focus ends up being the lowest interest rate at the expense of, I’m going to have a huge collateral assignment, I’m going to have terrible prepays, variable rates, balloon payments, really short terms… yeah, I get a lower rate because I’m gonna pay off this massive rate in five years. Which destroys cash flow, savings rate…
Reese Harper: If it is me, I mean, here is a personal example. Everyone has a different risk profile, okay? But at every opportunity that I have had in my life to get lending, I mean, at almost every one, I have opted for a higher interest rate just to give me more liquidity, because I want to keep growing. And there is no reasonable interest rate that I can pay that is going to be more than the opportunity cost I am going to lose by not putting the money back into business, or into the stock market. In my lifetime at least, interest rates have not been at a point to where there has been a more compelling alternative. And so for someone who wants to grow a practice or grow a business, a loan, over the longest term that they will give it to you, is probably the cheapest money you are ever going to get. Let’s say a bank is going to charge you 7% per year on a practice loan, and they are going to put it on a 25-year term, alright? For computers. They are going to give you a million bucks for 25 years at 7%. But you get to then only make like, five grand a month payments for that period of time, or less, right? And so— I actually have no idea what the am schedule would be. So someone is going to go calculate this and be like, “Reese, you didn’t even do the math.”
Ryan Isaac: It is going to be really cheap. The point it, you are going to have a lot more capital for other things.
Reese Harper: Yeah, and tell me, though— let’s say I had five grand more a month, or seven grand more a month. If I put all of that money towards even just a full-time, ten-years-of-experience marketing associate who could help me grow my practice to three times the size it was and add two associates, and maybe open up a second location… do you think that is really not possible? Like, is it really not possible that someone over 25 years at that amount of cash flow savings could end up tripling the size of your asset? And you are going to pay, what, like 400,000 more in interest than you would have paid? 350,000 more in interest? But you are going to have a multi-million dollar difference in an asset?
Ryan Isaac: Yeah, that is a big difference.
Reese Harper: Is it really not possible? Of course it is possible! Now, it might not be within your risk profile, or you might not want that stress…
Ryan Isaac: Or you might not have the ambition to pump all that money back into a business and grow it that big…
Reese Harper: No! You might not. And if you were just going to put it into the stock market, I would say, “I don’t know.” Like, it starts to get a little different there, because now, you are talking about a 10% annual return versus a seven. But I mean, I would still say, there is a real difference between having liquid cash invested that allows you to have a better lifestyle, more flexibility—
Ryan Isaac: What if you just spend that extra seven grand on a better lifestyle for the next twenty years? Do you think you will end up happier twenty years from now?
Reese Harper: No way.
Ryan Isaac: (laughs) I think you would be happier!
Reese Harper: Oh, you mean an extra seven grand on lifestyle?
Ryan Isaac: Let’s just say you stretched out the loan—
Reese Harper: Oh, I thought you said, like, the money just disappeared.
Ryan Isaac: No no no. Yeah, you stretch out the loan so you have lower payments, you have lower cash flow, and you what you did with that cash flow is you said, “I just want a good life, and I’m just happy that I’ve got this life that I wanted,” and you spent the money on your life. Psychologically? Mentally?
Reese Harper: Okay. You are just saying, you might be happier in that scenario. It is not the optimal financial choice to make, but you are just saying, that might be the cost that someone chose.
Ryan Isaac: That might be what that person chose, and that was still worth it, rather than putting the am schedule on five years and being strapped.
Reese Harper: Stressed out. I agree with that! Like, that is a viable choice. You should at least be able to say, “you know what I don’t know that I want to have a stressful next years. I kind of want to chill, and chill means not having pressure, so…”
Ryan Isaac: I want a bass fishing boat. Okay.
Reese Harper: See, that is the good thing about you and me on this podcast, because you and me would probably make opposite decisions as it relates to those issues, and they are both fine and viable. The thing we are both highlighting and we are both making the same point on is, the wrong thing to do is obsess about the interest rate as if that is the real issue. Your point that you are making is, it is about lifestyle, and my point—
Ryan Isaac: Or it could be. It could be about business growth.
Reese Harper: And the point I was making is it might be about business growth.
Ryan Isaac: Or it could be about higher returns in a public market instead of the loan.
Reese Harper: And having more liquidity that you can have access to so that your lifestyle is also a little bit better. Like, I’m just saying, you won’t go on the same vacation if you have zero money in the bank as if you had a larger balance. You know, more left over every month. You will go on a better vacation, and you will enjoy— and I am not encouraging people to live outside their means. You should never be saving less than 20% of your gross income. Like, your gross income should always be not living on all of it. 20% of your income, unless you are in school, or just really early phases of your career. So you should always be saving money. The question is, how should you be structuring your capital structure? You capital structure in a dental practice… like, when you start nickel and diming the interest down and you are like, “well I just gotta get that interest down as low as possible,” you are making massive compromises around business growth, lifestyle, cash flow, and liquidity. You are making massive tradeoffs.
Ryan Isaac: And all this too, like, what gets lost in this discussion about financing sometimes is I think dentists can take for granted the fact that they work in an industry where they could get a million dollars of 5% on a fixed fifteen-year rate in like a week. I mean, you can’t do that in so many industries. How hard has it been in our own business to raise capital? You don’t go to a bank and a week later have a million dollars, you know?
Reese Harper: You can, but man, the terms are very different!
Ryan Isaac: Like five-year repays, and—
Reese Harper: Yeah, and it is all personally guaranteed, and everything.
Ryan Isaac: It is crazy. The access to capital for growth or whatever you want to do in the dental industry, it is pretty incredible, the opportunities that it can afford a dentist to grow or have the lifestyle they want is pretty incredible.
Reese Harper: Well, I think these have been three really good topics or four really good topics we have covered. I think the point that we would like to make with this episode is, sometimes, the thing that we stress out about, especially in these areas, and there are a bunch of them, they get in the way of the bigger problem, okay? And I feel like whether it is me in my surfing story, whether it is your shark analogy, or whether it is loans, or expense ratios, or a lot of topics related to investing and the markets, we just have to make sure that we are focused on the big picture, and not get caught up in the small details that are usually someone else trying to manipulate us. I mean, when it comes to financial stuff, there is a slight of hand going on. They want you to look over here, but they don’t want you to look over there, you know? They don’t want you to realize there is a platform fee or some kind of account-based fee that is way more than the expense ratios ever would have been—
Ryan Isaac: Or it is a crappily-constructed proprietary product, but it is free.
Reese Harper: Yep. And so, keep an eye on that stuff.
Ryan Isaac: Yeah. To wrap this up, I would be curious what I should be focusing on. If I shouldn’t be worried about shark attacks, earthquakes, inconveniencing strangers, or being late for planes? What should I be worried about?
Reese Harper: You personally?
Justin (Q): The sun.
Ryan Isaac: What is the opposite? (laughs) yeah, as a bald man, I should be worried about melanoma.
Reese Harper: You should be worried about your doughnut habit, and your burger slamming…
Ryan Isaac: Tacos. (laughs) burger slamming?
Reese Harper: You slam a burger occasionally.
Ryan Isaac: I do slam burgers. The dragonslayer at Cubby’s.
Reese Harper: And really, the sun that you are exposing yourself to all the time and getting skin cancer.
Ryan Isaac: That is true. Melanoma, probably more than earthquakes. We will end with that.
Reese Harper: And scorpions.
Ryan Isaac: Ohhh. That wasn’t on there, but I am sure they kill a few. Thanks everyone for joining us! We hope you will join the new Dentist Advisors discussion group on Facebook. You can get to that by going to dentistadvisors.com/group. It is a new Facebook group where we are doing Q&A, posting hot tips, and having awesome discussions. Join the group, and then make some comments about this episode!
Reese Harper: Yeah, dentistadvisors.com/group. And here is a fair warning: we will never disclose your identity, but we love questions that come through there. Please send the questions through there! We have gotten a lot lately, and so it is going to be a really fun way for us to be able to respond it the community’s requests as opposed to— we are going to try to do that more throughout every episode as opposed to just doing it occasionally through Q&A.
Ryan Isaac: Yeah, so it is dentistadvisors.com/group. Join it, it is a free Facebook group. You can also book a free consultation with one of our advisors. We would love to have a chat with you about your situation, answer your questions, kind of help you know how we might be able to work with you to build your net worth faster and in a more organized way. You can go to our website, again, and schedule that at dentistadvisors.com. Just click on “Book Free Consultation.” Or you can call us or text us at our magnificent phone number, 833-DDSPLAN. We would love to hear from you. Thank you very much.
Reese Harper: Carry on!Investing, Debt & Financing