Real Talk with Rabih: The Role of Bonds and High-Yield Funds – Episode #408

While inflation has cooled a bit, the return available from both bonds and high-yield savings accounts remain high. So where should your short-term money go to get both the return and the safety that make you comfortable? On this Dentist Money™ Show, Ryan and Rabih look at why time is the biggest factor to consider when choosing where your short-term money should go.

 

 

 

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Podcast Transcript

Ryan Isaac:
Welcome to the Dentist Money Show, where we help dentists make smart financial decisions. I’m your host, Ryan, and I’m here with a longtime friend, fan favorite, Rabih. What’s up Rabih? Thanks for coming.

Rabih Dimachki:
Hey, Ryan. How’s it going?

Ryan Isaac:
It’s going. Rabih, just for everyone listening, is a new surfer and we would rather take this whole episode to just talk about surfing in front of everybody for the next 35 or 40 minutes, but we have a subject in mind. But just keep that in mind. We might sprinkle little surfing analogies in here now that you’re in the fold.

Rabih Dimachki:
Yeah. I’m…

Ryan Isaac:
Welcome.

Rabih Dimachki:
I’m gonna make use of this opportunity to ask you for as many advice as I can…

Ryan Isaac:
Let’s go.

Rabih Dimachki:
Between the finance questions.

Ryan Isaac:
It’s easy. And you know me. I would much rather just talk about the ocean than literally anything else in my whole life. Maybe my kids.

Rabih Dimachki:
Yeah. Like…

Ryan Isaac:
Kids and the ocean. It’s tiresome.

Rabih Dimachki:
Yeah, maybe they could…

Ryan Isaac:
I’m so excited for you.

Rabih Dimachki:
Actually, everyone who asked me at the office, like how was your trip? I was like, now I get why Ryan moved to California.

Ryan Isaac:
Yeah. You get it.

Rabih Dimachki:
I get it you guys.

Ryan Isaac:
Now you get why I’m broke. I purposely chose to be broke for my whole life and jeopardize my retirement so that I could be near the ocean every day of my life.

Rabih Dimachki:
Valid.

Ryan Isaac:
I just got out a few hours ago and it was a gorgeous, amazing day and made me so happy and fulfilled, and I don’t care if I don’t have any money.

Rabih Dimachki:
Good for you.

[laughter]

Ryan Isaac:
All right. We have a question today that actually… We’re doing an episode today. Main topic you’ll hear from the intro, obviously, is we’re gonna talk about bonds a little bit, but we’re gonna talk about bonds in the context of some of these more high yielding money market funds that are going on right now. For context, if you’re listening in the future, we’re recording this in, what are we? In June, 2023. Rates are high, yields are high on these money market funds. I don’t know if yield’s the right actual word, but they’re paying a higher percentage. Okay. So here’s where this topic came from. I had a client who was holding some bonds in… Just some short term conservative bonds in a portfolio. It was more… It was kinda like an emergency fund portfolio/we might buy a building in the next five years. Kind of like just holding onto some cash money.

Ryan Isaac:
It wasn’t like the main investment strategy fund or operating capital, anything like that. We’re just kind of parking some cash. And he was like, Hey, what if we just took the money out of bonds right now and put them in… There’s some money markets at my current bank getting 5% or five and a quarter or five and eighth or something. And so this whole question became about this time that we’re specifically in. So we’ll address something that’s a little bit more time sensitive that might not be applicable five years from now, or maybe it will, who knows? But we’ll also address kind of high level the role of bonds, the role of money market funds, and the opportunities for what feels a little bit of like interest rate arbitrage. Kind of switching between a few of these things.

Ryan Isaac:
So right out of the gate. Rabih, does that question make sense to you? What my client was trying to do. Get out of bonds, go into some like higher paying money market funds, and then the idea would be when the money market funds stop paying as much, we’ll go back in our bond fund that was a good appropriate fit for medium term money that might be used in the next three to five years. So first of all, does that question make sense or… And then how does that question strike you? Like what do you think about when you hear that question?

Rabih Dimachki:
Our favorite answer, depends, right?

[laughter]

Ryan Isaac:
Yeah. Yeah. Yeah.

Rabih Dimachki:
But it’s a really good question and I think it really depends on whether there is expected future financial obligation or not. If there isn’t and you’re just trying to chase higher yields then, yeah, just go and invest in whatever gives you the higher yield for the longest period of time in a sense. With money markets, given that they mature early, you’ve got the reinvestment risk because what if I put it in a CD or a money market and in two years the Federal Reserve decides to cut rates, the interest I’ll be receiving from those in two, three years is gonna be lower and thus it’s a reinvestment risk. Whereas had I chosen to like put it in a 10 year bond to start with, and I lock in that rate for 10 years.

Ryan Isaac:
So one thing you just said that almost negates [laughter] all of this is you said, “If there’s not an urgency in time to spend this money somewhere, then go chase down the highest yielding, highest returning asset for your money.” Which if there was no time crunch, this person didn’t need to spend the money, we wouldn’t be parking in bonds anyway.

Rabih Dimachki:
No. Exactly.

Ryan Isaac:
This would be in their long term portfolio anyway.

Rabih Dimachki:
Exactly. Exactly.

Ryan Isaac:
So it wouldn’t even be like a bond question. So I think that’s an important thing that you just said to just make that statement. The importance of financial planning around where to put money based on what it’s needed for and the goals of that money are super important and making a mistake around that and putting it in the wrong places. Maybe investing in stocks when you need the money in 12 months. People do that too.

Rabih Dimachki:
100%

Ryan Isaac:
And you should do that.

[laughter]

Rabih Dimachki:
100%

Ryan Isaac:
So glad you said that. Anyway, yeah. So I think that’s a good… That’s a good distinction right off the bat.

Rabih Dimachki:
Yeah. Just to continue because there’s another point. If you have a financial obligation that’s coming up, your risk isn’t like the reinvestment risk that we just mentioned. Your risk is the mismatch between when you need the money and when you have the money in your hand and when the financial obligation comes up. So if you need to invest in for a down payment for a house in five years, you don’t go and invest in a bond that’s matures in 10 years, right?

Ryan Isaac:
Yeah, yeah.

Rabih Dimachki:
Or even keeping it in money market, you’ll be taking lower risk than what is needed. It’s also a wrong investment decision. You would want to match the duration of the financial obligation to the money that you have on hand to eliminate that risk.

Ryan Isaac:
Yeah. This is a common topic. I mean, this is kind of one of the purposes and roles of financial planning. A financial plan is to have strategy around like the different buckets of money that you have and their purpose and what the intention is. Okay. To recap a couple of things that you sent me that I think are really great points to hit here in a broader sense, what are the roles of bonds in a portfolio? We just, we did an episode on this a few months back. But we can kind of revisit that. ‘Cause I think it’s always important to keep educating on. Why do we hold bonds in a portfolio? The other thing that you sent I thought was great does a change in interest rates prompt you to change your exposure? So, that’s a good question. Let’s hit and then what are some active bond strategies and what purpose do they serve? So maybe some more advanced, like bond lessons here.

Rabih Dimachki:
Yeah, sure. I thought of these questions as like good fillers to give us the overall framework of how to approach looking at bonds.

Ryan Isaac:
Perfect.

Rabih Dimachki:
In a previous podcast episode, we talked about the roles of bonds in a portfolio, and we were able to summarize them in three main categories.

Ryan Isaac:
Yes.

Rabih Dimachki:
It’s like capital preservation, income/shield, right? And diversification. And under each of these, I don’t know, roles, your reaction to an increase in interest rates will be different, right? Or a decrease in an interest rate will be different, if you are trying to preserve your capital. You would want to hold very short term bonds, right?

Ryan Isaac:
Yeah.

Rabih Dimachki:
And bonds do not fluctuate as much with interest.

Ryan Isaac:
Can you say short term, what that means when you, when we say short term, medium term, long-term bonds, what does it mean to hold a short term bond?

Rabih Dimachki:
Right. Short term would include money markets, so all maturities up to a year. So we’re talking three month T-bills, six months, nine months, up to one year bills. This is short term. You can even push it up to like two year notes. Medium term will be between the two year and like seven year maturity bonds. And long term would be over seven to 10, 15, 20.

Ryan Isaac:
Okay.

Rabih Dimachki:
In that range.

Ryan Isaac:
Okay.

Rabih Dimachki:
So if you’re trying to preserve your capital shorter end, like yields on the shorter end, as in lower maturity under two years do not fluctuate as much as the ones that are like…

Ryan Isaac:
Lower volatility.

Rabih Dimachki:
Lower volatility.

Ryan Isaac:
Which some people would call that lower risk, which I don’t like the equating risk with volatility but some of the people call it that, but also lower return in exchange.

Rabih Dimachki:
Exactly, but this will preserve your capital in times when the Federal Reserve decides to increase interest rates. So that is one logic you wouldn’t want to react to a change in interest rate if your goal is to preserve your capital. If your goal is to get as high yield as possible, to provide income. If you’re not in retirement, maybe as you mentioned Ryan, just be in your long term equity portfolio. But if you are retiring and you are seeking income, right? You would want to structure those bonds, spread them out, maybe in a barbell strategy or a ladder strategy, we can hit those in a bit. To make sure that you are getting return from every maturity that exists over there and to diversify your risk across time periods.

Ryan Isaac:
Yes.

Rabih Dimachki:
And if you are there to… So if interest rates fluctuate you wouldn’t want your income to change, right? So the logic would be I wanna lock in those rates and I really care about that coupon being there for me, for my monthly expenses each month. So you also, you don’t want to react as much, but if you are diversifying, and here’s a good interesting point. You might, if you are doing active management, but we really don’t care much about this at our firm, but for diversification that fixed income holding is gonna be part of a larger portfolio, mainly dominated by equities and we know Under most economic circumstances, the equities and bonds move opposite to one others. They…

Ryan Isaac:
Stocks and bonds. Yeah. They one when you, one usually goes up, the other will go down or stay a little bit neutral. Yeah. They usually act opposite, which is why you hold them together usually.

Rabih Dimachki:
Exactly. But it’s so interesting that when you look at the data, shorter term bonds, the bonds that mature, I’ll say shorter and medium term bonds, so up to like a seven year maturity. They have a stronger negative correlation to equities than like a 20 year bond or a 30 year bond does. So a 20 year bond, 30 year bond moves in tandem with equities. Their correlation isn’t as negative, whereas shorter term bonds, shorter term bonds because they are more sensitive to decisions made by the Federal Reserve. And the Federal Reserve usually intervenes during recessions. This gives them the ability to be even more negatively correlated stocks. So, if interest rates are fluctuating, the Federal Reserve decide to increase interest rates, you might be, you might want to be in the lower end, so lower maturity to maximize your return. Whereas if the Federal Reserve is cutting interest rates because of like a duration element, you would want to extend that maturity on your bonds to increase the hedging in that sense during tough times.

Ryan Isaac:
Yeah. And I’m just thinking like the majority of people we work with are still in career. I don’t know what percentage of people would be considered retired. It’s growing for sure, but a lot of these pe a lot of the people that we work with and maybe a lot listening, you know, how big of a component in their portfolio strategy are bonds really when they’re 20 years from retiring or not even 20 years from retiring, 40 years from even touching their money. You know, it’s like you said it in the beginning, match the timeline of the money to the best opportunity you can give for the money. Yeah. So, to go back, okay. With everything you were just saying of like these durations of different types of bonds in the person’s question, which was, should I just get out of these for a while and just go chase down some money market that’s paying five and a quarter or something, how does that fit in that discussion?

Rabih Dimachki:
Yeah.

Ryan Isaac:
Like this person’s like strategy in their head, and even maybe pick it apart a little bit, what might they not be seeing when they’re thinking of that?

Rabih Dimachki:
Yeah it’s actually a really good question because such behavior in markets is like relatively new.

Rabih Dimachki:
Like it’s very new that we see many, money markets yielding much higher than longer term like bonds.

Ryan Isaac:
Yeah. Yeah.

Rabih Dimachki:
And that’s because like the yield curve, which is literally a series of bonds according to their different maturities is inverted. It means that shorter term bonds are yielding more money than longer term bonds. And this is because it’s like, the reason for it is like, because market participants think that two and three and four and five years from now, etcetera, the interest rates will be lower because we might be heading to a recession. Like, this is how you see, oh, does the market think we’re in a recession? It’s what do they price in bond deals? This is how you gain that insight. And so far, and until now, shorter term interest rates, which follow the Federal Reserve really well, which are at like a 5.25%, right?

Rabih Dimachki:
Are yielding higher than the treasury yields that are yielding in the four-ish percent, right? So from that perspective, you’d be like yeah, it’s a no brainer. I will put it in a money market and get a 5% over one year. But when you are holding a bond giving you a 4% for two years there’s a mismatch, which we call the, this is gonna be a little bit technical, but think of it that way. You’re gonna go into a money market for one year and it’s gonna give you 5% each year. But the two year bond is giving you 4%, it means for you to be able to get that 4% on two years invested in money market and the first year only gonna get 5%, and the second year only gonna get 3%, because they have to average out to 4% in the future. The bond market is so efficient, investing in a one year bond and rolling it over will not get you more return than just locking in a future maturity bond as in like a two year or three year. So if you think about it, most of the people who are just gonna move to money market right now they are gonna face a high reinvestment risk one year or two years into the future where the actual interest rates are gonna be much lower what the T-Bills give you. So if you were already in T-Bills you would have had that forward rate we call embedded in the yield.

Ryan Isaac:
So if we were to give this person some simple feedback.

Rabih Dimachki:
I know, I went on a tandem they’re trying to explain forwards.

Ryan Isaac:
I like this, this person would hear maybe the feedback that, yes, in the next short period of months you might pick up a little bit more return or yield from those money markets but you might be missing out on a higher yield eventually on this timeline. Now if their timeline was only six months or only 10 months.

Rabih Dimachki:
Perfect.

Ryan Isaac:
Or 12, it’s probably okay. But at some point rates will change and then… Okay, this question doesn’t feel as consequential as people who are trying to do like market timing with seven figure portfolios. But it is still kind of market timing a little bit, is it not?

Rabih Dimachki:
It is, and all studies has shown predicting where interest rates are gonna be is as hard and tricky as predicting where stock prices are gonna be. Like the same random process exists in equity markets and fixed income markets.

Ryan Isaac:
Yeah, it seems tough, that does seem tough.

Rabih Dimachki:
It is.

Ryan Isaac:
Okay, so to your… And maybe you already talked a little bit about this but your second point over here… Well, actually, let’s recap. The role of a bond in a portfolio, by the way, the episode we did on that I went and found this was episode 362. It’s called, Here’s What You Need To Know About Bonds. Which is very encompassing of us to have a title like that. Here’s… We didn’t say everything you need to know but we said, here’s what you need to know about bonds. Episode 362, that’s a longer discussion about the role of bonds in a portfolio but if you had to summarize, what is the role of bonds in a portfolio you would say what?

Rabih Dimachki:
The three main points, it’s diversification, capital preservation or just income. A stream of cash flow.

Ryan Isaac:
Great, great. I’m gonna say it back to you, diversification, income and what was the other one?

Rabih Dimachki:
Capital preservation.

Ryan Isaac:
Capital preservation, meaning your money doesn’t go down. Yeah, so I guess what’s interesting for a early or mid-career dentist or even a dentist who’s not gonna touch them actually touch the money it’s not about when you’re done working it’s when are you gonna actually touch the money which could be decades after you’re done working in some cases. Capital preservation. Well, if it’s long-term money that’s not a huge concern, capital preservation, ’cause capital preservation is stuff you need to make sure you don’t lose any money. That’s like operating capital, it’s your tax account, it’s the down payment for the house or the building. Capital preservation in your portfolio isn’t the highest concern for a 35 or 40-year-old 45-year-old, or even 50-year-old sometimes.

Ryan Isaac:
Income, also not the biggest thing while you’re a working dentist ’cause income is just pouring out of the money tree called the dental practice. But diversification, yes, depending on your risk tolerance how you feel about volatility in your investments, what you can emotionally deal with as your investments go up and down so that’s a good recap of that. Your second point, I don’t know if maybe you already hit some of this with what you were saying but your question, I thought it was a great question, does a change in interest rates prompt you to change your exposure? Let’s visit that.

Rabih Dimachki:
Yeah, as we mentioned not if your strategy is income or capital preservation because the moment you set these strategies you are trying to make them as little sensitive to fluctuations in interest rates as possible. Whereas if your fixed income portfolio is taking the job of being a diversifier in the portfolio depending on whether interest rates are gonna be raised or cut and this is usually well communicated by the FED ahead of time, you would want to change the maturity schedule of when your portfolio matures because this will give it a higher or lower sensitivity to the change in interest rates and you need that for proper diversification to happen when you’re rebalancing your portfolio.

Ryan Isaac:
Okay, yeah. A lot of these questions do come back to I don’t know, maybe it’s just like the sense of control people want or feel like they even have over making what they feel are strategic changes to a portfolio. Here’s what’s interesting, in this person’s question, in this person’s scenario that even prompted this whole discussion, the amount of money we’re talking about is actually relatively small. What’s been really interesting though and like you said this is not a scenario we’ve been in. I mean when was the last time that a money market was returning higher than some of these treasuries or bonds? I mean.

Rabih Dimachki:
Most of the time when the yield curve inverts but usually a yield curve inversion is like for three or six months. This this time it’s the longest ever been. It’s been a year and that’s why it’s catching people’s attention right?

Ryan Isaac:
So you said it’s kind of a unique situation. We haven’t or our clients haven’t seen before but it, when I hear this discussion and it’s not just one person asking this I mean these money market funds are catching the attention of a lot of people. You know you belong to a Facebook group or you know just friends and you’re hearing about this. What’s funny is it’s usually like pretty small amounts of money that people are doing this with. Even that where this question came from it wasn’t a big amount of money compared to other buckets of money they have. But I think this speaks a little bit to the psychology of an investor during… I don’t know, you know, volatile times or uncertain times. When, I, as those words leave my mouth I’m like tell me what when is a certain time? [laughter]

Ryan Isaac:
Like you know, whenever I hear about like uncertainty I’m like eh when do we have certainty though? But I think this speaks to the psychology of that’s just human nature you know? Like it’s kind of a little bit of a grasp at control. Like I’ve got this big chunk of money I’ve got this practice. I’ve got all this real estate but I’m gonna go try to arbitrage a higher return out of my $50000 emergency fund. It’s interesting human behavior to me I guess is what I’m saying. And I think it’s speaks to I don’t know our sense of insecurity around things that we don’t feel like we have control over.

Rabih Dimachki:
I think this is the way it’s supposed to be. It’s like economics efficient allocation of capital and people think, oh I can leave it in a bank or put it in a money market fund and it’s kinda the same risk profile but over there I’m getting higher return then go ahead do it. That’s efficient allocation of capital. But the tricky part would be if you are shifting your allocation of capital into different risk exposures as in if that money was meant to be very short term for your emergency shouldn’t be exposed to any other risk, it shouldn’t go into treasuries just because treasuries are giving higher than money market. And if that money is supposed to be there for like a down payment in a couple of years then you shouldn’t go to a different risk profile which is lower taking lower risk just trying to get into a money market. Even if the money market is showing you that over the next 12 months it’s better than the treasury yield simply because your time horizon is bigger. And due to the no arbitrage element of the market the forward interests that are gonna show up in a year in a two year and a three year from now are gonna be below the treasury so that they average out what the treasury is today right? This is how the market functions.

Ryan Isaac:
Would you mind taking a second to explain I’m not sure it feels clear to people just the relationship like why, okay, why are we seeing money market rates so high right now? What is the relationship between like what’s going on? I think that’s it’s a very basic question but I think people do wonder what made that happen and what will make that change again like when or maybe not when but what will make money market rates go back down to that abysmally low rate that they’re normally at? Like what’s the mechanism behind all this that’s happening?

Rabih Dimachki:
 Yeah it is a good question. The mechanism is supply and demand but the difference between money market and short short-term bonds versus long-term bonds is that in this supply and demand game there is a big elephant in the room called the Federal Reserve also transacting. So when the federal reserves decides to set rates at 5.25% and tells people I’m gonna lend you and borrow from you at these rates. All banks in a sense have to start transacting at that rate. And that’s the rate that is shown in money markets these days. For bonds, the Federal Reserve isn’t as involved in longer term bonds as much except in like stress and quantitative easing and all of those other topics.

Rabih Dimachki:
But during day-to-day normal operations the Federal Reserve isn’t involved in longer maturity bonds. So the supply and demand dynamic happens between bonds and market participants and investors and the yield out of that transaction reflects their own opinion not what the Fed policy is. Right. And this mismatch between what the Fed want, what the Fed is determining short term and what market participants are showcasing in the medium run and long run tells us what the law of large numbers what all market participants average out to as an opinion about the market. And most market participants think that interest rates in a couple of years is gonna be lower, right?

Rabih Dimachki:
And this is the difference in the dynamic, why it happens? The Federal Reserve’s logic when he intervened in the market wasn’t because I want to provide better yields in the treasuries. No. The reason Federal Reserve intervenes like higher interest rates mean higher borrowing costs. Higher borrowing cost is unfavorable for many growing companies which will force them to borrow less which will force growth to be less slow down the economy to get rid of inflation. So the fact that money market yields are higher than treasuries not now isn’t because there is an opportunity in the market for investors to capitalize on as much as it is, it’s a by effect a collateralized effect from a federal monetary policy to reduce inflation.

Ryan Isaac:
Okay. What about can we ask you for Rabih’s secret crystal ball? And when I hear this question I’m like I don’t know how to tell you, when will we see money markets return to a normal range?

Rabih Dimachki:
So as we just mentioned like interest rates in the medium run longer run are in the 4% range. So they think this is what the new equilibrium rate is gonna be. And in a couple of years interest rates that are now at a 5% are gonna head there in the normal progress if nothing happens to the economy. And this is even what the Federal Reserve is communicating. It’s like we do not expect to cut interest rates this year at all maybe in like in a year or two not anytime soon. This is what they said. When it’s gonna happen is really gonna depend on whether suddenly people have to pay for their student loans and we go into recession and speed things up or if suddenly inflation isn’t going away and the Fed might have to increase interest rates a little bit more. So when it’s gonna happen we don’t know. But from an economic perspective we know that there has to be an equilibrium between what the interest rate in the market is and what inflation is telling us and what keeps the economy growing and this is reflected in the long term interest rates.

Rabih Dimachki:
Like if you look at the yield curve, the yield curve is our best indicator, but this is the indicator of everyone in the world, just like the stock price is the best indicator of what the current stock price is the best indicator of where the stock is gonna be, right? The yield curve which is what the yield is at different maturities, is our best indicator of where interest rates are gonna be. And if you look at the yield curve today, assuming it doesn’t change, it’s gonna tell you that maybe in a year, two years, we’re gonna be dropping back to the 4% level. But this is what the market thinks, is what the Fed thinks combined this is not what the reality is gonna be. And no one knows what reality is gonna be or else there wouldn’t be a market. Right?

Ryan Isaac:
Yeah. We only know afterwards.

Rabih Dimachki:
Exactly.

Ryan Isaac:
Or else there wouldn’t be a market.

Rabih Dimachki:
Yeah.

Rabih Dimachki:
That’s exactly right. That’s the whole, that’s the whole point. So I think as a short answer, when people ask me what money is appropriate for some of these short term money market funds, to me it’s not worth like chasing around like new banks, new bank accounts, banking somewhere totally inconvenient that’s a pain to like move money in or around, especially if it’s like operating capital or money that you’re gonna be spending. But if like your bank offers money market funds at a good rate compared to the checking account it’s sitting in and you can move money like pretty seamlessly between the accounts at your own bank or a bank that’s convenient to you, then do it. Do it with your operating capital, do it with your personal checking accounts, do it with your personal emergency fund.

Ryan Isaac:
Do it with your… I don’t know… If you have 12 months before you have to pay your six figure tax bill and it’s just sitting there, why not throw it in a money market in the meantime? Like, who cares? Like why not do that? If it’s not locked up, it’s not a CDE doesn’t have like a timeline on it. I think those are appropriate things. What’s not appropriate is when it’s like money you don’t need to touch for decades, in which case we gotta, we don’t like the nickel dime game between like bonds or money markets or cash or money markets. And then I’ll hear this like, well, I can get 5% or I can risk the uncertainty of the stock market right now. But then it’s like, well, we’re not risking the uncertainty of the stock market right now, we’re taking the premium of that uncertainty over the next like decades of the stock market and we’re gonna make money with that. So that’s what I think about where these should like what’s appropriate for these kind of funds right now and what’s not. Anything you’d add to that?

Rabih Dimachki:
I really liked the last point you mentioned about like the uncertainty of the stock market, in a healthy economy on the long run, like 10, 15 years you would expect the assets that have the most risk to give you the highest rewards. So you would expect bonds to do better than money market and you would expect stocks to do better than bonds. So if that’s your risk rising…

Ryan Isaac:
Which is historically accurate, which is true.

Rabih Dimachki:
Very accurate, or else the economy wouldn’t function like the math wouldn’t work out. Like you can’t take more risk and get lower return or else people will start defaulting everywhere, right?

Ryan Isaac:
Yeah yeah.

Rabih Dimachki:
Like the math doesn’t work out. So given that there’s a mathematical reality that pushes that in that direction over the long run, maybe on a month to month or year to year period, it’s gonna like skew. But given that there’s that reality, you wouldn’t want to be in the wrong risk exposure.

Ryan Isaac:
Yes.

Rabih Dimachki:
Over that period of time or else you are setting yourself up to receive lower return.

Ryan Isaac:
Yeah. And that’s a whole other topic in podcasts, but dentists choosing the right risk exposure for their money and the goals of the money is actually a big issue. Dentists tend to hold too much cash sometimes, or sometimes dentists will take way too high of a percentage of their overall liquidity. Let’s say you’ve got a hundred grand and you’re gonna take 80 and go chase down like a high risk, very illiquid, business opportunity or investment opportunity with like a friend or a brother-in-law, like risk tolerance and risk profiles and choosing those in the appropriate ways are actually, it’s a huge topic and it’s a problem for a lot of people. So I’m glad you said that. I’m gonna put you on the spot, Rabih, to round this out and I want you to tell us I want you to compare, one lesson you learned from the ocean and your first surf trip last week to investing.

Rabih Dimachki:
You’re loving all this, putting me on this spot because honestly…

Ryan Isaac:
This is easy, do you think about this the whole time?

Rabih Dimachki:
I was thinking about this while I was in the water.

[laughter]

Ryan Isaac:
Alright hit us, see what you got.

[laughter]

Rabih Dimachki:
I was like, okay, so this is how a day trip actually it wasn’t, it’s not a lesson of long-term investment because those waves do you dirty, they hit you every single minute.

Ryan Isaac:
Yes.

Rabih Dimachki:
So it’s not a lesson about long term investing, but being me nerding about the market, I was like, okay, so a day trader is like someone in the waves, right? And you don’t like catch every wave that shows up. If there are three coming after each other, you’ll cherry pick which one you want to do. So it’s more about like, there are plenty of opportunities as an investor, as a day trader, even as an investor there’s the opportunity right now to relate to this conversation of money market is yielding 5%, whereas like a stock is yielding higher.

Ryan Isaac:
Yes. Which wave are you gonna choose?

Rabih Dimachki:
Which wave are you gonna choose? And I’m like, this is so interesting.

Ryan Isaac:
Wave selection.

Rabih Dimachki:
Yeah.

Ryan Isaac:
So… Oh, finish your thought. Sorry, I was just gonna say something.

Rabih Dimachki:
No, it’s like I wanna choose the wave that’s gonna give me the biggest adrenaline rush. ‘Cause this is what I’m after.

Ryan Isaac:
Yes. I think about this all the time, one of the most underrated skills of surfing, and this by no means do I have this…

Rabih Dimachki:
Climbing the waves?

Ryan Isaac:
It is wave selection. So the people who surf the best typically know how to see which waves in any given moment are going to be the most opportunistic. And how to be in the right place at the right time for those waves, it doesn’t always work out. Sometimes it does you dirty as you just said, and it totally trashes you and hurts you. But wave selection. So as an investor, which wave are you selecting and which risks are you taking? Are you in the right place at the right time for the right wave? We don’t know. Being with an experienced surfer and a surf coach will help you choose your waves wisely.

Rabih Dimachki:
Definitely. It’ll allow you to keep surfing for the next 40 years.

Ryan Isaac:
Yes. Safely ‘Cause what do you want? You don’t want one high thrill experience. You wanna surf for the next 40 years.

Rabih Dimachki:
Exactly.

Ryan Isaac:
You want waves for decades. Not for a a moment. All right.

Rabih Dimachki:
Let’s end this podcast.

Ryan Isaac:
I’m gonna start doing this with you now.

Rabih Dimachki:
Let’s end the podcast. I wanna ask you some wave surfing questions.

[laughter]

Ryan Isaac:
Alright. We’ll end this so we can talk about surfing. Thanks Rabih for being here. As always, thanks to all of you for joining us. If you have any questions, go to dentistadvisors.com, ask us a question or just schedule on our calendar and let’s have a chat. We’d love to answer your questions and point you in the right direction. Thanks Rabih. Thanks everyone. We’ll catch you next time on another episode of The Dentist Money Show. Take care now. Bye-Bye.

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