What Should Be Inside a Dentist’s Investment Portfolio?

On this episode of The Dentist Money Show, Matt and Rabih continue their investing series by exploring the core building blocks of an investment portfolio. They break down the differences between stocks and bonds, explain how mutual funds and ETFs make diversification easier, and discuss why spreading your investments across different asset classes, sectors, and markets can help reduce risk over time. Tune in to learn how these foundational investing concepts can help you build a smarter portfolio.

Listen to part one of the investing series to learn all the basics you should know!

Related Readings

Nothing Works Forever

---

Podcast Transcript

Matt: Welcome back to the Dentist Money Show where we help Dentist make smart financial decisions. I’m a guy named Matt, and I’m here with the professor Rabih Dimachki How are you, Rabih? I’m doing great. Summer’s almost over, Rabih the professor. We got school. When when do we when do classes start?

Rabih: I’m good Matt. How are you? the summer semester is supposed to end in a week or two, and then the fall semester is going to start end of August.

Matt: it it’s crazy to me, like now that I have kids in school, Rabih, like I I’m blown away because summer feels so short. It’s like my my kids are starting. I mean, this’ll come out by the time school has started, but we’re about a month away from school. It feels like we just started summer. It just feels it it it’s way shorter nowadays.

Rabih: It is shorter. Honestly, I used to think summers were short until we started doing the Saint George retreat because we do it like in April and for me that’s when summer starts. If there’s a pool, if there’s a pool, that’s when summer starts.

Matt: Yeah. That’s your summer. Yes, for sure. Well, you know, as adults, we don’t really get the traditional summer that kids do where every day is just a fun day. But either way, ⁓ so we’re still we’re still testing and learning on the the professor side. We’re for those of you that don’t know, Rabih is a professor of the University of Utah. He’s been using this year as kind of a test and learn on if whether or not he wants to get into acad ⁓ academia or not. So

Rabih: Yeah, I agree.

Matt: The jury is still out, correct?

Rabih: The jury’s still out. My contract ends this December after the full semester ends. And it’s up to me to decide whether I want to go and discover other stuff in life or teach more or go into academia. I haven’t made my mind, but I’m definitely ⁓ better off right now that I had this experience. Because there were cons that I never thought would be cons, administrative stuff and dealing with spoiled kids. And there were pros, but they were not as magnified as I thought, I thought I would get this great pleasure of, you know, seeing someone eyes open in wonderment when they learn about central limit theorem. It didn’t happen. It didn’t happen.

Matt: Yeah. In the world of AI, I don’t I don’t think those days are unfortunately behind us. So ⁓ anyway, we digress. We this is not what we’re talking about. However, I like to say that we give some credit to to your ⁓ career here at DA and working on the Dentist Money show with this your ability to teach. I’m gonna take like 0.7% credit for your okay, I’ll take it all. All right, 99.9.

Rabih: You can take it all. I’m fine.

Matt: We do love teaching on the show and and at Dentist Advisors, which is what this show is brought to you by Dentist Advisors. We are a comprehensive ⁓ financial planning, tax, and accounting firm. ⁓ as again, I’m sure you can guess, just for dentists, all over the country. Our main focus is helping Dentist make work optional sooner. And the foundation of everything we do is education. And so, and that’s why this show’s been running for over 10 years now. And today, what we want to talk about and teach, if you will, or have a discussion about is investments. So this is going to be part two of our investments discussion. ⁓ we want to do a quick recap of what we talked about in part one, just in case you missed it. We’ll just do a quick overview, but we do suggest going back. These kind of are gonna build upon each other. So in part one, we talked a lot about like the the difference between accounts account types and and how that differs from investments was a big piece of that. So ⁓ we talked about the different types of accounts, so the taxable accounts, tax deferred accounts, and then qualified accounts. So I’ll just give a quick rundown. Taxable accounts when you hear that. We’re talking about brokerage accounts, we’re talking about cash, maybe a trust account for tax deferred accounts. This is what you think about when you think of like a traditional Retirement account, 401ks, traditional IRAs, SEP IRAs, simple IRAs. Those are all tax deferred. And then what we’d call ⁓ qualified, these are all kind of fit in the qualified bucket. What I’ll say is like tax, I’ll call them tax-free accounts. although it’s that’s a bit of a misnomer, but this is more like your Roth. So we call them tax-free because if used properly, the gains on those accounts would be. Tax free, free of taxes. So Roth four one Ks Roth IRAs, also HSAs would fit in that category. And then this is different from the types of investments that you can hold within that. What’s the analogy you used, Rabih? ⁓ as w when we’re talking about this? Drawers, I think.

Rabih: The drawer we were we talked about forks and drawers. We also talked about papers in a file, right? ⁓ the file or the drawer is the account type, whether it’s deferred, tax free, or ⁓ taxable. And but what type of forks or what type of papers you can put in, they could be the same in all three. It’s just how the tax treatment differs between them. The same fork can be in multiple drawers, but

Matt: Yeah. Yep, love it. I th I love that analogy because people often get this confused between investments and an account type. So we just hit the account types and then for the investments, the forks, the spoons, the knives, the things that can go in those drawers. We’ve got private investments, we’ve got public investments, and we’ve got real estate. And those are really the only few places you can invest your money. And, you know, various ways to invest in those types of things. We’re going to go deeper today on the public market side anything else, Rabih, that you want to highlight on just the recap of part one?

Rabih: yes, that the choosing which drawer you’re gonna put putting your forks in, like which type of account, might be more important than what investment you choose, especially from the lens of your after tax return, like your return after you account for taxes. You could have specified the best company out there to put your money in it in it, but you put it in a brokerage account and you’re a high tax earner and you end up paying so much of that gain to ⁓ taxes. So ⁓ they go hand in hand. And probably if you’re looking at the long-term impact of how tax efficient you are as an investor, the type of account you choose is more important than the investment you choose. So ⁓ the reason we started with the account is because they are they prevail when it comes to tax efficiency more than the investment itself.

Matt: Yeah. I’m glad you brought that up because I think we take it for granted we’re we’re a bunch of nerds over here, Dentist Advisors, but ⁓ I’m glad you brought that up because it’s it’s it’s important not to just understand the distinction, like know the distinction between different account types and kind of know the like checkbox knowledge of like, okay, yeah, I know that Roth means this and traditional means this. Knowing how to use them properly is the most critical thing. And like The the technical term for this is asset location. So people I think understand or have heard of diversification. We talk about it all the time. Kind of we’re going to talk about that today. ⁓ you may have even heard of ⁓ asset allocation. So your mix of stocks and bonds. But asset location is what you’re referring to, Rabih, is where you actually what types of accounts, the drawers are you actually putting these things in. And that is so critical to understand when it comes to the the course of your whole career, especially around taxes, to your point. So this isn’t just like know the difference. It’s understand how you can use these different types of accounts. And you’re going to possibly most likely invest very differently in a brokerage account over the course of your life compared to how you might invest in a traditional IRA. Or you would change allocations across your life and career just purely based on account type and the treatment of from a tax perspective. So I’m glad you made that distinction. Anything else you’d add ⁓ on the

Rabih: It’s a very rich topic. Some one more thing I would add is that w w w we should be happy that we have options and it’s not just one type of account for everything. The fact that you have a taxable account allows you to control your liquidity in life. And the fact that you’ve got ⁓ tax deferred and tax free accounts allows you to kind of immunize yourself against the change in the tax rate in the future. We do not know what the tax rate is going to be in the future.

Matt: Yeah. Yeah.

Rabih: Back in the 1940s and 50s, the top tax rate was in the 70%, right? Right now we are living in a good time where taxes historically are low. We don’t know 40, 50 years what from now what they’re going to be. So optimizing between the different accounts that you have might probably give you a little bit more control over the taxable fate of your money. so yes, it adds a layer of complexity, but it slightly gives us more control.

Matt: Yeah, yeah, love it. It’s a great point. ⁓ okay, I think we’ve we’ve recapped it hopefully enough to give people a little taste if they haven’t listened to it, but you should I I think it would be helpful to listen as we get into the deeper stuff here. So now we’re gonna spend more time on if we’re gonna continue to use this analogy, we’re gonna spend more time on the forks and knives and spoons, the things that go in the drawers, the actual investments, the stuff that gets Rabih jacked up.

Rabih: Me as Mm-hmm.

Matt: So let’s let’s talk. So if we say ⁓ you know, we’ve highlighted this that there’s three places to invest money: private, public, ⁓ private markets, public markets, and in real estate. Today we’re gonna dive deeper into public markets specifically. So let’s first start with the differences and distinctions between the stock market and the bond market. So equities versus versus fixed income. ⁓ we’ll probably start with the easier one being stocks and equities, meaning easier just to conceptualize. People often I think fixed income’s a bit a bit harder to grasp. But let’s let’s just start there, Rabih.

Rabih: yes, and I’m gonna give you an analogy of a dental practice. Just I I heard our listeners are dentists, so I’m gonna give you an analogy related to dental practice. So you just finished grad school, you’ve been working in an associate for a couple of years, and you want to start your own dental practice. And a dental practice is like any other business. You need to come up with some amount of money for you to be able to buy your assets, and your assets are going to be your office.

Matt: Yes.

Rabih: The chairs, the machines that you’re using, the equipment at your hands, the medicine, et cetera. For you to come up with that money, you can come make it up from two main sources. There is no other source in life. It’s either how much money you have saved in your pocket that you’re using, or whether you’re gonna go borrow it from the bank, right? The money that you have it saved in your pocket, or for example, your dad’s money or your mother’s money or your cousin, or whoever is your good friend who says, Hey, I’m gonna help you out. We’re gonna put in some money into this business to get it off the ground. This money is what we call equity. And stocks, what you see on the stock market, are nothing more than an indicator of the equity in that company. So, ⁓ why are they stocks? Why are they called equity? Think of it as your own money that you’ve put into that dental practice. If the dental practice does really well, all the money and the earnings were gonna go back into your pocket because you own the company. You’re gonna be receiving that reward. And if the dental practice unfortunately does bad and it goes bankrupt, you lose that initial investment that you put in. And this is what a stock stock ⁓ is. A stock is literally the legal document that says, ⁓ dentist A owns. 50% of the company, Dentist B owns 30%, Dentist C owns 20%. Each one of these people are going to be hold be holding stocks that reflect or slice up the ownership in the company. When we go into the extreme and we move from the simple situation of one dental practice with three owners to a situation where you have a multinational organization such as Apple with millions and millions of owners, for us to administratively manage. The ownership correctly, what we do is that we create shares. And those shares are just they are digits on a screen these days. But back in the days were the actual certificates that say, ⁓ if you are the holder of this certificate, you are entitled to 10 shares of the company, which is around, I don’t know, 0.2% of the size of the company, et cetera. Those are what stocks they are certificates that prove ownership in the company. And ownership means that you’ve put your own money into the company to help it grow or to help it to buy more assets.

Matt: I still remember the day, Rabih. ⁓ I was at Fidelity when Disney ⁓ the company Disney, for those of you that haven’t heard of Disney, ⁓ but I was at Fidelity working there when Disney made the decision that they would no longer offer paper certificates for their stock because it was one that so many like grandparents or parents would would because we would do that, like through the brokerage firm through Fidelity, people would actually like contact us and then we’d have to go through you know the back end and through Disney to get the the actual paper certificate. So we would like deliver those and they would give them to like frame them for like the baby room or whatever. And ⁓ they I was at Fidelity was what 12 years ago or something when they actually stopped doing Disney was like, we’re not doing this anymore. Everything’s digital. No more paper certificates. But that’s a good go ahead Rabih.

Rabih: Mm-hmm.

Matt: That’s a good that’s a good explanation, ⁓ around again, I think this is the one that people understand the most. At least like in theory. Even if they don’t like know the details, it’s like, yeah, I give my money, I own a piece of it. It’s called the public stock market. If I own some shares of Apple, I’m technically a a co-owner of Apple. If it goes up, it goes down, I participate. I think on the ⁓ Fixed income side, the bond side, it gets a little bit trickier. Do you wanna break that down?

Rabih: Yes, on the bond side, it’s not it’s you you go there because you don’t have money in your pocket and your mom and dad or cousin or friend are not willing to go in with you and help you start up that dental practice. So instead what you end up doing is that you go to a bank. The simplest situation is that I’m gonna go to a bank and take a loan from the bank. And I’m gonna take that money from the loan, I’m gonna buy my, you know, location, I’m gonna buy my equipment, I’m gonna buy the medicine and tools. I’m gonna start making some money. And with time, and from the earnings that my dental practice makes, I’m gonna be paying back my loan to that bank plus a little bit of interest for them. Right? This is the other way you can come up with money in your practice. You either put it out of your pocket or you borrow it. A stock was that legal document that defines that someone put money out of their pocket. A bond is the legal document that says money was borrowed from one party in the situation, the bank, to a lende in the situation, the dentist. And ⁓ you are borrowing from the perspective of the bank, which means from the perspective of the bank, you issued them a bond. They’re gonna give you money, and later on, they’re gonna get their money back with some interest. So a bond, unlike a stock that is completely exposed, you do well. Your stock price goes up, you do bad, the stock price goes down, and it is there is could be a chance that you lose all the money that you’ve put in with a bond because they don’t want to take more risk than they want, and they want they’re just lending you the money in the hope that they get it back. In that legal document, they put a little bit more risk constraints on it. They define how much money they’re giving you, and they define how much money they will get back after a pre-specified amount of years. So with a bond, ⁓ it’s not like it goes up or it goes down. The moment you issue a bond, you know exactly how much return you’re gonna get. We’re gonna invest $100,000 in this dental practice. In five years from now, we’re gonna get those hundred thousand dollars back. But every six months between now and five years from now, you are going to pay us a thousand dollars of interest. And you collect all these amounts, and then you have a bond. That bond is the certificate that if you money deployed will be will be returned at that date with that amount of interest. And it’s just there as a financial entrant instrument to track the value or track how much money has been accumulated, just like a stock does.

Matt: Yeah, I think the analogy of a dentist going to the bank, getting a loan, is the is perfect because that’s really easy to understand. And then when you buy a bond, you’re the bank. You’re giving you’re given money. But it’s the same concept. I also think it’s important distinction now to make when we talk about the you you said something perfectly there, which is ⁓ that you know the constraints and the schedule and the return when you invest in a bond or when you buy a bond, which is

Rabih: Go to the bank.

Matt: Vastly different than stocks. And because of that, fundamental characteristic of known versus unknown, there’s a direct correlation to returns. So you want to talk a little bit about that when it comes to the characteristics of uncertainty and how that relates to return expectations.

Rabih: 100%. The more you have stuff written down on paper, the more certainty you have, the less money you’re expected to earn. The more uncertain is, whether it’s the fate of the company or how many clients or patients you’re able to acquire, et cetera, the more uncertainty that there is that you’re exposed to, the more you’re expected to make more money, right? And this is what ⁓ this is where comes for the main difference between a stock or a bond. Because a bond, everything is predetermined. And you know how much return you’re gonna make. I want you to pay me 4% interest, for example. You know exactly what the return is going to be. For a stock, well, we do not know how much the returns of the how much earnings the dental practice is gonna make. So until you know that time comes and we know we’re gonna go to our bank account and see whether we made money or lost money, our stock price is living in that uncertainty. That’s why ⁓ the returns of the stock market or stocks in general are more volatile. They are they fluctuate a lot, but on the long run, give you a higher return than bonds do. One another distinction I want to add there, not just related to the uncertainty, but to the legal fabric of the doc those two documents themselves as well. Let’s say we’re gonna be pessimistic over here. You start this dental practice, you you open the practice, you buy the real estate, you you know, set up the whole office, machines, x-ray machines, everything is out there. And unfortunately. The dental practice does not do well. And the bank is knocking on your door and telling you, hey, you’re not making that $1,000 interest payment. I’m gonna throw you into foreclosure. Like this is not allowed. We had an agreement. You’re not honoring that agreement. What happens is legally, bond own owners have ⁓ seniority over share owners. Share owners are people who put money out of their pocket. So what happens is You’re gonna go and sell your practice, sell all the machines that are out there and take that money and start paying that money back. The first people who get paid are the bank, the people who have lent you the money, the debt holders. If there was any money left over, that goes to the shareholders or you who’ve put money out of their pocket. So just because there is a seniority for the situations where there’s a liquidation or there’s a bankruptcy, ⁓

Matt: The debt holders.

Rabih: Circumstance, because legally one is more protected than the other, this tells you that the money that is expected to be received from each of these investors, one is less risky, the other is more risky. One is less return, the other is more return. And this is where the idea of more risk means more return in finance comes into fruition. The more you are taking risk, when it whether it is operational risk, will the dental practice make money, or a legal list risk, who has more seniority, who’s going to collect their money more than I will that immediately translates back to how much return you’re expected to make on your money that you’ve invested.

Matt: Yeah, that’s a a great ⁓ breakdown. And I’m really glad you went into the the order of operations if something were to go bad and kind of because I think that highlights like you’re saying the key distinctions there. The other thing I think before we move on, not that we don’t want to go too deep, because we could go deep if we Rob, you could go deep and I could be here. But I do think ⁓ we wouldn’t I think going a little bit deeper on the the bond side. Because again, stocks in a lot of ways are pretty straightforward of just ownership in a company. And of course, there’s different types of companies out there in different kind of areas of the economy. But with bonds, there are the same thing that again can get confusing. ⁓ the three that come to mind, Rabih, tell if I’m missing anything, but government bonds, federal government like treasury bonds, there’s Corporate bonds. So those are bonds that companies are raising capital via, you know, debt, and then municipalities. Those are the three, so those are cities or like projects, you know, think of the all the stadiums going up all over the country right now. A lot of those are done through debt obligations through municipal bonds. Anything so first question for you is did I miss any big ones? And then second, could you kind of break down some of the characteristics that might differ between those three? Three things. Three areas of bonds.

Rabih: Hundred percent. No, you you got it right. Those are the big three, right? Anyone can borrow money. You can borrow money. I can borrow money. A government can borrow money. A company can borrow money. A state can borrow money, right? This is the whole idea. But ⁓ when we say those are the big three is because the government borrows so much money, as we know, right? There are so many companies out there and they’re all borrowing money, and we’ve got fifty states that all borrow money for different reasons, whether it’s an airport, a hospital, a stadium, a school, etcetera.

Matt: Yeah.

Rabih: Right. ⁓ and what happens is that the just like in any loan, the terms of the ⁓ the loan you’re borrowing are going to be di ⁓ differing from one another. There are bonds that mature in a year from now or less than a year, which in the situ in the example of a government borrowing money, this is what we call treasury bills. The government could be borrowing for three months, and that’s a three-month treasury bill. They could borrow for six, nine, or even twelve months. But also the government can borrow for a five-year period, a 10-year period, 20, even 30-year period, right? So all of these are called treasury bonds or treasury notes because they span for ⁓ more than one year. When we say the word treasury, it means the government is the one that’s borrowing money from us. They tell us, hey, here’s a bond for a thousand dollars, current interest rates are five percent. Give us a thousand dollars right now. In five years, we’re gonna give you a thousand the dollar thousand dollars back. But in between these five years, we’re gonna be making a payment of fifty bucks a year. That’s the five percent, right? That is the government. And usually the government is you know the big player. You do not worry whether the government is gonna pay you your money back or not. Like if the government is not paying you your money back, we have bigger problems, right? Then then the return, then the return on the bond, right? But ⁓

Matt: The yeah, that’s gonna be an issue.

Rabih: Company could also be borrowing money. And the worry about whether you get your money back or not is more nuanced in a company. Which company am I lending my money to? Am I lending it to the Apples and Amazons and Nvidia of the world? Or am I lending it to a small ⁓ community bank around the corner in my neighborhood? Right? The difference between those ⁓ should also be reflected. So, on top of the for how long are you borrowing the money from me for? the the term for how long the the bond lasts. There’s also the layer of how credit worthy is the person borrowing from me. Are those companies in really good standing and they have a high credit quality? So I should feel, you know, sleep if sleep better at night that they’re gonna give me my money back. Or am I lending to this, you know, shady community bank that I’m not sure they’re gonna give me my money back. They have a lower credit quality. The good news is if you’re lending for someone who’s less credit worthy, you just tell them, hey, I’m gonna charge you more interest rates just to compensate for the fact that you’re not as trustworthy as Apple, for example. Right. So in for the bond, the characteristics of the bond that determine how much money you’re making from the bond, there are two main factors how long you’re borrowing the money for, that’s the term, and how credit worthy is the person borrowing from you, which is the credit quality. And then who is borrowing? Is it a corporation?

Matt: Yeah.

Rabih: Is it a municipality? Is it the government? Because the tax treatment of those differs. But whenever you’re buying a bond, those are the three main things you look at. For how long the how long does it take till the till this bond matures? Who am I lending the money to, and how is that treated from a tax perspective? And then what is the credit quality of that bond? And the credit quality is bond specific. To give you an example about municipality, let’s say your state has two projects. The first project is ⁓ just some enhancements for the parks in your state, ⁓ adding swings, making sure the grass is green, etc. And most of those parks only require you to volunteer ⁓ for the money. So you’re not really committed to paying money. On the other hand, ⁓ the other project the state might be building could be a school. And you know that schools are funded with our property taxes in this country. So the bond related to the school project is backed by taxes. The bond for the parks and recs that are not backed by anything but your volunteer have a lower credit quality. So even though the issuer is the same and probably the duration of the loan is the same, there could be a difference in how high of a quality the bond is because it depends on what the money will be used for once it’s ⁓ collected.

Matt: Yeah. No, it’s a great breakdown. And I think helps understand some of the different characteristics. How this works in practicality, even though this is general, but pr in practical terms of how a dentist would even use this knowledge or this distinction between stocks and bonds, again, can’t emphasize enough, generally speaking. ⁓ in the practical sense, a bond is gonna have two main kind of focuses in your portfolio. It’s gonna be capital or principal preservation. Is the ideal and then income ⁓ would be the thing. So ⁓ a dentist who’s maybe nearing or in retirement and is asking, I had a question today literally from a client, it’s like nearing, you know, within five to seven years of retirement, and she just kind of was like, I’ve never thought about this before, but how do I generate income in a portfolio? How do I actually get money out? Bonds are a great way to do that. And so n near or near retirement or even in retirement bonds play a much bigger role for most people as you start to utilize the assets. Stocks or equities are ⁓ tend to be less income generation, less principal protection, and really more just about growing the portfolio. It’s pretty simple as that. I know that it’s general, but Rabih, anything you’d add to that that characterization.

Rabih: No, that is 100% correct. So it’s very important that you back the money with the goal. If you don’t know what you’re gonna do with that money, you will not know whether you want to put it in a bond or a stock. Every dollar in your pocket should have a role. And once that role is identified, you can zoom in, hone in on what is the most appropriate investment for it, whether it’s a bond, which type, as we just discussed, or whether it’s a stock and what other types of stock related investments that we’re gonna get.

Matt: Yeah, love it. Okay. Anything else we need to cover on stocks versus bonds before we go f go further?

Rabih: no. We’re for good. Yeah.

Matt: Okay. There’s probably something we missed. We could have gone deeper, but we don’t, you know, people are driving. We don’t want them to crash on the road by falling asleep. ⁓ so the the the piece we want to take this further with is the ways to own these things in your accounts, right? So how the the actual packaging of these investments. So you can own them individually is what kind of we’re discussing up to this point, which is just buying a stock, buying a bond. But There are a lot of financial instruments that allow you to, and in most cases, we recommend owning them within these packages and not owning them individually. There’s various reasons for that we can talk about. But let’s talk about Rabih. So owning them individually, ⁓ stocks and bonds, ⁓ versus in these packaged ⁓ tools like mutual funds or ETFs.

Rabih: Yes. The jump for why you don’t want to own a single stock or a single bond is not a feature of like stocks and bonds. It’s because of diversification. We’ve talked about diversification so many times. And this is a bigger conversation, much larger than a stock versus a bond. Diversification is a tool for risk management in your life. you don’t put your eggs in one basket, is as we say, and that is what diversification means. If you own one stock, And that company goes south, that dental practice goes south, all your life savings will disappear with it. If you own two, one of them could go underground, and there’s a 50% chance that you lose all your money. And you can see how that math evolves. Owning 10, you have a 10%, ⁓ 10% chance that ⁓ you lose all your money, right? The more you hold, the lower the probability that you will lose all of your money by the companies going bankrupt. So that is the idea. The idea is you want to diversify your investments so you you implement investments more robustly. You’re a better investor when you diversify. That is the theory. Now comes the technicalities of the implementation. So, how am I gonna go and own multiple companies? In the US alone, there’s around 3,500 companies. Are you gonna sit on your computer, go search for the name and identifier of each one of these companies? And type it in and put the dollar amount and said, it’ll take you a while, right? I’m talking from the perspective of, you know, the people who are not living on Wall Street, who want to invest their money. It’s very cumbersome to be able to diversify on your own in a more traditional way. So Wall Street was like, there’s a need, I’m gonna make a product for it. And they created this fund, which

Matt: Yep, yep.

Rabih: I really like to think of it as the bag of all the small candies we see in on Halloween. Like every single candy by itself has its own merit. They’re delicious, right? They make our teeth go back and then go to the dentist. They have their merit. But you’re Yep, you’re holding that transparent bag with all the deliciousness inside of it. But you don’t have to worry about. You’re just holding them. And it has all the candy in it. And that wrapper or that bag that’s holding them is what we call a fun.

Matt: They keep dentists in business, yes.

Rabih: A fund holds multiple stocks inside of it, or multiple bonds, or a combination of both. It’s good to hold so many things. But there are two types of funds or bags, like a plastic bag and a paper bag. Like there are two main ones. The older one is what we call a mutual fund. And the new one, newer one, is what we call an ETF, an exchange traded fund. they were created by the same law in the 1940s, by the way, but ⁓ The way mechanically they are traded is slightly different. With a mutual fund, it is the equivalent of you know finding 50 of your friends, all pooling your money together and creating this bag together, right? ⁓ a mutual fund is when you get that Halloween bag and everyone is contributing their candy into it. So when one person wants to take

Matt: And taking money out of it.

Rabih: Exactly. So when one person wants to take some money out, they’re gonna go put their hand into that bag and probably they’re gonna take some of your money too. So the whole idea with a mutual fund is that it’s really communal and your money is not lost. But where does that translate to? This translates to taxable events. When you sell a stock, what happens is that if there is a gain, ⁓ you have to pay a gain on it. In a mutual fund format. When other investors in that mutual fund decide to sell a lot of money, the taxes that this fund is supposed to pay are distributed across all the individuals who are participating in that fund. So that’s why when you own a mutual fund, usually at the end of the year you get a big distribution out of it, which makes it slightly less tax efficient. But this is what a mutual fund is. It’s a big bag where everyone is contributing and they share the gains and they share the taxes, et cetera. That is what a mutual fund is. And ETF on the other hand, there are more distinctions, but let’s focus on that one. The ETF, on the other hand, is ⁓ slightly ⁓ more creative. They say we’re gonna make a bag and put all the candy inside of it, but in front of that bag, we’re gonna hold some sticky notes and say how many each person of us owns in that ETF, how many bars in that bag you own. So if you decide to sell, you just give your sticky note to the other people. Instead of having to go into the bank bag itself and touch it and take chocolates out. I really ran through that analogy. But the idea is is the sugar rush for all the candy. But the whole idea with an ETF is that ⁓ the actions of other investors or participants who own that ETF does not impact your tax situation as an investor. So there’s that separation, which makes ETFs more tax efficient.

Matt: Yeah. Yeah. Rabih, I feel about this analogy like I feel about stores ⁓ putting out Hall so Costco already has Halloween stuff out in the in mid summer. It’s just too early. You know, now I want a bunch of candy. We can’t be talking about Halloween. No, I’m just kidding. ⁓ I love it. It’s a really good analogy. It’s really good. well I want to come back to one thing too, because I don’t want this to get ⁓ lost because I think the whole reason for these different packages, you hit it earlier.

Rabih: Mm-hmm.

Matt: around diversification, I think it’s a good chance to highlight when we talk about the risk that we are the risks that we are actually removing from your portfolio. Because I think we often throw people throw around risk as this, it’s like this squishy term. It’s like people don’t really know when they say risk, that could mean a lot of different things. So I I just I think it’s worth hitting this really when we talk about These being properly diversified, and that’s all these vehicles are, to your point, Rabih, is ways to very easily execute ⁓ the strategy of diversification. What you are doing is you are literally removing, truly removing very specific risks in a portfolio. ⁓ like like you were saying earlier, business specific risks. So one business going out of business, maybe one area of the world having political upheaval or war or whatever. That never happened it’s crazy. That never happens. But these very specific, we call them very specific risks are completely removed. The only risk you cannot remove, it is the entire mechanism of the of the whole market, is market risk, is the overall risk of the market. And what that all really what that is is the ups and downs. It’s just the it’s the it’s the ups and downs of a portfolio.

Rabih: That never happens, Matt.

Matt: the way you eliminate that, I’d say, if I don’t know if we can use that, if we can say eliminate, but the way you t you temper that is time. So I guess I wanted to highlight that and get your thoughts, Rabih, because I think it’s important to just differentiate that. Like we are literally removing risk from a portfolio, and it is massively different to say I’ve got a diversified portfolio of these ETFs versus this other person has one stock in their portfolio. Very, very different from a risk standpoint.

Rabih: Yeah, 100%. And the reason those risks eliminate each other, the more companies you have in your portfolio, ⁓ the less exposed you are to a company specific risk and more and more concentrated in a market risk is because companies compete with each other. Let’s think of ⁓ Claude and OpenNI, right? Those ChatGPT and Claude, those are the two ⁓ main competitors in in this year, for example. If you’re only invested in Microsoft that owns OpenAI. Example, then yes, GDP will impact your portfolio. Inflation will impact your portfolio. What global wars will impact your portfolio. But do you know what else will impact your portfolio? Whether there’s a scandal at OpenAI, whether the the Chat GPT got hacked by a foreign government, etc., or there was a big data leak, right? That is also going to impact your portfolio. But if you own both.

Matt: Yeah.

Rabih: OpenAI and Cloud and the companies behind them, right? Anthropic and Microsoft, then yes, your this combined portfolio will still be exposed to GDP, will still be exposed to inflation, to global wars, etc. But what happens is that if something bad happens to ⁓ Chat GPT, well the people at Cloud are going to abuse that opportunity and win more customers and make more money. So what was a bad news for one company became a good news for you, for the other company. But for you, you net zero. So company-related risk cancels out. Whereas the only risk that remains are the big picture risks that affect everyone, such as inflation, GDP, unemployment, global economy. And how do you deal with those risks? Well, you can’t diversify these risks away, as you mentioned, Matt. But what you could do is that you can weigh them out. Because the way we deal with these risks is we know that on the long run, Anyone is still trying to make their life better. And as a collective, humanity is gonna be driving the economy f ⁓ forward ⁓ in the future. So worries about inflation or unemployment or GDP growth will resolve themselves. That is why investing requires a long time horizon, simply because there are some risks you can’t really eliminate.

Matt: You said it way better than me and give examples. I like it. No, this is great, Rabih. anything else before we move on to the last part of this ⁓ deep deeper dive. anything else you want to say about ⁓ owning individual versus mutual funds versus ETFs?

Rabih: Yes, there is one important ⁓ thing to highlight, which is your cost. When you’re buying a stock, you’re just holding that legal certificate that says you’re an owner, right? But when you’re owning a fund, whether it’s a mutual fund or an ETF, you’re actually kind of hiring a company to buy all these companies for you and put them in a bag. And that job is not free. So funds, ETFs and mutual funds, have something called an expense ratio. And usually If if you’re doing your homework, you can find some that are dirt, they’re cheap, right? Very cheap. We’re talking 0.05% of the yeah, five what we call five bips of the value of the money you own. So if you have ten thousand dollars in that fund, you pay ⁓ 50 bucks a year, which is you know nothing. ⁓ so, or there are other mutual funds and ETFs that have two percent or two point five percent.

Matt: Yeah, basically zero, yeah.

Rabih: Sometimes they have commission just to buy and commission just to sell. So be careful. And that’s why, you know, we have feuds in the advisor industry. It’s like, what funds did your other advisor put you in to make sure that you are in the most efficient type of fund? The fund that is not really taking all your money away without you noticing. So funds have costs associated with them, but competition is fierce enough that you can find basically free options. It’s just that if you are uninformed, a lot of money can be stolen away from you in that situation. So fund ⁓ fund fees are very, very important and the taxable profile of mutual funds for ETFs would be the second most important one, which we covered.

Matt: Yeah. I love that you you just brought that up because it’s ⁓ it’s not all created equal. Like when we talk about fund fees, it’s what are you getting for those fees? And we see so often with dentists who come to us with existing positions, it’s it’s not just that you’ve got like we want to look at the fees, of course. Like we charge a fee for our services, like you know, there’s there’s reasons to pay fees. It all comes down to what are you getting? And so when we’re looking at a portfolio and saying, hey, we can get the same kind of outcome here of what you have and drastically lower your fees because there’s no reason to be holding these funds ⁓ other than those probably gave the advisor a kickback. Like a very common thing we see is in them is in 401ks. 401ks are huge corp culprits here where advisors have relationships with certain fund managers. I won’t name any names, American funds. ⁓ they have certain relationships with different groups.

Rabih: Yeah.

Matt: And then they those advisors put those like within again 401ks, and then they get a kickback. So those fees are are higher for no reason other than to ⁓ non non transparently pay the middleman. So we we digress. We won’t go much further into that. ⁓ okay, last part of this ⁓ is so we talked about stocks versus bonds, how to own them via either individually in within mutual funds or ETFs. The last part of this we want to cover for part two is ⁓ the different areas of the economy, the different kind of ways to further diversify a portfolio. As I I I’ll I’ll say it there and then you can you can take it from there, Rabih, like going a little bit deeper in this kind of diversification discussion. Yep.

Rabih: How the diversification happens. And it not it, I’m gonna go back to the Halloween analogy, Matt. I’m sorry. It really go it really goes back down to ⁓ what’s in that bag, right? We just said, we’re putting all this candy in a bag, but it could be just a bag of only candy versus a bag of only like biscuits versus a bag of only chocolate or a bag that has everything together, right? So that fund, that bag could have multiple ⁓ features.

Matt: It’s it’s okay.

Rabih: Of snacks in it. And similar

Matt: If you’re lucky it’s all if you’re lucky it’s all almond joys, but you know, that’s just we won’t go there.

Rabih: Right. So similarly with mutual funds and ETFs, ⁓ they can have certain themes to them on what is ⁓ in that fund. There is a fund that owns all the stocks and all the bonds in the world that exists. But there are also funds that only own technology companies or funds that own only utility companies or healthcare companies. This is what we call a sector-based fund, a sector-based mutual fund or a sector-based ETF. And ⁓ when you’re buying it, you need to make sure that you’re buying different funds from across different sectors so you can diversify. But this whole universe of stocks ⁓ ca it can’t can be sliced in many different ways, right? You don’t only have to slice it by sector. You can also slice it by the geographical region. You can have a fund that is only investing in US based companies and bonds. You can have a fund that is only ⁓ only targeting developed markets like Europe and Canada and Japan, for example, or a fund that is only invested in emerging markets such as China and India and Brazil and South Africa and alike, right? ⁓ or a fund that owns all of them. Again, you could there are also funds that only buy the specific stocks in a certain country. So for example, you buy an ETF that only exposes you to Chinese stocks. All of them. We have this in the US, right? Don’t we have the Russell 3000 that only invests in the US? The third layer.

Matt: Yeah. how many S&P five hundred in index funds are there? Yeah.

Rabih: Exactly. S S P five hundred is a US only, but the SP 500 also falls into this last category, which is instead of slicing them only by sector or by geographical region, you can slice them by the size of the company. We said in the US we have around 3,500 companies. Well, let me sort them from the largest company out there to the smallest company down there. And I’m going to only choose to invest in the largest 30, largest 500 of those. Well, the largest 500 of those are in a fund or a bag that is called the SP 500, right? There are ETFs that track the SP 500 index and they only have those 500 stocks in it. The Russell 3000 has 3000 of these 3500. The Russell 2000 has the lower 2000 out of these 3500, right? So the way you slice and dice this what we call investment universe in front of you, every single stock out there that is available for purchase or bond, will create a different type of ETF and mutual fund. And this is where you don’t stop as an investor. You make sure that in your portfolio you have multiple of these ETFs and mutual funds to cover the whole map. Or exclude, you know, if there are here’s where it comes, you know, general advice is bad advice. Depending on your investment situation, it’s it’s ⁓ exactly the advisor usually determines what should be excluded, what should be included to that so it fits in your long-term plan. But the the offers are out there and the products are out there. The you know the craftsmanship comes on what are you choosing to build something that matches what the client needs at that point.

Matt: Yeah, that’s really good, Rabih. And we our our goal here hopefully is is truly not to overwhelm. As I as you’re going through that, Rabih, I’m sure there could be people listening, like, holy cow, there’s so much to know here, which yes, there is. But I think ⁓ coming back to this idea when you’re going through that, when I said earlier, there’s really just not a lot of reasons to hold individual stocks or individual bonds for the for the end, you know, for the for the we’ll call a retail investor. There’s just so many tax efficient and cost efficient vehicles now to properly execute a diversification strategy within size, sector, region, between stocks, between bonds. Like it it it’s just so much more straightforward to do that and so much less risky to do that rather than someone, a dentist out there thinking, I’m gonna go ahead and ⁓ do this on my own and professionally kind of manage my portfolio with individual stocks. So I I guess I wanted to just highlight the the w day and age we’re in now, this has never been more accessible and more cost effective and more straightforward and even though it can be overwhelming.

Rabih: for me it’s not, but that’s what I wanted to say. It’s like because dentistry for me is overwhelming, right? Like I go to I dude. No, it for me it’s not. Yeah, for I go to the dentist and w the moment I open my mouth, I like want to ask about all the stuff they’re doing because I find it overwhelming for me. And I sense that also with you know clients or prospects who talk to us, asking about all these details.

Matt: Yeah. for you it you’re yeah, for you it’s not overwhelming. For the listener it is.

Rabih: And then they say, ⁓ well, I’m glad you’re helping me with this because this is this is a lot. And this is just because unfortunately our brains can’t learn ever everything at the same time. ⁓ we help you, you help us type of situation. This is what I tell my dentist. Like you’re helping me understand my teeth. I’m gonna help you understand understand ⁓ your investment portfolio. ⁓ I think the most important part, Matt, about this overwhelming point is that you don’t have to do it alone. ⁓

Matt: Yeah. Yep.

Rabih: Yes, it is overwhelming, but that should not be a reason for you to put aside the importance of having a plan and an investment strategy that’s gonna ⁓ service your long term goals and put you in a much better financial position in the future.

Matt: Yeah, it’s a really good point, Rabih. And I I I love for you, you’re like, this isn’t overwhelming for me. It’s not because you live and breathe it. And ⁓ this is like truly your main focus in your career and and and even even like you you read about this stuff on the weekend, you just enjoy it so much, just like a dentist would ⁓ for for their own profession. So that’s that’s so true. and I I like what you’re saying here of that you can get help.

Rabih: Yeah.

Matt: On on these types of things. And I think the other thing to highlight here as we go through this, hopefully what comes through as well is there’s such there’s so much nuance to this and such a difference like between investing in a couple of stocks in a brokerage account or saying, yeah, I’ve got the SP 500, I’m diversified, versus a properly diversified, like again, hopefully we’re highlighting all the different aspects of this That need to go into this that yes can be overwhelming, not to Rabih, but they can be overwhelming. But again, just that there’s there is more that goes into this to have a properly diversified executed strategy based on your unique goals and timeline. So cause I think what we’ve done in some cases, Rabih, as an industry, ⁓ and as a like ⁓ are we influencers? Are we gonna be in that category? I don’t know. Nah, no. I’m with you. ⁓

Rabih: Nah, yeah.

Matt: But generally speaking, I think one of the things we’ve done a disservice to is almost tried to oversimplify and just been like, yeah, just buy an index fund, you’re fine. And I think, yes, compared to certain things, compared to day trading, sure. But compared to a properly diversified portfolio with a systematic strategy that’s rebalanced and you know, we’ll go into all that later. ⁓ I just I want to highlight that. There’s a huge difference. Anything you want to add to that?

Rabih: No, I agree with you. What I always say, everyone will tell you diversify your portfolio, which is great. But how does each one of them choose to diversify the portfolio is where money is either made or lost. And this is where it’s definitely not nuanced.

Matt: Yeah. Yep, yep, love it. Yeah, there’s a good, better, best situation here. Yep. So okay. That was good. That was a lot, Rabih. now I just want some candy. I’m gonna go grab a Snickers. ⁓ anything else you wanna Yeah, there you go. We did do some side quests here and teased, I think, what we want to go deeper into. I this is my fault of going into ⁓ deeper things around like risk and diversification. We’re just teasing it. We’re gonna do that for part three.

Rabih: Well, you can go to Costco, they already have it.

Matt: We’re gonna go deeper into ⁓ like index funds versus stock picking and how to actually like the philosophy versus implementation, risk, diversification, rebalancing, all that kind of stuff, actually executing this kind of stuff. We’ll hit that on part three, even though we kind of like, you know, teeter around it today. but for now, Rabih, again, any other final words of wisdom?

Rabih: No, I can’t wait for part three. That’s where it gets technical.

Matt: I know you’re really excited for that. We can go really nerdy. ⁓ if you’re out there listening and you’re thinking, ma’am, this is a lot. And as Rabih said, it’s beneficial to get help or get some questions answered. We are here. We talk to hundreds of dentists all over the country every single year, just like you. and you can go to dentistadvisors.com, click on the book free consultation button. We would be happy to talk to you about your investment strategy. And see how we can help you along your wealth-building journey and really helping you make work optional sooner. So, dentistadvisors.com. For now, Rabih, thank you for being here. Everyone, thanks for listening. Until next time, take care. Bye-bye.

Keywords: investments, portfolio diversification, stocks, bonds, account types, asset location, ETFs, mutual funds, tax efficiency, financial planning

Investing