The WCI November Newsletter - Why IRR Is the Best Return Measurement

Featured Business

Looking to refinance your student loan, but unsure of where to begin? Look no further than Laurel Road, digital banking platform and brand of KeyBank. Refinancing allows you to combine all your existing debt into one single, new student loan.

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• Low fixed and variable rates available when refinancing student loans.
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Refinance with Laurel Road through this link today and we'll throw in the WCI Fire Your Financial Advisor online course absolutely free!

WCI News

We have a new member of the WCI team, an executive assistant working with the products team (books, courses, conference). Welcome, Morgan!

We wrapped up the 2021 WCI Scholarship program this month. We divided the competition into two categories this year, Inspiring Stories and Financial. Congratulations to the following winners:

• Inspiring Stories: Orion Rushin, Kayli Hall, Alessandra LaJeunesse, Sonam Dolma, and Julia Carlin
• Financial: Joanne Newens, Anna Lackey, Jonny Hatch, Sarah Velez, and Sierra Murphy

We are excited to have our second annual champion program up and running. If you want to be a champion for The White Coat Investor and you are a first-year medical or dental student, sign up here. We will send a copy of "The White Coat Investor's Guide for Students" for you and every person in your class. As the champion, you will receive a Lifetime Member WCI T-shirt and, if you send us a picture of your class with the book, a WCI Yeti tumbler.

I will be doing two Facebook Live events in The White Coat Investor Facebook Group this month. The first will be on November 2, at 5 pm Mountain Time with our partners at Resolve. Put a reminder in your phone and come learn about the #1 rated contract physician team. The second will be for those of you wanting to learn more about real estate investing. Join me and Peak Investments on November 15, at 5 pm Mountain Time. Speaking of Peak Investments, they offer a private REIT that invests in single-family homes, an asset class that a lot of investors are currently interested in. They also have a relatively small minimum investment, just $25,000. Another interesting real estate investment option is Origin Investments, a real estate sponsor that has been around WCI for a long time. In fact, I've almost had a fund go round trip with them. They have recently launched two new funds and will have a third one out soon. Minimum investments are higher, but the track record is also longer.

We're cautiously optimistic as we watched COVID cases in the country drop by more than 50% since school started, but we're still requiring vaccination to come in-person to The Physician Wellness and Financial Literacy Conference (WCICON22) on February 9-12th, 2022 in sunny Phoenix, Arizona. It's selling well, but not yet sold out. The room block will sell out before the conference, so we recommend you sign-up ASAP if you want to come. It is approved for 17 credit hours of medical and dental CME and we've got a ton of awesome speakers and activities lined up. Whether you choose to attend live or virtually for whatever reason, you will want to register by December 1st to get the sweet swag bag that includes four books by keynote speakers. More details at the link.

Market Report

Link to Spreadsheet Data sources: Vanguard and Morningstar

Great month for stocks, not so great for bonds, although TIPS were clearly the bonds to own this year given the rise in inflation. Commodities have done well as they are "supposed to" in an inflationary environment, but precious metals have not. Bitcoin made it back to its peak from earlier this year, rewarding those with "diamond hands" who suffered through a drop of over 50% this summer.

Best of the Blog(s)

Lots of great posts from across the WCI Network this month. Check them out!

1. Post FI Notes 004: $5.5 Million at 55. This feature from the Physician on FIRE blog talks about post FI life.
2. I'm a Sports Writer with a Passion for Finance - Let's Go on a WCI Journey Together. The new WCI content director pens his first column.
3. How Are Investments Taxed? Hard to win the game if you don't know the rules.
4. Crowdstreet: An Honest Review of the Largest Online Real Estate Investing Marketplace. Physician on FIRE tells you about his experience with this real estate platform.
5. Changes to the PSLF Program. I've hit this on the blog and the podcast. If you missed it and have federal loans, read this.
6. How to Get 80% of the Benefits of Real Estate Investing with 1% of the Effort. If you thought the 80/20 rule was cool, what about the 80/1 rule?
7. When Should You Fly First Class? A post that was originally going to be about NetJets ended up mostly focused on first class.
8. The Ethics of Asset Protection. Many readers found no dilemma here, while others agree that ethical dilemmas abound with just about every asset protection technique except buying insurance.
9. Why You Should Ignore the Financial Media. Almost nothing useful about finance can be found in newspapers, in magazines, or on TV. Frankly, most of the internet isn't great either.
10. FIRE Starter 004: Fast FatFI in Five Years??? Both Physician on Fire and I wrote about FastFI this month.

Best of the Web

Every month I recommend (about) 10 articles from across the web. Thank you to those who send us suggested articles.

1. Physicians Suffering from Infertility Face Challenges on the Frontline of the COVID Pandemic. CNN hits a topic near and dear to the hearts of many docs and other professionals who delayed kids into their 30s or 40s. 1 in 4 female docs per the article.
2. Are You Ready to Retire? Probably Not. Jim Wang isn't talking about the finances.
3. The Problem with Low-Income Tax Credits. Students and residents take note.
4. Roth Conversion Analysis Is Not Breakeven Analysis. Despite what some financial advisors say.
5. Are Defined Outcome ETFs for You? Did you even know they existed 5 seconds ago? I didn't. Don't worry, Allan Roth isn't impressed with them either.
6. An Unhealthy Obsession with Money. Some of you need this, maybe including me. "If you're always worried about the future value of your money, it becomes much harder to enjoy the present value of your time."
7. Why Buying the Dip Is a Terrible Investing Strategy. There has to be something to buy it with, and that something may not be earning much.
8. Will I Miss My Ex? CrispyDoc leaves clinical medicine. In the words of a hit song, "We are never, ever, ever...getting back together."
9. What the First Bitcoin Futures ETF Means for Advisors. And investors. Will advisors start recommending it be added to portfolios now that it is easier for them to get paid for doing so? Time will tell.
10. The 15 Worst Pieces of Financial Advice. Steve Adcock weighs in. I had to check to make sure I wasn't giving any of them. I wasn't. Funny how everyone into this stuff agrees on the basics of how this money stuff works, and yet so few know the basics.
11. Burnout Linked to A-Fib. It's now a moral, financial, ethical, and health issue.

Great Stuff from the Forums

The WCI Forum, subreddit, and Facebook Group continue to be great places to get some help with your questions. See these great topics that people are discussing now:

1. Bond Philosophy. Which ones do you use and how do you use them?
2. How to Structure a Fair Prenup. I really enjoyed this discussion.
3. New Practice, No Patients. Sounds like a nightmare. One reason owners generally make more is they take more risk.
4. Moving to Bigger House: Sell or Rent Our Current Starter Home? Accidental landlord, or building on home equity.
5. My Friends in Different Specialties - What Does Your Total Compensation Look Like in 2021? Tons of anecdotal data in this subreddit you may find interesting.

New Podcasts

Be sure to check out the podcast if you haven't yet. 30,000-40,000 are listening to every episode. If you'd like to leave a question to be answered on the WCI Podcast, record it here.

• #234 Roth Investment Accounts Q&A (Sponsored by Locumstory.com)
• #233 Insurance Q&A (Sponsored by Bob Bhayani at DrDisabilityQuotes.com)
• #232 Investing Q&A: The Dragon Portfolio, 457(b)s, 403(b)s, and Individual Stocks (Sponsored by Locumstory.com)
• #231 How Much Homeowners Insurance Do I Need? (Sponsored by GoodRX.com)

The Milestones to Millionaire Podcasts (all accessible at this link) are short podcasts celebrating your accomplishments! Lots of professional variety this month.

• #37 The Veterinarian Millionaires (Sponsored by The Peak Group)
• #36 Psychiatrist Real Estate Investor Multimillionaire (Sponsored by Locumstory)
• #35 The Attorney Millionaire (Sponsored by DLP Capital Partners)
• #34 PSLF Forgiveness and Millionaires! (Sponsored by Set for Life)

Not enough podcasts to get you through the month? Try these from Passive Income MD!

• PIMD Podcast # 76 How to Find Your Side Hustle
• PIMD Podcast # 78 How to Avoid FOMO When Investing

New Videos

Welcome to the new WCI Youtube Channel. 383 more of you subscribed this month, now more than 13,000! Please subscribe, like, and share!

Tons of new videos this month. Here are just a few of them:

1. What Does the 2021 Biden Tax Plan Mean for Doctors? It'll be interesting to compare the initial proposals to the final bill.
2. Should I NOT Refinance Student Loans in Hopes of Federal Forgiveness? Ahh....moral hazard. Now what to do about it.
3. Don Wenner from DLP Talks About Real Estate Investment, How COVID Has Affected Real Estate, and More. Don has an incredible personal story.

Tip of the Month

An interesting thing happened when I started getting involved with private real estate years ago. I started hearing about other kinds of returns. While return reporting is very standardized with stocks and mutual funds, that is not the case in the real estate world. Stocks, bonds, and mutual fund returns are nearly universally reported as an "internal rate of return." You can calculate that yourself using a spreadsheet function called "IRR." This number is annualized, whether the reporting period is shorter or longer than a year. If there are cash flows into or out of the investment other than at the beginning and end, you will need to use the XIRR function to calculate the return accurately. This is a "geometric" return or an "annualized" return, not an arithmetic return or an "average annual return." To make things even more confusing, Vanguard labels their annualized returns as average annual returns on their website!

Real estate investments do tend to report an IRR (really the same thing as XIRR if they calculate it properly, which they sometimes do not). However, they also report other returns. Most notably, real estate investments like to report cash-on-cash returns and equity multiples.

A cash-on-cash return is simply dividing the amount of cash you received from an investment in the last year (the yield) by the amount of cash you put into the investment. Maybe this is important to some sort of yield-focused investor, but I would argue that very few investors should be focused on yield instead of total return. The number means less and less as time goes on with an investment. For example, if you put in $10,000 years and years ago, you might be getting more than $10,000 a year out of the investment at this time. That's a cash-on-cash return of over 100% this year! But it means nothing if the actual value of the investment is now $500K. You're still only getting a true yield of 2% on the value of your investment. Likewise, if you refinanced a property and took cash out, but still had positive cash flow, you would now have an infinite cash-on-cash return. It's just not a very useful measurement of return in my opinion, and incredibly misleading if you don't understand the difference between a cash-on-cash return and an internal rate of return.

An equity multiple is even less useful. Basically, you take all the money you received from an investment and divide it by the amount you invested. So if you doubled your money in the investment, your equity multiple is 2. Well, that's great if you managed to do that in 3 years with an investment. That's the equivalent of an IRR of 26%. But it's not so great if it took you 20 years to double your money. That's an IRR of just 3.5%, and might even be less than inflation. Nobody should ever report an equity multiple without specifying the time period associated with it! Likewise, getting a bunch of money back early in the investment is more valuable than getting it all at the end. IRR accounts for this, but equity multiple does not.

The one difficulty with calculating an IRR for real estate is that you cannot do it accurately without knowing the value of the property. Since properties aren't appraised every day or even every year, it can be tough to get an accurate return. So you can understand why a cash-on-cash return might be more useful until the property goes "round-trip." But equity multiple is even worse, since it can't be calculated at all until you are done with the investment. Using IRR will allow you to compare your real estate returns to the returns available with your other investments and to the returns required to reach your goals, and that's really what you need to know.

Jim

James M. Dahle, MD, FACEP
Founder
The White Coat Investor
https://www.whitecoatinvestor.com

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