The WCI April Newsletter - Inflation: The Investor's Greatest Enemy

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WCI News

Katie and I are back to traveling with a vengeance. As most of you know, we're past financial independence. So it's really important to us that we don't miss out on too many fun opportunities just to do more paid work. That does mean we're usually saying "yes" to too much and then later trying to squeeze it all in, but when we pull it off we do get to do a lot of cool stuff. For example, in March I went on four trips. The first was a trip Katie and I took to Canada with friends to go heli-skiing. The weather got worse but the snow got better as the trip went on. My next trip was with my son to San Francisco. This one was technically a work trip as I was speaking to the Coalition of State Rheumatology Organizations at their fellows conference. But we had a great time scootering around San Francisco. Fisherman's Wharf, Alcatraz, all the classic sites. But his favorite was a new Virtual Reality business they have there where we lived inside a video game for about an hour. We had a family trip to Phoenix to celebrate a 90th birthday party (more details below). Then, as you read this, I'm in Costa Rica visiting some recently explored slot canyons in volcanic rock (see picture on the right) and whitewater kayaking. Somewhere in there I worked some shifts in the ED, readied my newest book (The White Coat Investor's Guide to Asset Protection) for publication in a few more weeks, updated the Boot Camp book, and wrote scripts for a new online course we hope to have out soon. And that's not counting writing a few blog posts, recording some podcasts, interviewing some graphic designers to join us, and doing this newsletter. Kudos to the WCI team for keeping this enterprise moving forward when all I ever want to do sometimes is see patients and play outside!

Passive Real Estate Academy, put on by Passive Income MD's Peter Kim and Pranay Parikh, is opening enrollment this month. If you have an interest in passive real estate investing (syndications, private funds etc) but are not sure where to start, this is THE course to take. Not only do you get the information you need to evaluate these opportunities, but you gain entrance into a community of folks that can help you along the way. The 4 week course starts April 20th, but the cheapest way to sign-up for this great course is to get on the waiting list today.

Once you've taken the course, consider investing with some of our best sponsors, all of whom I've invested with before. I just received my K-1 from the Dream Live Prosper (DLP) Capital Housing Fund for last year and was pleased to see that not only were my distributions completely covered by depreciation, but that there was no need to file any state tax returns. Brett, our COO attended their conference this last month to learn more about their two new funds out this year, one on the equity side and one on the debt side. Origin Capital also has a new fund out this year. Brett and I skiied with them last month when they visited Park City on a company retreat. Their new fund will be doing ground up construction, and then give you the option to either exit and invest your money elsewhere, or stay in the fund for more income focused returns. 6 figure minimum investments got you down? Check out RealtyMogul. You can start investing there with as little as $5,000. Their income REIT been distributing net income of 6-8% a year for more than 5 years now.

Know someone doing great work spreading the message of financial literacy to their colleagues and trainees? Nominate them for The White Coat Investor Financial Educator Award. Winners not only get recognition of their efforts and a nice certificate, but $1,000 in cash.

Market Report

Link to Spreadsheet Data sources: Vanguard, Morningstar, and SPGlobal

Apologies for the market report from last month, at least if you saw it before the resend. As you know, we added the fourth return column up there, the 5 year return. However, we made the mistake of using cumulative 5 year returns for the data we took from Vanguard and annualized 5 year returns for the data we took from Morningstar. That caused me to (without really thinking it through) say that stocks had outperformed Bitcoin over the last 5 years, which isn't even close to true. We also switched from using GBTC as a proxy for Bitcoin to BTC itself. GBTC really didn't track accurately and we found an easy to use source instead. Now on to this month.

Stocks had a good solid month, but are still down year to date. The "small value comeback" seems to have at least taken a month off. Real estate had a great month too, not sure why with interest rates being raised, but perhaps it is mostly due to fear of inflation. The big news this month was that bonds had a terrible month. When interest rates go up, the value of current bonds go down, but the yield on both current and new bonds goes up, increasing expected future returns. Keep in mind, of course, that "terrible" is only down 3% when it comes to bonds. They're not that volatile. Speaking of volatile, guess what is almost back to even on the year? That's right, Bitcoin. Huge turn around this last week. Commodities are also way up this month. I'm sure it has nothing to do with oil being $110 a barrel. The general trend for the first quarter seems to be that stuff that does well in inflationary scenarios (stocks, real estate, precious metals, commodities etc) tended to do okay to pretty well and stuff that doesn't (i.e. long bonds) got creamed.

Best of the Blog(s)

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

1. Privilege, Power, and Kindness Columnist Joy Eberhardt reflects on her blessings.
2. 12 Reason Not to Use a Corporation for Real Estate Investing An LLC is better in almost every case.
3. Preparing for Tragedy: Ensuring Your Partner Can Manage Without You Columnist Alaina Trivax cares about her partner. Do you?
4. Finding Financial Role Models in the Black and Brown Communities Amazing how many of us grew up without any.
5. Why My Credit Score is Higher Than Jim Dahle's Rikki Racela teaches you how to get that credit score up.
6. Prohibited Transactions and Investments in IRAs What exactly can you do and what can't you do with your IRA?
7. Rent vs. Buying a Home: Why We're Financially Independent and Renting A controversial take on an old debate.
8. Family FIRE Travels: A Week in Medellin, Columbia. I thought going to Columbia was a good way to get kidnapped. Apparently things have changed.
9. The Future is Unknowable. Spend it All or Sock it Away? YOLO vs FIRE; how will you find your balance?
10. 5 Ways to Earn Income Out Of the Hospital Could you use a little more income? Who couldn't? Peter Kim teaches you the best ways to get some outside of the hospital.

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. Debt Forgiveness Bill Introduced in Senate. Something similar has been introduced in the House before, so don't get too excited. Kind of doubt this will go anywhere given President Biden's $10,000 limitation, but who knows? Worth keeping an eye on for those with both public and private debt, but I wouldn't carry debt just hoping for this.
2. Bitcoin Cash Machines Ordered to Shut Down in UK. I may not invest in cryptoassets, but I still find them interesting. It has been particularly interesting watching governments slowly try to figure out how to regulate them.
3. Investments Most Doctors Get Wrong. A fun article from "Investing Doc." Which ones are you making?
4. Who's Got Your Back? Who will pay your bills when you stop doing it? What about your parents or other loved ones?
5. Debunking the Myth of the Doctor Car. You aren't what you drive.
6. Free E-File State Tax Returns. Sick of coughing up another $25 per state to Turbotax or H&R Block? Harry Sit shows you the work around.
7. Should You Tap Your Retirement Account to Buy a Home? Christine Benz weighs in.
8. No Such Thing as a Safe Amount of Money. This early retiree left at 50, then was back at 53. Then was forced back into retirement. Be careful punching out too early.
9. Young Investor with Low Risk Tolerance? There are solutions. Ben Carlson provides 4 ways to make that portfolio less volatile. Most of them, unfortunately, also make it less inflation-resistant.
10. Accounting for Illiquid Assets On Your Household Balance Sheet. I get this question all the time. I agree with Mike Piper's answer.

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. Where Will Gas Prices Peak? Speculation runs rampant. Make your predictions here!
2. Secure 2.0 Passes the House. Not nearly as big as the Build Back Better bill, but maybe something interesting for you.
3. Denied Disability Insurance Coverage What do you do next after a denial?
4. Married Filing Separately Roth IRA Mistake Don't forget if you file MFS, you need to go through the Backdoor.
5. Which Tax Deductions Do Doctors Typically Miss Out On? Always good to be aware of all the deductions you might qualify for.

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.

• #255 Answering Your Questions About 401(k)s and How to Manage Them (Sponsored by StudentLoanAdvice.com)
• #254 Afford Anything with Paula Pant (Sponsored by StudentLoanAdvice.com)
• #253 What to Do with Extra Money and Life After Covid (Sponsored by LocumStory)
• #252 Real Estate Q&A with Passive Income MD's Peter Kim (Sponsored by PearsonRavitz)

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

• #59 Resident with 100K in Assets (Sponsored by PKA Insurance Group)
• #58 Physician Assistant Millionaire (Sponsored by LocumStory)
• #57 Orthopedic Surgeon Sells Practice Early in Career (Sponsored by PearsonRavitz)
• #56 Decamillionaire Doctors (Sponsored by CrowdStreet)

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

• PIMD Podcast #99 Mindset Is The Key to Successful Investing
• PIMD Podcast #97 Doctors Make Great Entrepreneurs

New Videos

Welcome to the new WCI Youtube Channel. 462 more of you subscribed this month, now more than 14,300! Please subscribe, like, and share!

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

1. How Much Does Disability Insurance Cost
2. Can Start-Up Costs For a Potential Business Be Counted As Losses and Deducted On My Taxes
3. Multiple 401(k) Rules and Contribution Limits

Tip of the Month

Inflation. It has been dominating the economic news now for months. However, it is not a particularly new phenomenon. The oddity is not that we are now dealing with inflation, but that inflation remained so low for so long that many investors have not yet had to deal with it during their entire investing careers.

I was able to attend a 90th birthday party for a relative this month. I hope I can be just as sharp at 90 as he is, but he has been a successful investor over the course of his 90 years. One of his gifts was a copy of the front page of the New York Times on his birthday for each day of his life. He's lived through a lot of interesting stuff, having been born in the depths of the Great Depression. One of the more interesting comments during the weekend was that eggs used to cost 2 cents. Per dozen. Now maybe you don't buy eggs very often, but if you do then you know that a dozen eggs is currently about $2.00. One of the guys I adventure with regularly is an egg trader. He trades eggs by the semi-load. This is a tough time for the egg business given a chicken virus running rampant and Easter right around the corner. He'd love to see eggs go to $20 a dozen, but if he thinks about it, he doesn't want them to go there for the same reason they went from 2 cents to 2 dollars. That's pretty much all inflation. While fact checking this article, I found that the price of a dozen eggs in 1932 was actually 15 cents, not 2 cents, but the point remains. My relative is paying 13 times as much for his eggs in his last decade of life as his first.

As an investor, inflation is your biggest enemy. It decimates the value of your savings. Sure, it helps make it easier to carry and pay off debt, since you're paying it off with less and less valuable dollars. However, if you're successful, chances are the damage to your savings from inflation will dramatically outweigh the assistance on your debt over the course of your life. Of the "deep risks" that your portfolio faces: Inflation, Deflation, Confiscation, and Devastation, the most likely is inflation. Thus, your portfolio needs to be mostly aimed at that particular risk. The main issue is that the portfolio needs to grow. You need to be taking on enough risk that the portfolio keeps up with inflation. Better to outpace it, of course, but keeping up with it, even partially keeping up with it will help you to maintain your lifestyle. So you need to have money in risky assets. I'm primarily talking about stocks and real estate. Traditionally, their returns have been significantly higher than inflation, allowing you to get at least some real, after-inflation growth out of the portfolio. This is not the case for low risk assets such as bonds, CDs, cash value life insurance, and especially cash itself. While lower risk assets have a place in a portfolio (20% of my portfolio is in bonds), if they are the majority of your portfolio you had better be old enough qualify for Medicare. Better yet if you don't think of World War II as "history".

Right now inflation, as measured by CPI is almost 8%. It's well over 9% if you live in the Western US. And your personal rate of inflation could be even higher, depending on what you spend on. Even stocks and real estate may not be outpacing that right now. But you need to be careful before you go hog wild on anything else. Lots of asset classes have been proposed to help you deal with inflation. They can each assist, but none should become too large of a piece of your portfolio. Consider the following:

Inflation-indexed bonds: I Bonds and TIPS eliminate the main issue with nominal bonds--their susceptibility to unexpected inflation. However, they're still bonds with relatively low expected long-term returns. The real yield on I bonds right now is 0%, and it's negative on TIPS.

Cryptoassets: Their fans may tout these as the ultimate inflation buster, but the data, as little as there is, suggests they may not have much of a role here. For example, despite inflation being up sharply over the last 12 months, BTC is down 22%.

Precious metals: Silver and Gold! Real money! This has traditionally been a safe haven for those fearful of inflation. Gold has been so volatile the last couple of years that you can make a case for it or against it as an inflation hedge simply by varying your starting point by a few months. But it is up year to date where most asset classes are not. In the long run, you end up with a highly volatile asset that generally just keeps up with inflation, all while incurring significant storage and insurance costs, as well as a higher tax rate on gains.

Commodities: When money loses value, why not own stuff? Well, it turns out it is really impractical to own stuff sometimes. Precious metals not volatile enough for you? Try oil. It hasn't been that long (early 2020) since they were PAYING people to take oil off their hands. Now it's over $100 a barrel and I'll be paying $6 or $7 a gallon for gas at the lake this summer. Commodities can make up a small portion of your portfolio, but it is tricky to find a really great way to invest in them.

Debt: In times like these, taking out low interest rate fixed debt may seem like a hedge for inflation. However, debt comes with its own risks, especially when used excessively. At a certain point in life, getting enough debt to make a difference becomes tricky as well.

As you design your portfolio/written investing plan, keep inflation protection in mind. If you realize you did not do so when you made your portfolio, this may be one time when it can make sense to make a few adjustments. Inflation is a big deal. For investors, it's the biggest deal.

Jim

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

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