Speaker 1 00:00:08 What's up, everyone. Welcome to the finance for physicians podcast. I'm your host, Daniel Raimi. Join me as we dig into what it looks like for physicians to begin using their finances as a tool to live better lives. You can learn more about our
[email protected] let's. Jump into today's episode. What's up guys. So we're talking vitals again today and we're going to be, hopefully this is a little bit more fun topic. Last time we talked about safety net type stuff, like worst-case scenario planning, and that can get a little depressing for, you know, at times it's like what, thinking about the worst case scenario. So, uh, today we're going to be talking about having an investment plan. And so that, that is, uh, the fifth vital is having an investment plan and checking it every so often. And so I'm going to talk through like, what that looks like, how you can boil it down to like a simple kind of, you know, one page sort of a snapshot, you know, how to kind of check up on that.
Speaker 1 00:01:08 So, but the focus today is going to be on, what does that investment plan look like? Or why do you have it in the first place and kind of how some ideas for how to take a peak at that over time? All right. So before I jump into, uh, going through this, um, just little side, note it for those that are listening, that, that already, that work with our planning firm already, this is something, so I mentioned this last time, um, this is something and really all these vitals, these are things like we already keep track of for you. Um, and that really should be one of the benefits of working with a financial planner. If you're already working with one, you know, you you'll know what I'm talking about, that one of the benefits is they kind of keep up with these vitals for you.
Speaker 1 00:01:53 Um, they're still important to understand and kind of know the gist of, but like it's not as much on you to, to like DIY these things. Um, so just wanted to point that out for those of you listening that that already worked with us. So what is an investment plan? I think that's probably a good starting point. So, and an investment plan is really just a documentation. I mean, it is what it sounds like it's some people call it an investment policy statement. It's like the formal way of looking at it, but really it's just a documentation of what the investment plan is. Um, a lot of times you are, uh, lumping it together based on a goal. So like one family might have two investment plans. So like maybe the one investment plan is for like the retirement and then they maybe had a separate investment plan for vacation home, like saving for a vacation home, or maybe another one for like a charitable fund or another one for like a college savings fund.
Speaker 1 00:03:02 So it's oftentimes organized by like purpose or goal. And so it's just a, high-level like summary of basically like, what is the goal? What are we going to be doing? Like, what's the plan for investing whose responsibility is it? Um, the philosophy, um, what's the process and just an outline of the, you know, more specific, specific investment plan. So you might be thinking like, why do I mentioned one page? I like a one page plan. I like it like boiled down and simplified, but you might be thinking like, if it's that simple, like why do I need to document it? Or what is the, like, what's the real benefit to having this kind of plan? Especially probably if you do it yourself, like, I feel like it's hard to do this kind of thing if you're doing it yourself, because you're like, it's in my head.
Speaker 1 00:03:53 Like, why do I need to like extract it from my head and put it on paper? So the main reason if you're doing it yourself is that you it's emotional investing. It's not always emotional, but it can, it can easily become emotional. And it's so easy to like slowly start to deviate from the plan. And five years later, you know, forget that you had even put it together and you've been kind of, you've slowly gravitated towards a completely different direction and not realize it. And that's a problem. So that, that's definitely an issue that is very it's, it's easy to go that route. So if you don't have it written, it's much easier to go down that path. It's much, you're more at risk of going down that, uh, that route. Um, it's also, um, it gets really emotional when things don't go as well when, when the market gets dicey.
Speaker 1 00:04:53 So, uh, like LA March of 2020, that's the most recent example. It got like super dicey for a month or two where like, everything's like the world is falling apart. Like with the investments, they're just all tanking, everything's going down. It's like nothing's working. Uh, so when you have a, um, plan in your head not documented, it's really easy to be like, kind of get wrapped up into that and be like, well, what was the plan again? Like, was it to like tweak things because every, but it feels like I need to tweak things cause like everything's messed up right now. Like the market's tanking, I gotta tweak things and everybody's telling me I needed to eat things like ma I need to do something different and change it. And so then it's very, you're susceptible to like deviating from the plan, especially if you're, you've kinda like lost touch with it in those like volatile times.
Speaker 1 00:05:51 And then the third reason, I think it's helpful and this is more for people that are not doing it themselves, but I think it's helpful to just kind of be on the same page, have like a high level, uh, overview of like what they're doing for you. Like it's just a good way to like convey what the plan is for the people that are going to be taking care of the accounts for you. So that you're, you have a general idea so that you can make sure it all makes sense. Um, or that it's, you're on the same page with things. Um, so it's definitely important thing. I think it's, it's a huge, it's, it's almost like a necessity. And I think the real problem with not having one is you're gonna really gravitate towards, even if you have one in your head, you're going to gravitate towards not having a plan.
Speaker 1 00:06:38 So it's, it's like anything, you gotta get it on paper. Um, I think to, to document it, you gotta get it on paper and have it like, you know, real concrete so that you can refer back to it. So that that's what it comes down to is referring back to it. And that's why, you know, that's why I would call it like one of the big vitals is something ideally you have documented that you can refer back to and kind of do a quick check and be like, okay, that's good reminder to myself or good reminder of what's happening with this. Um, especially when it's getting kind of crazy. So I talked about some of the, um, example goals that it would typically be or purposes that you would typically use it for. Um, but the gist of it is you're using it for any like longer-term like investment strategy and you're, you're outlining that, uh, the plan for it.
Speaker 1 00:07:26 So I'll walk through like what the key parts of an investment plan are. And then we'll talk through that. Um, so first big part of it is like, what is the purpose of like an outline of the purpose and the responsibility. So, um, if you're just doing it yourself, it's like this, uh, it might be as simple as like the, this, uh, this is an, a plan to outline how we're gonna, I'm gonna manage my funds that are, will be eventually used for mine and my spouse's retirement. That's it. Now, if you're working with an advisor, it's going to say, you know, we're going to take care of this account for you. Um, it's our responsibility to manage it. You know, we're, we have a fiduciary responsibility to manage it on your behalf. Here's what our understanding is of the purpose of the funds, you know, for retirement.
Speaker 1 00:08:13 So that's, that's that first part is just outlining like the purpose or the why and who is responsible. Um, the second big part, um, that, that you'll typically see in these, um, is an outline of what the investment philosophy is. So with investing, there's all kinds of different like flavors of investing or philosophies, like ways people see, you know, ways of doing it. So I think you should like summarize which investment philosophy or approach you're going to take. And I'll talk through like, what are typical or what our approaches for each these areas to kind of help you, um, with some real world examples, like for example, our investment policies, the philosophy outlined, we're a passive, we believe in passive investing basically. I mean, there's a ton of academic research that backs this. So like, if you're, if you believe in like academics being a good source of like how to do things or, or, you know, data and research, um, passive is definitely, uh, approach a great approach for investing passive investing is a, like is a kind of a philosophy in itself.
Speaker 1 00:09:29 The idea is that like, it's, it's more efficient to own the entire market than it is to try to pick what's going to be better and what's going to be worse. So in other words, the market overall is pretty efficient and people are pretty inefficient or are not very good at picking the winners and losers. Um, and so lots of academic research backs that strategy. That's why we use it. We're big fans of it. Low costs is a big part of that philosophy that typically goes hand in hand with passive. That's one of the kind of, uh, secret weapons, I guess, of like passive investing is that it just inherently has lower costs because you don't have to pay so many humans to try to pick things. So, but outlining that passive, we have a passive strategy, which means we're going to try to own the entire market instead of trying to pick the winners and losers.
Speaker 1 00:10:17 And we're going to use low cost, maybe ETFs and mutual funds. That's pretty common and, and try to minimize taxation. So that's part of our philosophy. Like we believe that there's not a, there's really not much value to be had by trying to pick the winners and the losers in the investment world. And so that's where the passive philosophy comes from. On the other hand, we believe that there is some opportunity to add value by minimizing taxation, especially for most of you listening. Like if your income as your income starts to go higher and income brackets higher, there's more at stake. That tax piece can be a value. So we work to try to focus on minimizing taxation on top of that. So that's our investment philosophy. We, in our investment plans, we try to boil that down to a few sentences. Ideally, you have kind of an outline if you're doing it yourself, like what do you, what approach you're going to use?
Speaker 1 00:11:16 Otherwise, you're very susceptible to changing philosophies. Um, and I mean, most people are, they get the shiny object. Somebody tells you about a new strategy. So, um, ideally you're sticking to this. Once you set this thing up, this is a kind of set it and stick with it. Not forget it, but like set it and stick with it. As far as the philosophy, that's the way to go and then revisit it over time to make it's more making sure you're on track with the philosophy, as opposed to like, uh, changing it all the time. You're more going to be like checking. So say a year from now, it's like you, the past couple of years, people are like, like the trends in investing and been like game stop, you know, buying stocks and selling stocks or, you know, Tesla stock or Bitcoin or all those kinds of things.
Speaker 1 00:12:08 They've been like Robin hood. Those have all been kind of like recent trends, but those are incomplete conflict with like a passive approach. So it's good. I mean, not that they're like bad, those things are not in themselves bad. It's just, before you start to invest you, it's good to reference this. Say like, what's the purpose of this investment? How does it fit into my investment plan? Am I following my philosophy that I've put down here on paper? Um, if not, then do I really need to do this? So that's that second piece just outlining the investment philosophy. Third part of the plan is a summary of the review process because an investment plan, it's something I've heard. A lot of people, uh, ask us, like, I want to just automate this thing. And that's, that's a valid or a, that's a reasonable way to think.
Speaker 1 00:13:03 I mean, it's a, it would be efficient if we could just automate these kinds of things. But I think with investments, um, that's not really a good approach. There's going to be needing to be tweaks that are made along the way, but they don't need to be like big, huge changes. It's just, even if you're not changing anything, it's just important to check on this. Just a quick check every so often and have a process for how you do that check. And so like for example, on our investment policies, like our review process is that we look at the accounts like each account quarterly at minimum, and sometimes more frequently if the market gets follicle and we're gonna look at the percentages of each asset class. So like, where is it invested in the pie chart of broad categories? And we're going to rebalance it if it's outside of a certain threshold, our threshold is 20%.
Speaker 1 00:14:03 So, you know, if I'll give you an example of what that, what I'm talking about. So let's say, and this is one of the categories in our, our asset allocation, which I'll talk about in a second, um, us total stock market for a 90% stock, 10% bond portfolio. Our target for us stock is 32%. Okay. So when I'm talking about this review process, I'm saying, okay, we're looking at the, all the investment accounts. And so maybe it's the retirement example gold. And so maybe there's a Roth IRA, uh, and an invest, another investment account and maybe a traditional IRA or a 401k or whatever. We're looking at all those accounts that are earmarked for retirement. And we're saying, okay, of that total combined balance, like what percentage of it is in us total stock market. And so it needs to be went 32% ideally, but like, we will let it like go 20% up or down one way or the other.
Speaker 1 00:15:05 So I guess I'm going to try to do math off the cuff, um, 3.2. So 3.2% is 10. So 6.4%. So like, we'll let it swing about 6%, 6.4 up or down. And that's where that 20% variance is before we're gonna, you know, for sure rebalance it, that's kind of a general rule is like, we're gonna let it swing, you know, up to 20% up or down because otherwise you're going to be rebalancing it like every month. Second, also there, a lot of the research we've seen is that that's a more efficient approach is that you let it swing a little bit, you know, let it kinda kind of run, run its course a little bit, but then once you hit that threshold of 20%, you're rebalancing it. So in that review process, um, we're looking at w w which is quarterly for us. Um, or if the market's volatile, we're looking at each of the asset classes or each of those pieces of the pie, and we're saying, okay, what percentage do we have now?
Speaker 1 00:16:04 Because originally we were at 32% on that example, but what is it today? So if it's like 33%, we're like, check that's good. Uh, but if it's like exceeded that a 6%, so say it's 40% or like, okay, got to rebalance the whole entire thing. So that's, we're just looking at it to see, okay, have we exceeded that 20% variance in any given category? If so, we have to rebalance, if not, we're, you know, potentially good to go. So that's, that's the review process. The first part of it, the second part is we're, uh, we have kind of a note of like, we're going to look at the overall plan around on an annual basis typically. So that's kind of where we, since we're not, since it's not, since we're managing for our clients, we need to have like a kind of a high level update discussion of like, are we still good on the plan?
Speaker 1 00:16:53 Um, you know, in our target is around annually for that. So, you know, if you're doing it yourself, I think it's, you, you, it's very important to say, how often are you going to look at this? And how often are you going to rebalance it? You know, how often are you going to make sure your pie chart looks good? And when are you going to decide to rebalance it? Like at what point do you rebalance it? Uh, there's a, I guess to clarify this, for those of you that are like early on, like if you're in training and you just have, um, maybe your only investment at this point is like the, a work retirement plan or something in a lot of cases, it makes sense just to use like their automatic target date fund, they call it like the autopilot fund. And that's basically just one fund that operates under an investment policy.
Speaker 1 00:17:44 And it like, does it for you and it's based on your retirement date. So in other words, it's got its own like internal investment policy and it's kind of like doing its thing. It's almost like working with an advisor that does it for you. And so really it's less of a big deal to go through this process if you're using that approach. But typically our experience is you get to some point in life where it gets more complicated and it starts to become like important to have really a more concrete investment plan. And even if you are in that case where you have just the simple automatic fund in training, it's still good to like take a glance at it once a year. It's just going to be a much quicker like you log in, see what's what the fund asset allocation is. And then that's it.
Speaker 1 00:18:34 So just wanted to clarify that point. So that third part of the, part of the plan is just summarizing what this review process is. How often are you going to do it? It might be as simple or as, uh, you know, infrequent as annually, quarterly to annually is typically the range we see. Um, and you know, what are you going to do when you review it? Like w and what sort of, uh, rules are you going to follow? And then the last section is just, um, kind of a summary of like, what are we working with here? Like, what are the accounts that are a part of this plan? Like Roth IRA, traditional IRA, whatever. Um, what are the estimated kind of balance, uh, as of the writing, how much do you expect to add to it per year or per month or whatever, and then how much, um, like, are you willing to take a lot of risk?
Speaker 1 00:19:33 Like, is this a long-term sort of account, like just kind of a summary of like what those key points are that haven't already been noted. And then the last part of that is just a S a S uh, outline of the asset allocation target. So I was referencing that a second ago. So going back to the example of someone in training, maybe your asset allocation is just like, use the target date fund and that's it so super simple. Um, but for those of you, like further down the road, things are getting a little more complicated. You might need to have a little bit more like customization, I guess, for this. So I'll use the example for our clients that when we're managing like a 90% stock, 10% bonds, sort of a, uh, allocation. So that's a good, that's a typical allocation that you see for someone that's like relatively young and is very comfortable with taking risk with really long-term money.
Speaker 1 00:20:35 So like maybe retirement funds. So like for our 90 10, 90% stocks, 10% bond portfolio, our percentage targets are 32% us total stock market. I already mentioned that a minute ago, and those are just, that's just like own every stock in the U S based on how big it is. So like, we own kind of a percentage of that stock based on the total percentage it is of the market. Um, you can, it's not that complicated. You can, you can own the total stock market by just simply buying like a Vanguard total stock market fund. Um, so us total stock market is the first asset class. Our target is 32% in this portfolio. Second is us small cap, and that's 13%. Third is total international stock market. That's like kind of the same thing as us, but like total non us stocks kind of like all of them and that's 28% and then emerging markets.
Speaker 1 00:21:38 So those are like the, uh, emerging economies. Um, that's 8%. And then real estate is a separate asset class for us. That's like 9%. And hopefully that adds up to 90%. So that's the S what we call like the stock or equity component. And then the 10% is in just various bonds. So that's our target for 90 10. And ideally if you're doing this yourself, you need to have some target. And I think it's best to stick with a target over time and not tinker with it. That's probably the most common thing or mistake. I see people make, I guess the most common mistake we see is just people completely deviate from it. But another thing that happens is you, you, you tend to tinker with it. So you're like, ah, maybe international needs to be really low right now because it's not done very well.
Speaker 1 00:22:37 And then 10 years from now, you're like maybe international needs to be really high. So a lot of DIY investors we're seeing right now have low international exposure. And that's pretty, I mean, it makes sense. International has done pretty lousy the past 10 or 15 years. And so there's this, um, temptation to use it or, uh, own less of it. But if you truly are passive, you need to own a pretty sizeable percentage of international, because that is a pretty big part of the total stock market. And the stock market based on the research is very efficient, you know, owning the entire star market. So, as I mentioned at the beginning, the big reason this is helpful is it helps you to remove the emotion. You kind of systematize it, have a documented it's, especially if you're DIY in it, like this is a huge deal, like just to have that documented, to be able to reference.
Speaker 1 00:23:31 And it's, and as I mentioned, it's really good to see, even if you're not doing it yourself to kind of be, make sure you're on the same page with the advisor planner that is doing it for you. And it'll give you kind of a high level of what the plan is, so that everybody's on the same page there. So if you ha if you're like, I haven't even, I don't have any of this. Like how could I start? I think a good starting point would be to do like, you know, a retirement, everybody, most people, I guess, have a retirement, uh, bucket of funds. So like start with your retirement account. It's typically straightforward. And then just do the best you can like have a one page, you know, work through the points. I said like, first is like, what's the purpose and responsibility. Second is what's the investment philosophy, third, how am I going to, how often am I going to review it?
Speaker 1 00:24:23 And what am I going to do when I review it? And then fourth, like, let's outline the specifics of how we're going to invest. So just line it out and at minimum, just do what your write down, what you're already doing, because that's really your default investment plan is what you're doing. Now, if you don't have one that, you know, that's your investment plan. So write it down, have some sort of frequency of review and maybe it's annually at the least infrequent and get it, get it in the calendar for a year from now to pull that back out. And in the meantime, if you don't feel good about what you know, or how you're doing, either talk to an financial planner advisor, get help, that's what we do or start reading about it. Or maybe both, um, there's millions of books about like how to invest if you need, if any of y'all, if y'all are interested in like ideas for books, I can give you guys that let me know.
Speaker 1 00:25:18 Um, I have a million of them that are, I would say, but just let me know kind of what you're looking for, I guess, or where you're at in like the education journey. And I can, I'm happy to throw out suggestions, but yeah, I think that's a good starting point yet, at least something down on paper, ideally it's electronic, you can kind of refer to it and, um, maybe you print it out as well. And then put a reminder in your calendar at least once a year, maybe a little more frequent to refer back to it and just kind of do a review of it. And ideally you're making small improvements over time without like tinkering with them. Hope this has been helpful. And, um, we, uh, we'll look forward to jumping back into the last couple of vitals in the next few episodes. Hope you have a great rest of your day.
Speaker 1 00:26:06 We'll talk to you next time as always, thank you so much for joining us today. If you found this valuable, please give us a review on iTunes and share with a friend. Also check out our
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