#791: What Should Be Inside a Dentist's Investment Portfolio?

Speaker A: If you are a D4 recent grad associate or any dentist who wants to feel more confident and organized with money Dentist Advisors is hosting the Dentist Money LaunchPad, an eight week course that will teach you everything you didn't learn about money in dental school. You'll learn from our dental specific CFP advisors and other dental professionals on topics around debt investing, career development, becoming a practice owner, taxes, and so much more. Whether you're just getting started or simply want more clarity and direction with your finances, learn Launchpad is for you. The next session starts September 17th. Go to DennisMoneyLaunchpad.com to learn more and sign up, consult an advisor or conduct

Speaker B: your own due diligence when making financial decisions. General principles discussed during this program do not constitute personal advice. This program is furnished by Dentist Advisors, a registered investment advisor.

Speaker A: Welcome back to the Dennis Money show, where we help Dennis make smart financial decisions. I'm a guy named Matt, and I'm here with the professor, Robby Domoschke. How are you, Robby?

Speaker B: I'm good, Matt. How are you?

Speaker A: I'm doing great. Summer's almost over. Robby the professor. We got school.

Speaker B: When classes start, uh, the summer semester is supposed to end in a week or two, and then the fall semester is going to start end of August.

Speaker A: It's crazy to me, like, now that I have kids in school, Robby, like, I'm blown away because summer feels so short. It's like my kids are starting. I mean, this will 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's way shorter nowadays.

Speaker B: Honestly, I used to think summers were short until we started doing the St. George retreat because we do it like in April. And for me, that's when summer starts.

Speaker A: That's your summer?

Speaker B: If there's a pool, that's on. Summer starts.

Speaker A: 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 yeah, ah, either way, uh, so we're still, we're still testing and learning on the professor side, for those of you that don't know, Robby is a professor of the University of Utah. He's been using this year as kind of a test and learn if whether or not he wants to get into academia or not. So the jury is still out, correct?

Speaker B: The jury is still out. My contract ends this December after the fall 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, uh, 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 seeing someone eyes open in wonderment when they learned about Central Limit Theorem. It didn't happen.

Speaker A: It didn't happen in the world of AI. Those days are unfortunately behind us. So, uh, anyway, we digress. We. This is not what we're talking about. However, I like to say that we give some credit to your career, uh, here at DA and working on the Dennis Money show with this, uh, your ability to teach, I'm going to take like 0.7% credit for.

Speaker B: You can take it all. I'm fine.

Speaker A: Okay, I'll take it all.

Speaker B: All right.

Speaker A: 99.9. Uh, uh, we do love teaching on the show and, and at Dentist Advisors, uh, which is what this show is brought to you by Dennis Advisors. We are a comprehensive, uh, financial planning, tax and accounting firm, uh, as, again, I'm sure you can guess just for Dennis all over the country. Our main focus is helping Dennis 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. Uh, we want to do a quick recap, uh, 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 going to build upon each other. So in part one, we talked a lot about, like, the difference between accounts account types and how that differs from investments was a big piece of that. So, uh, 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, uh, a Traditional Retirement Account, 401 s, Traditional IRA, SEP, IRA, Simple IRAs, those are all tax deferred. And then what we'd call qualified. Uh, these are all kind of Fit in the qualified bucket. What I'll say is like tax, I'll call them tax free accounts, um, although that's a bit of a misnomer. But this is more like your Roth. So we call them tax free. Cause if used properly, the gains on those accounts would be tax free, free of taxes. So Roth 401ks and 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, Robbie? Uh, as well, when we talked about

Speaker B: this drawers, I think drawer, we talked about forks and drawers. We also talked about uh, papers and a file, right?

Speaker A: Yeah.

Speaker B: The file or the drawer is the account type. Whether it's deferred, tax free or uh, 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.

Speaker A: Yeah, love it. Uh, 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. Um, anything else, Robby, that you want to highlight on just the recap of part one.

Speaker B: Uh, yes, that the choosing which drawer you're going to putting your forex in, like which type of account might be more important than what investment you choose. Especially from the lens of, 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 uh, taxes. So uh, 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 uh, the reason we started with the account is because they are, they prevail when it comes to tax efficiency more than the investment itself.

Speaker A: 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, Dennis. Advisors. But I'm, uh, 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. Um, um, you may have even heard of, ah, asset allocation. So your mix of stocks and bonds. But asset location is what you're referring to, Robbie, is where you actually, what types of accounts with drawers are you actually putting these things in? And that is so critical to understand when it comes to 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 um, 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?

Speaker B: Uh, it's a very rich topic. One more thing I would add is that 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, uh, 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. 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 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. Uh, so yes, it adds a layer of complexity, but it slightly gives us more control.

Speaker A: Yeah, yeah, love it. It's a great point. Um, 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 going to spend more time on. If we're going to continue to use this analogy, we're going to spend more time on the forks and knives and spoons, the things that go in the drawers, the actual investment, the stuff that gets Robbie jacked up. So let's, let's talk. So if we say, uh, you know, we've highlighted this, that there's three places to invest money. Private, public, um, private markets, public markets, and real estate. Today we're going to 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. Uh, we'll probably start with the easier one being stocks and equities, meaning easier just to conceptualize. People often I think fixed income is a bit. A bit harder to grasp. But let's just start there. Robby.

Speaker B: Yes, and I'm going to give you an analogy of a dental practice. Just I heard our listeners are dentists, so I'm going to give you an analogy related to dental practice. So, uh, you just, uh, finished grad school, you've been working as 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, 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. Uh, uh, you can 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 going to 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 going to help you out. We're going to 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, uh, 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 going to go back into your pocket because you own the company, you're going to 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, uh, is. A stock is literally the legal document that says, oh, Dentist A owns 50% of the company. Dentist B owns 30%, Dentist C owns 20%. Each one of these people are going to behold the 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. There are digits on a screen these days. But back in the days where the actual certificates that say, oh, 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.

Speaker A: I still remember the day, Robbie, uh, I was at Fidelity when Disney, uh, the company Disney, uh, for those of you that haven't heard of Disney, um, 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 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, uh, 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. Oh, go ahead, Robbie. That's a good. That's a good explanation. Uh, 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 get 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 co owner of Apple. If it goes up, it goes down. I participate. I think on the uh, fixed income side, the bond side, it gets a little bit trickier. Go to break that down.

Speaker B: 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 going to go to a bank and take a loan from the bank and I'm going to take that money from the loan, I'm going to buy my location, I'm going to buy my equipment, I'm going to buy the medicine and tools, I'm going to start making some money. And with time from the earnings that my dental practice makes, I'm going to 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 lendee in this situation, the dentist. And uh, you are borrowing, uh, from the perspective of the bank, which means from the perspective of the bank, you issued them a bond, they're going to give you money and later on they're going to 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, uh, 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 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, uh, 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 going to get. We're going to invest $100,000 in this dental practice in five years from now. We're going to get those $100,000 back, but every six months between now and five years from now, you are going to pay us $1,000 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 instrument to track the value or track how much money has been accumulated. Just like a stock does.

Speaker A: 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 the bank, 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, um, 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 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.

Speaker B: 100%. The more you have stuff written down on paper, the more certainty you have, the less money you're expected to uh, earn. The more uncertain is whether it's the fate of the company or how many clients or uh, patients you're able to acquire, etc. The more uncertainty there is that you're exposed to, the more you're expected to make more money. Right. And this is what, uh, 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 going to make. Oh, 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 returns of the, how much earnings the dental practice is going to make. So until you know that time comes and we know we're going to 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 uh, the returns of the stock market, or stocks in general are more volatile, they fluctuate a lot, but on the long run give you a higher return than bonds do. 1. Another distinction I want to add there, not just related to the uncertainty, but to the legal fabric of those two documents themselves. As well. Let's say we're going to be pessimistic over here. You start this dental practice, you open the practice, you buy the real estate, you 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, uh, uh, interest payment. I'm going to throw you into foreclosure. Like this is not allowed. We had an agreement. You're not honoring that agreement. What happens is, legally bond owners have a, uh, seniority over share owners. Share owners are people who put money out of their pocket. So what happens is you're going to 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, 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, uh, 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, the more when it, whether it is operational risk, will the dental practice make money or illegal 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.

Speaker A: Yeah, that's a great, uh, 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 that a key distinction's 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. Robby could go deep and I could be here. But I do think, uh, we, I think going a little bit deeper on 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. Uh, the three that come to mind, Robbie, 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?

Speaker B: 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 uh, when we say those are the big three is because the government borrows so much money as we know. Right?

Speaker A: Yeah.

Speaker B: There are so many companies out there and they're all borrowing money. And we've got 50 states that all borrow money for different reasons, whether it's an airport, a hospital, a stadium, a school, etc. Right. Uh, and what happens is that the, just like in any loan, the terms of the uh, the loan you're borrowing are going to be differing from one another. There are bonds that mature in a year from now or less than a year, which 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 12 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 uh, 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 $1,000. Current interest rates are 5%. Give us $1,000 right. Now in five years we're going to give you $1,000 back. But in between these five years, we're going to be making a payment of 50 bucks a year. That's the 5%, right. That is the government. And usually the government is the big player. You do not worry whether the government is going to pay you your money back or not. Like if the government is not paying you your money back, we have bigger problems. Right? Yeah, that's the return than the return on the bond. Right. But uh, the 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's of the world, or am I lending it to a small, uh, community bank around the corner in my neighborhood? Right. The difference between those, uh, should also be reflected. So on top of the for how long are you borrowing the money from me? For the term for how long 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 better at night, that they're going to give me my money back? Or am I lending to this, you know, shady community bank that I'm not sure they're going to 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 going to charge you more interest rates just to compensate for the fact that you're not as trustworthy as Apple, for example, Right? So 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? 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 does it take 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? Uh, and the credit quality is bond specific. To give you an example about municipality, uh, let's say your state has two projects. The first project is, uh, just, uh, some enhancements for the parks in your state, uh, adding swings, making sure the grass is green, etc. And most of those parks only require you to volunteer, uh, for the money. So you're not really committed to paying money. On the other hand, uh, 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, uh, collected.

Speaker A: 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 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, uh, 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, uh, be the thing. So a dentist who's maybe nearing your 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 near or near, uh, retirement or even in retirement, bonds play a much bigger role for most people. As you start to utilize the assets, stocks or equities tend to be less income generation, less principal protection, and really more just about growing the portfolio. It's pretty simple as that. I don't know, it's general. But Robbie, anything you'd add to that, that characterization?

Speaker B: 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 going to 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 uh, stock related investments that we're going to get.

Speaker A: Yeah, love it. Okay, anything else we need to cover on stocks versus bonds before we go, go further?

Speaker B: Uh, no.

Speaker A: 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. Uh, so 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 Robby. So owning them individually, uh, stocks and bonds, uh, versus in these packaged, uh, tools like mutual funds or ETFs.

Speaker B: 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, oh, a stock versus a bond. Diversification is a tool for risk management in your life. Uh, you don't put your eggs in one basket, 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% chance that, uh, 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 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 going to go and own multiple companies? In the US alone, there's around 3,500 companies. Are you going to 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 set. It'll take you a while. Right. Uh, 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, oh, there's a need. I'm going to m make a product for it. And they created this fund, which I really like to think of it as the bag of all the small candies we see on Halloween. Like, every single candy by itself has its own merit. They're delicious, right? They make our teeth go back and go to the dentist. They have their merit.

Speaker A: They keep dentists in business. Yes.

Speaker B: Um, 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 fund. A fund holds multiple stocks inside of it or multiple bonds or a combination of both. It could hold so many things. But there are two types of funds or bags, like a, uh, 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. Uh, they were created by the same law in the 1940s by the way, but, uh, the way mechanically they are traded is slightly different. With a mutual fund, it is the equivalent of finding 50 of your friends, all pooling your money together and creating this bag together. Um, a mutual fund is when you get that Halloween bag and everyone is contributing their candy into it. So when one person wants.

Speaker A: And taking money out of it.

Speaker B: Exactly. So when one person wants to take some money out, they're going to go put their hand into that bag and probably they're going to 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, uh, 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, etc. That is what a mutual fund is. An ETF, on the other hand, there are more distinctions, but let's focus on that one. The etf, on the other hand, is, uh, slightly, uh, more creative. They say, we're going to make a bag and put all the candy inside of it. But in front of that bag we're going to 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 chocolate up. I really ran through that analogy. The idea is the sugar rush from all the candy. But the whole idea with an ETF is that, uh, 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.

Speaker A: Robby. I feel about this analogy like I feel about stores, uh, putting out. 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. Um, I love it. It's a really good analogy. It's really good. I want to come back to one thing too, because I don't want this to get, uh, lost. Because I think the whole reason for these different packages, you hit it earlier 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 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, Robbie, is ways to very easily execute, uh, the strategy of diversification. What you are doing is you are literally removing, truly removing very specific risks in a portfolio. Uh, like, like you were saying earlier, business specific risk. So one business going out of business, maybe one area of the world having political upheaval or a war or whatever.

Speaker B: That never happens, Matt.

Speaker A: That never happens. 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, uh, of the whole market is market risk, is the overall risk of the market. And what that all, uh, really what that is, is, is the ups and downs. It's just the, it's the, it's the ups and downs of a portfolio. Uh, 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, you temper that is time. So I guess I wanted to highlight that and get your thoughts Robby, 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 uh, these ETFs versus this other person has one stock in their portfolio. Very, very different from a risk standpoint.

Speaker B: Oh yeah, a hundred percent. And the reason those risks eliminate each other is the more companies you have in your portfolio, uh, the less exposed you are to a company specific risk and more concentrated in a market risk is because companies compete with each other. Let's think of Claude, uh, and OpenAI, right? Those, ChatGPT and Claude, those are the two main, uh, competitors in this year. For example, if you're only invested in Microsoft, that owns OpenAI, for example, then yes, GDP will impact your portfolio, inflation will impact your portfolio, 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 ChatGPT got hacked by a, uh, foreign government, et cetera, or there was a big data leak, right. That is also going to impact your portfolio. But if you own both OpenAI and Claude 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, et cetera. But what happens is that if something bad happens to, uh, chatgpt, well, the people at Claude 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 wait 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 going to be driving the economy forward, uh, 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.

Speaker A: You said it way better than me. Give examples. I like it. No, this is great, Robby. Um, anything else before we move on to the last part of this, uh, deeper dive, anything else you want to say about owning individual versus mutual funds

Speaker B: versus ETFs yes, there is one important, uh, 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 fund have something called an expense ratio. And usually if you're doing your homework, you can find some that are dirt. Dirt cheap. Right? Very cheap. We're talking 0.05% of the, uh, Basically zero.

Speaker A: Yeah, yeah.

Speaker B: What we call five bips of the value of the money you own. So if you have $10,000 in that fund, you pay 50, uh, bucks a year, which is, you know, nothing. Um, so. Or there are other mutual funds and ETFs that have 2% or 2.5%. 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, uh, 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 fees are very, very important. And the taxable profile of mutual funds per ETFs would be the second most important one, which we covered.

Speaker A: Yeah, I love that you just brought that up because it's, uh, 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, uh, 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 culprits here where advisors have relationships with certain fund managers. I won't name any names. American funds, uh, they have certain relationships with different groups and then they, those advisors put those like within again 401ks and then they get a kickback. So those fees are higher for no reason other than to uh, non, non, transparently pay the middleman. So we, we digress. We won't go much further into that. Uh, okay, last part of this, uh, is we've talked about stocks versus bonds, how to own them via uh, either individually within mutual funds or ETFs. The last part of this we want to cover for part two is uh, the different areas of the economy, the different kind of um, ways to further diversify a portfolio. I'll say it there and then you can, you can take it from there, Robby. Like going a little bit deeper in this kind of diversification discussion.

Speaker B: Diversification happens.

Speaker A: Yep.

Speaker B: And it's not. I'm going to go back to the Halloween analogy, Matt. I'm sorry. It's really, it really goes back down to uh, what's in that bag? Right? We just said, oh, 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 uh, features of snacks in it.

Speaker A: If you're lucky, it's all, if you're lucky, it's all Almond Joys. But we won't go there.

Speaker B: Right? So, um, similarly with mutual funds and ETFs, uh, they can have certain themes to them on what is, uh, 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 uh, sector based fund, a sector based mutual fund, or a sector based etf. And uh, 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, uh, 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, uh, 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. Uh, or a fund that owns all of them. Again, 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 U.S. right. Don't we have the Russell 3000 that only invests in the U.S. the third

Speaker A: layer S&P 500 index funds are there.

Speaker B: Exactly. S&P 500 is a U.S. only. But the S&P 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 U.S. we have around 3,500 companies. Well, let me sort them from the largest company out there to the smallest company out 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 S&P 500. Right. There are ETFs that track the S&P 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, uh, 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 uh, Exactly. The advisor usually determines what should be excluded, what should be included so it fits in your long term plan. But uh, the offers are out there and the products are out there. The craftsmanship comes on. What are you choosing to build? Something that matches what the client needs at that point.

Speaker A: Yeah, that's really good, Robby. And we, our, our goal here hopefully is, is truly not to overwhelm as, as you're going through that. Robby. 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 uh, 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'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, oh, I'm going to go ahead and do uh, this on my own and professionally kind of manage my portfolio with individual stocks. So I guess I wanted to just highlight the 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,

Speaker B: uh, for me it's not. But that's what I wanted to say. It's like, because dentistry for me is overwhelming, right?

Speaker A: Like I go to, I. Oh, for you, yeah. For you it's not overwhelming for the listener.

Speaker B: For me it's not. Yeah, I go to the dentist and, and 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 and then they say, oh, well, I'm glad you're helping me with this because this is a lot and this is just because unfortunately our brains can't learn everything at the same time. Uh, we help you, you help us type of uh, situation. This is what I tell my dentist. Like you're helping me understand my teeth. I'm going to help you understand, understand your investment portfolio. Uh, I think the most important part, Matt, about this overwhelming point is that you don't have to do it alone. Uh, 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 going to uh, service your long term goals and put you in a much better financial position in the future. Future.

Speaker A: Yeah, it's a really good point, Robbie. And I love for you, you're like, this isn't overwhelming for me. It's not because you live and breathe it and uh, 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, um, for their own profession. So that's, that's um, and I like what you're saying here of that you can get help 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, uh, between investing in a couple of stocks in a brokerage account or saying, oh, yeah, I've got the s and P500, 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 Robbie, 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. Because I think what we've done in some cases, Robby, as an industry, uh, and as a. Like, uh. Are we influencers? Are we going to be in that category? I don't know. Nah, nah, I'm with you. Um, 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 on to all that later. Uh, I just. I want to highlight that there's a huge difference. Anything you want to add to that?

Speaker B: No, I agree with you. And 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.

Speaker A: Yeah.

Speaker B: And this is where it's definitely not nuanced.

Speaker A: Yep, yep. Yeah, there's a good, better, best situation here. Yeah. So, okay, that was good. It was a lot, Robbie. Um, now I just want some candy. I'm gonna go grab a Snickers. Uh, anything else you want, they already have it. Yeah, there you go. We did do some side quests here and teased. I think what we want to go deeper into. This is my fault of going into deeper, uh, things around, like risk and diversification. We're just teasing it. We're gonna do that for part three. We're gonna go deeper into, uh, like, index funds versus stock picking and how to act 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, teetered around it today, uh, but for now, Robbie, again, any other final words of wisdom?

Speaker B: All right. Can't wait for part three. That's where it gets.

Speaker A: I know you're really excited for that. We can go really nerdy. Uh, if you're out there listening and you're thinking, man, this is a lot. And as Robby 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. Uh, 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, denis advisors.com for now, Robby, thank you for being here. Everyone. Thanks for listening. Until next time, take care. Bye Bye. Hey, Dennis Taylor here, financial advisor at Dentist Advisors.

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