Nate Reineke (00:13)
Hello, physician moms and dads. I am Nate Renneke, certified financial planner and primary advisor.
Kyle Hoelzle (00:20)
And I am Kyle Hesley, certified financial planner and retirement investment specialist at Physician Family Financial Advisors.
Nate Reineke (00:28)
Kyle, we have four questions. Every time you come on, we talk investing, since that's your specialty here. I'm going to get right into them. We got four good ones. It's funny, we were looking at who ⁓ wrote in on these questions. We had two ENTs, and then we were like all Ohio. And then ⁓ we found some different ones, but we were close to like nailing these specialties and states all in one. I know what's going on with those ENTs.
Okay, so first question, ANT in New York. ⁓ If my employer updates their plan's default investment option, does that change how my current retirement account is invested?
Kyle Hoelzle (01:10)
Yeah, I mean, I've gotten a couple of these already. It must be open enrollment season. So, yeah, so I've got a couple of notices that there's been an update or a change to the default investment. And so first I'm gonna just describe what that is. So imagine you just start a new job and you enroll in the workplace retirement plan, you know, the 401k, 403b, and you start making contributions.
Nate Reineke (01:15)
Yeah.
Kyle Hoelzle (01:40)
but you never log in to the website and you never pick an investment. You just start deferring and you never choose the investment. So there's no cash holding accounts in these 401ks, 403Bs. So the money gets invested immediately. so majority of these plans have what's called a default investment. And it's just a place to invest a participant's money if they have not made that election. And typically what you see is a target date fund.
and they usually default you to your age 65. So however that lines up, whatever your age 65 is, that's the target year. And they just put you in that. So if you do nothing, that's likely what you'd end up seeing in your account when you log in, is that you are investing in some sort of default investment.
So does this impact your current investments? Well, again, it depends on whether you've made an election or chosen investment in the past. So if you logged in and you actually selected an investment and consciously chose a fund and put the allocations, the percent you want to invest in that and you saved it and that's what you've been investing in, then this does not apply to you. This changed to the default investment because you've made a selection, you've chosen an investment. So they don't need to put you in a default.
Nate Reineke (02:50)
Mm-hmm.
Kyle Hoelzle (02:54)
If you do get a notification around that and you've made an investment selection in the past, most likely that's not going to change how you're invested.
Nate Reineke (03:01)
Mm hmm. Yeah, so they're not going to automatically move your money from an investment you selected to something else. Makes sense. Okay. Now, some sometimes ⁓ the investment options do actually change though, right. And I think some people are worried that that's what this is. So when that happens, what is that called?
Kyle Hoelzle (03:09)
Right, right, exactly. Yep.
Yeah, that's, I call that an investment lineup change. So, you when you log into your 401k, your 403B and you go to like, you know, choose my investments, you usually presented with a list of mutual funds. And, you know, sometimes it's just index funds or sector, you know, funds of different market funds, you know, like a US stock fund, international stock fund. But oftentimes you see those target date funds on there. So a lineup change can happen where the
Nate Reineke (03:25)
Mm-hmm.
Right.
Kyle Hoelzle (03:50)
you know, plan administrator, the plan trustee goes, you know, we're not going to use these funds anymore. We're going to replace them with these funds. And so you'll get a notification and it's usually like a table and it says, here's what we used to offer. Here's what we're currently offering. And it usually tells you at the bottom that if, you do nothing and you're already invested in one of these old funds, we're going to automatically move your, your money from this, this old fund into the corresponding new fund. So
Nate Reineke (04:16)
Mm-hmm.
Kyle Hoelzle (04:17)
If you had a total stock market fund from one fund company and they're putting a new total US stock market fund in from a different fund company and you were invested in that previous one, they're going to automatically move your balance of what you had invested in that fund in the new fund. So in that case, if you get that notification, you should start to get a little curious about your account and go, was I invested in any of those old funds? And if I was, I'm going to be putting this new fund.
And do I want to be in this new fund? So then you'll want to go in and kind of do a little research and look at that new fund to make sure it still provides you with what you need. It's the fund that you want to choose. It's adequate for you. It's appropriate for you. And you like it.
Nate Reineke (04:47)
Mm-hmm.
Got it. OK, good to know. Yeah, and usually it'll be a similar fund, but it could be higher cost and you might make a totally different selection.
Kyle Hoelzle (05:02)
because they will switch you automatically.
Exactly, yeah.
Nate Reineke (05:15)
Okay, next question is from a critical care doctor in Ohio. My oldest child is in college right now and we have some tuition money in a high yield savings account. Should we move it to his 529?
⁓ So I have seen both. I've seen people do both of these things for a variety of reasons. So getting into the specifics is not totally appropriate. It usually has to do with which college and are we sure the college is going to be you're going to use the 529 money to pay for college and all that. But I want to take a step back and get to the root of this question. Every time I hear this question.
every time I hear this question. It is a child is either in college or very, very close to college. Okay. And the reason that's when I get this question is I there is this assumption with most people really what they're asking is should I keep this money in cash or should I put it in stocks? That's actually what they're asking. So I want to make it real clear that if you're invested a
appropriately in your 529 You should not be in a whole bunch of stocks on the cusp of college or while your child's in college So before you even get into whether or not you should do this just do yourself a favor Go look inside your child's college 529 account and see how much bonds and cash is in there because for this specific person that I got asked this question from it was
something like 70 % bonds, 20 % cash, and 10 % stocks. And immediately, that should, I guess, calm your nerves about the decision you're about to make. Okay. The other piece of this is that if you were nervous to put this money in bonds, which I'm not saying you should be, but
If you were nervous to put this money in bonds, they also have cash options in a 529. So when I get this question, generally it's a large sum of money as well. Nobody's all that worried about putting $10,000 in their 529 and moving money around. So ⁓ look at your asset allocation, adjust it if necessary. And then now that you feel the asset allocation in your 529 is appropriate, then you think about
the outcomes of keeping it in a cash account versus keeping it in a 529. So let's just imagine no recommendation here, but let's just imagine it's it's apples to apples cash to cash. OK, this person wanted to put a couple hundred thousand dollars in the account. So let's say you're getting 3 % 3 % interest on your cash. It's a little bit better than that right now and a high yield accounts, but just for easy numbers.
That's a few thousand dollars that if you left it in your in your high yield savings account you would pay taxes on. Guaranteed right you're going to pay taxes so if it's if it is actually ⁓ apples to apples here I would put it in the 529 because why pay taxes on several thousand dollars you don't have to. And then there's another piece of this which is you might get a state income tax deduction.
right. And in this particular case they were mostly on track for college and then their child got into really expensive school. So they hadn't been contributing to college for a while because they were they were done. They thought they were done which is something we see often. So they got to put in it was one hundred and ninety thousand dollars. And if you get a state income tax deduction for those contributions you can deduct it on your taxes for
that they can deduct it on their taxes for the next five years because it's a five year forward averaging. So the answer is not totally obvious for some because they they're thinking about risk. Risk is an investment risk is tied up in this question. But if it's apples to apples, I don't see any reason why you shouldn't put in your 529. Now, you must be careful that it is apples to apples because a lot of times the cash account
or the FDIC insured investment option in your 529 does not pay as well as a high yield savings account. But you just need to do your due diligence on what your options are inside the 529. If you're comfortable with it, then it's just a tax question.
So most of the time we go 529.
Kyle Hoelzle (10:12)
a lot of sense. I know that these 529s have these capital preservation portfolios, but they're not, that doesn't mean cash necessarily. Don't those typically have bonds in them as well?
Nate Reineke (10:25)
Yep,
sometimes they have bonds and you know there's an element of risk in bonds. ⁓
Kyle Hoelzle (10:32)
But they usually have an FDIC shirt option next to that most times.
Nate Reineke (10:32)
I yes, they have an FDIC
insured option. ⁓ Capital preservation is generally what you'll be invested in though is kind of your question and or your your note here. And I think that's important. But I also you know, most of the time you have hundreds of thousands of dollars in the capital preservation or the bond fund anyways. So the I understand that there is risk there.
when you buy bonds, it should be less than stocks, the bond less risky than stocks. But at the same time, I don't ⁓ I don't always understand the fear because you have a whole bunch of money in that fund anyways. Right. So ⁓ again, this is a risk tolerance question.
And most of the time when we nail it down and we say I asked the question, are you nervous about the performance of these bonds? Nobody really says yes. I believe that most people are assuming they have a whole bunch of stocks. And that is not appropriate to put your money in right before college starts.
Okay, ENT in Oregon this time. How should investors think about owning broad index funds when they disagree with the practices of some of the companies inside them?
Careful, Kyle. We get this question ever so often. Usually, it's kind of the political climate that drives this question. And I feel like I understand the sentiment behind it. But ⁓ in practice, what you do with your investments can be a little bit tricky. So we're going to do our best to digest this.
It's not always a clear answer.
Kyle Hoelzle (12:28)
Yeah, and it's not always a clear answer too, because anyone who's been a long time listener of us will hear this reoccurring theme of kind of your disciplined investment practices and then your values, right? And sometimes this is kind of a question of that. Like, how do I get my values into, like, should my values be in my portfolio? really, is a really investing in what we call socially responsible investing is the industry term for that. It's a values question.
You know, how much do you really value this? But, ⁓ you know, from a strictly investment standpoint, kind of setting values aside for right now, ⁓ you know, diversification is very important and having as much diversification as you can get helps reduce, helps manage your risk. we've talked about this before, but
Nate Reineke (13:07)
Mm-hmm.
Kyle Hoelzle (13:25)
you know, when you invest, there's two types of risks. There's systematic risk and unsystematic risk. Systematic risk is just risk that you can't ever do away with because it's just inherent in investments. There's always a risk in investing and that's systematic risk. Unsystematic risk is all the other risks that you can think about, you know, ⁓ business risk like ⁓ technology ⁓ is a certain part of the economy, a certain type of business, right? So.
⁓ There's business risk if you were just to invest in one technology or in one specific business, like owning an Apple stock, a single Apple stock that you're exposed to business risk. There's people risk, you know, who's running the fund, who's running the company. ⁓ There's a whole bunch of other unsystematic risks I won't go into, but they're thinking about they're just kind of very specific to one type of investment. So when we diversify a portfolio and we have
Nate Reineke (14:00)
Mm-hmm.
Kyle Hoelzle (14:22)
you all the stocks in the U S that are worth having all the international stocks. When you have that level of diversification, diversification, you're reducing your unsystematic risk because you, you've basically kind of driven that out because you own a little bit of everything. And so you're not being exposed to any one narrow, narrow, you know, unsystematic risk. You're basically just exposing yourself just to the system as a whole. Right. So to come back full circle now to socially responsible investing,
Nate Reineke (14:32)
Mm-hmm.
Kyle Hoelzle (14:51)
When you start to take certain stocks out because you don't believe in those companies or what they do or what the products they make or how they, their culture or the reasons for that, you're removing some of your diversification out of there, you know, and as a result, you're starting to introduce some unsystematic risk, depending on how, how far you take this, how far you, narrow down your portfolio. ⁓ so that be aware of that, you know, you, may be opening yourself up to a little bit more risk.
Nate Reineke (14:54)
Mm-hmm.
Kyle Hoelzle (15:20)
by doing that. Now, just like any specialty fund you buy, you know, you buy a specialty mutual fund that's targeting a certain specific thing. Usually those are being actively managed or someone's paying attention to, you know, is this company socially responsible? Yes, let's put them in our fund. Oh, they changed their practices. Now they're not socially responsible. Let's pull it out. So anytime you have that level of attention,
Nate Reineke (15:43)
Mm-hmm.
Kyle Hoelzle (15:48)
it's going to cost more because it's not like just buying the index and targeting the index. It's like very specific investment strategy. And so you'll tend to see higher expense ratios on those socially responsible funds. ⁓
Nate Reineke (15:59)
Yes.
Yeah, and
you didn't make a single social remark, right? These are all just facts about investing. the thing that worries me about these, is, ⁓ and you know, it's difficult because I'm making statements about money. And the nature of this question is they're not asking about money. They're asking about their values. And so I feel for them.
when they ask this question. ⁓ social things are emotional. And so when you make a decision in a socially well, when the fund manager makes a decision in a socially responsible fund, ⁓ that just goes against some investment principles that we have, which is to make investment decisions based on emotions. We try to avoid that. so but so what do you actually do here? ⁓
If you are willing to bear the cost, which is there's a risk and there's a real dollar cost because these funds are more expensive in order to avoid certain stocks, then you can do that. You could certainly do that. And you just laid out kind of what the costs are. If you are nervous about that, ⁓ I think that there is a very reasonable way to approach this.
while staying in an index fund that is not ⁓ labeled the socially responsible index fund, which is to stay diversified, fully diversified in an index fund. ⁓ And you can express your personal values in a different way. And I believe, ⁓ well, I know the person who asked this question, they already do this. They do this through their consumer choices, right? They don't shop at these stores. They don't buy certain items or whatever it is. They don't support them.
And I would argue that that is much more powerful than your tiny little slice of that company. And it is tiny. Right. ⁓ But your tiny little slice of investment in that company by buying an index fund, if you were to remove that, ⁓ that is less valuable to the company than just not shopping there. Right. And you can also ⁓ let's say
You could somehow do the math and see how much money you made off that company You could take that money and give it away and give it away in a meaningful way You could be charitable with your money. You could be charitable with your time so rather than you Kind of managing your portfolio or some fund manager managing their portfolio making potentially ⁓ Emotional decisions with your investments
you could turn that around and say, I'm going to take the savings that I got instead of using this ⁓ socially responsible fund. And I'm going to take the returns that I can try to calculate from the funds that I didn't want to buy. And I'm going to donate it to somewhere I think ⁓ will do good in the world. So there are ways around this. But if you just think that's a whole bunch of workarounds to try to make
dirty money, just don't invest. You could buy in ⁓ a socially responsible fund. That's certainly an option.
Kyle Hoelzle (19:29)
Yeah. Yeah. And here's the other thing too, that, comes to mind is there's a whole bunch of different socially responsible funds out there to choose from. And they're all slice and dice differently, you know, different ways. And depending on what you're trying to achieve with your socially responsible investing, you might have a really hard time finding the perfect one. You know, the one that excludes exactly the stocks you want excluded. Oftentimes these SRI funds are
Nate Reineke (19:41)
Yes.
Mm-hmm.
Kyle Hoelzle (19:57)
you know, they're removing like what they call sin stocks, know, like tobacco and
Nate Reineke (20:01)
Yes.
Kyle Hoelzle (20:03)
manufacturers of war products, know, military products, things like that. But if you're looking to weed out a specific company and then maybe this company and you're not really thinking through that lens of these certain sectors of the economy, know, taking out just defensive stocks or whatever it is, you might not be able to find the one that fits anyways. And you might look high and low and never find the one, you know.
Nate Reineke (20:06)
Yeah.
Kyle Hoelzle (20:31)
In which case you're kind of left with the options that you talked about or, you know, even making yourself even more narrowly invested by choosing individual stocks. You know, saying, okay, I'm just going to abandon using a fund to funds now because I can't find the one and I'm just going to cherry pick individual stock positions, which we know can definitely increases your risk. You know, you definitely bear more risk that way. So, keep that in mind as well.
Nate Reineke (20:54)
Yeah. Tough question. Yeah,
it's a tough question if you feel really strongly about it. There's no two ways about it. ⁓ we see it. And if clients are listening and they want to talk about it, ⁓ give your primary a call. OK. ⁓ Last question here. Yeah. Sure. Sure.
Kyle Hoelzle (21:16)
Sorry, can I correct something I said earlier? So I said
defensive stocks. I did not mean defensive stocks. That's not what I meant. Yes, I meant military stocks. I was thinking defense of, know, yeah, so I did, I misspoke, but I...
Nate Reineke (21:23)
Oh, you meant you meant military stocks. Yeah. Yeah. Yeah. Yeah. Yeah. Defensive
stocks mean something in our world.
Kyle Hoelzle (21:34)
It does, means something differently. So I just wanted to correct myself.
Nate Reineke (21:36)
Okay, no worries. Family medicine doctor in Minnesota. I have $100,000 of extra money. Should I pay down my house or invest it? I swear I get this question multiple times a year, every year probably will, for as long as I'm working with physicians, which is great because they have extra money. So real quick, I'm going to assume this is truly extra money. Okay, you're buying your cars in cash.
got an emergency fund, you got a house fund, you got it. It's all all good. This is actually extra money. ⁓ And before I get into my what I actually think you should do here, I want to point out a couple of things. Well, most people are looking at this like an investment decision or a math problem. But part of some of the math problem that that makes this question hard is ⁓
It's not just rates of return, right? So very recently, many, many mortgage companies have made it possible, very easy, to recast your mortgage. So if I just got this mortgage and I put, let's say I have a $700,000 mortgage, I put $100,000 toward principal, and I can recast it, which would mean you would lower your monthly payment. Okay, so that they would
recast the whole whole one. I don't think that that's really an issue here because they have one hundred thousand dollars of extra money. So they don't really need a lower mortgage payment. But there are times where maybe you sold a house and you're like, man, my mortgage payments high and I'd like to get it lower. You could do that. ⁓ And then before I get into the next part, I want to say interest rates really do matter here. We still have people ⁓ that have interest rates in the 2 percent range.
That changes the math here. So this question got a lot more difficult to answer ⁓ when interest rates are on your mortgages below inflation. Right. ⁓ But. At a high level, most of the time, this question is posed ⁓ as a math problem. And the issue with this math problem is that there's a variable in there that is totally unknowable.
So you're talking to your mortgage broker. They say why don't you instead of putting 40 % down on your house why don't you just put 20. And you'll take the extra 20 % you were going to put on toward your house and just invest it you'll get a better return. Okay PSA number one don't listen your mortgage broker for investment advice. Okay you ever wonder why they always say this.
It's because they make more money if your mortgage is larger. OK. Ever wonder why people like Kyle and I usually say this? It's because if instead if you invest this hundred thousand dollars the typical financial advisor can charge you for it. So they are not ⁓ giving you good advice. mean they're not even posing the question in an honest way. A mathematically honest way.
They're just assuming you think that they can or you can beat your mortgage rate in the market, which is not true. They cannot guarantee they will beat your mortgage rate in the market. Now, ⁓ throughout most of history, over a long period of time, probably, right? But we can't make that promise. We don't. So because it's an unknowable number, ⁓
It makes the math problem impossible to solve in my eyes. So instead of trying to make it a math problem, I want you to imagine next time you have this issue in front of you, whether or not it's $25,000 or $250,000, I want you to imagine that your banker came to your kitchen table and they said, I'm going to allow you right now.
to borrow an extra $100,000 on your house at your going interest rate. So let's say it's 5%, 6%. So you get to borrow $100,000 more, 6 % interest. The only caveat is you have to go invest it right away.
Most people when they hear that question think that would be crazy. Why would I take an extra hundred thousand dollars against my home that I must pay off before I retire? Right. I want to pay it off someday just so I could leverage myself to put money in the stock market.
And most of the time when people hear this question, I mean, unless you risk isn't really a thing for you, like you don't care about it, your stomach turns a little bit. And I want you to realize this is the exact scenario you're in when you have an extra $100,000. ⁓
Whether or not you should do this you shouldn't do this there are caveats there's you know you can write this your mortgage interest on your off on your taxes depending on what rate you have all of that matters but at the end of the day you're asking should I leverage myself to invest more. And generally unless the math is so skewed one way. ⁓ I would say the answer is usually no you should probably pay down your mortgage this all assumes.
It's truly extra money. You're on track for retirement. You're on track for college. You have an emergency fund. All the boxes are checked. And in that case, you should probably reduce your risk and don't take risk. You don't have to. So lots of things that can go into this. you're behind on something, then you should probably do a mixture of both. But at the end of the day, if it's truly extra, most of the time I see
⁓ physician families decide to pay down their mortgage with a good chunk of it.
Kyle Hoelzle (27:53)
Yeah, that makes a lot of sense. And I was immediately thinking about planning too, which you touched base on. I was thinking of the importance of planning. you know, knowing that you're on track for retirement, that gives you the confidence. It gives you the luxury of doing this. Right. Now I'll leave this up. You're the planner here. I'm not. But if say you have a client who's not on track for retirement and they ask you this question, that changes how it changes the answer, doesn't it?
Nate Reineke (27:59)
Mm-hmm.
Yes. Yes.
Mm-hmm.
I think it does. know, and I the reason I believe it's it's it's reasonable to say that does. I mean, we have people with student loans early in their career and they're like, should I just pay off all my student loans first? Probably not. You're not on track for retirement because you haven't saved a nickel yet. Right. And so you you you do have to take a balanced approach to this any time you have extra money, which is why we do. I mean, this is why we've had this conversation hundreds of times.
You have extra money. You should look at your entire landscape of all your finances and make a decision. ⁓ You might need to spend some. You might need to save some. You might need to invest some. But in the the true nature of this specific question, which is it is truly extra. ⁓ I think you reduce risk when you have extra money, you reduce risk. And if you don't let's say you don't have a mortgage, how do you reduce risk? You ⁓ own less stocks.
So let's let's flip it again and say you have twice as much money as you could ever spend in a lifetime. Should you be a hundred percent stocks. Probably not. Maybe you just are really comfortable with it and you want to give it to your. Great grandchildren or something but the reality is that the way that we view investing the way that we view planning is that you should take the risk that you need to take.
and not take more and I view debt as a form of risk. Right and there and it and having a mortgage is not a egregious form of risk, but it is risk any debt is some form of risk.
Kyle Hoelzle (30:05)
That really, that actually, I have that similar conversation in the investment world when we're setting an investment policy statement, we're trying to decide how to invest and how much stocks, how much bonds. And sometimes clients express a higher risk tolerance, which is okay. And you can certainly have a higher risk tolerance than maybe you need to reach your goals or have a higher risk, you know, target allocation that's riskier than you need to reach your goals. But one of my favorite phrases to say is, why take unnecessary risk?
Do you want to take unnecessary risks? Because you don't need to take this risk. And I think that that's a really good question to ask yourself.
Nate Reineke (30:37)
Mm-hmm. Mm-hmm.
Yeah, my last takeaway thought on this, because you're investing, I'm mostly planning. This is why it's so important to set real goals. Right. If you don't have real goals and you're not just blatantly honest with your planner, then we're going to look at that plan and say, hey, you said this is what you need and we're going to act accordingly.
And then sometimes when you get, you know, they're like, well, what if I want a boat? What if I want a vacation home? Well, that changes things. You know, what if I want to pay for my grandchildren's college? That changes things. And you have a longer time horizon now and now your investment policy has changed and now an appropriate level of risk is totally different. Right. So make real goals, take them seriously. Don't just try to skip to the, you know,
The fun desk, is what I call Kyle's desk. All right. Don't skip to that. Take these seriously because it all factors into how you should handle your money.
Kyle Hoelzle (31:52)
Yeah, it's funny that you said that because I think of the planners is like you're planning the road trip, right? And then they come to my desk and I'm like the guy who checks your oil and put your tires on your car and make sure you're tired. You know, that's me. I like to say thanks for joining me. This is where the rubber beats the road, you know? And but you know, here we always do planning. We strive to do planning first because like you said, having real goals brings clarity to.
Nate Reineke (31:57)
Yep.
Yep.
Yeah, that's right.
Mm-hmm.
Kyle Hoelzle (32:20)
how your money should be invested.
Nate Reineke (32:22)
Yep, exactly.
And those change. mean, imagine you had a million dollars of extra money and all of sudden your goals got a little more expensive because you you start dreaming. So dream with me, everyone. I will will dream with you and we will ⁓ come up with real goals, which which has real effects on your investment portfolio, or at least it should. All right, I'm going to close this out. Thank you, everyone, for listening.
If you liked this episode, be sure to subscribe so you don't miss ⁓ when we release new episodes every Wednesday. And it would really help us if you could like and subscribe to the show, just so it could get out there in front of your other colleagues. ⁓ If you'd like to work with us, you can visit physicianfamily.com, schedule an interview. And if you aren't ready for that, you can just send us a question at podcasts at physicianfamily.com. We will answer your question either on the show.
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