In part 3 of our 6-part series for Healthcare workers, Amy Walls emphasizes the importance of diversification and asset allocation in building a well-rounded portfolio. This is especially true for those in the medical profession who may have higher-than-average salaries. There are many tax complications that come with them!
Risk tolerance is also a key factor to consider, as it determines an individual's comfort level with market fluctuations. Jag points out that your "theoretical" risk tolerance may not translate to what you actually feel when the market becomes volatile.
Amy explains the tax implications of different investment options, such as retirement accounts and tax-free investing. She also addresses the concept of ethical and social investing, highlighting the need to align investments with personal values. That said, beware the idea of "emotional investing." If you have particular companies you believe in, consider a smaller "fun" investment account, as opposed to betting your retirement on them.
We conclude by discussing the costs and fees associated with various investment options and the importance of adjusting investment strategies over time.
For more information contact Amy Walls and her staff at 503-610-6510 or click here Thimbleberry Financial.
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Jon "Jag" Gay: Welcome to ThimbleberryU. I'm Jon "Jag" Gay. I'm joined as always by Amy Walls from Thimbleberry Financial. Ironically, we are talking about part three of six on our series for healthcare professionals today. Amy is a little under the weather. She's got her big mug of tea. She's ready to rock and roll, right?
Amy Walls: I am.
Jon: Okay, so part three of our series, we're calling, Your Investments are Medicine, talking about investments specifically for healthcare individuals and healthcare professionals. Starting with the basics, Amy, I know this is going to start with, "It depends," but what is the right asset allocation for a healthcare professional's portfolio and how do they diversify their investments?
Amy: You are correct. It does depend. Like you said, let's start with the basics. Let's talk about diversification first. It's a term we all hear. We often feel we have a really good idea of it. What it is, is not having all your eggs in one basket. An example would be, since we're talking about investments, having all of your investments in the S&P 500.
Jon: Sure.
Amy: That's not diversification. What it isn't though is having investments spread around at different firms and with different advisors giving advice.
Jon: Oh, because sometimes they can be in conflict with each other, I'd imagine.
Amy: Absolutely, or maybe a couple of them have the same idea of overweighting. Now, you're overweighted because they don't know what each other is doing.
Jon: Oh, okay, that makes sense. I think that's really common with investing is, "Oh, I'm diversified. I have a bunch of different stocks." No, it's really diversifying in different areas, right?
Amy: It's diversifying in different areas of the market. That does need different holdings. Let's say that you needed 50% in large company stocks, large cap stocks. If you said, "Hey, I have 50% of my portfolio at Apple." Okay, sure, you check the box on large company stocks, but you're not diversified because it is in one holding.
Jon: Your eggs are in that one proverbial basket. If something fails with that basket, you could be in trouble.
Amy: Absolutely. Let's also talk about risk tolerance.
Jon: Sure.
Amy: Risk tolerance is an individual's comfort level with the fluctuation in the amount of their investments based on performance. Why I think that's important to say based on performance is, if you're adding or subtracting from an account, that doesn't really work if you're just looking at the balance because your withdrawals or additions make a difference in the account balance. We're looking really at performance here. Let me give you an analogy.
Jon: Please.
Amy: I've got a gastroenterologist. I know everybody's favorite kind of doctor. I absolutely adore my gastroenterologist. Periodically, for things I have going on in my life, he needs to recommend a low-fiber diet. I am not the best at complying with that when that low-fiber diet becomes longer-term to the point that my husband went to an appointment with me. [chuckles]
Jon: Sometimes you need to do that.
Amy: Yes. Short term, "Hey, this works, but, hey, Doctor, did you realize that if I weren't in the picture," my husband's from Texas, "Amy would happily be a vegetarian?" My GI's eyes got huge and said, "But you're not." I said, "No, because you've made it really clear that's not acceptable and I'm married to him."
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Amy: Essentially, here in that conversation, my GI, we're having these conversations because he's considering me and the different aspects of me in order to help me comply with his request.
Jon: He's tailoring an approach based on his patient just like you would for a client.
Amy: Yes, and so in his mind, there's nothing wrong with a patient being a vegetarian, but there is a problem with me being a vegetarian. [chuckles] Same thing in our world, there's nothing wrong with a client's risk tolerance being conservative or aggressive or anywhere in between. We call it "they can sleep at night" factor. That's really important. What did they comfortably have? Then we look at, does that actually get you to where you need to be with all the other factors? If not, what levers can we help you move? That's risk tolerance.
Jon: A quick side note on risk tolerance, and I think we've talked about this in previous episodes, Amy, is you may have somebody sitting in your office talking in theoreticals of, "Yes, I'd be okay if my portfolio dipped by this amount." When that happens in real life, maybe they're not okay with that. You've really got to figure out what it's like in practice versus, "Oh, I think I'd be okay with this."
Amy: You're right. Let me apply some numbers to that. Someone may theoretically be okay with a 10% swing in their portfolio, so it goes down 10%. They may be okay with a $100,000 dropping to $90,000, 10%, but they may not be okay with a $1 million dropping to $900,000.
Jon: Ah, so how do you navigate that?
Amy: It's really just conversation and making the numbers real like using those bigger numbers if they apply to the person to say, "Okay, but what if this? How does this feel?" That says a lot.
Jon: Amy, what are some factors that contribute to an investor's risk tolerance?
Amy: Experience is one. Have you had experiences where you put money into the market and it dropped the next day and you beat yourself up? We've talked about it in prior episodes that 66% or 67% of the time in the US, the UK, and Australian markets over 10-year periods, it makes sense to put money in it one time into the market versus dollar cost averaging putting a little in each month, but the psychological benefits of you get that timing wrong have a long-lasting impact.
We're regularly talking about those experience with clients and how it impacts their risk tolerance. Another one can be cash on hand. This is a unique one in that somebody's risk tolerance may be really low if their cash reserves are smaller, but you bump that up to maybe a year's worth of expenses being on hand in cash, and then they may be what's typically much more age-appropriate in terms of risk.
Jon: In terms of how close or far they are from retirement, okay.
Amy: Yes, they just need that buffer to really be comfortable. Timelines. How far or near you are to a goal, retirement being the obvious one. Then I talked about experience but slightly different than experience or at least in a different way is your level of knowledge and education about investments.
Jon: That's huge.
Amy: The more people learn accurately, typically, the more their risk tolerance increases or moderates. Another thing we should probably talk about when we're talking about the basics is asset allocation. You alluded to this with your comment earlier about one holding. Asset allocation is having a mix of investment types that are optimized for risk and return.
Jon: On both sides, okay.
Amy: Yes, we want both sides to get to a good spot. You can have high risk and low return. That's not optimized. We want both to be doing well. Asset allocation, and let me back up. Picking investments is really a process. I think that's important. Our title today is Investments are Medicine. I say building a portfolio is a process because it isn't just about the portfolio. Picking the individual investments is all the things that a physician would do in order to get to the place where they're actually picking this prescription.
An actual investment could be equated to a prescription. In that process, it's figuring out how much of large-cap stocks and how much of mid-cap and small-cap and international someone needs to not only get to their goals but then to optimize the portfolio. Then it's starting to plug in, "Okay, let's take this large-cap area. What holdings are we looking at putting into this?"
Jon: To further your analogy about medicine a little bit, I think of somebody who is diabetic, for example. The medicine is only one piece of it. They also need to exercise. They also need to diet well. Similar to that analogy, the investments in asset allocation are one piece of it versus it being the entire solution.
Amy: Absolutely.
Jon: We talk about healthcare professionals, Amy. What are some tax implications? I know taxes are always a concern. What are those tax implications of investments and what role should retirement accounts play in that?
Amy: Yes, let's talk retirement accounts in different kinds of accounts first. First, there's the obvious employer-sponsored retirement plans, 401(k)s, 403(b)s, 457 plans. All of these regularly available to our healthcare clients. These plans allow you to save through payroll deductions pre-tax. What that means is they reduce your taxes today, so your income goes down, so your tax bill goes down. Then what you've contributed is tax-deferred into the future. Now, some of these plans based on an employer may also have Roth provisions on it, which changes that a little bit, and that, now, you would be able to contribute after-tax and let that grow tax-free and be distributed tax-free if you follow the rules.
Jon: You're paying upfront as opposed to later, yes.
Amy: Exactly. What we do know is that our healthcare professionals in general have pretty high incomes and maybe needing to lower their taxes today and finding that balance. A lot of times, they will be using the pre-tax options. Two other options for saving would be tax reinvesting, so things like Roth accounts that we just talked about, municipal bonds, and there's also cash value life insurance. Very complicated and we're not going to get into details today.
Jon: Whole other podcast.
Amy: Yes, then they're saving into a brokerage account. Saving into a brokerage account is essentially saving money and investing it in an account that isn't a retirement account. Think like how you put money into your savings account, but it stays in cash. It's putting it into a brokerage account that then gets invested. I don't want to use the word "equivalent," but equivalent type of savings to a savings account just in investments instead.
Jon: You can withdraw that when you need to as opposed to needing to wait until certain thresholds, correct?
Amy: Exactly. The first we talked about, the 401(k)s, 403(b)s, 457, tax-deferred. Roth accounts, typically tax-deferred and tax-free. The brokerage account money is taxed based on the kinds of investments it has and on gains and losses. It also depends on when investments are sold. For example, if an investment is held less than one year and you sell it and it's at gains, you're going to pay capital gains, which means you're going to pay tax on the gains at ordinary income rates. Now, if you've held it more than a year in one day, you are going to get long-term capital gains, which are preferential tax rates.
Jon: By preferential, you mean lower?
Amy: Yes, I do.
Jon: [laughs] Amy, how can investments align with ethical or social values? I know a lot of your clients have things that they prioritize in that regard. How should one evaluate individual stocks or bonds, or should they?
Amy: Let's start with the ethical and social investing. Deciding to invest based on your ethics and social values is great. We do that at the grocery store. We do this regularly. To throw another analogy in here for our healthcare professionals, they're usually recommending eating and sleeping well because it helps the world better for everybody and getting exercise. For some people doing those things is part of their values and habits and it's easier for them than it is for other people.
Jon: So true.
Amy: A healthcare professional may need to give a little more attention or education to those that struggle with that recommendation and essentially, in that, to recognize that they need to understand what's important to the person.
Jon: Yes, what makes them tick and what are they going to prioritize, okay.
Amy: I think the same thing happens with ethical and social investing. We have clients that invest in socially responsible ways because it's important to them. Others have brought it up and we haven't. Here's I think what's important. How important is that and are there things that are more important to you in your investments and why is it you want to do it?
Socially responsible investing, specifically ESG, environmental, social, and government, has gotten some attention from some politicians recently. If someone comes to me and it's clear that they heard this from a politician or from a certain media source and it's politically motivated, we're going to have more conversations because that's not a great reason for taking action.
Jon: Yes, consider your source.
Amy: Yes, it's emotional investing based on what someone said to do. I already talked about that building a portfolio should be a process. Processes are good because they remove emotions and emotions are where we make mistakes. There's good reasons for doing it for certain people. For other people, it's not the right thing. There is a commonality in both socially responsible investing and investing in stocks and bonds.
Probably not all advisors would agree with this, but it ties to those emotions, and that is they both frequently are more emotional decisions or become emotional decisions. With stocks and bonds, first of all, the thing to know is many people will not be adequately diversified if they use individual stocks. Here, I'm really talking a lot to our DIY investors. We know that with our healthcare clients and our tech clients, two different worlds. Our new tech clients, when they come to us, often have bought the same stocks as all our other tech clients who bought their own stocks. In health care, guess what? We see the same thing.
Jon: Got it.
Amy: We buy what we know and we buy what the people around us are buying. The diversification can be an issue. That's one downside. The other downside though is that emotional attachment and the bias. We've talked about bias over the years. I believe I know because I work in this field and that gets dangerous because it may not, that stock being it, may not really fit well in your overall allocation or in the holdings for that particular part of your allocation.
What I often say with stock accounts, and it obviously always depends on the person I'm talking to in their situation, is maybe consider limiting your individual stocks to a play account that you put some rules on. This play account is allowed to get to X dollar size before I sell off part of it. If I did well, yay, that can go into my investments that are actually part of my financial future or financial plan.
Jon: I actually do that. Without mentioning the name of the app, I have one of those third-party DIY investing apps and it's play money. It's like, "I'll buy $10 of this and $10 of this and see what happens," kind of thing.
Amy: Exactly. Yes, that's a great way to handle the stocks and bonds because those emotional attachments do come up over time.
Jon: I'm okay losing the $10 if a company I really like goes belly up. [laughs] Amy, we talk a lot about the psychology of investing, psychology of money, and we alluded to this already, but investments come with costs and risks. What are the costs and the fees associated with different investment options and how can one of our listeners protect against market volatility?
Amy: Let's talk about market volatility first. Earlier, we talked about risk and asset allocation. Market goes up and down. That's what volatility is.
Jon: Sure.
Amy: The mix of investments in a portfolio is the allocation and that allocation will tie to a certain risk tolerance. That's why we went through all those things as the basics. That combination of things heavily influences the size of the swings in a portfolio. That's why it becomes important to understand your personal tolerance for risk first and also then the risk in your portfolio, which can be measured, and figuring out, "Do those two align?" If they do, that's a good start. If they're drastically different, well, now, what strategies can we use to bring them into alignment so that you are protecting against that market volatility in a way that you're comfortable with?
Jon: Got it.
Amy: Now, let's say that someone's risk tolerance is moderate-aggressive and their portfolio somehow is moderate-conservative. If they're comfortable with that and they can reach their goals, maybe no reason to change it, right? If it's reversed and they're moderately conservative and their portfolio is moderately aggressive, well, when the market changes, when there's these fluctuations, they're going to really experience the market volatility in a way that is much bigger than what they have really said they can stomach.
In this scenario where someone is moderately conservative and their portfolio maybe is moderate-aggressive, there's a couple of things to think about. I alluded to this earlier, is do they need to be moderate-aggressive? Can they get to their goals being moderately conservative? We talked about the investments. The actual investments are more like prescriptions. They're medicine. We have to look at what else is impacting this investor.
Maybe they don't have a chance of getting to their financial goals if they stay invested moderately conservatively. They may need to take on more risk. Before we jump there and say, "Hey, here's the solution," we need to look at the other things. Are there spending and saving levels in alignment? Because they can't control the market. They have a much better chance of controlling and influencing their spending and savings first.
Jon: How many times on this podcast have we said you may not realize that your spending might be higher than you think and your saving might be lower than you think?
Amy: Yes. Well, how do people know what those numbers are?
Jon: You've got to track it.
Amy: What's the right level of spending? What's the right level of savings? There's benchmarks out there, but unless you look at your specific situation based on when you want to retire, how long you're likely going to live, it doesn't mean a lot. You also asked about cost. Lots of different ways to break this down and we could do 15 podcasts on this.
Jon: [chuckles] Absolutely. We've probably already done 5 or 10. [laughs]
Amy: Probably. With costs, there are costs that you pay an advisor or a brokerage firm. Even if you're doing it yourself, brokerage firm is going to get paid somehow. You can pay for costs in a commissionable way or advisory way. Commissionable basically means you're paying for the buying and the selling the transaction. In advisory, you're paying a percentage of your assets under a management. Under the firm or the advisor's management and the buying and selling that they're doing should be included.
Jon: Right, because you're paying a percentage of what they're managing. You make more money, they make more money.
Amy: Exactly. Then you have costs at an investment level. This depends on the types of investments that you have. Again, there's no right or wrong. Every investment product, if you will, was designed to fill a need. It's a matter of, does it fit a particular situation? Their stocks. Stocks in and of themselves do not have a cost structure to an investor, but they're either going to be bought on a commission way where a cost is added on or they're going to be in an advisory account where there's cost, ETFs, exchange-traded funds.
There's going to be a little bit of cost for the management pulling together of those. Same with mutual funds and then index funds too. Basically, if we go back to our examples earlier with asset allocation, let's say there is an ETF mutual fund or index fund. That's all about those large company stocks. What that says is somebody's going in and saying, "Okay, here's all the companies that we're putting into this pie, if you will," and then the investor, when they buy it, is getting some portion of that pie.
Like we said, that would take us many different podcast episodes to break those down completely. To make it a little simpler, it's a little like in terms of cost structure. If you buy Tylenol or Advil or Motrin, which-- I was recently talking with my 15-year-old about these and what each one does. They feel different needs versus big pain relievers that you're not going to get at the grocery store. They all have different costs associated with getting into them, getting them, and they all do something slightly different.
Jon: Got it. Amy, as we wrap up, how should investment strategies be adjusted over time and how often should a portfolio be reviewed?
Amy: The easy answer here, which isn't an easy answer, is as life happens.
Jon: Okay, yes. No, that's fair.
Amy: Risk changes with experience. With more life experience, we get new ideas. Timelines also change. We talk with our planning clients at a minimum of every six months. Those conversations may not specifically be about if a strategy needs to change. In talking about life and what's going on, we're listening for changes that might warrant us to discuss if we should make a change or think about making a change to a portfolio. If it's not happening more frequently, I think at least once a year, that should happen.
That also ties to rebalancing. This is the idea that if you have investment A and investment B and those are at 50% each and they're the perfect mix for some section of your portfolio that one of them went up, one of them went down, you want to sell the one that went up and put it into the one that went down and get back to that 50/50 mix assuming that both investments are still sound investments. That's rebalancing. That can be good to do on a quarterly basis, but at least annually makes sense for the DIYers.
Jon: All right. Amy, I know you specialize in healthcare clients, tech clients. If our listeners want to know more and talk to you about their investment strategies, their financial future, what are the best ways to find you at Thimbleberry?
Amy: They can find us online at thimbleberryfinancial.com. For those that want to talk to a human, give us a call at 503-610-6510.
Jon: Great stuff, Amy. We'll talk again in a couple of weeks.
Amy: Sounds great, Jag. Thanks.
Jon: Securities offered through registered representatives of the Cambridge Investment Research, Inc., a broker-dealer, member FINRA/SIPC. Advisory services through Cambridge Investment Research Advisors, Inc., a registered investment advisor. Cambridge and Thimbleberry Financial are not affiliated. Discussions in this show shall not be construed as specific recommendations or investment advice.
Always consult with your investment professional before making important investment decisions. Security is offered through registered representatives of Cambridge Investment Research, Inc., a broker-dealer, member FINRA/SIPC. Advisory services through Cambridge Investment Research Advisors, Inc., a registered investment advisor. Cambridge and Thimbleberry Financial are not affiliated.
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