Ep746: James M. Dahle – Don’t Buy More Insurance Than You Need

Andrew Stotz 00:02
Hello fellow risk takers and welcome to my worst investment ever stories of loss to keep you winning in our community. We know that to win in investing, you must take risks but to win big, you've got to reduce it. In, ladies and gentlemen, I'm on a mission to help 1 million people reduce risk in their lives. And I want to thank you for joining that mission today. Fellow risk takers This truly is your worst podcast hosts Andrew Stotz, from a Stotz Academy, and I'm here with featured guest, James M. Dahle, James, are you ready to join the mission?

James M. Dahle 00:39
I sure am. Thanks for having me here.

Andrew Stotz 00:41
I'm excited to talk to you because I got your book a while ago, and you know, really love what you're doing. And so let's, let's get into it, I want to introduce you to the audience. Jim is a practicing emergency physician who took an interest in personal finance and investing in residency after getting ripped off by every financial professional he came in contact with, he founded the white coat investor in 2011. To help his fellow Doc's get a fair shake on Wall Street, Jim, take a minute and tell us about the unique value you are bringing to this wonderful world.

James M. Dahle 01:18
Yeah, I think I was the first one to really see the potential of combining a medical background with a little bit of baseline financial knowledge. One thing that Doc's do not get taught in college, in medical school, in residency during their careers, is how to manage money, business, personal finance, investing, nobody teaches it to doctors, it was a wide open niche, and a serious need. Because I truly believe that a financially stable and successful Doc is the better physician, partner and parent. But the issue is there are lots of Doc's that had increasing stress. And as the cost of medical school went up increasing amounts of student loan, and they were being basically distracted from being the best doctors, they could be it was affecting patient care. And so my goal is to help those doctors not have to worry about their finances, so they can concentrate on what matters most to them in their lives.

Andrew Stotz 02:13
Yeah, I mean, your focus is fantastic. You found a need these these guys, the men and women, all you know, they're generating enough cash flow, their need is not how do I create more money, although sometimes it is. But generally, it's how do I protect this money? How do I grow this money? And that, you know, is such a need? And tell us? How do you serve them? Like what's the most common way that they find you and what's the most common way that they engage with you?

James M. Dahle 02:46
Well, the two things I'm trying to give them is a combination of financial literacy and financial discipline, because if you have both of those these days, that's like having a superpower in our world. But I engage with them primarily through four or five mechanisms. Basically, we try to package up the same information into whatever format they prefer to digest it in. So it's a YouTube channel. It's a podcast, it's a blog, it's a newsletter, it's books, online courses, you name it, it all comes under, you know, the heading the brand of the white coat investor, but it's there in whatever format they prefer.

Andrew Stotz 03:19
And I see that you know, your podcast, one of the things that's interesting about your podcast, which I like, is that you're switching it up. So sometimes you're doing an interview with somebody which you title separately on the podcast that episode, as opposed to when you may be speaking about a particular thing. Tell us a little bit about what you're doing on the podcast and you know what people would get from it?

James M. Dahle 03:43
Yeah, well, the original podcast, the white coat investor podcast was simply, you know about every other episode is me answering questions from readers that they either emailed in or recorded on what we call the SpeakPipe, which is basically an answering machine that answer their questions on air. And then the alternated that with interviews with, you know, financial, authorities, gurus, authors, bloggers, people that I thought had something interesting to share with the audience. Not a couple of years ago, two or three years ago, we did a couple of episodes where we featured members of our audience that had reached milestones like paid off their student loans, or become millionaires, and people loved it. I just went crazy for these episodes. And so we started a new podcast, the regular one drops on Thursdays. This one drops on Mondays basically on the same podcast feed, but it's a different podcast. We call that one milestones to millionaire and we celebrate with somebody, whatever milestone they've gotten, and you'd be surprised what kind of silly milestones we have celebrated. A common one actually, for doctors is just getting back to broke because they start with such a terribly negative net worth getting back to a net worth of zero is really something that should be celebrated with them. So we do and then we try to teach from their experience.

Andrew Stotz 04:56
Yeah, it's incredible how much the cost of education in America has skyrocketed since I left America 30 years ago or so. It was still affordable for a young man and woman to be able to work and study I went to, you know, Long Beach City College for a lot of my courses, then I went to Long Beach State to get my final degree. And I still had to take out some student loan debt. But I mean, it wasn't crushing. But it's just incredible. And is that any different from a medical perspective that they're getting, you know, much more squeezed as far as the cost of education?

James M. Dahle 05:35
Oh, absolutely. It's not even close. I mean, college in America, you can basically pay what you're willing to pay, you know, you can go to college still for free, you can still work your way through college, but maybe not at the school you want to go to that is not the case, when you get to medical or dental school, it is not unusual at all. For me to meet a dentist, I had one email me just the other day that owed $850,000. Oh, my God in student loans. I mean, you can then even possibly be, well, it doesn't take much when you're borrowing $100,000, a year at six or seven or 8%. Right, because grad student loans have a higher interest rate. And they're not subsidized compared to undergraduate student loans. And a lot of times they can't even get it all in federal loans, they have to take out private loans. And so it's, it's actually not that hard. My record is about 1.2 million. And that's for one doc, not two.

Andrew Stotz 06:27
It's incredible. And I think you mentioned, one of the things you mentioned in your book was the idea of, you know, trying to pick a low cost medical school, maybe you could just tell us about that, you know, or or, you know, you're thinking about how a young person who wants to become a doctor navigates this without being I mean, enslaved by debt.

James M. Dahle 06:50
Well, I mean, I tell people go to the cheapest medical school you can get into. And for the most part, that's good advice, because as a general rule, the less expensive medical schools are actually the better ones. So it's not necessarily a bad thing, you get better school and you get less cost. So in general, that's, that's pretty good advice, obviously, every now and then somebody decides to pay a little bit more to get something they could get only at the other place, or to have a location they'd prefer to be in. But unfortunately, many, many people who get into medical school only get into one, they just don't have a choice, you got to go where you get accepted. It's just that competitive.

Andrew Stotz 07:24
Yeah. And one of the other things about your book that I thought was interesting was you had a section that you titled, and, you know, for the listeners out there. And for the viewers, his book, The White Coat investor, a doctor's guide to personal finance, and investing is clear, simple, easy to read, you know, and has such practical stuff in it. This one, I thought was quite interesting, given what I've seen happening in Asia, and that is don't mix insurance, and investing. What do you mean by that?

James M. Dahle 07:57
Oh, this is the classic, classic mistake the doctors made. And I made it too. And I'll be talking about it today. The problem is the insurance industry. And I mean, the financial services industry in general, has put a target on the back of doctors, they're whales to be harpooned. But it's even worse for the insurance industry, you know, and so they can come up with all kinds of products, that kind of mix insurance and investing. And they tend to be annuities, they tend to be types of cash value, life insurance, sometimes their long term care insurance, but they love to just muddy the waters and come up with a unique product designed to be sold, not bought. And if you've managed to get through your financial career without ever having mistakenly bought one of these, you're doing very well.

Andrew Stotz 08:42
And what advice would you give someone like that they're looking at insurance. They think they want to protect their family or you know, there is some value to insurance. What is the one piece of advice that you would give them as far as you know, what, what makes sense versus millions of options that don't make sense.

James M. Dahle 09:04
I think the important thing to remember is that you need to insure and insure Well, against and only against financial catastrophes. And if you can remember that as the general rule, I think that will lead you to make the right decisions when it comes to insurance. For example, the financial catastrophe for most people about dying is they die while they're generating money in their middle of their career, while someone else depends on their income. That is a true financial catastrophe. How do you protect against that a big fat, probably seven figure, term life insurance policy. But dying at 85 is not a financial catastrophe. You don't need an insurance policy that will pay out when you die at 85 It just is not a catastrophe.

Andrew Stotz 09:49
And should somebody who's let's say, I don't know 2025 Should they be buying should they be you know, getting that term life or should you wait until you're 30 or 40? To buy that?

James M. Dahle 09:58
If someone else depends Isn't your income, you should buy it people in their 20s die all the time. I'm an emergency physician. And I hate to, you know, be the witness to this. But I have watched plenty of 20s and 30s and 40 something year olds die unexpectedly of accidents of injuries of illnesses, and it certainly does happen. The good news is when you're young, it's very inexpensive to buy. This doesn't this isn't gonna break the bank to buy a big old term life insurance policy when you're 25.

Andrew Stotz 10:26
Yeah, it's one thing my father and mother did when I was born is bought me that insurance policy, which I still pay each year. And it's, you know, it's $120 per year.

James M. Dahle 10:39
Yeah, there was a sold by Gerber, same people that sold them, you know,

Andrew Stotz 10:44
could have been, I can tell you that it would be just enough money, probably to get my body back home. So, but it's not a massive one. But you know, they they tried to, they did the best they could, but I think the main point from my perspective is, you know, for people out there, be careful of, you know, sophisticated financial products that are linked to equity indices, or that are trying to say that this is a combination of, you know, you're saving, plus, you're investing plus you're protecting against this, when you start to hear all those things come together, you really, really have to question it and dig deeper. Also, within CFA with the Chartered Financial Analyst and the CFA Institute, we have something called the 10 investor rights. And one of those rights is to know the fees related to what you're buying, and being able to ask until you understand them clearly. So I always tell people never hesitate to ask. And if you do not understand, ask and ask and ask until they explain it clearly. Or they walk away. And say it's one

James M. Dahle 11:54
more, it's more than just knowing the fees, though, you also have to know what reasonable fees look like, because a lot of people I mean, everybody discloses their fees. And you assume that that's, you know, par for the course. But it turns out, a lot of people are charging four times more than other people. And if you don't know what reasonable fees look like, it doesn't do you any good. Just to have the fees disclosed to you.

Andrew Stotz 12:14
Why do you think fees are so you know, such an issue? I mean, like if I look at other industries, other products and services that I buy, I don't see the same type of situation. But in the financial world, it seems like fees can get out of control. Do you have any reasons as to why that happens?

James M. Dahle 12:36
Like Jack Bogle taught that in investing, you get what you don't pay for. So the more you give up, the lower your return, that's the only place the fees can come out of is your return. So if you're playing and paying an investment manager, 1% a year your return, all else being equal is 1%. A year lower, and over long periods of time that 1% can really add up. Yeah.

Andrew Stotz 12:59
Well, what's the best place for people to find your resources? Where would it be the number one place you'd send them to learn more?

James M. Dahle 13:07
For sure. White Coat investor.com? That is the hub of all things we're doing here. Yep.

Andrew Stotz 13:12
Okay, great. Well, what a great kickoff discussion now it's time to share your worst investment ever. And since no one goes into their worst investment thinking and will be tell us a bit about the circumstances leading up to an Intel us your story.

James M. Dahle 13:25
Sure. This is not necessarily the investment that I lost the most money on, but it is the one that taught me the most lessons and has really, as I look back, it is definitely my worst investment. I was a medical student, I had essentially no income, minimal income, my wife had a little part time job. That was it. And a friend of mine, who was interning with a large Mutual Life Insurance Company came to me and convinced me to buy a whole life insurance policy. What I really needed as far as insurance went was a big huge term life insurance policy. At that point, I was married, we didn't have any kids. But I was married in some ways. My wife was designing her life around my financial future as a doctor, which is a pretty good income and a pretty good financial future. And instead, what I got sold and sold, you know, in to be fair, partially as an investment was a whole life insurance policy. I held on to that policy for a number of years, about seven total and probably after four or five years realized this was not a good deal for me. Not only was it not insurance I needed, but it was a lousy investment. And by the time I surrendered that policy, seven years later, my cumulative return was minus 33% of the premiums I had paid on it. So I walked away with only two thirds of the money I had paid into it.

Andrew Stotz 14:56
And just before I asked you the next question, um, is part of that reason why there was a low return because there was penalty for early cancellation of the policy or that the policy has certain benefits that accumulate over a longer period. Like, what amount of that was related to just simply fees and bad management of the money versus a penalty for early?

James M. Dahle 15:21
Yeah, it's all baked in, right? This is the way a whole life insurance policy works, it takes somewhere between five and 15 years to break even on a whole life insurance policy, you just don't break even you know, and even if you hold it until the day you die, your returns still probably going to be something like three to 4% per year. And that's an awfully low return for somebody buying this in their mid 20s. That's now tying up money for six plus decades to earn three or 4%. This is nominal, this is not a real return. This is a nominal return. And that's kind of best case scenario. Lots of policies aren't designed very well have lots of fees and commissions. So that's just the way the policy is it's not it wasn't due to any particular surrender fee, it was just that's how it was performing.

Andrew Stotz 16:08
So let me ask you what how would you summarize the lessons that you learned?

James M. Dahle 16:13
Well, I think there's a few lessons number one, you got to understand anything you buy, you must understand it. And anything with a long commitment, you need to understand even more, a whole life insurance policy is designed to be held until the day you die. It's a little bit like getting married, it's until death do you part or it's gonna cost you a lot of money to get out of it. And so you should do a similar amount of due diligence as you did when you got married. And you really need to understand not only how this policy works, how it is likely to perform, but what the competitors look like. And I did none of that, when I bought this policy, I was not financially literate at the time. And as such, I made a poor decision, or a bunch of money into something that was really not a great idea for me, and suffered, what happens to those of us who choose bad investments,

Andrew Stotz 17:06
maybe I'll share a couple of takeaways. I mean, if you look at the stock market over a long period of time, let's just be conservative and say the average return is 8%. And then if we look at the bond market, we say the average return is let's say 4%. And you're going to be blending in bonds to a certain extent as you get older, and so you're not going to be earning, you know, 8%. And so you're going to be earning on average, let's just say 6%. Let's just say you've, you've grown your money at a young age in the stock market at 8%. And then the older years, you're doing it at a lower rate. So let's say 6%. And then of course, there's fees and other things related to that. So let's say the typical person would get a nominal yield, if they were like perfectly balanced of maybe a nominal yield on their portfolio of maybe 5%. To me, that's kind of like optimum, because it's blending in stocks and bonds, is taking in consideration, some, let's say 1%, fees, transaction fees and other fees. So let's say you get to 5%. Now, when you think about insurance company, they're going to receive your money. What are they going to do with that money? They're going to invest it in mainly bonds, a little bit of stocks, I know, regulators in Asia, don't let them hold more than a small amount of stocks. So they're gonna earn actually less than that on your money. And all the fees involved, then if you think about it, what is it? Why would an insurance company be a better investor than you investing your money at, let's just say, 5%, you're gonna be earning, you just said, two or 3%. I think that's even good. You know, performance, probably most of these insurance products that are being sold. So you're gonna earn half of what you could potentially earn, you know, by just investing carefully following your methodologies as an example, have I got anything wrong in that comparison?

James M. Dahle 19:06
Well, it's slightly more complicated than that they have a lot of costs of doing business that must be paid, they got to pay the agents commissions to sell it, they got to keep the lights on their investors themselves probably want some profits. And of course, they also have another source of revenue, all the people who surrendered their policies early on. And, and so they get to keep, you know, a lot of the premiums that those folks paid. But yeah, but basically, that's it the investment, the insurance company isn't going to do any better than you can do probably worse after paying all those expenses. And so your return, by necessity must be worse as an investment.

Andrew Stotz 19:42
So I'm thinking about the number you gave two or three, I'm going to focus on two probably as what maybe is the number so you could earn five, with a very carefully and well managed portfolio over a lifetime or two, let's say with an insurance product. So There, therefore, the point you're making is focus on one catastrophe related insurance product. That's reasonable, as you said, term life, I think is what you said, is that correct? That's correct. And then, you know, find the best price on it, set it up to protect your family against that catastrophe. And for the remainder of your money, build a solid investment plan, you know, like you teach in what you, you know, and what you're sharing out there. That would be my thoughts, based upon what you've said, anything else you would add?

James M. Dahle 20:35
No, that's absolutely it. I mean, insurance is expensive. On average, insurance has to be a bad deal, right? It has to pay out less in benefits than it takes in in premiums, because it's got expenses and profits, and so on. So it is a bad deal on average. So don't buy more insurance than you need. And when you're buying insurance, it's going to pay out if you die when you're 92. That's clearly insurance you don't need and you're getting a bad deal on it.

Andrew Stotz 21:03
All right. So based upon what you learned from this story, and what you've continued to learn in your life, what's one action that you'd recommend our listeners take to avoid suffering this same fate?

James M. Dahle 21:12
While you don't want to get paralysis analysis, you do need to take the time to understand what you're buying, whether it's an insurance policy, whether it's an investment, you need to understand how it works, and how it's likely to perform over the long term. So you're not disappointed and ended up bailing out?

Andrew Stotz 21:30
Yep. And what's the resource either of yours or any other resources that you'd recommend for our listeners?

James M. Dahle 21:37
Well, I'm going to give two resources one of mine and one of somebody else's, the first one is of somebody else's. It's called evaluate life insurance.org. And if you are already in a whole life insurance policy, and trying to decide whether it is worth keeping it, even though maybe you shouldn't have bought it originally, these are two separate questions, you might want to use James Hunter there who can help you make that decision. Now the resource of mine is an online course called Fire. Your financial advisor is designed to help you write a financial plan to go from zero to 60. And have that financial plan, you know that you otherwise would have to hire a financial planner for 1000s of dollars to help you draft up the beautiful thing about this online course it can be found at white coat investor.com is there's a one week no questions asked money back guarantee. So there's no risk to you at all, to check it out and see if it's something that can help you.

Andrew Stotz 22:34
And I'm looking at that right now. At your website. I'll have a link to that in the show notes a step by step guide to creating your own financial plan. valuable, valuable stuff. And just to make sure I've got it, evaluate life. insurance.org Correct.

James M. Dahle 22:49
Let me double check that and make sure it's evaluate insurance. Hang on, let me make sure I got this just right. That's a different website. Maybe it's gone out of business? I hope not. No, it is evaluate life. insurance.org. Exactly. As I said it

Andrew Stotz 23:16
was got it. Okay. All right. I'll have that in the show notes. So last question for you is what's your number one goal over the next 12 months.

James M. Dahle 23:25
My number one goal is to help as many doctors as I possibly can reach a situation where they feel good about their finances, whether that's reaching financial independence, or just feeling like they have their financial ducks in a row. I want them to be able to quit worrying about their money so they can concentrate on those things that matter most in life.

Andrew Stotz 23:44
And just curious, you know, you've been on this mission for a while. I'm just curious, like, what's the potential that you see as the number of people that you can touch the lives that you can touch through what you're doing?

James M. Dahle 23:54
Well, there's a million doctors in the United States, and I figure if I can just get to a quarter of them and provide this kind of information to them, it's probably worth $2 million apiece. And if you do the math, $2 million times 250,000 doctors, that's an awful lot of value I can create for them.

Andrew Stotz 24:13
And do you think that what you're doing can benefit doctors outside of America?

James M. Dahle 24:18
I think absolutely, it can obviously some of the things we talked about some of the tax laws and some of the specific investments and insurance companies may be us specific, but the general principles are going to be universal. And I'll bet 80% or more will apply to anybody, whether they're in New Zealand or Australia or Thailand or India, or anywhere over there as well.

Andrew Stotz 24:39
Fantastic. Well, listeners there you have it another story of loss to keep you winning. Remember, I'm on a mission to help 1 million people reduce risk in their lives. As we conclude, Jim, I want to thank you again for joining the mission and on behalf of East Dance Academy I hereby award you alumni status for turning your worst investment ever into your best teaching moment. Do you have any parting words for the odd Kids

James M. Dahle 25:01
Keep your head up and your shoulders back. You've got this stuff.

Andrew Stotz 25:04
Well, that's a good reminder. I just pulled my shoulders back. Excellent advice. You got this. That's a wrap on another great story to help us create, grow and protect our well fellow risk takers. Let's celebrate that today. We added one more person to our mission to help 1 million people reduce risk in their lives. This is your worst podcast hose Andrew Stotz saying. I'll see you on the upside.