Forum Mailbag: Bond Asset Allocation, Med Students and Primary Care, Growth Tilt, and More!

There is so much great information on personal finance forums. I regularly participate on several message boards, including Bogleheads, White Coat Investor, and Rockstar Finance. This is a roundup of my favorite discussions happening around the internet.

1. Bogleheads: Decreasing Bond Asset Allocation

Question: Silverskates is in his early 40s and allocates 25% of his portfolio to bonds. He noticed that many people, including Suze Orman, are advocating a 100% stock allocation. Given the increase in interest rates, he is wondering whether to decrease his bond asset allocation?

WSP’s Take: The amount of bonds in your portfolio is a very personal decision. More stocks in your portfolio gives you a higher average return with more volatility. If you can handle more risk and swings in your portfolio, then you should have more stocks. But if you lose sleep at night when the stock market falls 10% (as it does almost every year), then you should have a higher bond allocation.

I’m always a little wary about the asset allocations advocated on message boards and TV shows. They rise and fall with the swings of the market. When the market has gone up for 8 straight years, everyone wants to be in 100% stocks. People begin to talk about how to tilt their portfolio to small-cap value and emerging markets because they know they are “very tolerant to risk.” I don’t think many people on TV were advocating 100% stocks in 2000 or 2008. Sure, some people were saying it was a buying opportunity (i.e. Warren Buffett), but few had the guts to advocate a 100% stock portfolio when the S&P 500 fell 55% from 2007-2009.

What should not influence your bond allocation is the expected increase in interest rates. Yes, the Federal Reserve is planning to increase interest rates over the next year. But all of these interest rate increases are priced into the market. The efficient market hypothesis, which states that the current price of assets is based on all presently available market information, applies to bond markets as well as stock markets. If future interest rate increases were not already baked into current bond prices, then no one would want to buy bonds at current prices. Do not shy away from buying bonds because of expected future interest rate increases.

2. White Coat Investor: Med Students and Primary Care (From A Financial Perspective)

Question: FutureDoc posted an article from the journal Academic Medicine, entitled “Can medical students afford to choose primary care? An economic analysis of physician education debt repayment.” He was wondering whether medical students can still go into primary care and be financially successful, given the rising cost of medical school.

WSP’s Take: Absolutely! Medical students should not be discouraged from going into primary care because it has lower average salaries than specialists. First, who is to say that the salary differential will not narrow in the next 10-20 years? There is a strong trend away from fee-for-service reimbursement, which is the primary driver of the differences in salary between primary care physicians and specialists.  Second, primary care physicians make more than enough to meet their financial goals, if they invest and plan appropriately.

Given that primary care physicians have shorter residencies than their specialist counterparts, they should consider a “financial fellowship” for 2-3 years to get their finances off to a great start. Combine this with investing in low-cost index funds and avoiding trading in their taxable account, and a primary care physician may end up in a better position than many of their specialist counterparts.

3. Bogleheads: Total Stock Market or Tilt to Growth Stocks?

Question: Ray333 wanted to know whether he should invest in VTSAX (Vanguard Total Stock Market Index Fund) or VIGAX (Vanguard Growth Index Fund) for his Roth account.

WSP’s Take: Great question. I’m a huge proponent of a Total Stock Market index fund for your stock allocation. VTSAX (Vanguard Total Stock Market Index Fund) is the preferred fund for investors for Vanguard accounts. But some people like to “slice-and-dice” their portfolio, splitting the index into “growth” stocks and “value” stocks. Presumably, the original poster is interested in investing in VIGAX (Vanguard Growth Index Fund), because he thinks it will have higher returns than VTSAX. After all, most of the high-flying stocks I see on CNBC are growth stocks, especially tech companies (think Amazon, Apple, Netflix, and Tesla).

However, historical returns suggest that value stocks outperform growth stocks in the long-run. The Fama-French three-factor model (designed by Eugene Fama, one of the winners of the Nobel Prize in Economics in 2013) found that small stocks and value stocks outperformed large stocks and growth stocks, respectively. So if you were to tilt your portfolio in one direction, with the intent of trying to get higher average returns, use the Vanguard Value Index Fund (VVIAX).

4. Rockstar Finance: Asset Allocation for Taxable Account

Question: SteveC wanted a critique of his planned taxable account allocation. His 401(k) is all in a S&P 500 index fund, while his Roth is 60% Small-Cap Value, 20% Emerging Markets and 20% International Small-Caps (all index funds). He is leaning to a 50/50 Total Stock Market / Total International Stock Market portfolio for his taxable account. Overall, he would like a 50/50 U.S. / International stock portfolio with a tilt to small cap and value stocks.

WSP’s Take: Since he is just starting a taxable account, I would advise him to choose his taxable account wisely. For his desired goals, SteveC is spot-on with his analysis. Since he wants a 50/50 US /International mix for his overall portfolio, I would recommend 50% VTSAX (Vanguard Total Stock Market Index) and 50% VTIAX (Vanguard Total International Stock Market Index) for his taxable portfolio. This is a portfolio that he can keep for the long-run. By doing this, he will minimize the tax drag of changing his taxable portfolio. He can slice-and-dice with international small caps and emerging markets in his Roth IRA. 

Wall Street Shares: 5 Articles I Enjoyed Reading This Week

1. White Coat Investor: What You Need To Know About Disability Insurance – A must-read for any physician who is thinking about purchasing disability insurance.
2. High Income Parents: Writing Your Daily Personal Spending Policy – I like this variant on an investment policy statement by Tom, a new physician blogger who writes about raising five kids with a doctor’s income.
3. Physician On Fire and The Happy Philosopher: Renting versus Buying a Home: The Happy Philosopher’s Experience – A very comprehensive analysis of the buy vs. rent decision for medical residents.
4. A Lawyer’s Money: Doctors Have Better Personal Finance Blogs Than Lawyers – Yes, we do have better personal finance blogs. But the words “lawyer” and “malpractice” will cause any physician to sweat.
5. Future Proof, MD: Pay as You Earn (PAYE) vs. Revised Pay as You Earn (REPAYE) – Future Proof breaks down the differences between these two loan repayment options.

What do you think? Do you agree or disagree with any of my responses? What’s your take on the topics in this week’s forum mailbag?