Forum Mailbag: Older FI Docs Not Retiring, 403(b) vs Taxable for Residents, Warren Buffet Bet Post-Mortem, 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. White Coat Investor: Should Older FI Docs Retire Earlier?

Question: People have previously asked whether it is ethical for a physician to not work a full career as a physician. This question has been previously discussed on the WCI forum and elsewhere. Vagabond MD asks the converse question: should older, financially independent doctors retire early in order to make way for younger physicians? Radiology recently had a shortage of entry-level jobs for graduating residents, which was largely attributed to older radiologists not retiring. As the stock market has risen, more doctors are retiring and this shortage has subsided.

WSP’s Take: Similar to my answer to whether physicians are obligated to work a full career, I do not believe older, financially independent physicians are obligated to retire in order to make way for younger physicians. Financially independent to one person is different from financially independent to another person. Older docs may have more than they’ll ever need for retirement, but they may desire to continue to grow their wealth for philanthropic purposes, or simply to “run up the scoreboard.” As long as they are mentally sharp, physically capable to perform their job, and are up-to-date with the medical literature, physicians can work as long as they want.

2. Bogleheads: Traditional 403(b) versus Taxable Account for Residents

Question: Need403bhelp is a resident who wants to know whether it is better to invest in a traditional 403(b) compared to a taxable account.

WSP’s Take: For residents, he should first contribute to a Roth IRA, and any additional money should be put in a traditional 403(b). 401(k)s or 403(b)s have two tax benefits over taxable accounts — you get the upfront tax deduction and investment gains in the account is tax-deferred. In a previous post, I estimated the benefit of contributing to a 401(k) to be approximately $1.20 in today’s dollars compared to a taxable account.

3. Bogleheads: Ted Seides on Why He Lost His Bet with Warren Buffett

Question: Ted Seides was a hedge fund manager at Protege Partners who famously bet Warren Buffett $1 million in 2007 that a hand-picked basket of fund-of-funds would outperform the S&P 500. As the S&P 500 is handily beating the hedge fund portfolio, Seides has thrown in the towel, but not before writing an editorial in Bloomberg explaining why he lost and why he would be willing to bet Warren Buffett again. Lax67 wanted to discuss the column on Bogleheads.

WSP’s Take: Seides argues that there has been a bull market over the past 10 years, and the S&P 500 has done significantly better than other asset classes. Hedge funds generally are chasing absolute performance, while the S&P 500 is the benchmark by which relative performance is calculated. As such, he thinks that comparing the S&P 500 and hedge funds is an apples to oranges comparison. Further, because the S&P 500 is currently trading at a high valuation compared to historical data, he believes he would be even more likely to win a repeat bet than in 2007.

Seides minimizes the fundamental issue of hedge funds’ underperformance, which is the sky-high fees that hedge funds charge. The standard fee structure for hedge funds is 2% of assets and 20% of protfits, and the fund-of-funds charges an extra layer of fees. It is very difficult for a portfolio manager to deliver above-market returns to investors after fees. Seides did not succeed in 2007, and I don’t believe he would succeed in 2017.

4. Bogleheads: Total vs. Extended Market

Question: Mike14 asks whether it makes sense to invest in the extended market versus the total stock market. He notes that the total stock market has slightly outperformed the S&P 500 historically, and since the S&P 500 + Extended Market = Total Stock Market, then the Extended Market should outperform the total stock market.

WSP’s Take: Historically, the total stock market has slightly outperformed the S&P 500 because it contains mid-cap and small-cap stocks that are not in the large-cap S&P 500 index. The historical outperformance of small-cap stocks is well-documented, but small-cap stocks also have increased volatility. Buying the extended market index is like buying a combined mid-cap and small-cap index. If you are willing to take more risk in your portfolio (and it often takes a bear market to know how much risk you can take), then tilting your portfolio toward smaller-cap stocks is reasonable. This can be done with an extended market index fund, or with a small-cap index fund (e.g. the VB ETF with Vanguard).

Wall Street Shares: Articles I Think You’ll Enjoy Reading

I had a guest post on Physician on FIRE last week, The Rollercoaster Ride of Retirement: How to Survive Market Meltdowns — go check it out if you haven’t already read it.

InvestingDoc: A Caution For Doctors Entering Into A RVU Based Contract –RVU-based contracts are rapidly gaining popularity as more and more doctors work as employees for hospitals.

Dads, Dollars, & Debts: The cost of private education — College and medical school are expensive, and DDD shares his experience of choosing to go to his state school rather than a more expensive private school.

My Curiosity Lab via White Coat Investor: What I Learned From Getting (Kind Of) Sued — Dr. Curious shares his experience of being sued for medical malpractice. Spoiler alert: he wins, but not without a few scars.

Future Proof MD: Public Service Loan Forgiveness (PSLF) Application Walkthrough – Many physicians will be filling out this form over the next few years to get tens of thousands of dollars in loan forgiveness. Let FPMD guide you through this important form.

Physician Couple: The Corrosive Effect of High State Income Tax on the High Income Earning Family — living in a low-tax or no-tax state was the original geographic arbitrage.

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?