INTRODUCTION

This is the White Coat Investor podcast where we help those who wear the white coat get a fair shake on Wall Street. We've been helping doctors and other high-income professionals stop doing dumb things with their money since 2011.

Dr. Jim Dahle:
This is the White Coat Investor Podcast, and this episode is brought to you by KeyBank. For six years, White Coat member benefit partner, Laurel Road, has been part of KeyBank.

As of March, that partnership becomes even stronger, as Laurel Road is now officially under the KeyBank brand. With the transition to KeyBank, the same tools and services you rely on now come with enhanced resources and support, and the same great experience you trust.

WCI members can continue to enjoy the benefits and financial resources that they always have, with even more support from KeyBank. To learn more and for terms and conditions, please visit whitecoatinvestor.com/keybank.

All right, it is a pleasure to make this podcast for you. We're grateful for you. We're grateful for what you do in your daily life. We're thankful for you taking care of your finances.

I'm going to thank you on behalf of future you, as well as your spouse, your kids, your grandkids, their spouses, for taking care of this stuff now. It's going to make a difference in their lives, and so you should be proud of what you're doing, not just in your daily work, which matters, and some of you are out there stamping out disease and saving lives, or maybe you do estate planning or asset protection, or I don't know what you do if you're an attorney family law, real estate law, who knows, but thank you for doing that.

If you're a pharmacist, thank you for making sure your patients are getting the best possible treatment they can, and nobody's screwing anything up, like we doctors like to do oftentimes, based on the number of calls I get in the ER about prescriptions I have written or my partners have. Whatever you do out there, know that we appreciate it.

QUOTE OF THE DAY

Dr. Jim Dahle:
Okay, we should do a quote of the day here. “Far more money has been lost by investors trying to anticipate corrections than lost in the corrections themselves.” That was Peter Lynch who said that, and there's a lot of truth to that.

Stay the course. When things start feeling bubbly, know that the bubble might go for quite a while longer. When you see irrational exuberance in the markets, you've got to ask yourself, “Is it 1996 or is it 1999?” Alan Greenspan didn't necessarily get the timing right, and so I don't know why you would expect you would be able to time the market perfectly. Just stay in the market and stay the course.

WCI SCHOLARSHIP

Dr. Jim Dahle:
Okay, we need some help from you. We run a scholarship, the White Coat Investor Scholarship. We run it all summer, and then this fall, the scholarships will be awarded.

What are the scholarships? They are cash payments. We just literally give cash to students, professional students, medical students, dental students, etc. Lots of other types of professional students can also apply. You can find the details at whitecoatinvestor.com/scholarship.

You have until the end of August to submit your application, but we also need judges. Can't be a student or a resident and be a judge, but you don't have to be a doc or anything to be a judge. You just got to be someone in their career or retiree, and if you will email scholarship@whitecoatinvestor.com, you can just put “Volunteer judge” in the headline. We will enlist you into our army of judges, and we need 40, 50, 60, 70 each time we run this scholarship.

We won't ask you to do that much, but you will have to read something like 10 essays that people write to try to win the White Coat Investor Scholarship, and so if you're willing to do that, we would love to have you. You will be inspired by what you read. These people applying for the scholarship, they're incredible people. You will be inspired. It will renew your passion for medicine or whatever your career is, so please volunteer to judge. We'll contact you in September and outline the work you'll need to do as a judge, but if you're willing to volunteer for that, again email scholarship@whitecoatinvestor.com.

AVANTIS INVESTORS

Dr. Jim Dahle:
I've been looking forward to doing this interview for months. I'm really excited about it. We're going to be talking with somebody from the investment firm Avantis. And the reason why is I invest quite a bit of money with them.

A lot of you know my portfolio is 60% stocks and 20% bonds and 20% real estate. And in those stocks, I basically own four funds. A total stock market index, and that's either from Vanguard or from iShares. A total international stock market index, again from Vanguard or iShares depending on how much tax loss harvesting I've had to do lately. But the other two funds are to tilt the portfolio towards small and value stocks, and I use Avantis funds now for that. They're ETFs. They're low cost, not very low cost. They're not free like a Fidelity Index fund or nearly free like a Vanguard Index fund, but they're still low-cost funds, and I tilt my portfolio towards small and value in hopes that those factors will actually give me better long-term returns.

Now, obviously, those haven't shown up while large growth stocks have been outperforming the last few years, but for both risk and behavioral reasons, I do have hope that over my investing horizon, the remainder of my life, that they will outperform a total market approach.

Now, I haven't put the kitchen sink on it. I didn't put all my money into those funds, but I do tilt my portfolio toward those sorts of stocks. And so, it's interesting to me to talk to the people that are managing my money. A lot of times on this podcast, we have people that are White Coat Investor sponsors, and I've tried to be good about alerting you to when we have a financial conflict of interest with them.

We do not have a financial conflict of interest with Avantis. They have not bought any ads from us. They have not given us any money. In fact, I pay them, I guess, through the expense ratios through the funds that they invest with us. So, no conflict of interest today, but I think it's a really interesting interview, and I hope you enjoy it. Let's get our interviewee on the line.

Our guest today on the White Coat Investor Podcast is Jeromey Thornton, CFA. He's a vice president and a senior investment director at Avantis. He spent four years there. Prior to that, spent eight years at DFA as an investment strategist and the head of product management. He's been at Deloitte consulting, even did an internship at USAA for all you USAA fans out there. Jeromey, welcome to the podcast.

Jeromey Thornton:
Hey, thanks for having me, Jim.

Dr. Jim Dahle:
Yeah, I'm excited to have you here. As I told you before we started recording, I'm a big Avantis fan. Long-term readers of the White Coat Investor blog, long-time listeners of this podcast know I've got a significant amount of money invested in Avantis funds, but I've never really done a lot on Avantis. I think we've probably written one blog post over the years about the firm.

I'm excited just to introduce it a little bit, talk about it, and particularly about some of the things that are a little bit different, not only about Avantis, but about DFA, where you worked prior to Avantis. Different from a hardcore rigid index fund strategy like you might see with Vanguard funds. We're going to get into a lot of that material.

But why don't we start with just the history of Avantis. Avantis was founded in 2019. It's a pretty fast-growing investment unit of American Century Investments. Tell us a little bit about the origin story of Avantis and maybe how that relates to dimensional-funded visors or DFA.

THE ORIGINS OF AVANTIS AND ITS APPROACH TO INVESTING

Jeromey Thornton:
Sure. As you mentioned, Avantis was started in 2019, and it was started as a unit of American Century Investments. If you think about American Century Investments, a longstanding asset management company, historically offered active mutual funds. It's been their history. They've been around for more than 60 years, and today they manage over $300 billion in assets under management.

I like to think of it almost like a startup inside of an existing company, which is good for a lot of different operational reasons. It really meant that we got to focus at Avantis on what we think we do best and what we really love doing, which is designing strategies that we hope can help investors achieve their investment goals and service our clients. That's really where we focus our time.

Then we work with American Century to really handle the other many things that come along with managing an asset management business. Someone's got to do the finances. Someone's got to do HR, legal compliance, and all these things. We really tap into that existing infrastructure, which was really helpful for us to be able to come out day one with that backing and offer strategies at a price point that we thought could be really attractive to investors. That helps give you a little bit about that relationship.

I'll note that American Century, if you don't know American Century well, also has a really interesting and unique ownership structure. The largest owner of American Century is actually a medical research center called the Stowers Institute for Medical Research in Kansas City. 40+ percent of the profits that come from our operations across American Century and Avantis funds goes directly to the Institute in the form of dividends. That supports research into trying to cure and provide ways to solve meaningful diseases and trying to help in ways beyond the investment world in that sense. That's something that we're really proud of.

To give you a little bit more beyond, that's the structure. That's how we operate within the American Century. You asked me what are some of the relationships to DFA. Our CIO, Eduardo Rapetto, he's the CIO of Avantis Investors. Some listening may know his name. He previously was the co-CEO and CIO at Dimensional Fund Advisors for many years. I think he was there about 20 years. He retired back in 2017. He took a few years off to take the kids to school, be with the family, and that sort of a thing. Then those kids went off to college.

After being retired for a few years, he was approached by the CIO at American Century, who he formerly had worked with in different capacities in the industry. They came to Eduardo with an idea of, “Well, the American Century has a need to offer something that can be more competitive in this world where more and more dollars are moving towards the low-cost, passive world. How can we compete more in that space?”

The idea from that conversation came to be, “Well, let's create Avantis Investors as a separate brand and unit of American Century Investors that can offer low-cost funds that are broadly diversified and can compete in that world of low-cost, passive investments but offer something a little bit more, which is that opportunity to do a little bit better than the market.” That's how it started.

Now, we're approaching seven years in. As of last Friday, we were at about $137 billion in total asset center management around the world, managing close to 50, I think now, ETFs and mutual funds around the world.

As you mentioned, it has grown fast. I think the value proposition that we brought to the marketplace has been of interest, and people have adopted it. We've been super proud of what we've built and thankful for the support from the many clients that we have today and folks like yourself. We're certainly thankful and appreciative of the ride we've been on. It's been fun.

Dr. Jim Dahle:
Yeah, it's a pretty wild ride. If you think of, first of all, Avantis, apparently, is how you pronounce it. That's the first time I've actually heard it pronounced.

Jeromey Thornton:
Well, it comes from Avantgarde. The Latin term Avantgarde is “Continuing to move forward”, is what that means. Avantis comes from Avantgarde.

Dr. Jim Dahle:
Very cool. It's growing so fast. It's a huge percentage of the American Century. I think the numbers I saw a while ago, it was American Century's about $300 billion and Avantis was about $100 billion at the time. It might be more than a third of it now in just seven years. This company has been around for decades and decades, so it's pretty impressive, the amount of growth there.

Jeromey Thornton:
Yeah, like I said, it's been a fun ride.

Dr. Jim Dahle:
Yeah. Now, I'm sure, given how many fairly sizable number of the staff of Avantis has worked at DFA in the past, and I'm sure there's all kinds of non-disparagement agreements and things like that, but I have this picture in my head and I don't know how accurate it is of how this ended up happening. Maybe you can disabuse me of this notion I have of how Avantis came to be.

I picture some people sitting around a table at Dimensional Fund Advisors, at DFA, where the model has been to offer mostly traditional mutual funds and only through advisors. I have this image in my head of people sitting around a table going, “Maybe we can do this without going through an advisor network, especially now that ETFs are so popular. Why don't we just offer ETF share classes for these?”

I have this vision of a disagreement and half the people wanting to do that and half the people not wanting to do it, and the ones who wanted to do it, leaving and forming a new company. Accurate, not accurate, how much of that is similar to what actually happened with the origin of Avantis?

Jeromey Thornton:
Well, I guess full disclosure, Jim, I wasn't in the room that you're referring to, so I didn't hear the conversation. Eduardo, I work with very closely. I was intentional in laying out, he was in retirement. He took a few years off. If you think about Eduardo, his family was in LA, he was being in Austin, Texas, where DFA was located, and he worked there 20 years. That's a long time, doing a lot of work and traveling back and forth between Austin and his family. What I've heard from Eduardo is, hey, it was his time to go spend that time with the family when he had that opportunity.

Like I said, I wasn't in that room, who knows what conversations were had, but Eduardo retired, took a few years off, and then I think what I do know more about is that at the point at which Eduardo started thinking about Avantis, while it was, now he'd spent his career in this world that we know of factor investing and mostly operating out of mutual funds.

In 2019, he had a blank sheet of paper to think about, “If I could build this new, what would I do different?” I can tell you, one of his stipulations in launching Avantis was that we needed to be able to offer ETFs. At that time, that was something that the ETF world was predominantly just passive index options, but that world was changing quickly.

I think he, like many others, have found that there's real value in the ETF structure. I think the timing of Avantis was such that it started at the point at which you really saw that acceleration in ETF assets. I think Eduardo saw that that's where things were going, and that's continued to be the case since then.

Clearly, Eduardo felt compelled and conviction, and we needed to offer ETFs, and we needed to be able to offer our brand of investing in an ETF structure. I think that was certainly an important part of it.

Dr. Jim Dahle:
Not shortly after Avantis launched, DFA magically decided to come out with ETFs available to people without an advisor. How much of that do you think was due to the starting of Avantis?

Jeromey Thornton:
Again, hard to say. I think it was inevitable. DFA launched ETFs, but they're one of many other historically large mutual fund managers that have made the same decision. Capital Group, another one, American Funds, another one that took that path. Fidelity, all these other historically large mutual fund providers have all come to the same conclusion.

I think trying to say that Avantis was the reason they'd have to answer that, but I think either way, it's clear that everyone was going that route, and I think that's to the benefit of investors because we think there's real benefit and value in the ETF structure. Everyone's coming to that same conclusion, it seems.

Dr. Jim Dahle:
Now, the first thing I usually hear about from people who have accepted the merits of passive investing, when they hear about a fund or an investment ETF, whatever, similar to what DFA has done for years and Avantis has been doing for the last seven years, the first thing they come out with is, “That's active. What they're doing is active.” You're always very careful to explain that we have a passive philosophy, but active implementation. Can you explain what that means?

Jeromey Thornton:
Sure. I think that there's a few pieces to this. I'd say, first off, we should define, well, what is passive? If we define it, or if we said to find passive or index investing as tracking an index, then anything that's not exclusively tracking an index would not fall into that camp.

When you think about the world today, it's a lot less black and white than I would say it probably was many years ago. At one point, it seemed like there was traditional stock picking active approaches, and then there was funds tracking an index, and neither of the two shall meet. Those are the options. I think it's now more of a spectrum.

We often talk about it in three camps, where you have traditional passive solutions or index-based solutions, where your security selection is done by an index provider who determines what companies are going to be in the index. Then it's also passively implemented. Every so often, whether it's once a year or it's quarterly, it will be reconstituted or the holdings will change. That's really your passive implementation. It will just be periodically rebalanced.

Then I think you have what I would call the strategic beta, maybe factor world in the middle, where there is some deviation from market cap weights and selection. Someone's making some determination on how we will select companies that's different than just market cap weighting, which is what I would say that the first camp is typically doing, just market cap weighting selection.

There's some active decisions that go into that, obviously, but then they may still do that in an index implementation. They'll still rebalance that periodically, but just the weights of the companies won't be market cap weighted.

Then you have your true, just fundamental active, where you're actively picking and implementing through time. You can trade any day you want, and you can determine what you want to have in there.

For us, the way I think about it is that, well, even if you are deviating from market cap weights, why should we have to only rebalance the portfolio one time a year or four times a year? Prices and fundamentals of companies, the characteristics of companies are changing every day. Why should we really have to wait till next June to be able to rebalance the portfolio? I may be running a small value portfolio, and if I have to wait till next June, it's possible. I'll have a company that's a large growth company. Do I really want to hold that until next June? That can happen. We see that with some indexes.

But that doesn't mean, just because you look at the companies, the prices, the characteristics every day, that you necessarily have to be, you share all the same traits as the traditional active approaches. You don't have to necessarily be really concentrated. You can still be diversified. You don't necessarily have to have really high turnover. Just because you look every day doesn't mean you have to trade every day.

I think that's really more of where we fall. We want to build broadly diversified portfolios like you can get in passive solutions, but we want to be thoughtful about how we change it, how we change what holdings we have. We want to have the opportunity, the flexibility to look on a daily basis because we think that can add value over just waiting once a year to trade the portfolio.

There's a couple of different things going on there, but certainly there's a difference between passive implementation and also passive design or constant creation of the portfolio.

Dr. Jim Dahle:
I think probably the best place for somebody to start when they start trying to wrap their mind around this concept of a passive philosophy and active implementation is to remember why index funds work. The reason they beat all these stock picking actively managed funds is primarily low costs. Not only do they keep their expense ratio very low, which is very interesting, investing beta essentially has become free in today's world. Fidelity has these zero expense ratio index funds, even at Vanguard for a total stock market index ETF, I think you're paying three basis points. It's essentially free. But it's not just that low expense ratio, it's also keeping turnover low. By keeping turnover low, it makes it very tax efficient and reduces costs as well.

Once you get the costs low, the hurdle for any sort of active management to get over is much, much lower. You only have to be able to add a little bit of value to overcome your costs. I think a lot of people don't understand why index funds trounce actively managed funds. The main reason is costs.

One of the things I've loved about, particularly Avantis and as it's moved into ETFs, is it's managed to keep costs low. Now, it's not three basis points. I think most of your funds are more like 25 or 30 or 35. When I first started investing at Vanguard in index funds, that's what I was paying for index funds. It costs 20 or 25 basis points to go invest in a total stock market index fund. We'd rejoice when the ER got cut to 18 basis points or 15 basis points. I watched it trend down over a couple of decades.

Once you get the cost down to a certain point, that's not the most important thing anymore. Going from eight basis points to seven or six or five basis points doesn't matter much. At that point, you got to start looking at what else is the fund doing. I think that's created room for somebody to come in at 20 or 25 or 30 basis points and go, “Well, we think there's some things we can do that adds more value than the 20 basis points this is costing.” And so far, at least, it's only been seven years. There's a lot of evidence you guys are doing pretty well.

I looked at ABUS the other day. I was answering a question on one of the online forums just comparing it to VTI. Both hold most of the stocks in the US. The Avantis Advantage, despite charging whatever it is, 20 more basis points or whatever, was 20 or 30 basis points per year over the last five years. They have added more value than the cost.

It's super exciting to see it working as people were arguing it would work in 2019, 2020, 2021, but there just wasn't this long track record of showing, “Hey, we can, by efficiently trading, by trading patiently, maybe adding a little bit of factor investing, we can make a difference and avoid index slippage and those sorts of things we talk about when we talk about the problems with index funds.”

While I'm on that subject, let me ask you a question that somebody asked me. I said, I'm not sure I know the answer, but I'm talking to the Avantis folks soon, and maybe they'll be able to opine on this. But they asked, well, is that outperformance primarily due to the factor investing, or is it due to these active implementation and daily implementation and patient trading, those sorts of techniques that they started doing at DFA and obviously you've continued doing at Avantis. Which one do you think you would chalk up that sort of outperformance more to?

Jeromey Thornton:
I think that when we think about outperformance, there's many things that can go into that. But when I think about what is the driver, what do we expect from our strategies that would drive the most meaningful component of outperformance over time? It's really going to be about the exposure that you're getting relative to the benchmark.

For any of the equities strategies that we run, the different approaches and objectives and asset classes here, but really across the board, they're all designed to provide consistently higher exposure relative to their benchmarks and companies that are at the same time attractively priced with strong balance sheets and strong profits.

And so, when you have consistently higher exposure to those companies, and I would view these, I would talk about these as companies that are, their prices are highly discounted relative to their fundamentals. These are the companies that we expect to produce a premium over time.

So, if we are consistently providing greater weight to those companies, that's what we expect to drive the performance relative to just pure market cap weighted benchmarks. And if you look at the performance of our strategy since we launched back in 2019, that's going to be the significant driver.

You mentioned trading and implementation. I would argue that implementation always matters. I think you have an ability to add some value by simply not being led to an index and being forced to track that and rebalance on some periodic frequency. But when we think about the ideas of patient trading and these sorts of things, I think that is more meaningful in the mutual fund structure than it would be in the ETF structure. Because in reality with the ETF structure, a lot of the rebalancing occurs in kind.

So, it's really when you have new shares being created and redeemed of an ETF, securities are being brought into the portfolio or passed out of the portfolio in kind, which doesn't require the manager to go out into the market and trade them. I think that that's really a concept that had greater importance historically when mutual funds were more dominant than I think in today's world where we're talking about ETFs.

Dr. Jim Dahle:
It sounds like you attribute it more to the factor, the profitability factor, the value factor, the small factor, size factor, whatever you want to call it, producing that outperformance. Because if you look at it, if you pull it up, you pull a VUS up against a VTI on Morningstar, you'll see on their nine box thing, you'll see it's a little smaller, a little more valuey.

And obviously, the performance has been quite good. It's not that easy to beat an index fund. If you look at the long-term data over 20 years, and of course, this is pre-tax data, but that data over 20 years, is it only something like 5% of actively managed funds beat an index fund. It's no small feat to have done this over five years, even if it's only by 20 or 30 basis points, it's impressive to me. I looked at a lot of this over the decades, it is impressive outperformance to me and makes me start going, “Hmm, maybe I ought to think about that.”

But where I've actually implemented, used Avantis funds in my portfolio is in, I tilt my portfolio toward primarily small in value factors. And so I've used AVUV, which is the US Small Value Index ETF, and ABDV, which is the International Small Value ETF. And I've used those as significant components of my portfolio.

FACTOR INVESTING, EXPECTED RETURNS, AND PORTFOLIO TILTS

Dr. Jim Dahle:
So, what I'd like to talk to you a little bit about is about this concept of factor investing and this decision that an investor, whether they're a do-it-yourself investor or whether they're working with an advisor, has to make a decision “Am I going to tilt my portfolio toward these factors, whether it's small or value or profitability or momentum or whatever the factor is?” And what do you think somebody should think about when they're deciding whether or not to tilt their portfolio?

Jeromey Thornton:
I think there's a few questions that I would ask. I think first is, how comfortable are you with deviating from the market portfolio itself? As you mentioned, you've got VTI out there. If you think about the US stock market, whether you take the S&P or what VTI's tracking, CRISPR US market, Russell 3000. Those indexes will ballpark it at around 10% per year over time.

That's not a bad outcome for investors. It's a pretty good starting point. You're getting a broadly diversified portfolio of stocks that has performed and provided a pretty good growth for investors over time.

And so, I think you have to ask yourself, “How comfortable am I with deviating from that and accepting that my performance will not match what I read on the Wall Street Journal every morning?”

Dr. Jim Dahle:
The classic tracking error.

Jeromey Thornton:
Exactly. And I was intentionally dancing around the term tracking error because I know not everyone, and maybe your audience is more familiar, but some don't know what that means. But in simple terms, we're just saying the tracking error is just a fancy way of measuring how different does your portfolio perform through time? How much does it track away from a benchmark or an index through time?

Higher tracking error just means you're getting away from it more through time. You should expect more volatility in your return relative to the market return. And so, I think that's an important concept that people have to be thinking about. If I say, “Well, if I'm going to deviate from the market and I find out one year I underperformed the S&P by 4 or 5% in one year, am I comfortable with that?” And I think that first and foremost, we have to understand that question. Am I comfortable?

The second question I would ask is, “Well, what am I going to overweight or what am I going to tilt towards? And do I have a good belief system around why I should expect that to continue to provide outperformance or some value in the future?”

Because when we think about, and I think we should get more into the idea of more, talk more into the concept of factors and kind of how we think about it. But I think what you're then getting to is if you have an area of the market or some exposure that you want to put more weight into, then it's a question of, “Okay, am I comfortable with how different that's going to make my returns through time?”

Obviously, most people are going to do that with a goal of adding value over time, but also recognizing that there will be periods. Anytime you deviate from the market, there will be periods that you do better, there will be periods that you do worse. And so you have to have a strong belief system in what you are pursuing so that you can stick with it through the periods where it doesn't do as well as you want with the hope that it will be there more often than not to provide value over the long term.

And so, then that starts to get into the question of, “Okay, well, how much do I do it?” And just recognize that the more you tilt away from the market, the more tracking error you will get. It's a trade-off. You can pursue greater and greater levels of outperformance on expectation relative to the market, but that will result in more and more tracking error relative to the market.

So, we often get asked, what's the right amount of tilt? And the answer is it all comes down to you. And what is your goal? What's your time horizon? How much do you need the money over a certain period of time? Are we working with excess cash that you can manage more tracking error? All of those things have to kind of weigh into how you come to those decisions.

But that's kind of the framework I would start with. If you're going to deviate from the market, have a good belief system so that you can stick with it through time, understand your tolerance for tracking errors so you can get a better sense of how much tilting you can be comfortable with over the long term.

Dr. Jim Dahle:
And I think this is a big deal because we talk about personal finance. And it's 90% personal and 10% finance, 90% behavior and 10% math. Tracking error is when you're at that cocktail party and somebody talks about how well their portfolio did because so much of it is invested in the Mag 7 and you realize that your small and value stocks have been underperforming the market for the last 15 years.

My tilt that I've had in my portfolio for the last 15 years toward the small and value factors has resulted in me having less money because large growth stocks have had this historically incredible run the last 10 or 15 years.

I've always told people when they ask “How much should I tilt?”, I tell them do not tilt more than you believe. If you don't believe that these factors are real and that they will pay off in the long term, you don't want to have a very big tilt because the long term can be an awfully long time. This is a bit of a lifelong commitment to a portfolio because it might be 40 years for this sort of a tilt to pay off. And of course we have limited data in the past. There's no guarantee the future will resemble the past.

I think you really do have to be a believer for lack of a better term to have a significant tilt in your portfolio and be able to stick with it through periods of underperformance that can be at least as long as 15 years. Right now, I think small in value is outperforming large in growth this year, but that hasn't been the case for most of the last 15 years.

Jeromey Thornton:
Yeah, I think the belief part that we're talking about right now is really important because I think when you think about factors, the reality is, there’s a paper that documented more than 400 different factors with some statistical significant pattern in the historical data. There's just tons of patterns in the data that have existed historically. Some of them are just correlated to other ones. Some of them are maybe more for hedging, aren't really there to produce that performance. And there's a lot of noise that's out there.

We have to have some reason that we should believe and expect it to provide outperformance in the future. You can even take a small cap, as you mentioned, as a good example. I guess the small cap factor was really first formalized in a paper in 1981 by Ralph Bonds.

But then if you look at how small cap has performed since then, there's really not a statistically significant outcome for small cap outperforming large cap since that period of time.

And so you have to ask yourself, “Well, what's the rationale? What's the logic? Why should we expect small cap stocks to outperform large caps? Why should I expect that in the future?” And this is an area where we differ from what I would call the traditional fact world. I think about small cap, all it's looking at is just market capitalization, just looking at the price.

And if all you know about a company is its price and its market cap, why should you expect it to outperform some other company just because that other company is larger? And this is where we, I think, deviate or where we provide a different point of view of that, “Well, even with small caps, we probably want to look at the company. We probably want to understand its fundamentals. Is it making money? Is it not making money? Does it have significant liabilities? Or does it have a strong balance sheet?”

We think those things probably matter, even in the small cap space, if we want to find companies that should provide a premium over the market over time. That theory matters, and we think it should all link back to valuation, evaluation framework, so that we not just have a pattern historically, we have a good reason for why we expect it should occur in the future.

Dr. Jim Dahle:
I've often heard and probably repeated a fair amount of times that there's really two kind of cases for small and value outperformance. One of which is a risk story. They're riskier companies, they're smaller companies, they have fewer products, their moat is not as wide, et cetera.

And the other story is a behavioral story. Because people want to own the Nvidia's of the world. And so, they tend to shy away from stocks that nobody's heard of because it's not cool to own them. If you had to decide how much weight to put on both of those stories for why you would expect outperformance of these sorts of factor investing type companies, which one would you put more weight on? Do you think it's more of a behavioral aspect or do you think it's more of a risk story?

Jeromey Thornton:
That's hard to answer on its own because we have to come back to, “Well, where do we think that the premiums actually exist?” When I think about small caps, I struggle to find a great story for small caps on its own because I think that that factor just doesn't give you enough information in our view.

We just think you can find out performance in the small cap space. We just think you have to also look at the companies. You mentioned a strategy that you use of ours, which is a small cap strategy that specifically focuses on companies with attractive prices, good balance sheets and good profits in the small cap space. And we've seen those companies in the small cap space provide strong outperformance.

Now that's a premium that I believe in. I believe that if we find good quality companies at good prices, that's a good thing. The market's discounting those companies. So we would say that those are companies with high discount rates and that are highly discounted. And then we should expect a premium for that.

Now, exactly why that premium is there, I'm in the camp of we may never really know. We can make these stories. And I think that there's a reality here that investors often want to have, they need a story. They need to know why, they need to know why. And I can't really tell you.

So the way that I think about it is that, well, if I can find companies whose price is highly discounted to their fundamentals, to their balance sheet, to their earnings, then the market is telling me that that company is highly discounted and has a high discount rate and it should have strong outperformance. We can link that back to a valuation equation, a valuation framework.

I can't tell you why that company is highly discounted. It can be for any number of reasons. Maybe some people have more uncertainty or feel more risk about something. It could be a number of things. It could be other tastes and preferences. Maybe people are buying something else because they prefer something else or they're buying something else because they need that to hedge. There can be all these different reasons that's really hard to nail down.

And so, where we gain our confidence is that, well, if we have a good theoretical framework that makes sense logically, but then we also see that in the historical data, those patterns have shown up in the returns. That gives us a lot more confidence that we expect to be going forward. And I know I didn't answer your question directly, Jim, because I just don't frankly know why it would be a risk story, a behavioral story. It can be some combination of all of it. Who really knows for sure? But I give you the way we think about it, which is a little bit different.

WHY AVANTIS COMBINES VALUE AND PROFITABILITY

Dr. Jim Dahle:
Yeah, obviously I don't know the answer either. Probably nobody knows the answer, but it's interesting to think about and talk about. Okay, let's talk a little bit. I think people understand size as a factor. It's market capitalization, it's very easy to understand. For the most part, I think people understand value as a factor, whether you're measuring it with a price-to-earnings ratio or a price-to-book ratio or dividend yield or whatever. I think people understand value.

I think it's harder for people to wrap their mind around the concept of quality as a factor, around the concept of profitability as a factor. Can you explain a little more about those factors and how they're incorporated into funds like AVUV and AVDV?

Jeromey Thornton:
The way we think about this is that we really don't think about the factors themselves. I think that there's a large community I spent a lot of my career as well in what I call really factor-focused approaches and mindset. But I think that there are shortcomings to the factor, being too wed to the factors themselves. And I'll give you some examples, and then I'll get into how we think about it specifically.

But if we think about the value factor the most common way of thinking about it comes from the Fama-French research, and that factor is really focused on companies with low prices to their book equity. So, you've got a price and you've got some information about their assets and liabilities that come from the balance sheet.

In that scenario, we've said nothing about profitability. We're only looking at the price and the book equity. We've ignored profits. And what we find is that, when we do that, we find companies that are cheap, they have low prices, but many of them actually are probably cheap, not because they necessarily are discounted or should have a high expected return. It's because they don't make any money. They might have net operating losses, but we didn't look at profits.

So far in the value factor, we've only looked at the price and we've looked at the balance sheet data. They might have really high liabilities. They might have a low price and be viewed as a value stock to the factor world for reasons that aren't really linked to what we would say is they shouldn't have expected outperformance. They don't have a high discount rate, but that's what the value factor in the traditional sense of.

Dr. Jim Dahle:
Maybe they're a value stock because they're on their way to bankruptcy is what you're saying.

Jeromey Thornton:
That's right. Sometimes I call it as, “Well, they're cheap, but they're cheap for a reason.” They're not cheap and it's not that I should expect them to provide a premium to me as an investor.

Now, profitability, that factor is also from the Fama-French definition of it is really just looking for companies with high operating profits. Those companies have outperformed companies with low operating profits. And that factor runs into similar challenges.

Now I'm looking at profitability. So I'm looking at a relative measure of profits, but it's profits to book equity. So now what have we left out? Well, now we've left out price. We don't know anything about the price at that point. So now we might just be buying companies that are great businesses, really high quality earnings and profits, but we might just be paying extraordinarily high prices for them. So now we're missing information as well.

And that's actually the reality. We tend to see companies that are low price to book in the traditional value sense tend to have lower levels of profits. Companies that have really high profits tend to have higher price levels. Now, what we would contend is that if we get too focused on the factor itself, and I say, just give me a value factor portfolio, well, now I'm going to get a lot of low profitability companies. If I say, give me a high profitability or quality portfolio, I'm going to end up with a lot of expensive, highly valued companies.

And so, what we say is that, “Well, why do we have to keep these things separated? We really shouldn't.” In our view, we need to look at this more comprehensively. If we want to find companies that are highly discounted, and that should provide a strong premium, and these are going to be the types of companies I'm going to talk about are being the types of companies that are overweight in our strategies, are going to be companies that at the same time have attractive prices, strong balance sheets, and also strong profits.

In simple terms, if I can get companies that have attractive valuations and at the same time strong profits, now I'm finding companies that have a discounted price relative to a more comprehensive view of their fundamentals. So, I can avoid overweighting these companies that are cheap, but aren't making any money.

What we see in our data is those companies historically perform a lot like the market, and don't provide a premium to the market. We don't expect them to provide outperformance. But you get a lot of that in the traditional value factor approaches. And we can avoid the companies that are highly profitable, but really expensive. Again, those companies have historically returned kind of like the market, not a premium on expectation.

And so, really what I think what we have done is said, we learned a lot from the factor world, but we're evolving that and saying, “We need to look at companies more comprehensively.” And so I'm less worried about factors and I'm more focused on premiums.

What are the companies that give me higher expected returns? I don't care about the factor, we learned from the factors, but what I really care about are, what are the companies that are prices highly discounted to those fundamental characteristics linked to evaluation framework that can give me higher expected returns. I think that's an important concept. And that gets into a lot, Jim, around what we do would just differ from a value factor approach or a profitability factor approach.

Dr. Jim Dahle:
It's interesting and it makes a lot of sense to blend those together and hopefully getting the best of both worlds by doing so. Okay, so there's a listener out there that's been kind of a total market investor up until this point. And they've become convinced that, okay, maybe there's something to this factor investing thing. I'm going to go ahead and tilt my portfolio overweight some of these factors. And I think I'm going to do it with such and such a percentage of the portfolio.

Now, how do they choose. They can go to Vanguard and buy a small value fund. They can go to Avantis, they can go to DFA, they can go to iShares. How do they choose which fund to use to get this tilt?

Jeromey Thornton:
I think this is a really interesting question because there's some things here that I think a lot of folks fail to recognize about some of the index options that are out there. So let's think about if we were to say just by the total market, you can buy a total market, US market index fund from Vanguard or from iShares. And they're going to look pretty similar. There's each market cap weighted portfolios buying really every stock. There's not really any selection that's happening. Just give me all the companies.

Once we go into say small value, now there's an active element of even the index world in my view. Someone has to decide what companies are going to go into that small value index. So if it's Vanguard or iShares, it's going to be decided by the index provider for whatever index they're tracking, whether it's Russell or CRISPR or what have you. They are all going to have to make decisions on “Well, what is small cap and what is value?”

And as it turns out, they're all making some different decisions on that. And so interestingly, if you look at the exposure that you get between these different small value index funds from different providers, that can vary. The rebalancing frequency of those can vary. And critically and importantly, the performance that you get from those will vary. In some cases, more than you might think.

Even in large value, we've seen return differences in a single calendar year between different large value indexes of 13% in a single year. In the small value space, we've seen almost 20% difference in a single year.

And so, I also want to urge people to not just assume that the option is, “Give me the style passive index fund option” or someone who frames it more as a factor option is maybe not implementing so passively and not linked to an index. There's different options, but even the truly index tracking options can be more different than you might think.

And so, what I would urge anyone to do is to not just look for the name, look beyond the label, not just look at, “Well, is it passive or is it active?” We need to look under the hood and really understand, “Okay, what exposure am I getting? Is it giving me the exposure that I'm really interested in having an overweight to?”

Now, when I think about small value, while there are differences in how these different indexes are constructed, what we tend to observe for most of the value index options is they run into that shortcoming that I talked about earlier, where you will get a lot of low price to book companies, but many of them will be low profit. So you will also get a tilt to low profits when you buy a small value index type solution.

I would argue that that is also true of much of the factor approaches or the strategic beta approaches, because there's even the factor itself in the research is just a low price to book. And so, it tends to bias you towards low profits. And so, I think where we will be different in that world, in the small value world or any of the value worlds is what you will find from us are portfolios that are similarly attractive in price in terms of their price to book or book to market ratios, but on average at much higher levels of profitability. So you're buying on average, similarly priced companies, but that on average have higher levels of profits.

And so, I think if you believe like I do that that approach can add value over time relative to the value index options that are out there, well, then I think that that can be attractive. Beyond that, if you're just looking at the passive approaches versus the factor approaches, then I would still argue, don't just look at costs. Also look at what is the actual exposure I'm getting because it can vary widely, even when they're all the same name and label.

Dr. Jim Dahle:
Yeah, I think your argument to sum it up is if you're choosing a small value fund, whether in trying to choose it from various companies that offer these sorts of funds and that are well-run low cost funds, you would say look for one that not only incorporates a value factor in there, but also a profitability factor, I think is your argument. Is that fair to sum it up?

Jeromey Thornton:
I think that's fair. My basic argument is that if you want to have exposure to a lot of cheap companies that don't make much money, well, there are ways to do that. That's what a lot of the options that are out there today. But if your goal is to provide, to get higher returns over time and pursue higher expected returns of premium, that's supported good theoretically and empirically, well, then I would argue you want to look for that combination of exposure to attractive prices, but also strong profits.

Dr. Jim Dahle:
Now, I think as people dive into this, and they'll probably come to a similar conclusion like I have, if you're looking for companies to do this at relatively low cost, not the very low cost, but low cost, and you want somebody that looks at both, a value type variable there, as well as a profitability type variable, they're going to end up looking at Avantis and they're going to end up looking at DFA.

I confess, I use both funds. I need a tax loss harvesting partner because I'm investing in these in a taxable account. So I need two funds for each of these asset classes and I actually use them both. What differences do you see between Avantis and DFA?

Jeromey Thornton:
I think we've been circling around it for a lot of the conversation, Jim. I think we don't hold ourselves out to have the same factor focus. We're really focused on finding companies that are highly discounted. And so, we think about value specifically differently. I think over time, it's felt like value driven through the factor world has been, it kind of synonymous with just finding cheap companies.

And when we think about value, it really should be getting the most you can for what you pay is value. Analogy that we often use is that, if you want some sushi, you want cheap sushi and I take you to 7-Eleven, you may not be that thrilled with it. You're probably going to get what you pay for. It's cheap, probably not going to be very good.

And so I ask you, would you think you're getting value from that? Versus our team at Avantis is in LA, near an area where there's a lot of good Japanese food and there's a lot of good sushi there. There's a guy who runs a little sushi shop there, 10 seats, he's got great prices and it's good, authentic, quality Japanese food. For me, that's value relative to going to 7-Eleven and getting sushi.

If I can get something that's just a little bit higher price, but I get a much better quality to it, well, now I'm getting a better value. And so, what we're arguing is largely just thinking about value differently. That it can't just be looking for a low price to book cheap companies. We have to look more holistically.

And that concept of thinking about value differently, you'll see that really play out across any of our funds, where I'd say relative to DFA, as you mentioned, or relative to the value type index, asset class indexes that are out there. That's going to be relatively consistent of we're thinking about value differently, which is going to mean we're not just looking for the cheap companies, we're looking for companies that are highly discounted and are going to give us the most for the price that we pay.

I think you'll see that play out if you look at the characteristics of an Avantis value strategy versus any of these other value type approaches you're talking about. You'll find similar levels of similar valuation metrics like price to book, but on average, higher levels of profitability, which just means, hey, we're getting more of the companies that we think provide good value versus just the ones that are cheap.

I think that's the easiest way to think about it. So, it's an evolution of it. Let's look at these things more comprehensively, be less wed to these factors in isolation and think about companies more holistically to get to the ones that we think are really discounted and should add value.

Dr. Jim Dahle:
Do I understand that you now have traditional mutual funds as well, not just ETFs?

Jeromey Thornton:
We do. We've had mutual funds from day one, actually. We launched five strategies initially back in 2019. And each of those were offered in both an ETF and a mutual fund.

Dr. Jim Dahle:
Were they different share classes of the same fund? All of the Vanguard patent that's now expired?

Jeromey Thornton:
No, they are not. They are independent funds. They're the same strategy, same price point, but you have the option to invest in that in an ETF or invest that in a mutual fund. I would say in practice, what we've seen is, I've looked at the numbers really recently, but the last time I looked at it, it was probably about 9 out of every $10 that have come through the door would have gone into the ETFs versus the mutual funds.

But we still think there's a role for the mutual funds, particularly in the retirement space where many plans the record keepers don't have the ability to keep ETFs. And so, we think that there's a place for those mutual funds, but there are far more dollars going into the ETFs across the industry than in the mutual funds. And we've seen that sort of reflected back in our own offering.

Dr. Jim Dahle:
Yeah, it's pretty impressive. The company says seven years old, it's the fourth largest ETF company by the amount of dollars invested, which is pretty darn impressive, I think. Okay, well, our time is getting short. It's probably going to be listening to 25,000 or 30,000 or 35,000 high income professionals, most of them doctors. What have we not talked about today that you feel like they ought to know about investing?

Jeromey Thornton:
Oh man, that's a great question. What I often talk to folks about, and I speak with a lot of advisors, and I think there are many people that spend a lot of time tinkering with portfolios and trying to find the perfect mix of all these different funds that they like. And I urge people to really just focus in on the core investment principles that matter to them.

When I think about it, ideally, I want to build lower cost portfolios. I want to embrace diversification. I want to embrace the long-term view. And if you can then tailor that portfolio to bring in the tilts that we talked about earlier, that where you have that belief in, like we do, building that portfolio that really suits your goals in terms of the level of tilt you're comfortable with, the level of tracking error you're looking to get, building that in a simple way and holding that and sticking with something like that, something that you can stick with for the long-term, I think that sets up people for good long-term outcomes in my view.

And so, I think I always try to reinforce those basic principles. And I think they're important to keep in mind for anyone. There's no perfect portfolio, but we can build pretty darn good ones. And then if we manage our own behavior and give ourself an opportunity for success, there's a good chance folks can have good outcomes over the long-term.

Dr. Jim Dahle:
Yeah, that's great advice. At the end of the day, we love to talk about the intricacies and get into the weeds on the differences between one fund or another. But at the end of the day, it's how much money you put in the account and whether you can stick with your plan long-term matters far more than the exact details of the plan. Well said.

We've been talking with Jeremy Thornton, CFA. He is a vice president and the senior investment director at Avantis. And we thank you so much, Jeremy, for your time.

Jeromey Thornton:
That is great to be here. I really appreciate the opportunity.

Dr. Jim Dahle:
All right, I hope you enjoyed that interview. That was a lot of fun for me. A lot of those are questions I've wanted to ask him for a while. And in a public setting like this podcast, I don't know that I get all the dirty details I wanted to hear about how DFA and Avantis are related.

And there's so many people that work at Avantis now that used to work at DFA. I figured there's probably a lot of stories there, but I think unless you work at one of the firms, you're probably not going to ever hear all of the details of what appears to be a little bit of a breakup in the industry. Maybe it's just two totally separate companies, but they certainly work similarly when it comes to managing the investments.

But a fascinating conversation for me to have, so I hope you enjoyed coming along for the ride. One of the fun things about having a popular podcast is that I can get guests on here that I want to talk to. And it's a large enough audience, thanks to you, and we appreciate you being here, that they're willing to come on and talk to me. I thank you for that and hope that makes for more interesting content for you to listen to as well.

SPONSOR

Dr. Jim Dahle:
This episode was brought to you by KeyBank, one of the nation's largest full-service banks offering banking, lending and financial solutions for healthcare professionals at every stage of their career. Key's suite of services includes student loan guidance and financial education tools to help clients find financial peace of mind. To learn more and for terms and conditions, please visit whitecoatinvestor.com/keybank.

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That's the whole point of the White Coat Investor Scholarship is to help reduce your debt to go through school, your costs to go through school, while also promoting financial literacy among your peers and giving us a chance to pay back a community that has given us so much.

If you're willing to judge, please email scholarship@whitecoatinvestor.com and you can choose the winners. None of the staff here at White Coat Investor choose the winners for this scholarship. It's all our community, our audience that does the selection of the winners. We need you to volunteer to help out. It's not that hard. You'll just have to read a few essays in September, but email scholarship@whitecoatinvestor.com to volunteer today.

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The longer I do this, the more inspired I am by what you're doing in your lives. I love hearing about your financial successes, but most importantly, I love hearing about what that financial success allows you to do. I got an email back from somebody that's actually one of my partners, although it's like 450 people in the partnership. I don't actually know the doc personally, but he told me about what learning about WCI early in his career meant for him, what it had allowed him to do.

At this point, he was in his mid to late 40s and was able to leave medicine if he needed to, but he's been able to cut back. He's been able to coach his kids' teams. He's been able to get into the music scene. He's been able to do all this stuff, and it's really cool to see not just that people can be financially successful, but what that success allows them to do, not only in their own lives and boosting their own wellness, but also in the lives of other people.

I congratulate each and every one of you for the steps you've taken so far to make yourselves a little bit more financially stable, a little more financially successful, and promises you, as you continue to pay some attention to this aspect of your life, it will pay great dividends and be very worthwhile. Future you thanks you for what you're doing.

Keep your head up, your shoulders back. You've got this. The whole White Coat Investor community is here to help you. See you next time on the podcast.

DISCLAIMER

The White Coat Investor podcast is for your entertainment and information only and should not be considered financial, legal, tax, or investment advice. Investing involves risk, including the possible loss of principal. You should consult the appropriate professional for specific advice relating to your situation.

INTRODUCTION

This is the White Coat Investor podcast, Milestones to Millionaire – Celebrating stories of success along the journey to financial freedom.

Dr. Jim Dahle:
Welcome to the Milestones to Millionaire podcast, where we celebrate your successes and use them to inspire others to do the same. If you'd like to come on this podcast, you can just go to whitecoatinvestor.com/milestones, fill out the application and you might be surprised that you'll be the guest we're interviewing on this podcast soon.

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All right. Another thing you should be aware of that we've got going on right now, if you book a consult with studentloanadvice.com between now and June 30th, we're going to give you our Continuing Financial Education 2025 course.

This is like a huge deal. This course costs more than the consult does. It's really a great benefit and you get the CME with it as well. You get, I don't know, 16 credit hours or something to CME and you get 30 or 40 hours of material. Half of it's on burnout prevention and treatment. The other half's on hardcore financial topics. We create this course from the conference every year and this is from the conference in 2025. We're going to give it to you if you book a consult. Obviously, you have to go through with the consult before you get the course, but just as a sweetener for you to get a plan in place for your student loans.

Save hours of research, save hours of stress, get answers to all of your student loan questions. You can have a professional guide you through the best options to manage your loans. Our staff has consulted with more than 2,300 borrowers on over $720 million in student loan debt. They know what they're talking about. They have been doing this for a long time. I think they know more than anybody else about medical school and other professional school student loan management.

You could potentially save hundreds of thousands of dollars with your custom student loan plan. The average client saves about $160,000 on their student loans. A lot of that's public service loan forgiveness obviously, but we help people make sure people are checking all the boxes so they can get that as early as possible and get as much forgiven as possible.

Others are just saving interest on refinancing student loans or taking advantage of their income driven repayment programs or just filing their taxes the right way or using retirement accounts the right way in order to minimize those payments and maximize forgiveness. So, check that out. Again, go to whitecoatinvestor.com/studentloanadvice. Book it between now and June 30th and we'll throw that course in for free. That's a $789 value. That's more than your consult's going to cost.

All right, we got a great interview today. Sometimes we highlight docs who have made all kinds of mistakes and still overcome them and been successful. Today we're doing a doc that didn't really make any mistakes and it shows. And so, rapid success is what this doc has seen together with her husband. And it's a pretty awesome story. So let's take a listen to it.

INTERVIEW

Dr. Jim Dahle:
Our guest today on the Milestones to Millionaire podcast is Teresa. Teresa, welcome to the podcast.

Teresa:
Thank you. It's a pleasure to be here.

Dr. Jim Dahle:
Let's introduce you to the audience. Tell us what you do for a living, how far you are at a training and what part of the country you're in.

Teresa:
I'm a sports fellowship trained orthopedic surgeon. I live in the Midwest. I'm currently finishing up my fourth year in practice. This has been a little bit of a delay in getting in the podcast celebrating my milestone.

Dr. Jim Dahle:
Okay, very cool. So four years out and you're married as well. Any kids?

Teresa:
I am married. We have two little kids. Yes.

Dr. Jim Dahle:
Okay. And tell us what your spouse does.

Teresa:
He's in sales. That's been a unique part of our story and that he's not within the medical health profession. But part of our success has been attributed to his company and employee stock ownership program that's positioned us a little bit uniquely and helped us financially.

Dr. Jim Dahle:
Very cool. And I'm sure it didn't hurt. I assume he was working while you're in training, maybe even in medical school. How long have you been together?

Teresa:
Yeah. Actually, we just celebrated our 10th wedding anniversary this weekend. We've actually been together for 18 years.

Dr. Jim Dahle:
Wow. Awesome. Now, when you first applied, you applied because you had just become a millionaire. It's been a while since you applied though. So we're still kind of doing a net worth milestone. Tell us what your net worth is now.

Teresa:
Today, it's $1.8 million.

Dr. Jim Dahle:
$1.8 million. And break that down. How much is in retirement accounts? How much in brokerage accounts? How much in your house? How much sitting in cash? How much you have in debt? All that stuff. Break it down for us.

Teresa:
Okay. So my cheat sheet here in 401(k) and 403(b), we have $725,000. A Roth IRA, $160,000. A taxable brokerage account, $220,000. HSA, $60,000. Employee stock ownership program, which is essentially an additional retirement option through my husband's company is half a million dollars. Cash on hand is $145,000. We don't have a ton of equity in our home. We just moved. I think our house is worth $650,000.

Dr. Jim Dahle:
How about debt? How much debt do you have?

Teresa:
Aside from our home, only $18,000 left on one car payment still.

Dr. Jim Dahle:
One car payment. Okay. How'd you pay for medical school?

Teresa:
My husband would cringe to hear that I paid for my first semester with cash that I had saved up through college. He would have loved to invest that in our retirement accounts. The rest was debt, all public loans.

Dr. Jim Dahle:
You borrowed it?

Teresa:
Yes.

Dr. Jim Dahle:
But it's gone now. When did you pay it off?

Teresa:
Yeah. So paid it off in November of 2024. I had been in practice for just over two years.

Dr. Jim Dahle:
You paid off your student loans in two years?

Teresa:
Yes.

Dr. Jim Dahle:
How much did you borrow?

Teresa:
I borrowed $290,000 and by the time we paid it off, it was a total of $330,000.

Dr. Jim Dahle:
Okay. I know orthopedists make pretty good money in general and your husband's working as well, but that is not a small amount of debt you paid off in two years.

Teresa:
No, it wasn't. And we did through residency. So I graduated from medical school in 2016 and we did the income loan forgiveness. Public service loan forgiveness program. So we were paying for it throughout residency. It was really a nominal amount. I don't even think we were touching interest. It was still accruing interest until the federal freeze. We still continued to set money aside.

At that point, I had chosen a job using your term geographic arbitrage. We lived in a location that was fairly rural, had some strategic opportunities in terms of locations near family, thought it could be the job of our dreams. I'm a sports orthopedic surgeon. So despite it being pretty rural, I was working with the D1 college.

And so, we were setting aside that money in case anything changed and we needed to pay it off. But we were also positioned in a way that I had a fairly high income and even as far as orthopedic surgeons go, that could be eligible for PSLF.

Dr. Jim Dahle:
Did you actually get some forgiven or did you pay it all off?

Teresa:
No, we paid it all off. When they reinstated payments, we had a lump sum. We were essentially saving a hundred thousand dollars a year. We were setting aside was our goal. And then when the job didn't turn out to be exactly what we were hoping it would be, and we found an opportunity elsewhere in a more desirable location, we used essentially that $200,000 we had set aside plus some additional from our savings, knowing we were going to be moving to a more desirable area and leaving hospital employed to go to private practice. And so, PSLF wasn't giving me an option for us. Instead of holding onto that debt longer, we had additional savings set aside that we just threw at it.

Dr. Jim Dahle:
All right. So you had options there and you chose to use one of them. Very cool. Okay. Now, part of this story is an income story. You chose to become an orthopedic surgeon. You chose to go into sports. He chose to work in sales throughout this. And you did, as you said, geographic arbitrage. So give us a sense of what your income has looked like both during training, as well as since you've been out of training.

Teresa:
Yeah. Throughout residency, the five years we made anywhere from a total of a hundred to $150,000 as a married couple, about $50,000 of that was my resident salary, same into fellowship. For the two years that I was an attending in our other location, we made a total of $830,000 combined, which was significant clearly for those first two years.

We currently make around $400,000 to $450,000. So it was a significant change in changing our locations, but felt like it was freedom. We were employing by being able to be debt-free and being off that hamster wheel and didn't have the pressure of needing to pay down that debt in moving to a more desirable location and away from household employed and to private practice.

Dr. Jim Dahle:
Yeah. So you're moving into private practice. Do you expect your income to increase from here?

Teresa:
Yes, I do.

Dr. Jim Dahle:
Okay.

Teresa:
But I do not think it will reach what I was making those first three years out of practice.

Dr. Jim Dahle:
Okay. Are you working full-time?

Teresa:
I am.

Dr. Jim Dahle:
All right. Well, it's a pretty awesome story. You're four years out, you said?

Teresa:
Yes.

Dr. Jim Dahle:
The student loans were gone two years ago. Now you're worth $1.8 million. It's pretty awesome. Yeah, you make a good income, but you still have all of it. It's all still here. It's pretty awesome that way. So very well done. All right. People, they want some tips. They're out there, they're finishing residency this summer. And they're like, “Well, I want to be where she's at in four years.” Give them some tips. Tell us what you did and why you guys were so successful.

Teresa:
Well, I can't remember what event I was at. And that's actually how I learned about the White Coat Investor. But I vividly remember coming home one day, my husband who's out of medicine. And I slapped the book in front of him and I said, “I don't have time to read this. This is your job now.” And he ran with it. He read the book. He's done some of your classes, every Milestone to Millionaires podcast, all your other blogs. We use it for disability insurance. So, thank you to you and my husband for doing his due diligence.

We have always saved at least 20% of our gross income. And so we just put it right aside. We never see it. So we don't know that we never got to use it, so to speak. So that number one.

Number two, always living within our means. And really, my parents always taught me it's good to have options, as you said. So I think a lot of that comes from financial freedom. I think that's huge.

Dr. Jim Dahle:
You've made good decisions that have made a big difference. You chose to wipe out those student loans rapidly. You chose to go somewhere where you could earn good money for a couple of years. This classic “live like resident” period, for lack of another term. Now you're choosing, you said the house was $650,000.

Teresa:
Yes.

Dr. Jim Dahle:
I'm in Salt Lake. $650,000 doesn't buy you a huge house here anymore. You used to. Mine didn't cost that much when I bought it in 2010. But these people in the Bay Area and in Manhattan and DC and these other places are like “$650,000. I can't even buy a condo for $650,000.”

But that's part of your success. You've been able to put so much money toward debt and investments because it's not going toward a huge mortgage or a huge rent payment. So part of this is just the decisions you made and the natural consequences of what happens when you make those decisions.

Teresa:
Yes, absolutely.

Dr. Jim Dahle:
Very cool. Okay. Tell us about the biggest money fight you guys ever had.

Teresa:
Oh, that's a great question. Right now, my husband drives a lot for work. The hottest debate recently is we love to buy used cars. The biggest appreciation is driving a brand new car off the lot. We're both believers in buying used cars. However, through my husband's work, because he's expected to drive quite a bit, he also gets an additional stipend if his car is new within the first three years. He has probably close to 150,000 miles on his car, and we're going to need a new engine soon. So, we’re now fighting on new engine, same old car, or invest in something that's newer for more reliability to be determined.

Dr. Jim Dahle:
Yeah. Well, at 150,000 miles, a new engine's got to be pretty close to the value of the car unless it's a pretty nice car to start with.

Teresa:
Yeah.

Dr. Jim Dahle:
Well, very cool. What's your next financial goal you're working toward?

Teresa:
We'd love to make some additional payments on our home to get ahead of that and pay that off. And then hopefully buying into this new private practice if I get voted in as partner.

Dr. Jim Dahle:
Very cool. Well, congratulations to you on the decisions you guys have made, the hard work you put in. You did it. Yeah, you threw the book at him, told him he had to learn it, but he learned it. And you guys applied it. You're clearly working together on it. You're here on the podcast without him, and you can talk about all your finances, and yeah, maybe he's the one who does the spreadsheet, but you're doing it together, and that matters a lot. So, congratulations to you on your success. Thank you so much for being to come on the podcast and share it with others.

Teresa:
Thank you. Thanks for having me, Dr. Dahle.

Dr. Jim Dahle:
I hope that was helpful to you. As I mentioned at the beginning, when you don't make the mistakes, when you learn this stuff at the beginning of your career, and you actually apply it. You have a live like a resident period of some kind. You do a little bit of geographic arbitrage. You make sure you're saving 20% for retirement. You wipe out your student loans in less than five years. You don't throw a bunch of money away into stupid investments. It's amazing what happens.

Yes, it happens a little faster if you're an orthopedist than if you are a preventive medicine specialist, but it happens. It happens for all of you. If you just follow the program, it's not complicated. Make sure you're getting paid what you're worth. Work hard. Send 20% plus of it to your pay yourself first to future you. Spend the rest on whatever you like. Have a plan for your student loans. Make sure you have insurance in case something happens to you. That's it. That's all you got to do to be successful with your finances.

So thanks so much to Teresa for being willing to come on and share her story. They've done great, obviously, and they're going to continue to do great. Yes, they're still going to have financial issues and dilemmas and problems, but they're the financial issues and dilemmas and problems that you want to have, not the ones that most doctors are dealing with in mid-career because they haven't been paying attention to their finances.

Just pay some attention to it. You don't put more attention to it than your practice or your family or even your hobbies, but you got to put a little bit of attention toward your finances. It's going to be pretty amazing what you can accomplish with them.

FINANCIAL BOOT CAMP: DONOR ADVISED FUNDS

Dr. Jim Dahle:
Let's talk about donor advised funds or DAFs. What is a DAF? This is a vehicle where you can take money and put it in the vehicle and the moving of the money from your brokerage account to this donor advised fund is permanent. You can't take the money back out of the donor advised fund and spend it on whatever you want, but it's also considered a charitable contribution.

So, if you're taking charitable contribution deductions on your taxes, just putting the money into this vehicle gives you that same deduction. Whether you actually give it to a charity or not, you basically committed to give it to a charity eventually so you get the deduction now. That's a donor advised fund.

While it's within the donor advised fund, the money can be invested because it's a charitable thing. You don't pay any taxes and neither does the DAF or the future charities pay any taxes on the earnings while it's in that account. And then whenever you want to take out of that account, you can recommend a distribution, a grant to the manager of the DAF.

Please give this to the United Way or some other charity and they generally follow your instructions. As long as it's a legitimate charity, they'll just give whatever money you say out of the DAF to your favorite charity. Now, you don't get another tax deduction when it's distributed from the DAF, but you get the original one.

Now, like any donation to charity, the best thing to donate is appreciated shares you've owned for at least a year. And the reason why is because when you donate it to charity, including a DAF, you don't pay taxes on the capital gains. And when it's sold by the charity or the DAF, neither does the charity or the DAF. Nobody pays the capital gains, the government just doesn't get them. So there's no capital gains taxes. Plus, you get the entire value of the contribution as a charitable deduction. This is really powerful tax-wise.

Now, should you do this just to lower your taxes? Absolutely not. You do not, almost always, it's possible to come out slightly ahead depending on how much you're going to end up paying in capital gains. But you generally don't come out ahead donating to charity. If you give $100 to charity, you might get a tax deduction that ends up being worth $35 off on your taxes. You're not coming out ahead that way. So, don't do this just to lower your taxes. You've got to actually have some sort of charitable desire to donate to charity. If you don't want to support the mission of a charity, don't give money to a charity, including via a DAF.

But if you do, a DAF is a super convenient way to do it for several reasons. The first one is you don't have to distribute to the charity at the same time you get the charitable deduction. I've called this the jerk move in the past. You get all the benefit of donating to charity, the charity gets no benefit. Hopefully, you don't leave it in the DAF too long before the charity starts getting that benefit. But that is one thing that people really like about DAFs.

That can be really useful. If you're in a super high tax bracket this year and you're going into retirement or you just sold a big business or something, super high tax bracket, you can get your deduction while you're in the high tax bracket, even though the charity gets the money later. So, that's a real benefit there.

The bigger benefits I see and why pretty much all of our charitable giving is done through a DAF now is convenience. All I have to keep track of tax-wise is usually one donation a year to one charity. That's it. That's all I have to keep track of for my tax paperwork. That's way easier than what we used to do when we donated money to multiple charities. And especially if we're donating appreciated securities, in-kind donations, we would have to keep track of those and every one of them was a little bit different, how they worked with them. Some small charities couldn't handle that sort of a donation. Well, your DAF can handle that donation. And they can handle the small charities as well. So, that's a real benefit.

The other benefit is anonymity. And until you've given a lot of money to a lot of charities, you don't realize what a benefit this is. But if you give money to somebody, say Doctors Without Borders, for the next 10 years, four or five times a year, you get a glossy pamphlet in your mailbox from Doctors Without Borders, trying to get you to give more money to them.

I'm not going to give any opinion on this particular charity and its mission, but I do know it spends a lot of money on marketing to get more donations. And I don't want to do that. If I'm giving it money to support medical care for people in war zones, I want the money to go to medical care for people in war zones. I don't want to go to marketing to me. I know about the charity. If I want to give more money to them, I'm going to give more money to them.

With a DAF, you can give anonymously. They don't know I gave the money. I don't get on their charity porn list and they don't fill my mailbox with these glossy $5 pamphlets five times a year. And so, that's a real great benefit of a donor advised fund. More convenient, simpler paperwork, anonymity, potential delay between getting your charitable deduction and giving the money to the charity. Those are the main benefits.

Obviously, if you're not itemizing your deductions, if you don't use Schedule A, if you just take the standard deduction, donating to charity is not helping your tax situation. And donating to a DAF isn't going to help your tax situation either in that sort of a situation. But if you are itemizing, you're going to get a tax break just like you would if you give it directly to the charity and probably a lot less hassle.

What DAF should you use? Well, we've used the Vanguard Charitable, which is Vanguard's DAF. It's relatively low cost. I think they charge something like 0.6 or 0.7% for the first few hundred thousand dollars worth of assets. So, it's an AUM fee. But the truth is that's probably lower than what you'd be paying on taxes if that money was sitting in your taxable account. So even if the money's sitting there for a while, you shouldn't feel like you're getting ripped off. Plus, if you do what I do and just leave it in cash while it's in the DAF, at least you're making good interest on it.

Vanguard's money market funds are typically paying a higher interest than anybody else's, it’s a higher interest rate. And so you might be paying a 0.6 or 0.7% expense ratio, but you're also earning 4.5%, 5%, et cetera. And you're definitely coming out ahead in that sort of a situation.

The downside of using Vanguard is, it's very convenient if you have a Vanguard account already. The downside is it's got a high minimum initial contribution. It's $25,000. If you're not ready to give $25,000 to charity, this is not an option for you. It also has a relatively high donation minimum, which is $500. So, you can't give less than $500 as a grant out of the DAF to your favorite charity. So if you like giving $20, $50, $100, this might not be the DAF for you. It's for big contributions, big grants, and it's really convenient.

Some people find they like the Fidelity DAF a little bit more. And it does have lower initial investment. I think it's $5,000. And I think it has lower grant amounts. I think they're $50. So much better if you're using smaller amounts of money.

Another new one on the scene is called DAFI. We've had that CEO on the White Coat Investor podcast and talked about it. And it seems like another great option, relatively low fees, relatively convenient, and I've heard good things about them. I think you can probably find a DAF that's going to work for you between one of those three, Vanguard, Fidelity, or DAFI. I would check those out.

I hope that's been helpful to you to learn the importance of donor advised funds and help you decide whether you want to use one and which one.

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Okay. That's the end of our podcast. I hope you've been enjoying these. I hope they're helpful to you. I hope they inspire you to do the same, whatever milestone you're working on. Maybe you're working on your first $10,000 or first $100,000 or first million or first $10 million, whatever it is, we'll celebrate it with you. We'll use it to inspire others to do the same.

Keep your head up and your shoulders back. You've got this. We're all here to help you. See you next time on the Milestones to Millionaire podcast.

DISCLAIMER

The White Coat Investor podcast is for your entertainment and information only. It should not be considered financial, legal, tax, or investment advice. Investing involves risk, including the possible loss of principal. You should consult the appropriate professional for specific advice relating to your situation.

When investing, you need to pay attention to your costs. That includes not only any fees you might pay to an advisor, but the fees you pay for the investment in the first place. Those fees have to come out of your return. There is nowhere else for them to come from. So, if the pre-fee return is 10% and there's 2% in fees, that means your after-fee return is only 8%, and that makes a big difference over time. Just like compound interest works on your returns, it also works on your investment costs, so they're worth paying attention to, especially these days when investing can be nearly free, right?

If you function as your own investment manager, i.e. you don't have a financial advisor, you cut those fees out. Now, as long as you're doing things as well as a financial advisor would be, you're going to come out ahead by whatever fees you would have paid that financial advisor. Some people are paying 1% a year, so they get returns that are 1% a year better. Over the course of 30 years, that means you have about a third more money than you would otherwise, so the fees really matter.

Typical investment fees, such as for mutual funds, include an expense ratio. That's all the costs of running the fund divided by the assets in the fund. While the industry standard for that is about 1% a year, the truth is most low-cost, broadly diversified index funds, like those you would get from Vanguard, Fidelity, Schwab, BlackRock, or iShares, and companies like DFA and Avantis, typically charge dramatically less than that. In fact, often less than 0.3%, or 30 basis points. Many of them are less than five basis points, or 0.05%, like the Vanguard Total Stock Market Index Fund (ETF), which is currently charging 0.03%.

In fact, Fidelity's got a few index funds for which the expense ratio is literally 0%. Now, while there's not much difference between 0% and 0.03%, it's interesting to see them use that, presumably as some sort of a loss leader for the other places where they do make money. But the bottom line is you can invest in every stock in the world, every bond in the world, essentially for free these days. So you've really got to ask yourself, when you are paying fees, why?

As I mentioned, there are a lot of mutual funds out there that charge higher fees, higher expense ratios. It's not unusual to see an expense ratio of 0.5 or 0.6 or 1% or even more. They get away with that because people don't know that investing can be pretty much free, and they also think that they're getting a benefit for paying that money. They think the active manager is going to get them out of the market before it goes down, pick only the stocks that go up and get rid of the ones that are going down, or short the ones that are going down. But the data suggests they are not very good at doing that. It's very hard to beat the market long term, so you're better off just paying really low costs and matching the market.

In fact, the main reason why index funds beat actively managed mutual funds the vast majority of the time, in the long run, especially after tax, is a cost story. They just cost less. It isn't that the active managers can't beat the market, they just can't beat it by enough to pay for their own costs. And so you've got to pay attention to those fees.

Other fees you might see are called loads. These are commissions, and there are advisors—I put that in quotes—out there who give advice in exchange for selling you these commissioned investments, such as a loaded mutual fund. The load can be paid up front. It can be paid when you exit the fund. It can be paid all along as you go each year when you own the fund.

Those are called A loads and B loads and C loads, or A shares, B shares, and C shares. Pretty much what they don't tell you is that there are mutual funds that are no-load, that you don't have to pay that commission at all. Again, if you're going to places like Vanguard and Fidelity and Schwab and BlackRock and buying their very low-cost index funds, you can avoid those loads.

So pay attention to your fees. They do matter. Keep them as low as you reasonably can, and recognize that the only place those fees can come from is your investing return.

The White Coat Investor Podcast is for your entertainment and information only and should not be considered financial, legal, tax, or investment advice. Investing involves risk, including the possible loss of principal. You should consult the appropriate professional for specific advice relating to your situation.