Interest Rates, Inflation, and I Bonds

Transcription – WCI – 264
Intro:
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: `
My name is Jim Dahle. I'm an emergency physician and the founder of the White Coat Investor. And I'll be your host for this podcast today.

Dr. Jim Dahle: `
This is White Coat Investor podcast number 264 – Interest rates, inflation and I bonds.

Dr. Jim Dahle:
This podcast is sponsored by Bob Bhayani at drdisabilityquotes.com. He is an independent provider of disability insurance planning solutions to the medical community in every state and a long-time White Coat Investor sponsor.

Dr. Jim Dahle:
He specializes in working with residents and fellows early in their careers to set up sound financial and insurance strategies. If you need to review your disability insurance coverage, or if you just need to get this critical insurance in place, contact Bob at drdisabilityquotes.com today by emailing info@drdisabilityquotes.com or by calling (973) 771-9100.

Dr. Jim Dahle:
Thanks for what you do out there. It's been a long time through the pandemic. We're recording this on May 11th. I guess it'll drop on May 26th. But it's interesting. A lot of places had an even harder time with the pandemic than some of us did.

Dr. Jim Dahle:
I recently visited Roatán. We're down there doing some scuba diving, a beautiful island off the Caribbean coast of Honduras surrounded by a reef. So, it has a lifetime of diving just off of one island. But it's interesting talking to some of the locals there. During the pandemic, they couldn't even get the food ships in. And so, a lot of people were out on the reef fishing. There's actually fewer fish there now than there used to be.

Dr. Jim Dahle:
But imagine having to deal with that, having to go out and procure your own food from the ocean around you, because you couldn't get your usual stuff off the grocery store shelves. I think the only shortage we ever dealt with was toilet paper around here. But it was a completely different experience going through that on Roatán. Nevertheless, the experience you've had in the hospitals has given PTSD to lots of people. So, let me be the first to thank you for what you do.

Dr. Jim Dahle:
By the way, if you're not aware, we have a newsletter. You should sign up and get it. It's totally free. If you go to whitecoatinvestor.com/free-monthly-newsletter, you can sign up. You can sign up for the daily blog post to get them right in your email box. You can get a weekly summary of those blog posts. You just get the once-a-month newsletter that contains the best of the web, and contains a special blog post that doesn't even show up on the blog.

Dr. Jim Dahle:
You can also sign up for our real estate newsletter that will tell you once a month about all things real estate there. It will give you a special real estate blog post essentially that doesn't show up on a blog. These are basically secret blog posts you only get if you're signed up for the newsletter. And we also, if you sign up for that one, tell you about opportunities to invest in private real estate or take real estate courses, that sort of thing. If you're not signed up for that stuff, that's where you go to do it. You can just go to the WCI plus tab on the website, scroll down and you'll see the newsletter. Sign up there.

Dr. Jim Dahle:
All right. Today we're going to be taking your questions. And I love the fact that the podcast is completely driven by you. We bring on guests that you request, we celebrate your accomplishments with the Milestones to Millionaire podcast, and we answer your questions on the podcast. So, if you don't like what you're hearing on this podcast, or you want to hear more of something else, let us know. It's completely listener driven.

Dr. Jim Dahle:
My recent email I got said this. “I'm graduating fellowship and moving to a relatively high cost of living area. We're selling our fellowship house and buying an attending house, which is a new build scheduled to be completed in late September. Our mortgage balances on that house will be around $650,000, which yes, it’s less than two times my gross salary.” I’m glad they've heard my recommendation there.

Dr. Jim Dahle:
“Everyone seems to be forecasting interest rate increases over the next year. In shopping for mortgages, I've learned from a few lenders that you can pay a fee of 0.5% to 1% of the cost of the loan to lock in today's mortgage rate for six months. The only risk to this is that you lose your fee and you lose your interest rate lock if you don't close on the home within the six-month timeframe. With supply chain issues, there's certainly some risk of that happening. Once we get closer to the house being built, what do you think about this mortgage rate lock option?”

Dr. Jim Dahle:
Wow. Well, obviously it's a great deal. If rates rise like crazy between now and when you would normally lock that mortgage rate. If they don't rise well, you threw away some money. If they go down, you threw away some money. Knowing the right answer to this requires a clear crystal ball.

Dr. Jim Dahle:
Everybody says interest rates are going up, but you know what? Everybody's been saying interest rates are going up since 2009. Eventually they'll probably be right. Who knows whether they will be right from the time you sent in this email until the time you buy your house? I just don't know.

Dr. Jim Dahle:
The Fed has said it is going to raise its interest rates, which are essentially very short-term interest rates. And they have pretty good control over short-term interest rates because they are pretty closely correlated to those rates that the Fed sets. As you get into intermediate long-term rates, they don't have nearly as much control over that.

Dr. Jim Dahle:
There are a few things they can do, buying treasury bonds, et cetera, injecting liquidity into the system and that sort of stuff. But they're not in complete control of that as they are the shorter-term interest rates.

Dr. Jim Dahle:
However, you do expect rates to go up. When inflation is high, inflation is high now, everybody has said expect higher interest rates. I see no reason not to expect interest rates to go up, but whether your mortgage interest rate will go up in the next six months from now it's really hard to say.

Dr. Jim Dahle:
Because keep in mind, markets are forward looking. Some of the interest rate increases that are expected later in this year have already taken place because it's basically priced into the market. And so, it's not a guarantee by any means that just because the Fed is planning to raise short term interest rates that intermediate term interest rates, mortgage interest rates, and long-term interest rates are going to go up accordingly.

Dr. Jim Dahle:
So, you might end up throwing some money away, but I don't think that's a terrible bet to make. 0.5% is not that much alone. If you're borrowing half a million dollars 0.5% is only $2,500. That's a pittance of how much you're going to pay an interest every year for 10, 15, 30 years as you own this home.

Dr. Jim Dahle:
So, if it can help you to get a rate that's lower by even 0.25%, it's probably worth it. That sounds like a pretty good deal to me. At 1% is not as good of a deal, but again, if interest rates go up dramatically, it may work out pretty well. There's no guarantee here, but I'd certainly consider it, I think in your case.

Dr. Jim Dahle:
All right, let's take a listen to a question that came in off the SpeakPipe. By the way, if you want to leave a SpeakPipe question, you just go to whitecoatinvestor.com/speakpipe. We love having these questions because we like having your voice on the podcast. So, feel free to leave us a question there. We get almost all of them on the podcast.

Speaker:
Hi Jim, longtime listener here. Thanks for taking my question. We are saving a substantial amount of money to put towards a down payment on our future home in a high cost of living area. We hope to buy in about 2.5 years. If we are talking about quite a few hundred thousand dollars here, anywhere between $350,000 and $550,000.

Speaker:
What is your recommendation for the best place to keep this money for the time being? We understand it needs to be somewhat liquid, but we feel guilty letting it lose out to inflation in a high yield savings account. What other options do we have that you would do if you were in our situation? Thank you so much.

Dr. Jim Dahle:
All right. This is an exceedingly common question that we get here at the White Coat Investor. I've written a blog post about this that's worth checking out. If you go to whitecoatinvestor.com/short-term-investing you can find that blog post.

Dr. Jim Dahle:
But in essence, there's three considerations that you have to consider when you are investing for the short term. The first one is the easiest to deal with. It's liquidity. Some investments are liquid and some are not. So, if you're going to need the money in two years or three years, you cannot put it into an investment that you're not going to get the money back for five years.

Dr. Jim Dahle:
It seems really obvious, but ding, ding, ding. You got to be able to get the money out when you need it. The more liquid, the better in this case. In case you change your plans. For example, you might have thought you were going to buy a house in two years. Maybe you actually buy a house in a year.

Dr. Jim Dahle:
And so, having significant liquidity is very helpful. That doesn't mean you couldn't tie the money up into six months or one year or two-year CDs or something like that. There's still liquidity. You can get the money out, even though you give up a little bit of interest, but you certainly can't put it into a private real estate syndication. That's not going to work.

Dr. Jim Dahle:
There are tons of investments that are liquid enough to use for a one-year or two-year or three-year investment. You can get liquidity out of a stock index fund. It's liquid in the day the market's open. And so, that's not really an issue. If you want to invest the money from a liquidity standpoint, you just have to make sure it's in a liquid investment.

Dr. Jim Dahle:
Although I wouldn't necessarily put it into a retirement account. I know you can borrow against 401(k)s up to $50,000 a year and half the balance, whichever is less. I know you can take some money out of IRAs and Roth IRAs to use for buying a new house. But in general, if you are going to be using something within a few years long before retirement age, retirement accounts really aren't the place for that money. So, you want a liquid investment. You want to make sure it's in a liquid location that you can get to without any significant penalties or hassles.

Dr. Jim Dahle:
The second thing to consider is the risk of loss. And this is the big one. You don't want to put a bunch of money into something that you need in two years and have it drop in value 40% and not come back for five years, right? Then when you need the money to buy something, you're not going to have it.

Dr. Jim Dahle:
And the classic investing adage is don't put money into stocks or real estate that you need within the next five years. Mostly if you need it soon, you leave it in cash. High yield savings account, money market accounts, that sort of thing. If it's a few years out, maybe you can put a little bit into bonds.

Dr. Jim Dahle:
Now I don't know that it's completely crazy to put some of the money into more aggressive investments such as a stock index fund. This isn't crazy if you put 30% of it into a stock index fund and you put 40% of it into bonds and you put 30% of it into cash. That's not crazy. Yes, you could lose some of it but you also have a much better chance of keeping up with inflation or at least earning something additional on that money in the meantime. And so, that's not a crazy thing to do as long as you have the liquidity that you're going to need for that.

Dr. Jim Dahle:
One thing you could do to consider that is you could look at rolling returns for these various asset classes. And it's interesting to look at the best and worst returns that you can see in any given period. For example, if you look at three year rolling returns historically for the various types of assets, you will see that for cash, the best return was a little over 12% and the worst return is basically zero.

Dr. Jim Dahle:
If you look at the US bond index, if you're looking at three year rolling returns, for intermediate bonds, the best return was something like 16% and the worst return again, was very close to zero. Same thing if you're looking at corporate bonds over three-year time periods.

Dr. Jim Dahle:
Long term government bonds, you can have some significant loss at times. The worst returning period over a three-year period there was about minus 6%. The best three-year period being about 25%. But as you move into stocks, that range gets a lot wider. The worst return there over a three-year time period was approximately a 16% loss for the S&P 500. And it's closer to 20% for small cap stocks. That's something to think about. What happens if you get to your goal three years from now? You need the money and 16% of it isn't there. How is that going to affect you?

Dr. Jim Dahle:
And so, that brings us to the third consideration. We talked about the need for liquidity. We talked about the consideration of the risk of loss. And we also need to talk about the consequences of the loss. How big of a deal is it if that money's not there when you need it? Can you delay your home purchase by a few months? Can you tap something else to make up for that shortfall? The more flexibility you have with both the timing and the amount of the money you need from these investments, the more risk you can take.

Dr. Jim Dahle:
On the other hand, if you really need this much money right on that date, it needs to be in cash. And if you can earn 0.5% or 1% on it, that's great. It's better than nothing but at least you know the money will be there when you need it.

Dr. Jim Dahle:
Some people take a little bit different approach. For example, I bonds can be thought of as inflation protected cash. And you can't get your money out in less than a year. So, there's a little bit of a liquidity issue there. And after that, for up to five years, you give up some of the interest if you pull the money out in less than five years.

Dr. Jim Dahle:
But the biggest issue with I bonds is you can basically only put $10,000 in there per year. $10,000 for you, $10,000 for a spouse, $10,000 for a trust, $10,000 for business. Maybe you can add it up there, but that's not going to work for you because you're trying to get hundreds of thousands of dollars into it. So that's not an option.

Dr. Jim Dahle:
Another thing that people consider doing is investing it in real estate. And here's the thought behind it. Obviously, in real estate you can lose a lot of money, it can be volatile. But here's the thought. The thought is, “Well, if this real estate investment does poorly, my house will probably be cheaper too. If it does really well, my house will probably have gone up in cost that I'm going to buy, but at least I'll have more money to go with it.”

Dr. Jim Dahle:
And so, the idea is to get something that maybe correlates a little more with the housing market. And maybe you might consider a REIT that specializes in single family homes, for instance. And you can buy that both publicly and privately. But that's also an option.

Dr. Jim Dahle:
I hope that gives you the ways to think through this and to decide what you want to do as far as that house down payment. The traditional thing is to just keep it in cash. Certainly, any period less than a year, that's what I tend to do. I might get a little more aggressive if it's more than a year.

Dr. Jim Dahle:
All right, let's take a question from the email box. “With all the talk of inflation, I keep wondering about the math behind what it's doing to my existing mortgage. If I have a 3% fixed rate mortgage from March of 2021, and inflation is at 8% since then, is that like the mortgage company's going to have to pay 5% of the real value of the remaining mortgage for me? I can't find any examples of somebody doing that math and I would love to hear you talk about it on the podcast.”

Dr. Jim Dahle:
All right, here's the best way to think about it. If your mortgage is at 3%, inflation is at 8%, they're paying you 5% to borrow money from them. They're saying, if you will borrow $100,000, we'll pay you $5,000 a year. That's a pretty good deal obviously. It kind of stinks to be in debt and have that cash flow issue that you got to make payments every month, but it's not nearly so bad when your rate is 3% and inflation is 8%. But that's the way the math works. Literally they are paying you money on real terms to borrow from them.

Dr. Jim Dahle:
Perhaps the best example of this from my life is when I took out an 8% student loan in 1993 to help pay for my undergraduate education. It was only $5,000. This isn't some big part of my financial life by any means. But I didn't actually pay it back until 2010. And the reason why is it was basically at 0% and no payments due between those time periods. It was really good terms.

Dr. Jim Dahle:
The interest was deferred while I was an undergrad while I was a med student while I was a resident while I was serving in the military. And so, in essence, I paid back $3,000 in 1993 dollars after borrowing $5,000 in 1993. And that's just the way inflation works and how it affects borrowers.

Dr. Jim Dahle:
Inflation is good for people who are debtors. If you owe money, especially at a low fixed interest rate, inflation is helping you. I'm still not a huge fan of being in debt and taking out as much debt as you can get, but there's no doubt mathematically that inflation is helping you as a debtor. It hurts savers, it helps debtors.

Dr. Jim Dahle:
All right, let's take a question off the Speak Pipe. This one is about student loans.

George:
Hi, Dr. Dahle. This is George from California. Thank you for the great podcast. My wife and I wish we had discovered it a decade ago, but better late than never, I guess. We have a question about the department of education's new policy against forbearance steering announced on April 19th, which results in a one-time account adjustment to count certain long-time forbearances toward IDR and PSL forgiveness.

George:
My wife's nearing the end of her residency now, and she has a loan for disadvantaged students that's currently in forbearance with interest billed monthly. It's been in forbearance since she graduated medical school three years ago. I know we probably should have put these loans on an IDR plan, but we didn't know any better. So now, we're wondering, does this new policy announcement help us at all? And what do you recommend we do moving forward? Thank you for all that you do.

Dr. Jim Dahle:
The department of education, I think, spends most of its time sitting around conference tables, wondering how it can make bloggers and podcasters look foolish. Because you give people advice for years and years and years on how to play this game, how to do well at it, how to understand the rules and how to take maximum advantage of it.

Dr. Jim Dahle:
For example, for years we've been telling people “Do not put your loans in forbearance. It's the dumbest thing you can do. You're missing out on all these low IDR payments you could make during residency that could count toward public service loan forgiveness.”

Dr. Jim Dahle:
Then these guys, the department of education decide, “Yeah, you know what? If you did the wrong thing, we're actually going to reward you for that. We're going to let all those payments you should have made actually count as payments.” Whereas those people who actually made payments in an IDR program aren't getting anything special for it, much less those who paid off their student loans.

Dr. Jim Dahle:
That's kind of the same thing with the 0% interest rate. Those who refinance their loans did the “right thing” and refinanced their loans to a low rate. And then the federal government changed them to 0%. They felt kind of put out and you can understand why.

Dr. Jim Dahle:
But basically, what is happening here is that you are getting the benefit of being in forbearance. You're getting the benefit of being in the IDR program despite having made the mistake of going into forbearance.

Dr. Jim Dahle:
So, if you're going for public service loan forgiveness, this is very, very, very helpful to you. For example, if you were in forbearance for three years, you just got 36 payments that count toward PSLF and they were all $0 payments. Super beneficial to you. It may help you to qualify for public service loan forgiveness.

Dr. Jim Dahle:
If you're not actually trying to get your student loans forgiven anyway, it's not going to help though. You're still going to end up paying off that debt down the road. But for anybody going for PSLF this is a huge benefit this year. Likewise due to the emergency declared for the pandemic through Halloween of this year, if you didn't have your student loans in exactly the right program, for example, maybe they were in the FFEL program, or their FFEL loans rather than direct loans or you made some late payments, those payments all count. If you made partial payments, those payments all count.

Dr. Jim Dahle:
Between now and October 31st, you got to basically get credit for those. And if you need help with that, andrew@studentloanadvice.com can walk you through that process. That's our recommended place for student loan coaching, student loan advice, etc.

Dr. Jim Dahle:
But it's a pretty big benefit, this forbearance thing for anybody going for PSLF. Whether it's good policy, whether it's fair, I'm not going to debate necessarily. You can tell I've obviously got some thoughts about that. But that's not what we do here at the White Coat Investor. We tell you what the rules are and how you can use them to your advantage completely legally, completely ethically. But when the rules change, then obviously things have to change.

Dr. Jim Dahle:
So, look into that. If you have had loans in forbearance, and you are going for PSLF or now you want to go for PSLF, all those months you were in forbearance now count toward PSLF for your federal student loans. So, take advantage.

Dr. Jim Dahle:
All right, let's take another question out of the email box. “I was reviewing one of your articles on I bonds recently, since they have gotten a lot of press and noticed someone had made some interesting points in the comments section about EE bonds. Specifically, the fact that they're guaranteed to double if held for 20 years. Additionally, per the treasury direct website, there's some optionality in how they are taxed annually, or at the time of when they are cashed or mature.

Dr. Jim Dahle:
They also have the same tax advantages for higher education if you qualify. I believe they can also be gifted to children as well. Could you comment about this on the podcast? If I'm understanding this correctly, it seems to have flown under the radar as a very low risk 3.5% return for those with bond allocations and willing to hold for a long-time horizon.”

Dr. Jim Dahle:
I don't know. Maybe we do need to talk about it more if you feel like it's under the radar. Savings bonds have been around for decades. The I bonds that people are hearing about a lot lately, which are inflation index bonds seem to be a particularly good deal right now.

Dr. Jim Dahle:
EE bonds, however, have also been around for a long time. And if you're willing to tie money up for 20 years to earn 3.5% on it, and you only need to invest $10,000 a year, or $10,000 for your spouse, $10,000 for your trust, $10,000 for your business, etc, then there's a great option.

Dr. Jim Dahle:
It's kind of hard for me to get super excited about that proposition though. But that's the way they work. EE bonds, their rates are really low if you don't hold them for 20 years, but if you do hold them for 20 years, you're basically guaranteed to get 3.5% a year. And of course, like any savings bond, if you use them to pay for higher education, you don't have to pay taxes on those earnings. So, that's the same EE bonds or I bonds.

Dr. Jim Dahle:
Here's another question from my email box. “Investing in total US stock market versus international. I know, I know. Just choose something to stick with it. And zero to 20% international is probably reasonable. My question specifically comes after reading one of Dr. Bernstein's books, where I believe he mentioned he expects future US returns to be 2% to 3% less due to US equities doing well for so long.

Dr. Jim Dahle:
Have you changed your mind over the years about how much international tilt to have in your portfolio? Would there be something that may change your perspective? I think I've heard you and others state something along the lines that you plan on retiring in the US. Therefore, you want your investments in US currency. Why is this if you held international funds? Couldn't you just sell it, and receive dollars?”

Dr. Jim Dahle:
Well, here's the deal. US stocks have outperformed international stocks over the last decade. What does that usually mean? It means international stocks are probably more likely than not to outperform US stocks over the next decade. If you look at the long run, they have fairly similar returns. And so, when one is done well recently, it's probably not going to do as well in the near future.

Dr. Jim Dahle:
There's no guarantee of that, of course. And so far, this decade hasn't shown up yet. But that's what I would expect given that the valuations on international stocks are significantly more attractive than on US stocks right now.

Dr. Jim Dahle:
But what do I think you should do? I think you should pick a reasonable percentage. And personally, I think a reasonable percentage is to have anywhere between about 20% of your stocks to about 50% of your stocks be international stocks. Anywhere between there, I think is a pretty reasonable percentage.

Dr. Jim Dahle:
The market weight is closer to 50%. It used to be over 50%, but due to US outperformance, it's a little less than 50% now. And so, that would be the market portfolio. It would be whatever the world markets are which I think is something like 55% US and 45% international or something like that right now.

Dr. Jim Dahle:
But a lot of people choose to hold less than that. And the reason why is because they plan to spend dollars in retirement. They expect to retire in the United States. So, when you're investing overseas, there is an additional risk you are taking. You are taking currency risk.

Dr. Jim Dahle:
And yes, when you sell a total international stock market fund at Vanguard, you're getting dollars. It's not like anybody's sending you yen and euros. But there is an additional risk there. Sometimes even if the international companies do just as well as US companies, if the dollar strengthens, they have lower returns. Likewise, if the dollar weakens, they have higher returns.

Dr. Jim Dahle:
So, there's an additional risk that's being run there. That's why a lot of people justify having less than market weight of international stocks. And I think that's completely reasonable.

Dr. Jim Dahle:
Personally, a third of my stock is international stock and I've had it there since 2004 or 2005. I plan to keep it there in the long run. And sometimes international stocks have their day in the sun and sometimes US stocks have their day in the sun. But whatever's doing well, I own it. I own all the publicly traded stocks in the world.

Dr. Jim Dahle:
All right. Speaking of international stocks, here's another question off the SpeakPipe about Japanese markets in the 1980s.

Speaker 2:
Hey, Jim, as best as you can, within the time constraints of this podcast, could you discuss what happened to the Japanese markets in the late 1980s and early 1990s and the subsequent lost decades? Also, could you discuss if this should be used as a cautionary tale for the current US markets? Thanks.

Dr. Jim Dahle:
All right. The Japanese asset price bubble for lack of a better term is what we're going to talk about. So, what happened in Japan? Those of us who were conscious in the 1980s remember that it felt like Japan was taking over the world. They were making everything in Japan. Everything we were buying was even coming from Japan.

Dr. Jim Dahle:
Look at the back of box of any sort of electronics, it was made in Japan. The Japanese cars were better than our cars. All this rise of Japan as this economic power. And that showed in Japanese stocks. It also showed in Japanese real estate. And so, by the end of the 1980s, these were both pretty inflated, pretty impressively inflated.

Dr. Jim Dahle:
If you look at the stock market chart for the Nikkei 225 index, you'll see if you look back into March of 1991, it was up at 26,000. It subsequently fell and that index did not get back to 26,000 until 2020. Basically 30 years later, three decades it took for Japanese stocks to get back to the level they were at, at the end of the 1980s.

Dr. Jim Dahle:
But you saw this as well in real estate. At one point in the late 1980s, the land on the Tokyo Imperial Palace grounds was worth more than all the land in California. I mean, it was a huge, huge classic bubble. And obviously that collapsed as well. And the next year I think all the housing prices fell by 20% or something like that, and then continued to fall and not do great.

Dr. Jim Dahle:
But what's most surprised people as they've watched this, and the reason this gets used as an example is not that there was a huge bubble and crash. It's the fact that it really hasn't done much since then. Japanese stocks haven't done great. Japanese bonds haven't done great. Interest rates have remained very low. In trying to boost the economy, they kept the interest rates low, and they've stayed low.

Dr. Jim Dahle:
Everyone always says interest rates have to go up. And of course, the counter argument is to look at Japan. Interest rates don't have to go up for a long, long time. And so, this is the classic example of what stocks can do, what real estate can do.

Dr. Jim Dahle:
Particularly if you've only been investing in the last decade in the US, you might have this impression that the stock prices always go up, that real estate always goes up. That's not the case. And the Japanese experience I think is exhibit number one of that.

Dr. Jim Dahle:
And yes, you should consider it as a warning. This is one possible outcome that we could experience in the United States. Your stocks, at least not counting dividends, might go nowhere in the next 30 years. That is a possibility. Same thing with real estate prices, interest rates might remain low. This is a possible outcome.

Dr. Jim Dahle:
And so, there's a lot of lessons to learn from this. One of which is to diversify. Diversify internationally. Any of those Japanese investors who invested also in the US, who invested also in Europe were really glad they did. And likewise, you as a US investor should be holding some international stocks. You ought to be owning some companies in other places. You may want to do that with real estate as well, and even your fixed income. So, that's one lesson to learn from it.

Dr. Jim Dahle:
The other lesson to learn from it, of course, is that trees don't grow to the sky. If you're watching some asset, whatever it might be, whether it's stocks, whether it's cryptocurrency, whether it's real estate, it doesn't go to the sky. It can't. Eventually there is a check on these things. For example, real estate. There is a check in that eventually people don't have the income to pay the rent. And so, there's a check on how high these prices can rise. Sometimes they seem to remain illogical much longer than you can remain solvent, but they don't go to the sky. So that's another important lesson to learn from this bubble.

Dr. Jim Dahle:
I hope that's helpful. I don't know how much else I could cover on that topic. There are entire books written on what's happened with the Japanese economy over the last three decades.

Dr. Jim Dahle:
All right. Let's take the quote of the day here. This one is from John Bogle. He said “If you have trouble imagining a 20% loss in the stock market, you shouldn't be in stocks.” And that's true. Because markets drop 20% on average about every three years. They drop at least 10% on average once a year.

Dr. Jim Dahle:
So, when your stocks go down 10%, it shouldn't be a moment to panic. It should be an expected situation. You should expect to do this approximately 60 times during your 30-year working career and your 30-year retired career. Likewise, a bear market, a 20% loss in the stock market, you should expect to go through about 20 of those during your investing career.

Dr. Jim Dahle:
It's an expected event. It shouldn't be something that causes you to do something different. It should be something that you thought through beforehand as you designed your portfolio, that you expect stocks to go down 20% from time to time. And that's just fine because you're not investing that money to use like the discussion at the beginning of this podcast three years from now.
Okay. Another question. This one about global overpopulation on the SpeakPipe. Let's take a listen.

Speaker 3:
Dr. Dahle, do you have any thoughts on global overpopulation? I feel it is a relevant topic for the podcast/blog due to most of our investment strategies and philosophies being predicated on continuous future growth of the economies we invest in.

Speaker 3:
Is never ending growth even possible, or will there be a day where this ceases to be the norm? How can the global economy continue to grow nonstop forever? And if it doesn't, how will this affect our investments and future strategies? Thank you for your thoughts.

Dr. Jim Dahle:
All right. Well, this is kind of a deep question that is certainly not my area of expertise, but it's not hard to look at a chart and see that the global population has grown. If you go back to the year that Jesus Christ was born, there were 190 million people in the world. By 1800, there were 990 million people in the world, about five times as many over those 18 centuries.

Dr. Jim Dahle:
However, it's accelerated rapidly over the last couple of hundred years. By 1900, it was up to 1.65 billion. By 1960, 3 billion, By the turn of the century 6 billion. And in 2022, 7.9 billion. So, lots and lots and lots of people on the planet.

Dr. Jim Dahle:
Obviously, the more people there are, there are that many more people competing to buy real estate. There are people who are going to work and producing things and working for companies and buying products from companies, making them more valuable. So, the more people that are around in general, makes the economy stronger. The economy grows because of that.

Dr. Jim Dahle:
There was a period of time when the population of Europe dropped significantly. You may remember this, I don't know, 1300s, 1350-ish or so. The black plague came through and killed all kinds of people. And it didn't just come once, kept coming back over and over and over again to the point where it took a couple hundred years for the population of Europe to recover to its previous population.

Dr. Jim Dahle:
And that absolutely affected the economy of Europe. In fact, it affected the climate in some ways. So, there can be drops in population. There's no guarantee that the population will always go up. You may have noticed we had a pandemic recently. And thankfully despite the many, many people who became sick, became disabled or even died from it, it was a relatively non-virulent organism.

Dr. Jim Dahle:
Imagine if instead of 1% or whatever mortality that we had from people who got COVID. Imagine if it had been 50%. It was contagious enough that we basically all got it. And if 50% of the people who'd gotten it had died, the world population would be much lower right now than it was a couple of years ago. And there is no guarantee that that sort of thing doesn't happen again. In fact, the more people we have, the more likely something like that is to have.

Dr. Jim Dahle:
Likewise, there are other threats. War and starvation, and particularly this one that's been in the news lately, hanging over our heads. This prospect of nuclear war, again, it could obviously wipe out a large percentage of the population in a relatively short period of time, whether that's from the actual blast or from the following nuclear winter, or whatever, this is a real risk. The population could go down.

Dr. Jim Dahle:
Now, will it go down? I have no idea. My crystal ball is cloudy in this regard, just like it is in everything else. But I don't sit here worrying about it when I make my investments. This is not something that tends to happen super quickly. And like I said, as long as your investment career is, maybe 60 years, 30 years during your career, 30 years after, that's a relatively short period of time compared to these time periods that we're talking about.

Dr. Jim Dahle:
And so, I don't know that it would have a huge effect on how I chose to invest my money, to be quite honest with you. I had something interesting to think about, something interesting to talk about, something to plan for, particularly in underdeveloped countries where we're seeing the majority of that population growth. And it certainly has significant environmental impacts, which are probably the biggest deal affecting the world and maybe even newer investments from that population growth.

Dr. Jim Dahle:
How many people can the world support? I'm sure there are people who have studied that and speculated about that. I suspect that number is more than 8 billion. We're getting more and more efficient at creating food all the time. Hopefully we're getting more efficient at using our resources and not wasting them over time. I'm sure that number is higher than 8 billion but I can't tell you exactly how high it is.

Dr. Jim Dahle:
I don't know what the carrying capacity of the planet is. I'll bet Google could give you some sort of an estimate on that. If I Google here “carrying capacity of the planet” it says these are as small as half a billion people, which seems odd given we have 8 billion right now to as large as 14 billion people, which I don't know, that seems an awfully low estimate to me. I just don't believe that it's only 14 billion people. We're awfully good at producing food these days. And I think we can probably support more people in that.

Dr. Jim Dahle:
Now can they all live the jet setting lifestyle? Probably not. We might not have the resources for that, but there are studies. Here's a list of studies. They range anywhere from less than 2 billion to more than a trillion people on the planet. And if we can really carry a trillion on the planet, well, we're still a long, long, long way away from that.

Dr. Jim Dahle:
But as far as your investments, I don't know what you would do to change your investments or how this would affect your asset allocation. Maybe I'm not smart enough to deal with that, but I'm just going to stay the course with my reasonable plan I put together. And I guess if the population gets so high that it starts affecting that, it'll affect us all equally.

Dr. Jim Dahle:
All right, this podcast was sponsored by Bob Bhayani at drdisabilityquotes.com. One listener sent us this review. “Bob has been absolutely terrific to work with. He has always quickly and clearly communicated with me by both email and or telephone with responses to my inquiries usually coming the same day. I’m in somewhat of a unique situation. Bob has been able to help explain the implications and underwriting process in a clear and professional manner.”

Dr. Jim Dahle:
You can contact Bob by info@drdisabilityquotes.com, by calling (973) 771-9100 or by going by the website at drdisabilityquotes.com.

Dr. Jim Dahle:
Don't forget to sign up for our real estate newsletter and our regular monthly newsletter. You can get both of those at the website under the WCI plus tab. Just go down to the newsletter sign up, and you can sign up for as much or as little as you like. You can unsubscribe anytime you like, you can change how often you're getting them, etc. It's free. There's no commitment, there's no obligation. But I think you ought to sign up for it. It's a really useful resource.

Dr. Jim Dahle:
Thanks for leaving us five-star reviews. It does help spread the word about this podcast. Our most recent one said “Great stuff. It's difficult to make finance something that you look forward to listening to, but this information is so relevant to everyday life and well organized that I do. Thanks.” Proskier69, five stars. Thank you. We appreciate that review. Hopefully you find our discussion of the overpopulation of the planet useful to your everyday life.

Dr. Jim Dahle:
At any rate, keep your head up, your shoulders back. You've got this and we can help. We'll see you next time on the White Coat Investor podcast.

Disclaimer:
The hosts of the White Coat Investor podcast are not licensed accountants, attorneys, or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.