Financial Ignorance, The Great Equalizer (3 Of 3)
Ignorance Becomes Unaffordable
Fast forward a decade. After my physician group institutes some changes that significantly improve our collective lifestyles, my work-life balance is restored and I am reading voraciously once again. In February 2016, an article in The New Yorker profiles Mr. Money Mustache. He and his wife, both software engineers, spent 10 years working intensely and saved 70% of their annual income to invest it. They achieved financial independence at age 30, just before having a kid. Financial independence is defined as having sufficient assets so that the investment income generated covers your annual expenses. Put another way, you have accumulated sufficient Free-You money so you never have take a job solely because you need the cash.
Reading about Mr. Money Mustache resonates: he’s my age, educated, a saver, an optimist, shares my work ethic, and his attitude to life is one of growth mindset (I’m capable of anything if I spend the time developing the skills). When I notice that both our wives are more attractive than we deserve, I feel an immediate kinship.
I read five years’ worth of his blog posts from start to finish. Suddenly, for the first time since med school, I’ve become obsessively interested in learning about something: financial independence (FI) and investment. I start with Mr. Money Mustache’s recommendation of The Four Pillars of Investing by William Bernstein (who, to my delight, trained as a neurologist; a rare example of a financially savvy physician!). I read a few more Bernstein books, which lead me to Benjamin Graham’s The Intelligent Investor, which reportedly altered the trajectory of a young and impressionable Warren Buffett back in the day. My financial awakening is straight out of The Lion, the Witch and the Wardrobe; every open door leads to another world to discover.
“Mustachianism” is a cult, and I’m weirdly attracted to it. I branch out to related blogs, where I grow acquainted with a friendly if inbred network of mostly young people who rejected consumer living, drastically reduced expenses, achieved financial independence, and are currently pursuing various interests (arts, travel, cooking, parenthood, lower stress hobby-career in a field that is less remunerative). I start to read blogs like Early Retirement Extreme, the Mad Fientist, Jim Collins, and Go Curry Cracker (not racist, just a weird name). I find fellow emergency physician James Dahle’s White Coat Investor blog, a terrific resource for physician financial literacy.
When I share my newfound enthusiasm with my wife, she looks at me like I’m renouncing all earthly possessions to join the Hare Krishna. She observes that this is a near-pathological obsession, acknowledges she may benefit from it, and confides her hope that I’ll return to our shared reality soon.
I sign up for an account at Personal Capital, whose simple interface and intuitive graphs help me understand my investment portfolio (and my investment fee burden) for the very first time in my financial life. I read up on Betterment, and find that moving my taxable funds there could benefit from tax loss harvesting. I also start to skim entries from the Bogleheads wiki, which articulate the philosophy of a distinct but compatible cult surrounding Vanguard founder John Bogle’s data-driven, low-cost index fund investment philosophy.
I discover Vanguard Target Retirement Funds, which use a simple four index fund portfolio to diversify investments, automatically rebalances the portfolio, and conservatively adjusts stock/bond allocations as you approach retirement age all for one sixth the cost that we’ve been paying our financial advisor. In contrast, our advisor works for 1% of assets under management and has invested us in some load funds (I pay a high fee for the privilege of entrusting someone my money to invest!) with expense ratios as high as 2%.
I start to lose sleep. It’s one thing being ignorant that you are a sucker, it’s quite another to wake up every day with the knowledge you continue to hemorrhage money. I have a talk with my wife, where I lay out a strategy to transfer our taxable investment account and roll over both of our Roth IRAs to Betterment to obtain their lowest fees and benefit from tax loss harvesting. I also decide that our nest egg, the tax-sheltered retirement account, should be moved to Vanguard, where a target retirement fund promises to meet our needs by minimizing effort while maximizing cost-effectiveness. She gives me the green light.
[Note: I have since decided against using a Vanguard Target Retirement Fund, instead opting to rebalance my own simple portfolio annually and reduce my expense ratio from .16 to .08. Also, I have since transferred taxable and Roth accounts from Betterment to Vanguard.]
Which leads to a Friday afternoon this past spring. I have taken my kindergartener on a favorite playdate, hot chocolate over a board game of Othello at a local independent coffee house. We walk from the coffee house to the local library, where we happen upon a Friends of the Library book sale. As he peruses the latest Captain Underpants book, I get a call from our financial advisor. My son gives me his blessing, “It’s okay dad, I’m reading, you can take it.”
I step out to explain to the advisor that we are looking to minimize fees. It’s not you, it’s us. We’ve changed. You’ve been good to us, but we are moving to investment vehicles with expense ratios of .16% compared to your 1% + load fund fees with additional expense ratios. We are grateful that you took a chance on us when we had little. We wish you well. It’s tough, because my wife and I remain genuinely fond of him, but eventually our financial advisor accepts that our departure is inevitable.
That day, it’s as if a weight is lifted from my shoulders. I get the best sleep I’ve had in weeks. Vanguard and Betterment, here we come. Early financial independence, here we come. Having at long last put my financial house in order, I’m excited to move on to scrutinize other unnecessary expenses we might cut…