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Dentists, Puns, and Money is a podcast focused on two things: The financial topics relevant to dentists leaving clinical practice and the stories and lessons of dentists who have already done so.
1. The stories of dentists who have transitioned from full-time clinical dentistry.
2. The financial topics that are relevant for dentists making that transition.
If you’re a dentist thinking about your exit from clinical, and you’d like to learn from the experiences of other dentists who have made that transition, be sure to subscribe to your favorite podcast app.
Host Shawn Terrell also dives deep into the many financial components of exiting dentistry, including tax reduction strategies and how to live off your assets.
And, we try to keep it light by mixing in a bad joke… or two.
Please note: Dentists, Puns, and Money was previously known as The Practice Growth Podcast until March 2022.
Keywords: index fund, indexing, index, investing, buy, fund, expense ratio, company, stocks, dentist, cost, direct, fractional shares, unbundled, investment, s&p, strategy, gain, blackrock, bundled.
Welcome to dentists, puns and money. I'm your host Shawn Terrell. In this episode, we will dive into an investment strategy known as direct indexing. Many dentists are familiar with the strategy of buying index funds or indirectly investing in an index. But directly investing in an index is a little different. We'll cover three things in this episode one, what's the difference fundamentally between indirectly investing in an index versus directly investing in an index? Number two, what are the benefits of directly investing in an index versus indirectly investing in an index by buying an index fund? And three, why is direct indexing becoming available to more people and becoming more popular than it ever has been in the past? As a reminder, our affiliated firm dentist Exit Planning helps dentists nearing or already in clinical retirement with things like direct indexing. In addition, we work to reduce your lifetime tax bill and replace your practice income so you don't have to compromise on the lifestyle that you love. If you are interested in financial guidance on your exit from clinical schedule an initial consultation with us on our website, which is dentist exit.com that website again, dentist exit.com And with that introduction, let's dive into direct indexing. Let's start with discussing the difference between investing in an index fund or indirect indexing versus directly investing in an index. That sounds really confusing, so I'm going to use an analogy that will hopefully make it a little bit easier to digest. Best way to think about indirect indexing with an index fund versus directly investing in an index is by comparing a bundled solution to an unbundled solution. And just to reference a couple practical examples, value meals, you go to Chick fil A and you buy the number one you get a chicken sandwich, you get waffle fries, and you get a drink for 10 bucks. Whereas if you buy the sandwich, fries and the drink all separate, might be $12 total. And I'm totally guessing on those specifics, but you get the idea. Same thing with a gym subscription, a subscription is a bundled solution . 50 bucks a month. For that I can use any of the equipment at any of their locations at any time of day, day of the week, by where to buy a one day pass to work out, it might be $10. And then I can only use the equipment at that one location on that one day. So often in life, the bundled solution is the better deal or at least it's the easier solution to accomplish something even in a different scenario, you pay a premium for whatever that bundled solution is, with that as a backdrop, index funds are a bundled solution for investing. Who might be familiar with the concept of owning index funds inside your portfolio.
Drop index funds are a bundled solution for investing. You might be familiar with the concept of owning index funds inside your portfolio. One common index fund is for the s&p 500 index. That's a fund that is made up of the stocks, the largest 500 companies in the United States. Several fun companies have created s&p index funds. So if you own one of those funds inside your 401 K or inside your brokerage account, that's an example of indirect indexing. Because probably going to leverage a fund company like Vanguard or Blackrock designed that index fund that scenario Vanguard or Blackrock or whoever goes out, buys shares of all the individual company stocks that make up that s&p 500 And then it slices those funds up into little tiny slivers technical term and piles, those slivers into the fund makes that single fund available for consumers to purchase normally as a mutual fund or as an electronically Traded Fund, which is often referred to as an ETF. So for massive investment companies like Vanguard or BlackRock, something they can do at scale, because they have millions and millions of people investing their funds, the small charge or fee built into those funds called the expense ratio. And that's the premium that investors pay for access to the funds. And that's how the fund companies make money by charging small fees to millions and millions of investors a single time. And so again, that's indirect indexing, you have exposure to an index directly via the Fund Company. The opposite of that is direct indexing where someone actually owns all of the individual company stocks comprise that index. So if someone wanted to replicate the s&p 500 index, it would buy the stock of each of those 500 companies in the index directly or individually. So this is a strategy that has technically long been available to everyone. I mean by that is that an individual investor has always been able to go out and buy the individual stocks that make up the s&p 500 directly. You can go out and buy Apple or Microsoft or Tesla or whatever. If you think about trying to accomplish that or think about trying to buy all those individual stocks directly. An unbundled or an ala carte way would be seemingly difficult to do. It's of all you need. A fairly big pool of money to buy one share of all 500 companies at once. If the price for one share of each of the 500 companies was $100 per share, need $50,000 Just to get started. And some of the transaction fees that could be paying those 500 stocks, but you can see why directly investing in an index using index funds have been very popular the last couple of decades. It's really an easy way for bass investors to get diversified access the market to an index, or a relatively low cost is the backdrop Why would anyone want to complicate their investment selection? I trying to directly own an index instead of just buying the index fund. What are the benefits of direct indexing? There's two benefits. Savings. Cost savings. Let's hit cost savings first when you invest indirectly in an index using an index fund. cost of doing that is reflected in the funds expense ratio. Three index mutual fund or ETF has something called the expense ratio is a percentage of fees relative to your fund value that you will pay or be assessed each year. So just as an example you want an index fund that's worth $100,000 and the expense ratio of that fund is 1% cost of being invested in that fun is $1,000 or 1% per year. So that's the amount that would be deducted out of your account each year. There are a lot of index funds out there that have a relatively low expense ratio of 10 to 20 basis points so well. below 1%. Does Vanguard and BlackRock have trillions of dollars and under their management because of that total volume, they can have a really profitable company by charging a relatively low expense ratio. When you invest directly in an index by buying the individual stock of each company in the index. There is no expense ratio associated with that. That's not to say there can't be sometimes other fees associated with doing that that have to be taken into account when direct indexing, there is no expense ratio. So this unbundled solution can be available at potentially a lower cost. The real advantage of direct indexing is the potential tax savings and non qualified accounts. When you invest in stocks directly in a taxable investment account. In any given year, there are bound to be stocks that do very well. stocks that do not do as well in terms of performance. When you are directly invested in all these different companies you have the ability to both tax loss, harvest and tax gain harvest. It is you can offset some of the capital gains do with the capital losses inside your portfolio. Or conversely, you can harvest gains in your portfolio, intentionally sell assets to recognize the gain when it makes sense to do so in your individual situation. tax loss harvesting and tax gain harvesting are both topics that probably deserve their own podcast so I'm not going to get too deep in the weeds on those topics today. main takeaway is that when you are directly invested in an index, have much much more control and can be a lot more tactical about the taxes associated with that account. When you simply invest in an index using an index fund. At that point, that's the main reason why direct indexing came into existence in the first place. ultra wealthy so to speak. Have been utilizing this strategy for decades because for tax purposes, because there was enough money at stake to deal with it. But take on the cost and the effort of directly investing had enough capital to buy the index outright. Back to the larger point when you own an index mutual fund or an ETF is not nearly as much control with tax loss and tax gain harvesting. That's because all of that is done at the fund level or at the entity level of that index fund. That's where the gains that's what the losses get rectified for they get passed on to the investor that owns that index funds so you don't have as much control about how and when to pass gains and losses onto yourself. Sometimes funds have to realize short term capital gains which are taxed at ordinary income rates and not Preferred rates. And when that occurs, short term gains are passed on to the owners of the index fund. So in the benefits of direct indexing the cost, owning the indexes can be less and the potential tax savings can be much greater compared to simply owning an index fund. So question number three, why is direct indexing becoming available to more people and becoming more popular than it was in the past and short of technology? A couple layers to this but the first piece is that technology has made it possible for individuals to purchase general shares of Company stock. So the longer does someone have to buy one share of every company that makes up the s&p 500. Now, GE has made it possible to buy fractional shares, really small slivers of each company in the index. So the total amount of capital required to own the whole index is much much lower as a result. Along with that the cost of buying stocks, fractional shares are not as much lower than it used to be. In many cases, it's completely free. As an example, not only did you previously buy whole shares of each company to directly own the index, you also had transaction costs associated with the purchase of each of those shares. It might cost you 20 or $25. Per trade by each of the 500 stocks in an index. You can see why even though direct indexing has been around as a strategy for decades. In the past, you'd really need a lot of capital and really have to have a pretty significant capital gains tax problem. make it worth your while to pursue this as a strategy in the last decade or so the transaction costs of buying and selling stocks have mostly been eliminated. So that cost is gone. Then with fractional shares, there's not as much capital required to own it. Combine that with the fact that anyone was interested. Now can open an investment account start buying and selling Stocks ETFs or whatever if you minutes and it's the perfect storm can see why direct indexing is emerging in investment strategy and will continue to grow in popularity moving forward. Until very recently it had been difficult to execute at scale both because of the transaction costs of buying those stocks. Total investment required. Someone would in the past need 10s of 1000s of dollars or hundreds of 1000s of dollars to buy one share of all those 500 companies in the s&p 500 So there you have it, indirectly investing in an index with an index fund versus directly
investing stocks or at least some different things, cutting the tax benefits including the cost differences. We've covered the reason for the trend toward direct index investing technology, like Chick fil A Anytime Fitness index investing is the rare case the bundled solution may not be better than the unbundled solution, which longer alrighty then that is all I've got for now. I hope you found this information useful. And we will talk to you again very soon. Thanks for listening and follow along. Are you a dentist nearing your retirement from clinical or have you already hung up your handpiece? Would you like to learn more about ways to reduce your taxes and generate income from your assets in our firms Exit Planning might be able to help you with us to schedule an initial consultation on our website. Our web address is no obligation for your initial consultation. Again, schedule that initial consultation at dentist it's our disclosure dentist Exit Planning and Terrell advisors is a registered investment advisor. The information presented should not be interpreted or construed as investment, legal tax financial planning or wealth management advice. It does not substitute for personalized investment or financial planning from dentist Exit Planning or Terrell advice. This podcast conveys the views and opinions of Shawn Terrell and his guests and the information herein should not be considered a solicitation to engage in a particular investment or financial planning strategy. information presented is for educational purposes only and past performance is not indicative of future results.