[Editor's Note: Today's post originally published in June as one of my regular columns for ACEPNow. It is just as true now as it was then.]
Q. What Lessons Can We Draw from the Coronavirus-Associated Economic Downturn or the “CoronaBear” Market?
A. I think there are at least six lessons that can be drawn from this collective economic experience.
#1 Stocks Are Risky
For many physicians, especially those younger than 40, the recent market downturn was their first experience losing a large amount of real money. At its nadir, the stock market was down 35 percent. A physician with a $2 million portfolio composed of 80 percent stock would have lost over half a million dollars. That might represent twice the cost of their education, more than the value of their house, or a decade worth of retirement account contributions. This is not a mere academic financial experience but an emotional and behavioral one. You likely learned a lot about your risk tolerance and can now adjust your investing plan going forward accordingly. If you did not have a written investing plan, you likely learned the value of having one. You also learned the value of having less-risky assets like bonds in a portfolio.
There are three good ways to protect yourself from stock market risk.
- Don’t put all of your money into the stock market—place at least some of it into less-risky assets like bonds.
- Diversify. Rather than trying to pick the winning companies out of the economy, simply use low-cost, broadly diversified index funds that hold thousands of stocks to ensure you get the market return.
- Hold those stock index funds for decades. Money you need any time soon does not belong in stocks.
#2 Markets Recover
The second lesson that can be drawn from this experience is that markets are resilient and recover eventually. I did a Twitter survey of more than 1,000 investors, mostly physicians, at the bottom of the market in March. Pessimism abounded. About 93 percent of them expected stock market losses to continue, and the majority expected losses greater than those experienced in the 2008 global financial crisis. As the market rapidly recovered throughout April, it was widely described as a “dead cat bounce”, meaning the market was sure to soon go right back down. Those who attempted to time the bottom found themselves missing out on years’ worth of gains in just a few weeks. While every bear market is unique, they all end eventually.
Those who pay attention to financial history “have seen this movie before and know how it ends”. They know the difficulty of trying to time the market, so they don’t even try. They simply follow their investing plan unemotionally and make sure they’re still in the market to capture those market gains when the recovery does happen. Ensure your investing plan does not require a functioning crystal ball to reach your reasonable financial goals.
#3 Physician Incomes Are Not Secure
Perhaps the biggest surprise of the CoronaBear was seeing physicians lose both assets and income at the same time. Medicine is generally considered to be relatively insulated from economic downturns. People need medical care in both good times and bad, the thinking goes. Especially during a pandemic, one would expect physicians to be working and earning more than they usually do, not less.
Thus, we were surprised to see ED volumes drop in cases by over 50 percent. Those of us who own our jobs took massive pay cuts. Employees were furloughed or even asked to take voluntary pay cuts, all while facing greater personal health risks to themselves and their families.
Instead of being able to take advantage of the economic situation by “buying stocks on sale”, we were forced to dramatically cut spending and saving just to make ends meet. The lesson is that physicians need an emergency fund just like everyone else. An emergency fund is generally considered to be three to six months of living expenses invested in a very safe, liquid place like a high-yield savings account or money market fund. Physicians who were furloughed without one will never forget that mistake.
#4 Government Help Isn’t Always Fair
The CARES Act and similar legislation were rushed through Congress at nearly the bottom of the stock downturn. The impact of the law varied across the economic spectrum. For example, a family of four with an adjusted gross income of $150,000 per year received $3,400 in stimulus money. A family of four with an adjusted gross income of $200,000 per year received nothing. A single employee earning $100,000 per year received nothing, while an independent contractor with the same income would have been eligible for a forgivable loan of more than $16,000. While on a macroeconomic scale the stimulus may have accomplished many of its goals to prop up the economy, on a microeconomic scale it demonstrated the challenges of rapid, massive government intervention in the economy.
#5 Ownership Matters
Many physicians have learned that it really does matter who they work for. Those employed by the military, government, and large universities saw no changes in their monthly paychecks and benefits. Many of those employed by private employers, including contract management groups and other private equity-backed enterprises, were told to use their paid time off or asked to take a “voluntary” 20 to 50 percent pay cut. They may have even been furloughed or laid off entirely. Some of those doing locum tenens work saw the pool of available shifts dry up or were only offered work in the most dangerous parts of the country. Partners in democratic groups experienced the risk they have been taking for years. While they keep the benefits when the group is profitable, they also suffer the losses when it is not. Overall, I was disappointed to see so few examples of servant leadership in the crisis among the owners of physician practices. Good leaders (and owners) eat last. When there isn’t enough “food” to go around, they don’t get any. Expecting employees who never reap the benefits of business profit to take a pay cut at threat of job loss when there are business losses is profoundly unfair in any but the most dire business circumstances.
#6 Wellness Matters
Finally, we learned that wellness matters. Although we all eventually experienced some of the “war-like” attributes of fighting a pandemic, the initial experience of physicians in New York City, New Orleans, Detroit, and similar hot zones was profoundly different from that of physicians in other areas, with resulting stress, anxiety, posttraumatic stress disorder, and worse. While there is much more to wellness than finances, adding financial stress to the mix at such a time demonstrates the benefits of having a solid financial plan.
What lessons are you taking away from the CoronaBear? What are you doing differently now? Comment below!
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Great advice!
It was a really unique experience to do through this as I was just beginning my financial education. I think in the long run it will be beneficial to learn all of the “tough” lessons up front. I don’t pretend however to have gone through my first bear market at all. I was able to buy into the market when stocks were on sale. I didn’t lose money. So I still keep my asset allocation at 80/20 according to my plan until I really see my risk tolerance in the next downturn.
1. Thank you for a great post. All of the lessons discussed are very applicable to all.
2. IMHO, #5 is the most important lesson. Nothing new…treat others as you would like to be treated… All of us work for somebody…
We tapped our emergency fund to make an alternative investment in February right before this all happened. Of course the plan was to build it back up pretty quickly with an expected bonus. But then this all hit and the bonus was withheld. What’s more the base pay then fell into uncertainty for some time. It all ended up being ok and we also massively reduced our monthly expenses by paying off debt in the coming months, but we learned our emergency fund lesson for sure. It’s for emergencies, which by nature are unforeseeable.
Glad it worked out okay!
#3 has been a big contributor to me deciding to stay in the military. The difference in pay between military and civilian for an academic ER doc is small enough (when you add retirement in) that I am willing to take the hit in exchange for the lower risk of furlough/etc.
I was already considering staying in anyway though. It’s not a good enough solo reason to stay in if you hate being in the Army.
Retirement isn’t the only benefit you should add in. Just adjusting for tax-free BAH, tax-free BAS, tax-free deployment pay, and the ability to claim a tax-free state as home is worth a lot.
ED doc at a VA here. Similar perspective. I am thankful to be a government employee, superb job security and income is guaranteed. Like WCI said, when you add TSP match and pension, it ends up similar if not better than private practice. Being a shift worker allows me to have a part time position at a community hospital ED. So it’s great from all perspective.
I think a lot of military/VA docs think their pay is pretty average because they’re only comparing themselves to employee docs in their specialty. Owner docs often make significantly more. For example, a typical military emergency doc under commitment might make $140K these days. The average emergency doc makes $375K. A partner with a decent payor mix who is really hustling might be making $500K. Military tax benefits and pension don’t make up for an extra $300K in salary, sorry. But if you want to compare a military pediatrician to an academic pediatrician, that military doc may very well come out ahead. Every specialty and every doc is different and the higher paying your specialty (and the less expensive your med school) the worse a deal military medicine is. VA is slightly different but the same basic principles apply. You are usually giving something up for those guarantees.
Awesome article. I have been asked to give financial talks to doctors lately about “Pandemic Finances.” I reviewed my prior slides and realized 95% of the advice is exactly the same pre and post. The difference is that now many more doctors realize the truth of these points.
Other thoughts:
Stocks are risky. True. Higher reward comes with higher “risk.” Although the risk is usually measured in the variability of current stock prices. Jim hates the phrase “You only lose when you sell” but it is true. Compare all of my stocks with those of FutureProofMD. He sold in the Spring. I didn’t. He lost. I didn’t. I own the same number of shares even if Mr. Market thinks in crazy valuations briefly. I barely noticed the big drops I hear people panicking about. Why? Because I’m not prepared to sell now so I don’t really care about short-term variations.
Markets recover. Well, normal markets do. Not every market in the history of the world has recovered, but it is a reasonable expectation. It isn’t a law of nature though. And we have been lucky with fast rebounds in 2009 and 2020. That isn’t always true. The next one could take 10-20 years to recover.
Incomes are not guaranteed. Yup. Amazing anyone thinks otherwise. But doctors still have valuable, scarce skills and so employment prospects still are great. Besides the average doctor is in the top 5-10% of income, so we can survive some brief cuts.
Government policies may be suboptimal. Big surprise eh? Government intervention in markets is a blunt tool at best. If you rely on the government to help your financial situation, it is time to look elsewhere.
Ownership matters. Control over how and when you practice is important. I have worked in academia, contract worker, in private practice, and as an employee. They all have pros and cons. We give up some autonomy when we work for someone else. That tradeoff is often worth it. We just need to understand that. Owning your own time and your finances is important. If you are FI you will be free from the arbitrary decisions of any employer.
Wellness matters. So true and yet physician wellness programs are getting cut. For me there is a lot that has helped me: meditation, prayer, sleep, exercise, playing with kids, reconnecting to hobbies, gratitude, etc. We all need to figure out for ourselves how to stay sane in crazy times.
It’s not true. You really did lose a lot of money in March and you really did make a lot since then. But because you didn’t sell, you neither got the losses to harvest nor did you have to pay taxes on your gains.
But if telling yourself that makes you stay the course, then keep doing it!
I agree with Wealthy Doc, despite you making the same claim in the past. You do not make or lose money until such point as you sell your shares. It’s only in the abstract or subjective. It becomes objective only when you sell. Perhaps a bettor way to look at this is the number of shares owned. When the market goes up or down, the price per share fluctuates, however, the number of shares you own stays constant – unless and until you sell. I believe I read in the past that Ben Carlson, Mike Batnick or one of their Ritholtz colleagues is in agreement with this sentiment.
Be greedy when others panic. A pretty good investor said that. Solid companies aren’t going away, pandemic or not. More risk, more reward is ever so true. The key is not having to sell when stocks go down which they do periodically. Have cash available to at least avoid selling or at best buy at a discount. No, it’s not different this time.
Careful doing the “dry powder” thing. It probably doesn’t work as well as you think, if at all.
https://www.whitecoatinvestor.com/does-dry-powder-work/
I think one of the big lessons is the stock market is not the economy, but nor does it care about society in general. despite the economy having taken a huge hit and still even now not recovered to it’s previous capacity, the market is up! The bear market was so quick! Thousands of people have died and more are dying, but the market pays no heed. Talk about a random walk. Reminds me of the The Matrix when Neo meets the Source who can’t predict the future of the Matrix, despite running trillions and trillions of possibilities. All we can do is just keep investing, like the humans keeps fighting in the Matrix.
Excellent article. I think the CoronaBear has made many young investors falsely expect a strong and quick rebound after any bear market. I worry that they won’t handle a prolonged bear market very well.
I said the same thing after the 2008, 2011, and 2018 bear markets. The last “grinding” one was probably 2000-2002. We’ll have another one eventually, but hopefully not as bad as the stagflation of the 1970s.
As bear markets go this was pretty minor, so I have the same concerns as Ryan Kelly.
On ownership mattering and owners eating last, I have mixed feelings. I did not pay myself at all in 2020 until April when I got the PPP funds, mainly because the pandemic hit immediately after I had fully funded the 2019 401k and then revenues immediately took a big hit. I did have one employee on “COVID unemployment” mainly because she had trouble arranging child care, otherwise all the employees were paid normally.
Having said that, I did tell my PA there was a possibility I might be forced to put her on unpaid leave. And frankly if things hadn’t picked back up I would have had to lay off employees. The “owner eats last” only works up to a point, the business has to stay viable.
A 30%+ drop is hardly “pretty minor.” Maybe it looks that way in retrospect. But it’s pretty average. If you had no problem there, you’ll likely do fine in most bear markets. I assure you many investors WERE panicking.
I agree, no margin no mission.
Other than rebalancing, 45 yrs of investing has taught me that the best course is to do nothing following your AAmodel
When you near RETIREMENT, the rules change to preserve capital as the main goal to provide a lifetime of income
Great Post!
Only one minor suggestion…
Instead of saying “#1 Stocks are Risky!” one might say “#1 Stocks are Volatile!”
And I know that you espouse this. Individual stocks are risky, but the broad markets are generally not over the very long term.
I have been around long enough to have suffered “the lost decade of investing” of 2000-2010.
I bought the Total Stock Market Index Fund in the late 1990’s, only to watch it slowly go down and stay down. But it did not stay down forever! And I hung in there.
Having an emergency fund and a balanced portfolio are key, as you espouse.
I am not the originator of this vocabulary discussion, I read it at [email protected].
Giving credit to the author. Stay Well!!!
This is actually a really deep, interesting discussion when you dive into the details. I’d recommend some Bernstein, specifically his series of short books for “investing adults.” They discuss shallow risk (volatility) and deep risk (inflation, deflation, confiscation, and devastation.) Technically, stocks, even an index fund, is riskier as the time horizon gets longer in that the dispersion of returns gets wider.
Great article. Anesthesiologist here. Had to live off our emergency fund for a few months in the Spring during a period after elective surgeries were cancelled but before we were redeployed to the overflowing ICU’s. No sweat at all to live off the emergency fund, but interesting to observe a few others in my group were taking paycheck advances. It pays to plan for a rainy day!
I wish our local partner hospital understood that leaders eat last. All the C-suite and admins got the COVID vaccine first but then they ran out for front-line doctors/nurses/staff. Oops!
Yes, I’ve been surprised to see partners get stressed when our partnership distributions come in a day or two late.