By Katherine Vessenes, JD, CFP®
Doctor, my heart goes out to you. You are on the front lines of one of the most difficult wars we will ever face. Emotions are running high, and we are being bombarded with negative news every single day. In trying times, it is easy to let your emotions take over and make some very bad financial decisions.
Here are some of the missteps we have seen doctors making recently and our thoughts on how to make good financial decisions in difficult times.
Mistake Number 1:
Buying hard-hit companies, like airlines.
We have had a couple of doctors want to buy airlines, cruise lines, and oil companies because they are depressed now and some of them are going to be the beneficiaries of government bailouts.
Interestingly, these calls from clients were all made to us before the news last week: Warren Buffett announced he was dumping all of Berkshire Hathaway’s airline holdings, which depressed their prices even further!
I know buying depressed stocks looks like a good idea on the surface, but let’s look at financial records. Do you recall TARP? That was the government bailout after the 2008 crash. At that time, Citigroup and AIG were both suffering, and both received significant bail outs. Citigroup received $20B and AIG got $67.8B.
Unfortunately, this taxpayer-funded bounty did not advance these companies’ stock value. In the chart below, we analyzed AIG and Citigroup, then compared them to a mutual fund that mirrored the S&P 500.
*Source: Morningstar. Past financial performance is no guarantee of future results.
This chart shows a hypothetical $10,000 investment in Citigroup, AIG, and the S&P 500, at the end of December ‘04 through the end of 2019. These investments were up slightly before the ’08 crash. By ’09 all three investments had fallen. Both Citigroup and AIG never fully recuperated. By January 1st of 2020, that $10,000 Citigroup investment was worth only $2,148. AIG did much worse. By January 1st, 2020, $10,000 of AIG was worth a paltry $548!
Let’s compare that with a $10,000 in an S&P exchange traded fund. By January 1st, 2020, it was worth over $36,000. Instead of losing money, those investors got more than a 3.5-times return!
Even in the best of times, we have found that stock picking only works about 6-7% of the time. You would have better odds in Vegas! When markets are dicey, like they are now, stock picking is a bad idea that just got worse.
Action items:
Use a broad basket of investments (like a mutual fund) to reduce your risk.
Even Warren Buffet makes mistakes because stock picking is a lot more difficult than it looks!
Mistake number 2:
Ending Dollar Cost Averaging Funding
Dollar Cost Averaging (DCA) is an investment strategy we use with most of our doctors. It works by taking a fixed amount and investing it regularly, on a systematic basis. Most of our clients do it monthly. We use very low-cost mutual funds that don’t have any sales charges. In fact, you are likely using it today with your retirement accounts at work.
In my example, two doctors have the opportunity of investing $120,000 in one lump sum. This happened recently for one of our doc couples who sold a piece of property and wanted to invest the entire amount. They were worried about the market and feared they might be investing it at “high” point. We suggested taking equal monthly payments of $10,000 and instead of investing all of it at once.
I like this approach for a lot of reasons: for one, it eliminates the speculation of timing the market. Two, it reduces the pressure and emotions of trying to hit the perfect target: the perfect stock at the perfect price at the perfect time, and then going through the exact same exercise again when it is time to sell.
We also know that in any year, the price of their mutual funds will fluctuate a lot. By purchasing on a monthly basis, these doctors have the likelihood of buying a lot more shares in some months because the price is down.
I ran the above simulation to show how this might work. In it, I compared investing one lump sum of $120,000 (Dr. Lump Sum) vs. monthly investments for one year of $10,000 each (Dr. Dollar Cost Average). Although the total investments were the same, the end results were wildly different. For my analysis I assumed the starting and the ending price of our mutual fund was $50 per share. However, during the year, the price fluctuated each month between a low of $40/share to a high of $65/share, as you can see below.
* Source: Morningstar
At the end of the year, the lump sum was worth exactly the same, because the share price was the same, but Dr. Dollar Cost Average had much better return. In my hypothetical the different ending prices were $181,157 vs. $120,000.2
* Source: Morningstar
Successful doctor investors are not only calm during market turmoil, they know that down markets are the right time to continue with their investment plans, and they can be the best times to increase their investments. A bad plan would be to react emotionally and discontinue systematic investments. This is your chance to buy a lot more shares of your favorite investment when they are “on sale.”
Does a DCA strategy “always” increase returns? For doctors who are long-term investors and properly diversified, this should be an excellent tactic, because history tells us that the stock market over time, is always increasing.
There are a couple of circumstances where I wouldn’t use this approach for our doctor clients:
Over 95% of our doctor clients understand the fallacy of stock picking. But we do have a couple who inherited some stocks or for other reasons want us to manage their serious money and they keep a few individual stocks in a separate account. I don’t recommend using DCA for stock picking. The reason is because a stock investor, unlike a mutual fund investor, could lose their entire investment. This happens when a company goes under and its value goes to zero. In that case, it doesn’t matter if you invest in a lump sum or use a DCA technique, you can still lose all your money.
I also don’t like to use this for doctors who have a very short time horizon. Maybe they need a large lump sum for remodeling their kitchen or a partnership buy-in within the next few months, or even over the next year or two. In that case, the market could still be down during the short run, and this technique will not help them.
Finally, if you’re one of the unfortunate doctors who took a pay cut, and you don’t have a large emergency fund, it’s best to hunker down and conserve some cash.
One other thing to keep in mind: if you believe the market is going to skyrocket, like it did most of 2019, then you are best to invest the entire lump sum at the beginning of the period because your investments will be priced the cheapest. Personally, I don’t believe you can ever predict the market, so I prefer the DCA approach, which reduces volatility and anxiety!
Action Items:
Stick with your monthly or quarterly investment schedule, and if you have any spare cash this might be a good time to put more into the market.
If you have been stock picking in the past and trying to time the market, use DCA instead to even out the ups and the downs of your investments. You have a good chance of increasing your returns and reducing your stress at the same time.
Mistake Number 3:
Thinking You are Bullet Proof and
Continuing with the BIG Purchase
Fortunately, I have only had one doctor call me for help financing his new $1,500,000 house. But I have had a few who are going forward with their $75,000 kitchen remodel or $150,000 pool and spa for the back yard.
My advice: Wait! Volatile markets may not be the time to drop a lot of your hard-earned cash into your mini-mansion, trip to Fiji, or new Tesla.
Many of our clients are taking pay cuts. Some of them, particularly our orthopedic surgeons, gastroenterologists, and orthodontists are not taking any salaries at all. Twenty percent salary reductions are not unusual among our clients.
When I look back at the real estate market after the crash in 2008, I remember all too well how long it took for real estate to recover. My house is still not appraised for what it was in 2007! What is the advantage to waiting to purchase your $1,500,000 house? If we have another real estate set back like 2008, it may only cost you $900,000 in a few months! Also, your kitchen may cost $100,000 now, but if your contractor is in need of work, then he might give you a deal and only charge you $85,000 later this year.
I still remember one doctor who wanted to purchase a $2,000,000 house in a pricey part of Rhode Island. He waited until the market was completely depressed and then picked it up for $800,000.
Action Items:
Don’t be surprised if you are looking at pay cuts over the next few months. Even doctors can have pay cuts.
Don’t be in a rush to make your big purchase. A down market can be the best time to get a great deal.
Mistake Number 4:
Stock Picking and Timing the Market
Yes, I wish we could time the market—it is bewitching and captivating to watch the market fluctuate. Unfortunately, the studies show it doesn’t work. An S&P/Lord Abbett study analyzed investing $10,000 on January 1st, 1994 and holding it until December 31st, 2019. You can see in the graph below that the doctor who held his investment for the entire time period, he made a whopping $112,840! Unfortunately, the doctor who missed the 20 best days of the market, made less, a lot less. That doctor made about $35,000 or 69% less than the doctor who ignored the bad press and didn’t touch his investment.
Action Items:
It is not possible to pick the best market days because studies show they are not only unpredictable but concentrated in a few days.
Nervous doctors who are trying to time the market run the large risk of missing the best days and this will dramatically reduce your returns.
Mistake Number 5:
Discontinue Investing,Liquidate your
Holdings, and Move to Cash
Take a look at Chart F, below. Dr Blue, Dr Navy, and Dr Green each have $100,000 invested in the US stock market on January 1st, 2007. Each of their portfolios have an uptick and then are quickly ravaged by the crash of ’08. They each have a different reaction to the crash and they each have a much different result.
* Source: Morningstar
Dr. Green, panics, sells her entire portfolio and moves to cash for the rest of the period. By January ’20, she still has a loss of over 40%; she is down to $57,320. To add insult to injury, her cash didn’t keep up with inflation. She not only lost hard dollars by selling out, but also lost purchasing power, a double whammy.
Dr. Navy also lets his anxiety get the best of him and sits on the sidelines for a year. After a year, he gets back in the market and participates in part of the market’s historic rises. By January ’20, he has almost doubled his money; he is up to $195,315.
Dr. Blue turns off the depressing daily news reports and stays put. By January ’20, her $100,000 investment has tripled, and is now worth $299,780, or $100,000 more than Dr. Navy!
Action items:
Doctors, your losses are just on paper until you make the final decision to actually sell.
Many times, the best advice is to ignore the news and stay the course.
Mistake number 6:
Thinking Short-term,
Not like a Long-term Investor
All of our doctors should be thinking like a long-term investor. Even the 62-year-old physician needs to be thinking long-term. We run our retirement plans to at least age 95. So, at 62, you will need your investments to be provide you with income for at least 33 more years!
Any drop in your investments today may have the most minor impact on your financial security 20-30 years from today.
Consider your home. There is no sign over your garage door that is announcing in big neon lights how the value of your house has changed today. Your home’s value is going up and down daily, as more homes in your neighborhood change hands. Some days the value of your home is up 5% and other days it might be down 10%, or even more. It is highly unlikely you would ever say to yourself: “My home is up 5%, so I should sell now!” The reason is: you are likely to be in your home for many more years and the value today is immaterial to what it will be when you sell, whether that is in a few years or decades from now.
Part of the reason you can take the long view with your home is because you are not constantly barraged with details about its value. When I lost value in my home from the 2008 housing crisis, I knew this home was not going to be sold any time soon, so the blow wasn’t as substantial for me. You not only don’t know what your home is worth today, you probably don’t care (and won’t care) until it’s close to the time you want to sell it.
I would like you to take the same approach with your finances. Successful doctors don’t get whipsawed by the daily investment reports. Those canny news producers know that negative and scary market news secures them more listeners, which leads to more advertising dollars. Think of investment news as entertainment, not advice.
Action items:
Don’t look at your accounts every single day. The day to day changes are meaningless and very likely to raise your blood pressure! I only look at mine a couple times per year.
Any changes today in your portfolio values are likely to be completely unimportant 20 years from now when you are using these funds to live on during retirement.
Taking the long view in your investment strategy reduces anxiety and stress, something we could all use during difficult times.
A few concluding thoughts:
One pundit said recently, “The same folks who invented the roller coaster, also invented the stock market.” Remember, the people who stand up on the rollercoaster, or get off before the ride ends, are the ones who get hurt!
Right now, Doctor, your life is particularly challenging, and it is likely you are especially frazzled and anxious.
This is the time to stay cool, composed, and as calm as possible. I find one of the things that helps doctors stay calm is when I share with them the facts, so they don’t go to fear. Staying cool and composed, focusing on the facts, can help you avoid making these investing mistakes. In a few years, when the market recovers, your children are back in school, and your life is back to normal, you will be very glad you did!
Katherine Vessenes, JD, CFP®, is the founder and CEO of Minnesota-based MD Financial Advisors, who serve over 600 doctors from Hawaii to Cape Cod. An award-winning Financial Advisor, Attorney, Certified Financial Planner®, author and speaker, she is passionate about bringing ethical investment advice to doctors. She can be reached at Katherine@mdfinancialadvisors.com.