​  Financial Planning

Investment strategies

Assessing a volatile marketplace

By Katherine Vessenes, JD, CFP

hysicians on the front line of the COVID-19 war are faced with unprecedented stress, both on the job and with their personal finances. Many are working long hours, constantly exposed to a deadly pathogen. Others are furloughed, or working from home while home-schooling their children, all on a reduced paycheck. Life for a physician has never been more stressful.

It is easy, during tough economic times, for doctors to let their emotions take over and make costly financial decisions.

Here are some examples of common investment mistakes, and reasons doctors should avoid them.

Timing the market

The stock market’s sizzle is seductive, but timing the market doesn’t work. An S&P/Lord Abbett study looked at investing $10,000 on Jan. 1, 1994, and holding it until Dec. 31, 2019. The doctor who held his investment for this entire period saw his initial investment grow to $112,840, but the doctor who missed the 20 best days of the market made only $35,000—69% less than the doctor who stayed the course.

Takeaways:

• The best market days are not only unpredictable, they are concentrated in a few days.
• Missing the best days dramatically reduces your returns.
• When you time the market, you have to be right twice: when to get out and when to get in.

Buying depressed companies

Some doctors might be tempted to buy depressed companies that may benefit from government bailouts, but look at history. Under TARP, Citigroup and AIG both received multibillion dollar bailouts. Unfortunately, Uncle Sam’s largesse did not improve their financial future.

​The same folks who invented the roller coaster, also invented the stock market.

We looked at both of these companies and compared them to an Exchange Traded Fund that mimicked the S&P 500, from the period of December 2004 through the end of 2019. A hypothetical $10,000 investment in Citigroup, AIG, and the S&P was up slightly before the 2008 crash, but by 2009, all three investments had fallen. Both Citigroup and AIG never fully recovered. By Jan. 1, 2020, that $10,000 Citigroup investment was worth only $2,148. AIG did much worse. By Jan. 1, 2020, $10,000 of AIG was worth a paltry $548. By contrast, a $10,000 investment in an S&P exchange traded fund grew to more than $36,000.

This is not the time to pick an individual stock and trust that it will bounce back after bailouts.

Takeaways:

• A broad basket of investments reduces risk.
• Stock picking is a lot more difficult than it looks.

Stop investing, sell out, and sit in cash

Consider the example from 2012 of a physician couple who owned their own primary care practice. At the beginning of 2008, they had started a 401k for themselves and for their employees. Six months later, their investments were down and they had liquidated their accounts, lost 50%, and vowed never to invest again. Unfortunately, if they had stayed the course, and continued with their investments, they would have doubled their money. A trustworthy advisor could have given them better advice and help calm their fears.

Imagine three hypothetical investors—Dr. Blue, Dr. Navy, and Dr. Green—who each have $100,000 invested in the U.S. stock market on Jan. 1, 2007. Their accounts all go up, and then are immediately devastated by the crash of 2008.

Dr. Green freaks out, sells everything, and stays in cash for the rest of the period. By Jan. 1, 2020, she still has a loss of over 40%; she is down to $57,320. Unfortunately, her investment didn’t keep up with inflation, either. She not only lost hard dollars, but also purchasing power, a double whammy.

Dr. Navy also freaks out, sells all of his investments, and sits in cash for a year. He then gets back in the market and participates in part of the historic runup. By Jan. 1, 2020, he has almost doubled his money. He is up to $195,315.

Dr. Blue ignores the dismal daily news reports and stays put. She holds on to her existing investments and avoids looking at the news every day. By Jan. 1, 2020, her $100,000 investment has tripled, and is now worth $299,780; $100,000 more than the doctor who sat in cash for a year.

Takeaways:

• Your losses are just on paper until you actually sell.
• It pays to stay put.

Discontinuing DCA Investments

Dollar Cost Averaging (DCA) is an investment strategy that entails taking a fixed amount and investing systematically, usually on a monthly basis. We use very low-cost mutual funds that don’t have any sales charges.

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Let’s say you want to invest $120,000—the proceeds of a property sale, for example—in one lump sum. You may have concerns about the market and don’t want to invest it all at the “high” point. Consider taking $10,000 and investing it monthly over a year instead.

There are many advantages to this approach. It takes the “guess work” out of timing the market and reduces the tension of trying to pick the perfect stock at the perfect time and then selling at the perfect time. In any year, the price of mutual funds fluctuates. By spreading the purchases out, they have the chance of buying more shares in some months because the price is down. This reduces volatility and allows the investor to reduce the overall purchase cost.

One simulation compared investing this lump sum of $120,000 to 12 monthly investments of $10,000, assuming that 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.

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 a much better return. In my hypothetical: $181,157 v. $120,000.

Most doctor/investors understand that the time you want to maintain your investment strategy, or even increase your investments, is during a down market, when your investments are “on sale.” A bad strategy would be to stop your investments during market down turns, because you miss the chance to buy a lot more shares when the prices are depressed.

Does this technique “always” work? As long as you are a long-term investor in a properly diversified portfolio, this should be a good strategy for you, because we know that the market, over time, is always up.

There are some situations under which this approach may not work:

• One would be if you are stock picking. The reason is a stock, unlike a mutual fund, can go to zero, meaning you could lose your entire investment. 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.
• If you have a very short time horizon, needing, perhaps, a large lump sum for college funding or purchasing a share in a partnership 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.
• Lastly, if you’re one of the many doctors who recently had their income decrease, and don’t have a large emergency fund, then it might be better for you to conserve some cash and reduce your DCA purchases or even eliminate them completely.

One other consideration: if you believe the market is going straight up, as it did during most of 2019, then you should invest your entire lump sum at the beginning of the period because your investments will be priced the cheapest.

​It’s tempting to buy depressed companies.

Because you can never predict the market, consider the DCA approach, which reduces volatility and anxiety.

Takeaways:

• Keep investing on a monthly basis. Put any spare cash into the market.
• If you have been trying to time the market, use DCA instead to even out the ups and the downs of your investments, potentially increase returns, and reduce your trauma.

Thinking you are bullet proof and continuing with the big purchase

Perhaps you are seeking financing for a $1.5 million house, or want to go forward with a $75,000 kitchen remodel or $150,000 pool and spa. This may not be the time to sink a lot of money into your house, dream vacation, or fancy new car.

In light of the pandemic, many physicians are taking pay cuts, and some are not taking any salaries at all. Twenty percent salary reductions are not unusual. Even physicians who work for state-funded hospitals realize taxes are likely to be way down for the rest of the year, and that will impact their salaries over time.

After the 2008 crash, real estate values took a long time to recover. If history repeats itself, that $1.5 million dream house is likely to be worth only $900,000 in a few months. The swim spa may cost $150,000 now, but if your contractor is desperate for work, he might charge only $85,000 at the end of the summer.

Takeaways:

• Even doctors can have pay cuts.
• Don’t be in a hurry. There can be great deals in a down market.

Not thinking like a long-term investor

Now is the time to be thinking like a long-term investor. Even the 65-year-old doctor needs to be thinking long-term. We run our retirement plans to at least age 95. So, at 65, you will need your investments to last 30 more years. Any blips in the market today will only have the most minor impact on your finances 20 or 30 years from today.

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Think about your house. Some days the value of your home is up 5%, and other days it might be down 10%. But at no time are you likely to say to yourself: “My home is up 5%, I should sell now.” 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 decide to sell.

You can take this long-term view with your home because, unlike the daily stock reports, you are not constantly bombarded with information about its value. Take the same approach with all of your finances, and don’t get caught up in the daily investment news. Negative market news, as opposed to positive market news, earns the media more eyeballs and more advertising dollars. Think of this as entertainment, not advice.

Takeaways:

• Any changes today in your investments are likely to be meaningless over the long run.
• Taking the long view in your investment reduces worries, something we could all use during difficult times.

Conclusion

One pundit said recently, “The same folks who invented the roller coaster, also invented the stock market.” The people who stand up on the roller coaster, or get off before the ride ends, are the ones who get hurt.

You have enough stress in your life during good times. Today when you are short on PPE, home-schooling your kids, and exposed to a deadly virus on a daily basis, stay calm and avoid making these mistakes about your finances. In a few years, you will be glad you did.

Katherine Vessenes, JD, CFP, is the founder and CEO of Minnesota-based MD Financial Advisors, who serve over 500 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 physicians. She can be reached at Katherine@mdfinancialadvisors.com.