Finally, stocks are risky. While the worst year for a 100 percent stock portfolio was a 43.1 percent loss, that understates the way a loss feels. That figure comes from the loss from Jan. 1 to Dec. 31, not the peak-to-trough, which is the percentage decline from the fund’s highest net asset value (peak) to the lowest net asset value (trough) after the peak. For example, in 2008, the US stock market lost 37.1 percent. However, the peak-to-trough loss was -48.4 percent. It was even worse if you extend the period to the bear market bottom in March 2009 (-52.9 percent). Basically, in a nasty bear market, you should expect to lose about 50 percent of the value of whatever portion of your portfolio you invested in risky assets such as stocks.

If you have not lost real money in a bear market before, it is a bit difficult to understand how it feels. It is not a matter of logically looking at a 40 percent to 50 percent loss and saying, “I’ll tolerate that because I want those 10 percent returns.” It is more of a visceral feeling of loss. While intellectually you may be able to tolerate that sort of loss, emotionally you may not be able to withstand the very real pressure from your partner, family members, coworkers, media, and your own psyche. Experienced physician investors compare it to the sleepless nights associated with being named in a medical malpractice lawsuit.

To make matters worse, if you succumb to that pressure and abandon your plan in the depths of a bad bear market, the results will be far worse than if you had just invested a little less aggressively in the first place. Thus, to get the highest possible returns, you generally want the highest stock-to-bond ratio that you can tolerate without selling out at a market bottom. Unfortunately, most people don’t know what they can tolerate until they have invested through a nasty bear market, such as 2008–2009. There are many attending physicians in the workforce who have never done that. My advice is to pick an asset allocation that is less aggressive than what you think you can tolerate, at least until you pass through your first bear and prove your risk tolerance to yourself. Don’t overestimate your ability to sleep well while hemorrhaging money.

There is another factor to consider. The data in Table 1 come from the past. Physicians in the evidence-based medicine era are all quite familiar with the limitations of retrospective data. The future does not necessarily have to resemble the past. The real risk of stocks is not that they will decline in value temporarily, but that they will decline in value permanently. While that risk is likely fairly low, it’s not zero. Owning some less risky assets in the portfolio is a good way to hedge against that unlikely possibility.