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Note: This column was written on April 30. Economics, like the coronavirus itself, is an evolving situation. Please take that into account as you read the following:
Question: What lessons can we draw from the recent coronavirus-associated economic downturn, or the “CoronaBear” market?
Answer: Even at this early juncture, I think there are at least six lessons that can be drawn from this collective economic experience.
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. First, don’t put all of your money into the stock market, placing at least some of it into less-risky assets like bonds. Second, 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. Finally, hold those stock index funds for decades. Money you need any time soon does not belong in stocks.
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.
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, especially emergency 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 by 50 percent or more. 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.
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 had 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 forgiveable 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.
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.
Finally, we learned that wellness matters. Although we all experienced some of the “war-like” attributes of fighting a pandemic, the experience of emergency 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.