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The White Coat Investor: It’s time to follow your plan

Illustration of physician with piggy bank doing financial planning

The last few weeks have seen a dramatic stock market crash and even a downturn in the bond markets attributed to the worldwide coronavirus pandemic. This has led to a perfect storm for many doctors with decreased clinical income combined with a dramatic decrease in their net worth.

Locum tenens physicians often function as independent contractors, paid on a 1099 rather than a more typical W-2. These doctors are actually small business owners and take on additional risks in addition to those of employees. Many of them — particularly those who do more elective procedures — are currently sheltering at home with their families and may find this is a perfect time to finally get their financial plan in place. Rather than spending 12+ hours a day reading the latest news on coronavirus and increasing your anxiety, why not spend a few minutes each day in the coming weeks becoming financially literate and putting a financial plan together? Perhaps you can even get that life insurance, disability insurance, and will you’ve been meaning to do in place.

The value of a financial plan

In my work at The White Coat Investor over the last 9 years, I have been instructing physicians to put together a written financial plan and warning them that they would want it when they encountered the inevitable bear market. A comprehensive written financial plan provides a sense of control and a road map to financial success. In fact, when millionaires are polled as to the causes of their success, nearly all of them list “having a plan” as a significant factor.

Part of that written plan is a plan for your investments, and especially your behavior regarding those investments during the inevitable bear markets that your portfolio will face before and during retirement. Even a cursory study of financial history will reveal that significant drops in the value of the stock market are relatively frequent. On average, the market drops 10% (often called a correction) about once a year. The market drops 20% (often called a bear market) about once every three years. Many people have referred to the last ten years as a long bull market, but in reality, there were two occasions (2011 and 2018) when the market dropped about 20%. For a long-term investor in the great publicly-traded corporations of the world (preferably through low-cost, broadly-diversified stock index funds), a bear market should be an expected event, not something you need to react to.

Make your plan and stick to it

If you do not have a written financial plan, I would encourage you to put one in place as soon as possible. This can be a do-it-yourself project if you are willing to read financial books, spend time on financial blogs and forums, and review your plan with other educated do-it-yourselfers. Others find an online course such as the one I put together a couple of years ago at The White Coat Investor to be a helpful aid in drafting up a financial plan. But the majority of doctors should enlist the aid of a fee-only, experienced, fiduciary financial planner who offers great advice at a fair price in drawing up their financial plan.

If you already have a solid, written financial plan in place, a bear market is not the time to change it; it is the time to follow the plan. If the plan says you are supposed to have 60% in stocks and 40% in bonds, then make sure you do so. If the plan says you should rebalance your account back to its original percentages every April 1st, then do so. If the plan says you should rebalance your portfolio when the percentages are off by 5% or more, and they are, then rebalance it. Panic selling in response to market events is a well-known detractor from your long term returns. Don’t try to time the market by jumping in and out; you are more likely to hurt yourself than help yourself, and you will incur transaction and tax costs by doing so. Continue making your regular contributions — these investments will provide some of the best long term returns you ever have.

For advanced investors

There are two other options to consider during a bear market for more advanced investors. The first, Roth conversions, is for an investor who has been looking for an opportunity to move some of the money in their tax-deferred retirement accounts into a tax-free (Roth) retirement account by prepaying the taxes that would be due upon withdrawal from the tax-deferred account. When the value of the account is lower due to recent market losses, the tax cost of this conversion is also lower.

The second, tax-loss harvesting, is a way to share your losses with Uncle Sam, at least in a non-qualified or taxable brokerage account. If you have mutual fund shares that you are now underwater on, simply exchange them into a similar but not identical fund, such as from a Total Stock Market Index Fund into a 500 Index Fund. This captures that “tax loss.” These losses can offset any capital gains you may have and up to $3,000 per year can be used to offset your ordinary earned income from your job or self-employment income. Even if you don’t use all of those losses in 2020, they can be carried forward indefinitely. You essentially still own the same investments, but you have lowered your tax bill without any real change to your portfolio.

Protecting your paycheck

In this particular bear market, especially with the passage of the massive CARES Act, you may find other smart financial moves you can take. For example, many independent contractor locum tenens doctors don’t realize they are eligible for both the Paycheck Protection Program (which provides a tax-free forgivable loan for up to 8 weeks of payroll expenses) and the Pandemic Unemployment Assistance Program. Whether or not you are working less than you usually do, be sure to look into the details of both of these programs.

The late Jack Bogle, founder of Vanguard, famously told investors, “I’ve said ‘Stay the course’ a thousand times, and I meant it every time. It is the most important single piece of investment wisdom I can give to you.” He was referring to times like these. While every bear market is unique, they all end the same way and, most importantly, they all end. Don’t sell low, stick to your plan, and you will be glad you did within just a few years. You haven’t invested money in stocks that you need in the next decade, so let them do what they do—which is outperform other investments in the long run, but with massive volatility in the short run.

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