We are currently (May 2022) in the middle of a big stock market downturn or decline or dip or correction or even…dare I say, bear market! Just yesterday on May 18, the S&P 500 declined by greater than 4%!
And let me tell you. People are really concerned. And I get it. It can be unnerving to see a daily 2-4% evaporation of your stock market investments in a downturn. In some bear markets, you could lose 25-50% of your wealth…temporarily of course.
Because…how you act and invest in a stock market downturn will absolutely set the stage for your ultimate ability to build wealth. In fact, I would argue that what you do during this (or any) downturn will have the greatest impact on your ultimate wealth than anything you do in a bull market.
How can I say such a thing?!
Warren Buffett (you may have heard of him? He had a small time role in the hit TV series, The Office…) has a great anecdote.
To paraphrase, “Let’s say all you want to do is eat hamburgers. Would you be happy or upset if hamburgers went on sale? The question answers itself. However, longterm investors rarely react that same way when the stock market declines. But, if all you want to do is buy stocks, don’t be upset when the stock market goes on sale. Instead, buy more stocks!”
This anecdote is 100% true.
The problem is twofold:
- It almost seems too simple or hokey to hold true (but remember, it’s the simplifiers in life who actually understand things)
- We hold a fear that because the stock market is down now, it will be down forever
I can’t really address the first concern above except to say, embrace the simple. Especially with investing. Making things more complicated than necessary is a direct way to hurt your wealth building. Remember the simple formula…
With regards to the second concern…well, let’s just get into our list…
11 tips for doctors to get through this (or any) stock market downturn
And off we go!
1. Remember…the sun will come up tomorrow
About that pesky second concern in the back of our mind. The one saying, “But what if the stock market downturn never gets better? I gotta get out now!”
Well, you’re right. No one can say for 100% certain that things will recover. The same way we are never guaranteed each night that the sun will rise in the morning.
But, if things decline forever, then the US and world economy collapses. Society follows. We have bigger issues…
This is exactly why investing in broadly diversified index funds representing the overall market for the long term is the way to go.
2. In fact, convince yourself a stock market downturn is the best time to invest…
…Because hamburgers just went on sale, my friend!
So far, every stock dip or bear market has been followed by a recovery. In fact, studies show that one of the best predictors of future stock market returns is the current yield of the stock market when you invest. And they have an inverse relationship. I.e. if you invest when things are bad, your return is generally higher in the long run…
Some of the best historical returns have been realized after investing in the darkest of days. And sure, historical returns don’t guarantee future ones. But we are talking about the overall stock market over the long term. So our odds of success are maximized.
Watch Jordan’s Masterclass Webinar on The 12 Steps to Financial Freedom for Physicians here!
3. Remind yourself how compound interest works
Compound interest is the greatest mathematical invention ever made. At least that’s along the lines of what Einstein said.
It’s magic because compound interest allows you to make interest on the principal of your investment as well as the interest you accrue along the way.
But the key is that you need to keep holding onto your investments to keep accusing interest on principal and interest on interest.
Any selling (especially when the market is low) will seriously interrupt your compounding and halt your wealth building.
4. Go back to your written financial plan
Right now is a great reminder of exactly why a written financial plan is so important.
Hopefully you wrote one during a time of financial calm and laid out, among your financial goals and priorities, how you would invest your money. And hopefully you also wrote what you will not do when investing your money. Including selling during a stock market downturn or bear market.
Since you wrote that with a cool head, you can now look back and use your past self to convince your present self not to deviate from your own rules.
Your financial plan is your road map to financial freedom. So stay in the road!
And this is a great time to start working on a written financial plan if you don’t have one! You can see mine and use it as a template here.
5. Appreciate your doctor income
As a physician, you are a high income earner.
This means that you have the current income and future income potential to withstand a stock market downturn.
You are investing for the long term. That means that you don’t need the income or cash flow now. In fact, the more income streams you have outside of your investment income, the better and longer you can withstand any dips and dives in the market. That’s why I have focused on building these additional income streams.
But the main point is this: Your high income helps shield you from the impact of the market.
Related Post:
How to Increase Your Compensation Both Clinically and Non-Clinically
If you are relying on your investment income for expenses though…
6. Reflect on your risk tolerance and asset allocation
If you need the income or investments now and you are not sleeping well, that means you need a more conservative asset allocation.
Now is not necessarily the best time to make this adjustment because you will be selling low (more risky stocks) and buying higher (more conservative bonds). But when things settle out, you definitely need to adjust to your actual sleeping point.
This post can help: Asset Allocation and Rebalancing: A How-To Guide for Buying Low, Selling High, and Relaxing In Between
7. Tax loss harvest
Just because the stock market is down doesn’t mean that you cant actively do something to build your wealth.
This is a perfect opportunity to tax loss harvest. This is basically the practice of selling some stocks (index funds) that have experienced a decline. Thus, a loss is realized. Up to $3,000 of such losses can be used as a tax deduction. Anything over and beyond this can be used to offset current or future passive gains.
But wait, isn’t the whole point to avoid selling when the market is down?! Yes, it is. But in this case, you just buy a similar, but not substantially identical, index fund to replace the one you sold.
In this way, you kept your index fund holdings essentially the same but gained some tax deductions.
The key as I mention above is that the two stock holdings cannot be “substantially identical” or this triggers a wash sale, essentially washing away any tax benefits.
8. Practice mindfulness
It’s such a hard thing to do and something I struggle with. But staying in the moment is a great goal to work towards.
And this is a great opportunity to practice.
When you find yourself focusing or worrying about the stock market, refocus to the present moment. Often times, we can convince ourselves rationally of something, like the fact that the stock market dropping is a normal phenomenon that may actually help, not hurt, us. But our minds still keep drawing back to it. Because we are not always rational.
Mindfulness can help us to refocus.
9. Actively ignore the noise
TV programs and newspapers make money by generating interest. And nothing generates interest quite like anxiety or fear.
So, these media outlets are of course not going to cover a stock market downturn by encouraging everyone to be calm and invest for the long term. No way! They are going to feed the frenzy.
So actively ignore it! Stop checking websites. Stop watching these TV programs. Better yet, just stop even checking the stock market. It’s daily fluctuations (should) have no impact or bearing at all on your actual financial plan.
Related Post:
My Love Affair with the Fading Excitement of Stock Market Investing
The “noise” also includes your financial advisors. They make money when you trade stocks or make sales. So if they are encouraging you to sell, this is (A) a conflict of interest and (B) just not good advice.
That’s a sign it may be time to look for someone else or learn to manage yourself…
Related Post:
The Simple Path to Wealth for Doctors: Back to Basics
10. Don’t be tempted to rebalance if it’s not time
Rebalancing is a great strategy. Basically it means that you rebalance to your asset allocation back to the goal percentages.
It’s a guaranteed way to make sure you are selling your securities high and buying them low. And that’s how you build wealth. It’s also been shown to improve return over the long term.
But you really should only do it once a year. That’s the key. If your planned time to rebalance is now or during a downturn, go ahead and do it.
But don’t just do it because there is a stock market downturn. Stick to your planned timing. That’s how rebalancing works.
11. Refocus your energy
Read a book.
Binge watch a show.
Play with your kids.
Exercise.
Enjoy your rewarding work as a physician.
Do anything but watch the stock market!
Let’s sum it up!
How you handle a stock market downturn will have a huge impact on your ultimate ability to build wealth and achieve financial freedom.
While a bear market can be scary, it’s actually the best time to invest. Buying stocks on sale will ultimately contribute the most to your wealth building. As long as your asset allocation and risk tolerance are well aligned, you are best to stay the course and find somewhere else to turn your attention!
Maybe now is a good time to learn about real estate investing or to start a side gig!
What do you think? How are you handling this stock market downturn? Are you staying the course? Have you sold anything? Let me know in the comments below!
Thank you so much for writing this post…it truly helps in this trying times. You are absolutely right on item #5.
Please continue your drive to communicate with us. You are so gifted!
EGE
Thanks Enrico! šš
dude you da man! great post as always Jordan. just small comment on rebalancing technically has not been shown to improve returns in the long term. Just letting your stocks ride and never selling them actually would bring you better returns in the long term (kind of makes sense).
though yeah definitely have to rebalance to make sure you stay within your risk tolerance, and that allows you not to sell in a bad bear, and that is what actually improves returns š
I’m loving this market crash! please investing gods let it go down further!!!
Thanks Rikki!
Youāre exactly right about rebalancing. But in fact some studies have shown that rebalancing actually does improve returns! Taken from the 20 years preceding Dec 2017, a 60/40 rebalancing strategy actually improved returns by about 0.1% and reduced volatility by about 1%. A real win-win!