By: Chris J. Roe, CPA/PFS
In the midst of this roller coaster market, Rx Wealth Advisors is get two questions. "Shall we go to cash?" and "Is now the time to buy stocks?" Have you ask yourself these questions? As a doctor, are your colleagues asking these two questions?
These questions are very common in times like these. However, these two questions are at the exact opposite thinking of each other. The first question passes through our mind as our emotional self invokes our survival mechanism. Once we feel our survival is no longer a concern, we immediately switch into fear of missing out (FOMO) mode.
While our survival mechanism keeps us from dying in dangerous situations, it does not serve us, the long-term investor, well during these time. It can cause us to make irrational decisions that may have profound long term affects on our finances. Here are five things to use as your GPS if you are struggling with these two questions.
Should I Invest Now?
Invest during a market downturn can make a lot of sense. Asset prices have declined and certain stocks, real estate and more are trading at a fraction of what these assets traded hands just a few months back.
Doctors who have years, or even decades, before cash is needed from their portfolio may be the ones who can really benefit from this downturn. This is especially important for young doctors just starting to build and diversify their portfolio. They have the time needed to watch the market recover and their bargain-priced assets slowly regain their value.
Consideration #1: Do I have Sufficient Cash to Weather the Storm?
With the uncertainty this global pandemic has brought to America, many people are preparing for the worst job loss, medical bills, or even the unexpected loss of a loved one. Who would have thought that a significant number of doctors have been placed on reduced schedules or even furloughed during this significant health crisis. And as we continue to weather this bear market, we are already seeing record numbers of Americans (including doctors) filing for unemployment. We are still early into this crisis, but if we look back at the 2007-2009 recession, unemployment rose to five percent at the end of 2007 and up to nine and a half percent in June 2009. Unemployment actually didn't peak until after the recession ended, at 10 percent in October 2009.2
Even if you are certain your physician specialty is secure and stable, it does not mean you are immune to loss of income during this market downturn. The number of cases of COVID-19 is growing every day, meaning it’s entirely possible that you may need to care for a sick loved one or yourself in the near future. Depending on your job’s policy on leave and your eligibility for the recently passed Families First Coronavirus Response Act, this could mean going for an extended period of time without a paycheck. You should make sure during this time that your personal disability policy is paid up in case you happen to get sick.
While the amount you need in cash is depended upon your personal situation, a general rule is to have three to six months of your monthly spending immediately available. To be safe, we recommend at least six to twelve months depending on a client's specific situation. As you consider putting your additional income towards investments, first take a look at your savings. You want to feel comfortable with what you have already saved and be ready to live off of your savings if you had to. Once that is taken care of, then, you may be ready to turn your focus toward long-term investing.
Consideration #2: Should I Pay Off My Mortgage or other debts?
In the fourth quarter of 2019, the New York Federal Reserve reported that American household debt rose to $14.15 trillion.3 While the majority of this debt covers things such as housing, auto loans and student loan payments, this still leaves $46 billion in credit card debt.3 If you find yourself in the position of choosing between paying down debt or investing, there are plenty of factors to consider, and this a great reason to consult with your financial advisor. Working together, you may find that paying off debt will serve you better over increasing your investments in stocks.
"Cash is King" !! During these uncertain times, we recommend that cash be conserved, as much as possible, due to the uncertainty that lies ahead. When the uncertainty passes, there is always time to pay off debt if it fits into your long-term financial plan.
Consideration #3: Should I Buy Stocks Now?
It is generally recommended that you invest cash immediately if not need in the short term, but these are uncertain times. While It feels like the market turned overnight, it is important to remember that recessions and downturns tend to last awhile. Our last recession, for example, lasted 18 months.4 What does this mean if you are eager to jump in this stock market? It means you have time to make a rational decision.
You should consult with your financial advisor and make sure that investing your cash fits into your long-term financial plan. There is no need to make a hasty, emotionally driven decisions if you have many years to go before you need the cash. While the markets will continue to fluctuate, they are more than likely to not recovering overnight, even if it seems likely.
Consideration #4: Am I Emotionally Prepared to Watch My Account Drop?
If you choose to buy while the market is down, there is always a chance that you will buy when it has yet to reach “rock bottom”. This means that you, as an investor, should be prepared for the roller coaster your investments will likely continue on. While investments are always fluctuating, during an especially volatile period, there is a good chance you will be watching your stocks rise and fall on a downward trend for months.
All of us have a personal attachment to our money, and it is important to consider the emotional toll watching your assets drop in value will have on your mental well-being. If it is unbearable to watch market fluctuations; then, the potential gains from investing now may not out weight the emotional toll you have to endure. It is important to express and discuss your concerns about this to your financial advisor before deciding to invest during a market downturn. Your advisor will help you determine if investing in these markets makes sense based on your goals and financial plan.
Consideration #5: Am I Still Following My Investment Plan?
Do not treat the tempting lower stock prices as a chance to forego your investment strategy or plan. This is a time in which you will want to be precise and logistical about the next investment decisions you make. Remember, the markets are forward looking when they price investments. Sometimes, the companies with large share prices declines, may look cheap, but are not always the best investment opportunities going forward. These companies have declined for a reason (lower expected future earnings). As an investor, we must decipher if the reason is simply temporary or permanent.
In these times, you want to to be sure you are maintaining diversity and not taking on excess risk. You want to be sure that any investments you make in these times are still reflective of your greater long-term financial goals.
In 2020, Americans are facing a future of uncertainty, between the global pandemic of COVID-19 and the economic instability of a recent market downturn. If you are in a position to continue to invest, investing now may prove to be a beneficial move for your portfolio, but it is important to consider your decision carefully and thoroughly. Now more than ever, it makes sense to seek a second opinion on your investment plan and to consider your next financial decisions carefully as you navigate through these upcoming months.
2020 All Rights Reserved. This content is developed from sources believed to be providing accurate information, and provided by Twenty over Ten and Rx Wealth Advisors, LLC for general informational purposes only. It may not be used for the purpose of avoiding any federal tax penalties and in no way is meant to provide specific tax, legal or financial advice. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any advice or security.