Approaching Market Uncertainty Early in Your Career
One day during my intern year, not long after the stock market crash of 2008, my chief resident changed the morning report format to discuss the stock market. She informed us that the S&P 500 had lost nearly 50% of its value from a year earlier.
Despite that fact, the message she conveyed was of opportunity rather than panic.
Bear markets are defined as at least a 20% loss in value relative to peak. It is in those bear markets that we build most of our retirement growth, we just cannot see it until much later. In retrospect, a dollar invested that day in 2008 would have doubled in less than five years.
It goes without saying that your investment account is not the most important thing during a pandemic, but eventually we will turn our attention to our retirement portfolio.
Whenever the stock market becomes turbulent, I try to remind myself of a few principles for early career investing.
Don't "Over-Peek" at Your Account
If you are not planning to make transactions, calculating how much potential money you have lost is neither pleasant nor productive.
Check your account at set intervals to ensure your investments are distributed appropriately, otherwise try not to look during the highs or the lows.
The stock price of Apple today has very little to do with its stock price the day you retire.
Stick to Your Investment Plan
This is the third bear market and sixth market crash since 2007, but that short-term volatility is inherently linked to the long-term returns that make stocks such a crucial part of retirement savings. Short-term investors pay a premium to buy and sell rapidly, but profit made this way is taxed as regular income compared to long term-capital gains tax rates, which are much lower.
This becomes increasingly important as one moves into higher tax brackets.
For the average investor, it is almost impossible to beat the return of a diversified index fund over 20+ years. Although there are "risk modification" funds which limit yearly losses in a bear market, these will also cap the maximum gains that often follow a down year.
Finally, think about stocks being "on sale." Gasoline is cheap today, but we did not walk to work in February and wait for gas prices to fall before filling our cars. We needed gas last week, this week and next week, so enjoy buying at a discount.
...But Do Not Try to Time the Market
As physicians, we like to look for meaning in trends. However, there are too many individuals, companies and computer algorithms responding too quickly to pick "the bottom." It is better to invest with imperfect timing than wait on the sidelines until a bull market is already underway.
There are many ways to do this, but the easiest is by establishing set purchasing intervals within your account. Scheduled buying of a set dollar amount, also called dollar cost averaging, allows you to negate some of the volatility because at the end you will be buying at the average.
Additionally, because the dollar amount is fixed, you will buy more shares when the price is low. If you cannot resist trying to time things perfectly, set aside a small amount of money to invest speculatively.
In summary, all three reminders have something in common: they do not require you to do anything extra. As physicians in the middle of a pandemic, we have so many things to do and worry about, and your investment account should not be one of them.
This article was authored by Thomas J. O'Neill IV, MD, cardiologist at Wake Forest Baptist Medical Center in in Winston-Salem, NC.