Inflation, Recession, and Bears (Oh My!)

As an Early Career physician, it can be overwhelming to tune into the news cycle with the seemingly endless succession of negative stories. What is the current inflation rate? What is happening with interest rates? Are we going to go into a recession? Are we in a "bear market" and what does it mean for me? 

The real question you have to ask is: How do these external factors affect me?

The truth is, not much. If you have a written financial plan, with short-term and long-term goals, market fluctuations should not have a major impact on most Early Career physicians. Bear markets, defined as a drop of 20% from the market peak (most often referencing the S&P 500, NASDAQ or Dow Jones Industrial Average), are considered regular occurrences in the business cycle.

In fact, a bear market is often considered an opportunity for early investors because the cost of shares purchased during a bear market are, by definition, at least 20% off of the peak price (who doesn't love a good sale?) and, historically, over the course of years, the stock market has continued to increase in value. Does this mean stocks always go up or can't go down further once in a bear market? Absolutely not! Trying to time the market would be great if you had a crystal ball or a time machine, but for the average investor, the behavior of regular saving and investing is the best way to accumulate wealth.

What are some strategies for an early-career physician facing their first bear market?

  1.  "Always be buying" – the beauty of dollar-cost averaging (investing a fixed dollar amount or percentage of pay every pay period) over a 20+ year career is that when you save and invest regularly via a retirement vehicle (401k, 403b, 457b, SEP IRA, Simple IRA) and low-cost index funds in a taxable brokerage account, market fluctuations will average out in periods of volatility and the end-goal of regular savings will be achieved. When you look back 20 years from now at the shares purchased in the summer of 2022, you will see some of the greatest gains.
  2. Have a safety net in place. This includes term life insurance (avoid the unnecessarily expensive, "whole" or "universal" or "variable-life"), own-occupation disability insurance, and an emergency fund of 3-6 months of expenses saved in cash.
  3. Wait on large purchases, if you can. New cars and the "attending house" are common, large purchases for early-career physicians. Often these purchases are made with minimal down-payment and are financed. Please, do not let lifestyle creep destroy your financial plan.
  4. If you happen to have "old" accounts such as rollover IRA or 401k/403b accounts from previous employers, you can covert these to a Roth retirement account. This means you pay the tax on the total amount now and all gains will be tax-free in the future. Bear markets tend to be good times to do this because the total value is lower (by at least 20%) and even at a relatively high-income tax bracket, the conversion has decades of compounding interest prior to retirement. The major benefits of Roth retirement accounts are that they aren't subject to the rules around required minimum distributions (RMDs) and Roth accounts are passed down, tax-free to your heirs at the time of death.
  5. Purchase "Series I Savings Bonds." These are government-issued, inflation-adjusted bonds purchased directly from the United States treasury. The current rate at the time of this article is 9.62% (rate will adjust twice annually). There is a limit of $10,000 per person, per year and funds cannot be withdrawn for at least one year from purchase.

Strategies 1-3 should be key components of every financial journey, while 4-5 are unique to the current environment.  Try not to lose focus of your financial goals as markets enter periods of volatility. As the "Oracle of Omaha" Warren Buffett said: "Be fearful when others are greedy and be greedy only when others are fearful."

This article was authored by Anuj Mediratta, MD, FASE, FACC, a multi-modality imaging cardiologist at Morristown Medical Center in New Jersey. Twitter: @anujmedirattamd.

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