For those of us who are securities investors, with a good chunk of cash in stocks, bonds, and other publicly traded investments, we could improve our rate of return by increasing our contribution during market downturns. Timing the market with our income means that we increase our income and increase our investment contributions at such opportune times.
Market Timing Concept
Blanket statements are often misleading. In the index fund investment community, timing the market by putting money in when the market is “low” and selling when “high” is considered a bad idea – it’s called market timing which is a no-no.
There are numerous reasons. The main 2 are time out of the market and being unable to predict the highs and lows.
Time out of the market – Whenever you are out of the market, you don’t get to benefit from earning dividends on your investments.
Indistinct highs and lows – The second factor being that we don’t often know when the markets are at their highest and when they are at their lowest – at least not until that time has stamped itself into history.
Jumping in and out of the market numerous times due to false alarms can diminish our returns.
Index fund investors believe in a buy & hold strategy, believing that in the long-run the aggregate market will go up. They conveniently don’t call this timing, in fact, it’s exactly that, timing – but it’s longterm timing.
It’s Okay To Work Less
If you aren’t particularly keen on paying off your debt or don’t have an imminent financial goal to achieve, it might make sense to cut back a little on work during times when the market is performing well – as in, right now.
“Honey, I’m going part-time! Dr. Mo said that earning money when the market is doing well is stupid!!” -no, I didn’t.
For those outside of medicine, it’s often the other way around. When the economy is doing really well then most households are trying to earn as much income as possible in preparation for potential layoffs or future potential of lack of overtime.
Physicians don’t have such problems. Fortunately, our profession remains in high demand regardless of changing economic situations. Though hiring often slows down when the economy is doing poorly. Those who are employed will often have enough opportunities for extra work.
The markets are doing well as of this writing (2017) and though it’s advantageous to continue contributing to our savings, it might also be a good time to prioritize other ways of increasing our wealth.
Don’t Spend During High Times
The average household responds to economic times by spending more when outlook appears positive. Since debt is more readily available during such times, many will even increase their debt burden.
I know I can be a downer when it comes to spending but I want to make sure that my message is clear; there is a time to save in order to build your initial wealth and there is a time to loosen up a bit, spend on what matters to you, and just trickle in some savings.
Pay Down Debt
If you are a traditional household with somewhere around $200k in student loan debt, a mortgage of $800k and a couple of car loans, then it might be a great time to contribute just enough to get your tax deductions – often a 401k or 403b with/without an employer match – and use the rest of your money to pay off debt.
Focus on the student loan, in my opinion. It’s the last umbilical cord to your grueling education. It’s an unsecured debt without an attached asset that could appreciate unlike your home mortgage.
You could calculate your after-tax income, deduct your expenses and use every dollar to pay down the debt.
Delay Spending On Expensive Items
- home renovations
- vacations
- entertainment
- speculative investments
- gadgetry
Everything costs more when the economy is doing well. Real estate will cost more and so will renovations. As more people are buying homes, they are renovating more, driving up demand, diminishing the supply which drives up costs.
If you are planning on a major landscaping job or an addition on your home, wait until the housing market stabilizes. Currently, the real estate market is so hot that contractors have plenty of business.
Increase Your Cash Reserves
If you are comfortable with your debt-payoff pace then consider adding to your cash stash.
Deciding on how much cash to have on hand depends on your investment strategy, your asset allocation, your debt load and other liabilities.
It’s important to separate your emergency fund from your cash investments. I got into the habit of raiding my emergency fund whenever good investment opportunities arose in the past. However, this often left me feeling a little naked.
Cash Investments
I used the term cash investments because cash is definitely a kind of investment. Though the return is generally near zero or, even worse, negative due to inflation, cash has a lot of potential energy versus the kinetic energy of our securities investments.
Having cash on hand can help you take advantage of opportunities, whether investing in securities which are now priced lower or investing in other opportunities which arise during such market downturns.
Increase Your Income When The Markets Tank
If you ran cross-country in high school you know that reserving your energy is important, you’ll need your energy towards the end when you have to position yourself well to win the race.
Working 50 hours a week can be tough for someone who has a family and hobbies.
If your definition of a good time is watching porn with a beer in hand then you’re probably good. If it’s exercising, cooking and spending time with loved ones, you might have a tough time with that 50-hour a week gig.
Having A Plan Will Give You Confidence
When that downmarket comes knocking, many will panic and their financial advisors will have to perform damage control.
Those who have been through market crashes will likely fare well, they will hold the course and continue investing.
You could position yourself to be less afraid of a crashing market by coming up with ways to increase your income when you see your investments lose 20-30% of its value.
Anecdotally, during a bear market securities can either tank and take a few years to recover or the market can just flatten out for a few years and offer minimal returns on your investment.
If you look at such an event as something negative then it can be an anxiety producing anticipation. Instead, if you look at it as an opportunity, you can come up with ways to prepare for it.
How To Earn More Money
Doctors often have opportunities to pick up more shifts with their medical group. This could be either taking more call, do more rounding, perform more cases or jut pick up more shifts.
If your group doesn’t offer extra hours you could get into some administrative work. However, this is something you have to prepare for, it’s not often available exactly when you want it.
Your employer may not allow you to see patients outside of your network. Frankly, this is bullshit. Your employer should have no right to enforce this even though it’s written in your contract.
There are cases of doctors who have successfully fought this but I don’t recommend creating such a stink. It’s always best to fly under the radar. If your own employer won’t offer you opportunities then start lining up work outside of your 9-5, quietly, gracefully.
My Plans For The Next Economic Decline
The areas which fascinate me when it comes to investments are business, real estate, and securities. I want to lay out my plans for the next economic decline, what I will do with my time and money.
I am fortunate that I don’t need to add more assets to my net worth, therefore most of what I am doing is an experiment, for self-edification.
Real Estate
I try to educate myself on my local real estate market. I have a good idea of which areas make for good rentals and which have a good potential for appreciation (there I go speculating again!).
If I can find another cheap condo like mine then I would try to make that purchase. These little guys make for great rental units.
I don’t care what the interest rates are at that time, most certainly higher than they are now. I wouldn’t be taking 30 years to pay off a condo which costs <$200k.
Securities
I’m sure that a part of me will panic when my investments drop down during a market correction or crash. I don’t want to act when I’m panicked, rather, I want to have a plan to implement once I change my underwear.
I believe in my current investments which are REITs, equity index funds, and a few bonds. These are sound investments, viable and likely to appreciate over the long-run.
When the prices for these investments drop, I will start picking up shifts at work to invest into these.
Business
There are few entrepreneurial endeavors which I’m interested in pursuing. Most of them won’t depend too much on the status of the economy since they are health related.
However, I would be curious to invest some of my money in businesses which spring up during a shitty economy. Some of the greatest entrepreneurs have amassed massive wealth during such times.
When the economy takes a hit, banks often tighten their purse strings. Obtaining loans becomes much harder so entrepreneurs rely on private investors.
From the research I have done on such private investing, the failure rate is incredibly high. So again, we have to go back to our asset allocation. If 2-5% is reserved for speculative investments then that’s how much I would invest.