Expert insights: How doctors should prepare financially for a possible depression
Key Takeaways
Experts are warning that a recession may be on the horizon.
When heading into an economic downturn, proper portfolio diversification is key. Investors should eschew individual stocks in favor of broad-based investment funds and investment-grade bonds.
Physicians should continue to save for retirement during an economic downturn, with the financial climate offering good deals in retrospect.
The Federal Reserve has embarked on a campaign of interest-rate tightening to curb inflation. Add to this campaign the recent collapse of the startup lender Silicon Valley Bank—which marks the biggest bank failure ever since the Great Recession—and the markets are definitely roiled.
Heightened concerns over a recession abound among experts. Based on a survey of economists, Bankrate’s Fourth-Quarter Economic Indicator poll found that there is a 64% chance of contraction in 2023.[]
In an exclusive email interview with MDLinx, we asked Anthony Watson, CFA, CFP, of Thrive Retirement Specialists, what a recession could mean for investing physicians.
MDLinx: What do you believe is the likelihood that there will be a recession? What are the indicators telling us?
Watson: The economy is being forced to slow down by the Federal Reserve through its interest rate policy decisions as it continues its fight against inflation. Whether the slowdown will reach the level of a recession is still very much up for debate, and depends greatly on the Federal Reserve's continued policy decisions and the pace of inflation.
MDLinx: How are you advising your physician clients on the recession?
Watson: We have financial and retirement strategies we follow with clients, and chances of a recession are expected and baked into our strategies.
A recession, or at least an economic slowdown, is a naturally recurring part of our economic business cycle. It should not come as a surprise.
Our clients who are still accumulating are in properly built portfolios with appropriate asset allocations that will allow them to weather these inevitable downside cycles. Our retired clients have a Plan B to fund their retirement expenses, so we do not need to sell their investment assets when they are substantially down in value.
MDLinx: What financial moves should docs make to shield their risk?
Watson: If your portfolio is not properly diversified, this would be a great place to start.
"Avoid individual stocks and bonds in favor of more broadly diversified stock and bond index funds."
— Anthony Watson, CFA, CFP
Try to achieve a 60% US to 40% international stock allocation with broad stock exposures to Europe, Asia-Pacific, and emerging markets.
If a doctor is near retirement, they should make sure there is a Plan B to fund their needed retirement spending, should their investment assets be down substantially in value at that time. Otherwise, a negative sequence-of-returns could have an exponentially negative effect on their nest egg, potentially jeopardizing their retirement security.
Reassess your risk tolerance and resulting asset allocation decision between stocks and bonds.
"Everybody has a much greater risk tolerance when the stock market is climbing."
— Anthony Watson, CFA, CFP
Otherwise, you risk not being able to stomach the paper losses and capitulating (ie, selling your stocks) and making the paper losses actual losses near the bottom of the market or, worse, failing to get back in before markets head higher, which is nearly always the case.
MDLinx: Should physicians still be investing heavily in the markets going into the recession?
Watson: Absolutely, especially if they are still in the accumulation phase of life, are not planning on needing the investments for a few years, and can handle the volatility. Chances are you will pick up some pretty good-priced stocks. as a recession leads analysts to lower their earnings forecast, and investors become less willing to pay a higher multiple for those earnings, given the growing uncertainty. This kind of environment often leads to some pretty good buys when one looks back later.
MDLinx: What assets are safer during the recession?
Watson: Broad-based index funds are safer than individual stocks. An individual stock represents equity ownership in a specific company.
During a recession, a specific company could go bankrupt, leaving the shareholder with a complete loss. If someone holds an S&P 500 index fund, the odds of all stocks going bankrupt would be near impossible.
Investment-grade bonds are generally safer than stocks heading into a recession. Not only are bond prices less susceptible to price decline than stocks in light of temporary earnings declines, but they actually stand to increase in price once the economy bottoms and the Federal Reserve begins lowering rates to stimulate the economy back to health—assuming inflation is under control, a pretty good assumption if the economy slows down enough to enter a recession.
MDLinx: How long do you anticipate the downturn in the markets will be?
Watson: Most economists are split on whether the economy will even reach the level of slowdown necessary to be deemed a recession. If we experience only an economic slowdown or shallow recession, the economy will likely not take long to resume a slow growth path.
"What's unique about this slowdown is that it is being manufactured by the Federal Reserve's interest rate policy to slow the pace of inflation."
— Anthony Watson, CFA, CFP
As long as the Federal Reserve does not overshoot on its policy measures, it will likely be short-lived.
What this means for you
The Federal Reserve has been tightening interest rates to combat inflation. This campaign has stoked fears of a recession among certain economists and investors. On the other hand, the downturn could be a mere slowdown or shallow depression—only time will tell. Despite such headwinds, physicians should continue to invest but avoid individual stocks in lieu of broad-based index funds and investment-grade bonds. Keep in mind that any downturn can be a remarkable buying opportunity in retrospect.