"When?", not "How?" is the question ODs are asking about the stock market

January 26, 2020
Not surprisingly in today’s market, I’m doing a lot of financial planning for ODs who are selling their practices, both to larger buyers and to other ODs. One of the first questions I get from clients is “How do I invest my money?,” but lately the conversation has quickly revealed the real question to be “WHEN do I invest my money?”

It’s not hard to see why doctors feel this way. It’s been 10.5 years since the last US recession (versus a historical average of 7 years). The stock market is hitting all-time highs, and technical indicators such as Price to Earnings ratios and unemployment suggest we’re at a peak in this cycle. But what to do about it?

For my clients who are saving towards retirement through 401k or Simple contributions as well as additional savings from practice distributions, this is an easy answer. Adding to your portfolio over regular intervals is a natural way to dollar cost average into the market, and the goal is long term portfolio growth with little concern for the bumps along the way.

But for doctors selling their practices, the proceeds are probably the most substantial addition to their investment portfolios they’ll ever have. And regardless of what planning suggests their long term expected portfolio growth rate is, I’ve never met a doctor who wanted to be the investor put all their money in the market right before the crash of 2008.

It’s not wrong to be concerned about this. Let’s say a doctor sold their practice, netted $1 million and put it in the S&P 500 on January 1st, 2007 with took no withdrawals from their portfolio. At the end of 2019, their original $1 million would have grown to $2.29 million. Not too shabby for a 13-year period. But had they stayed in cash and timed the market perfectly by investing on January 1st, 2009, that $1 million would have grown $3.6 million at the end of 2019. I certainly know which end number I would prefer!

Here’s the problem: those 3 words “timed the market”. It’s really, really hard to do. I would argue almost impossible. First, ask me how many of my clients wanted to put all of their money in the stock 3 months after Lehman Brothers collapsed (January 2009). I’ll give you a hint: very few.

Also at stake: the literal rise before the fall. Take last year as an example, when many of my clients and prospects felt like the market had already peaked. If a doctor was waiting to invest in the S&P 500, they missed 28.88% returns. If this year experiences similar growth, a doctor sitting on the sidelines for 2019 and 2020 would have missed out on over combined 50% growth.

And there’s the rub. No one knows what’s going to happen or when. So what do I tell my doctors who are selling their practices?

In addition to making sure my clients have adequate assets to last through retirement, I also care about their ability to sleep at night. For ODs concerned about market downturns, we take a middle-of-the-road approach by dividing the monies going into the stock market over a 2 or 3 year time frame so that everything isn’t at risk in a lump sum but also not missing out on all return.

There’s a reason investment companies have the disclosure “past performance is not an indicator of future results”- there are no set rules to when and how the stock market performs. The most important aspect of portfolio management is to develop an investment strategy that you can stomach through good times and bad. And don’t try to time the market.

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