This was not the article I planned to release today, but with the recent volatility in the stock market, I figured this post would be timelier. The S&P 500 fell a combined 10% on Thursday and Friday, April 3-4, reaching the threshold for a market “correction.” Some notable stocks fell even more, with Apple down 16.3%. Since the market high of 6144.62 on Feb 18, the S&P index is down 17.3%, nearing the 20% loss that defines a “bear market.” Who knows what will happen when the market opens on Monday?
Many investors are scared and unsure of what to do. Should you sell, sell, sell? Is this the time to be greedy while others are fearful? Or is this all much ado about nothing?
A Little Historical Perspective
The market drops 10% every 30 months on average, while bear markets occur once every 6 years. The last market correction was in 2023, when it dropped 10.3% from July to October, while the last bear market was in 2022, with a 25.4% drop from Jan to Oct.
A 10% drop in two days is unusual but not unprecedented. In fact, the market has dropped 10% or more in a single day five times, led by a 22.6% decline on Black Monday, Oct 19, 1987. The 1929 stock market crash, which started the Great Depression, had two days with more than a 10% drop (and a third with -9.9%), while the other two were in March of 2020 at the start of the Covid-19 pandemic. Yet, over time, the market has gone up. Here is a historical chart of the S&P 500.
This chart demonstrates that since the 1920s, the market has tended to go up and to the right, but not in a straight line. Let’s blow up portions of the chart to take a closer look.
On the left is the Great Depression, where stocks fell an unbelievable 83%. On the right is the Dot-Com crash of 2000, followed by the Great Financial Crisis (GFC) of 2008. In total, the market fell 57% from its peak.
I lived through the Dot Com crash and the GFC, yet these historic market crashes barely affected me. Why? Because the way stock market downturns affect investors depends heavily on what stage of life they are in.
What Life Stage Are You In?
There is a natural arc to your working life; you start your career, slog through the middle, approach retirement, and then finally retire. A significant market downturn affects you differently in each stage.
Early Career
For a typical 30-year medical career, “early” can be considered the first 10 years after residency. You start this stage with little to no assets and might even have a negative net worth due to student loans and/or a mortgage.
The difference between what you earn and what you spend determines your savings rate, which is what allows you to start investing money in the stock market. The question is not what returns you earn but how much you can save and invest.
Dollar-cost-average (DCA) investing during your working career allows you to buy a fixed dollar amount of stocks each pay period. If the market drops, you can buy more shares with the same money, which means that early in your career, you should pray for a market downturn.
Today, you can buy the entire US stock market index, VTI, at an 18% discount! As long as the market stays down, you get to buy stocks on sale. Remember that in the short term, the stock price has nothing to do with how many chips Nvidia sells, how many people use Instagram, or how many cigarettes Americans smoke. The stock market is not the economy.
What if you started your career at the onset of the Great Depression? If you dollar-cost-averaged during the entire 25 years it took the market to return to its pre-crash level, you still earned 10% annually. Then, just as you approached retirement, the market took off.
What if you started your career just before the GFC? I don’t have to imagine it because I graduated from residency in 2006. The annual return for the S&P 500 has been 11.3% since 2008.
If you are in the first decade of your career, keep investing. Dollar-cost-average into the downtown; if the future is like the past, you will eventually be handsomely rewarded.
The Middle
We can define this stage of a 30-year career as the middle third, years 11-20. You now have a firm grasp on medicine and (hopefully) a nice nest egg invested in the stock market. You also probably have a lot going on in your life and career: marriage, school-aged children, a mortgage, aging parents, and a leadership role at work.
A drop in the stock market during this stage begins to hurt because you actually have something to lose. Compound interest has not started to really work in your favor, so most of the money you have in the market is from your hard labor.
Fortunately, you have plenty of time to recover. While the US stock prices were down for 25 years during the Great Depression, most downturns have been much shorter. The market took approximately 6 years to recover after the Dot Com bubble and the GFC, while stocks reached new highs less than 2 years after the 1987 crash. The Covid crash of 2020 lasted less than six months.
So, while you shouldn’t root for the sky to fall during this stage of your career, you still have plenty of time to recover. Grieve your losses, then get back to work and continue to dollar-cost-average into the market at new, lower prices.
Approaching Retirement
During the last 10 years of your career, you are a grizzled medical veteran likely experiencing changes in your career, family, and health. You may start to work less, your children may have left home, your parents are aging or deceased, and you may have even faced your own mortality with a health scare. Your final decade of work should be spent preparing mentally and financially for retirement.
You must make changes during this stage of your career, regardless of what the market does. Your asset allocation will begin to shift away from a stock-dominated portfolio and more toward the relative safety of bonds.
If you plan to use the 4% Rule, your aim is a 60/40 stock/bond portfolio by the time you retire. So, while a market downturn will hit your impressive net worth hard, some of this will be tempered by your shift to bonds.
You may consider increasing the amount you invest to take advantage of the reduced prices and hope to regain some of what you have lost when the market recovers. Unfortunately, this means you may have to work additional hours or cut back on lifestyle expenses during the duration of the market downturn.
While you don’t have as much time to recover as you did during previous stages of your career, market downturns rarely last longer than a few years. You could always work another year or two if the market hasn’t recovered by the time you retire.
Retirement
If you are already retired, you have two options: Do nothing or reduce your spending. If you follow the 4% Rule correctly by having a 60/40 asset allocation that you rebalance yearly and plan to use for 30 years, you don’t necessarily need to do anything. The 4% Rule is already conservative by design – it weathered the Great Depression, two world wars, stagflation in the 1970s, Black Monday, the dot-com crash, and the GFC. It should withstand this market correction, too.
However, if you are in the first 5 years of retirement, wish to be ultra-conservative, or plan to live off your money for more than 30 years, you can reduce your withdrawals from your retirement accounts. The easiest way is to forgo this year’s inflation raise (the 4% Rule is adjusted annually by the prevailing inflation rate. This simple move not only reduces the amount you remove from your accounts this year but in all subsequent years. This adjustment forces you to reduce your spending or bring in some income to account for the difference.
Conclusion
Over the past 100 years, the US stock market has produced annualized nominal returns of just over 10%. However, stocks produce these outsized returns for investors in exchange for risk, and market corrections and even bear markets are common and expected. The current market volatility is simply the price you pay for those higher returns.
If you are in the early or middle stages of your career, actively dollar-cost-averaging into a down market may eventually be the best thing that could happen to your net worth. The only mistake you can make is to stop investing. Even if you are approaching retirement, you are better off just staying the course of your investing and retirement plan.
The creators of the 4% Rule factored in periods of the worst stock market performance in American history. Maybe it will be different this time, but it probably won’t. Unless we are on the precipice of something worse than the Great Depression, where stocks lost nearly 90% of their value and didn’t recover for 25 years, we will all be fine.
Bear markets, bull markets, dips, corrections, U and V-shaped recoveries, blah, blah, blah. The truth is that most medical professionals don’t need to worry about the current market conditions. We all have more important things to do. Take good care of your patients, encourage your colleagues, spend time with your family, enjoy your life, and just keep investing.