While recessions are anxiety provoking for everyone, physicians are in a privileged position of having jobs that are considered ‘recession-proof’ relative to most other professions. Despite this, there are many decisions that can significantly alter the course of a physician’s financial life during a recession, some of which can be financially devastating, and some of which can be great opportunities to increase wealth. Most physicians in our online communities for doctors advocate for staying the course, not panic selling or locking in losses, and not trying to time the market. Below, we’ll expand on these as well as provide other tips and tracks for navigating recessions (or threats of a recession) as a physician.
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Is being a doctor recession proof?
Let’s start with a reality check. While we all have likely been told at some point when we were considering a career in medicine that being a physician is ‘recession proof,’ nothing is truly recession proof.
This is particularly true in today’s healthcare environment, where private equity, consolidation, and corporatization of healthcare has happened at scale. If the parent organizations of your practice environment are suffering financially or lack access to capital, there is no question this will affect you and your patients. Additionally, nobody wants to see their patients suffering financially, and there is good data that these financial woes can impact health decisions and outcomes.
That said, it is true that people will always need the skills of physicians, and therefore most physicians will have relatively stable incomes even in a bad financial market, particularly given the physician shortage.
How should early and mid career physicians approach a recession (or a threat of a recession)?
There are few things that are more stressful (financially at least) than seeing your net worth decline by multiple percentage points in a day. However, it’s very important to keep historical context in mind.
Know that historical data shows that timing the market does not work
There is a famous quote by Peter Lynch that states, “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” That is corroborated by statistics showing that missing some of the best days of the market (ironically, of which the majority seem to have happened during bear markets) significantly reduce overall returns. See this image from Visual Capitalist below, sourced from data by JP Morgan.
Don’t panic sell
The worst thing you can do is to lock in losses. Until you sell, these are just paper losses. However, selling may trigger long term capital gains taxes, and there’s no guarantee that the market will go down further for you to buy at a discount later. In a worst case scenario, the stock will rise, and you’ll have to buy the same holdings at a much higher price.
Beef up your emergency funds and cash holdings
As we alluded to above, you don’t want to be in a situation where you have to lock in losses. Therefore, you may want to consider having more cash on hand during this time for unexpected emergency needs for cash or for anticipated large expenses. Some ways to do this include eliminating unnecessary expenses from your budget, finding extra sources of income, or making a conscious decision to save more of what you make. Do not invest money that you will need soon.
If you are close to retirement, you may want to significantly increase your cash holdings to cover even more than a year, with some suggesting having up to 2-4 years worth of expenses in cash.
Learn more about emergency funds and where to keep them.
Understand your investment horizon
While a 3-10% dip can seem like a huge deal, zooming out on a graph of the stock market over the course of decades shows how small these blips are in the long run. Know that the average recession lasts less than a year (though it may take longer to get back to pre-recession market levels). As long as you don’t have to access that money and can allow it to recover, statistically and historically speaking, the market will go up. Make sure that all the money you’re putting into the market is money that you won’t be needing in the short term. If you will need it in the short term, consider short-term investment options or high yield savings accounts instead.
Consider tax loss harvesting
One tax savvy thing to do may be to consider tax loss harvesting. While you will “lock in losses,” if you employ this strategy, those losses can be used against capital gains, which may be very valuable in the long run. Tax-loss harvesting involves intentionally selling securities you own at a loss to shelter away losses against future gains, but promptly reinvesting the capital from the sale of the investment into a different but similar other investment.
Learn more about the nuances of tax loss harvesting.
Consider buying the dips or opportunistic investing in distressed assets
One thing that’s really nice about being a physician is that you’ll still likely have regular consistent cashflow from your job as a doctor. We know we just told you not to time the market, and don’t consider buying the dips the same thing. History suggests you should continue to dollar cost average into the market with regular retirement contributions. Rather, this point is saying if you have extra cash above and beyond what you normally invest, you may want to deploy it to buy extra when particularly large dips or corrections happen.
Similarly, this may be a great time to buy distressed assets that you can buy at a bargain price. As a physician, you may be in a unique position where you have cash flow when others don’t, and you may hear of great off market deals or other opportunities to acquire valuable assets at significantly discounted prices.
Learn more about opportunistic investing.
Consider prioritizing reducing debt
A big x-factor during times of recession is the risk that your debt carries. Not only does reducing and eliminating high-interest debt give you more financial stability, it will reduce your cash outflow on a monthly basis, which can allow you to save more cash or weather temporary dips in income better.
Diversify your income streams
We alluded to this above, but we’re going to double click on this one, because we do think it’s so important to not have all your eggs in one basket in general, but particularly during a recession. You want to make sure that a threat to cashflow in one stream of income can be counterbalanced with cash flow from another stream of income. Some ideas include:
Get a side gig like consulting or expert witness work
Open up another business (ideally one with a low upfront investment to minimize the risk of losses)
Diversify your practice’s income streams
Invest in cash flowing real estate like long term rental properties (ensure any short term rentals can be converted to mid term rentals or long term rental properties as people tend to cut out extra expenses like travel during a recession)
Consider taking a W2 job instead of a 1099 job if you need stable income
This is very situation dependent, but one risk of having all of your income be 1099 income such as in a locums position is that institutions may cut budgets for these expenses and favor asking their staff physicians to do more. You may find it harder to find shifts or have to travel further for shifts. If you know your services are in demand, this may not be as much of a problem, but consider your need for financial stability in your decision making process.
Be careful about investing in individual stocks and diversify your investment portfolio
We are always advocates for a diversified investment portfolio, but where this strategy really shines is in times of recession. Many physicians at early stages of their careers invest in very aggressive stock portfolios; unfortunately these are also the ones that take the largest hits and swings. Having a mix of stocks and bonds is a classic example of ways to use investment pairs that aren’t strongly correlated, such that when one investment is down, another may be up or steady. This is also when real estate investors may find that it’s nice having hard assets that maintain more steady value rather than having large fluctuations on a daily basis.
If you’re someone that loves investing in a particular company, understand that recessions are times where even the greatest of companies can succumb to external forces. Your net worth could take a huge dive if you have 20% of your holdings in a company that goes bankrupt.
Learn more about the three fund portfolio and asset allocation.
Make sure you keep your credit score as high as possible
Hopefully your credit score is already high, but having a good credit score during a recession is a very good idea. This is true for multiple reasons, including:
If you find yourself needing to borrow money, banks will be more likely to lend to you.
If you find a good investment opportunity to buy an asset while the value is down, you’ll need a good credit history to secure funding.
Keep your lines of credit open, pay your bills on time, and don’t spend a large percentage of your credit limit. Also freeze your credit to prevent fraud from derailing your credit score and precluding you from qualifying from a line of credit that you may need like a mortgage or a loan for a practice buy-in.
Learn more about credit scores.
Conclusion
While recessions can wreak havoc on your investment portfolio’s growth and potentially your plans for a rapid pathway towards achieving financial independence, if navigated in a disciplined way, you can minimize the long term effects of a recession. In fact, you may even be able to use the financial opportunities presented by a recession to expedite the value of your net worth - but that’s a topic for a separate article!
Additional investment resources for physicians
Explore related PSG resources: