This week I am solo, talking about a question that I was asked this week by a physician client. The headline of his email said, “Should I be concerned?” No one ever likes getting an email with a subject line like that. In this episode, I will discuss a few different things that you should be aware on the investing side as we quickly approach the end of this election year.
Hey, it’s Justin Harvey. Thanks for tuning into the anesthesia success podcast, where we take a close look at important topics pertaining to business, practice management, personal finance, and careers for anesthesiologists and pain management physicians on the show. I work hard to take your critical questions straight to the experts. Thanks for listening.
What’s up, everybody. Welcome to episode 64 of the anesthesia success podcast. Really happy to be speaking with you today, coming to you solo from our global headquarters in Philadelphia, I wanted to address a question that I got from a client this week. And I thought this is something that a lot of people are thinking about. I’ve been talking to my parents about it a little bit lately. Hadn’t having to do with the stock market. And I thought that some of our listeners may benefit. So this is going to be an investment focused discussion, and it has brought applicability basically for anybody who has some money in the stock market. And by that, I mean, maybe you have a 401k for three B, maybe you have a Roth IRA, or maybe you’re going to one day, the content of today’s conversation is going to hopefully be helpful.
So I got an email last week from a client and the subject line said this, should I be concerned? Question Mark. And when, whenever you see that show up in your inbox, you’re never quite sure what you’re going to find. So I opened the email and in it was this MarketWatch headline. There was no con no body of the email, just a headline. The headline said this. Here’s why the Dow plunged last week. And what’s ahead for the stock market. Now don’t get me started on whether or not a financial journalists can even say why the Dow plunged let alone what’s ahead. But so that was the subject. And then the subtitle was September is a notoriously weak month for investors in October. Also has the hallmarks of a rough patch for wall street with the November 3rd presidential election looming. So we’ve got the triple whammy here of September notoriously, weak October rough patch, November looming, like, Holy cow, you read this and you’re depressed already before you even get into it, which is why when it comes to sites like market watch, I try to frankly, just avoid them in full, but I want to dig into this a little bit and then frame this question specifically, you know, should I be worried about the stock market before the election or after the coronavirus recovery?
You know, in February and March, we saw just crazy sell off. But subsequent to that time, since March 22nd, the market bottom, we’ve actually seen the best a hundred day period, literally of all time in stock market. So anybody who is sold out cause they were freaking out in the middle of March, they missed the best stock market consecutive 100 days, literally since they started keeping track of these things with the S and P 500. So important to note that there’s actually some great news embedded in there. You’d never know it from reading these types of headlines, but so this headline, here’s why the Dow plunged last week, what they’re referring to is the Dow Jones industrial average. And I’ve talked about this average a little bit in some of the videos I’ve done on our YouTube channel. And let me take a moment and plug the YouTube channel if you haven’t seen it before anesthesia.
Yes, we have a YouTube channel. I do. I do the video versions of these podcasts in addition to some other educational videos and content. I’ve talked about this there before, but what the Dow Jones industrial average is, is it’s this collection of 30 stocks. Many of which you’re going to be basically like household names that you’re going to recognize 3m American express, Apple, Boeing, Caterpillar, these big, what, what are Nunes chip, a U S companies and their participation in the Dow Jones is frankly arbitrary. And they may or may not be a good benchmark bellwether for the U S economy in general, but it’s sort of presumed that it is. And that’s why it’s talked about in this way, but here’s the point? The Dow Jones industrial dusty aerial average is a sort of a per proprietary mix that is owned by a company company called NewsCorp, which you may have heard of owned by a guy named Rupert Murdoch, whom you also may have heard of, if you haven’t heard of news Corp and you haven’t heard of mr.
Murdoch, maybe you’ve heard of some of the news outlets that he owns, including the New York post, the wall street journal barons and the site that was sent to me, marketwatch.com. These are all full of vertical integration owned by Rupert Murdoch and news Corp. So what this means is put yourself in the business chair for a minute. If you own a bunch of media companies, how do you make money on these media companies? Well, probably one of the biggest ways is you’re going to sell advertising to your advertisers. People who are paying you money to put their ads in your articles and your blog posts and your videos and those annoying little 15 minute intros, you know, click a button and watch a video and goes, Oh crap. I gotta watch this trailer for this video, how those companies get paid. And so the best way to manage the number of eyeballs on their content is to make people feel like they need to read it.
Like it’s going to make their situation better if they do. So you’re going to write articles titled. Here’s why the Dow went down. Here’s what’s ahead. Here’s why everything is bad. And here’s 10 reasons you should be anxious implying that perhaps by reading this article, maybe there’s something you’re going to be able to do about it. And so that brings us to our question and the title of this episode today. Should I be worried about the stock market before the election and other poorly framed questions? So it’s always important to think about the question at hand and wait, like, is, are we asking the right question? Is this question even relevant? You know, if we say, do we know why the Dow plunged last week? I mean, even if this person did know it, like, is this question relevant for this client of mine who is concerned about their financial assets invested in the stock market?
Like, does it matter? Does it matter why the stock market sold off? And do we have any context for understanding what does the sell off mean for this particular and for this particular investor? Cause he, these media companies are gonna thrive on your panic and they’re going to monetize it same as like Facebook and Twitter. They make more money when significantly polarizing news headlines happening. And then everyone can jump on a forum or on a thread or tweet and just hate on each other and pile on and then get angry and continue to rage tweet. Like they love that because that’s how they make more money. That’s why I’m a big fan of, as I’ve mentioned in the past the low information diet as proposed by Tim Ferris to counteract this effect, like unplug your social media, don’t go to market, watch, don’t watch CNN as far as financial media, it’s it doesn’t give you anything actionable.
It’s not helpful. It’s only designed to monetize your panic and anxiety. That is just my opinion, but it there’s a strongly held. And I think empirically verifiable one, humans have this feeling that we should be quote unquote, doing something and lots of people right now. I mean, I don’t know if anybody does look at the stock market at all. Like we’ve been on a tear. Things have been going really well since middle of March and a couple of stocks in particular, Apple, Tesla. I mean, Tesla is just crushing it this year. You’ve probably had some friends say, Hey, like, you know, have you seen what’s happening? Or maybe, Hey, I made a ton of money on this and there’s this feeling that you’re missing out. You see these headlines and you think, man, I should be willing and dealing and getting rich like everyone else.
And the fact is it’s really hard to do. There are two primary enemies to the retail investor. And by that, I mean, somebody that doesn’t have $50 million in investible assets and it’s okay. It’s hard to say which enemy is bigger when it comes to investment success, we’ve got our own human irrationality, which is hardwired in us. It’s the thing that makes you glued to your computer screen when you see, Oh my gosh, September is bad and October is bad. And then November election, that could be even worse. Like there’s this fight or flight hardwired mechanism that engages and it’s the stress response. And it makes you feel like, Oh man, I need to do something to advocate for myself. That’s the one photo that we have is the hardwired internal one. And then the other is obviously wall street banks with whole city blocks filled with computers, running algorithms, doing high frequency trading, crunching market data faster than you ever could read a news headline and reach for your mouse and transact.
And if you don’t believe me, there’s a great book that I read called flash boys. It’s probably like seven or eight years old right now by a guy named Michael Lewis. If you want to know what you’re up against, if you’re thinking, you know what, I can buy Tesla and make money on it better than other people read this book. And you’ll see the, the, the race to lay the fiber optic cable from Chicago to New York and how companies are spending millions or maybe even billions of dollars to build infrastructure, to place trades on razor thin margins at nanoseconds before their competitors, in order to squeeze out an extra penny per share. It’s, it’s insane. The infrastructure and how it’s stacked against a retail investor. Who’s trying to compete in this way on the stock picking front. So you might say, Holy cow, Justin, this is really depressing.
I feel like I have no hope. These headlines are depressing. What you’re telling me is depressing. I’m just getting pushed around by wall street. What’s the point of all of this great question. And, and here’s what I want to point to. There’s, there’s two things that I want to equip you with to allow you to succeed in this market environment. And I’m going to talk about the response that I sent to this client with this, you know, very intelligent question. And I pointed out why this client need not be concerned. And we talked about some of these ideas in the past. I want to reference the first is called the bucket method. What I call the bucket method. Colloquially also known as asset segmentation. We talked about this in episode 42 with dr. Aaron Lewis. I talked about it in episode 38. When I, when we first started seeing the coronavirus sell off.
And I was talking a little bit about that market turmoil, but what the bucket method does or the asset segmentation method, it allows you to have money that is earmarked for certain periods of time and having it to be reliably available in that period. So basic example, we’ve got three buckets, we’ve got the checking account bucket where I used to pay my bills for like the month or the next couple of months. We’ve got the second bucket, which is our short to intermediate term cash savings and emergency fund. Maybe a home down payment or a car payment car purchase money would be in there or any other big chunk of cash that we need. And then we’ve got the third bucket, which is the wealth building bucket. This is the longterm bucket, the money we’re not going to need for another 30 years. And the way that we’re thinking about each of these buckets, not only is it very different and distinct, but the methodology itself allows us to turn off Rupert Murdoch, turn off NewsCorp, turn off market, watch and wall street journal, because they’re not going to impact your financial outcomes if you use this method.
And here’s why we know that if we’re using the bucket method, if we have everything that we need in our checking account for the next, you know, to pay our bills and then an emergency fund that then what does it matter what the stock market does today or tomorrow, or between now and the election or the next six months? Like if the stock market fell off a cliff and, and if I lost my job, I could literally use all the cash I have in my emergency fund to fund my living for the next six months while I look for a job or while I recover from disability or while I wait for elective case volume to come back after coronavirus. And that provides a lot of protection in this instance. And then as a sort of a second layer of protection is that, that bucket to where, you know, any additional monies that we’re having in very short term, immediately accessible daily liquid, like an ally high yield savings account, which right now, unfortunately is paying a pitiably low 0.8%.
It’s kind of the best we can do as far as risk, what we traditionally call a risk free asset. But that 0.8%, you know, you’re gonna earn a little bit and it’s going to be there when you need it. You’re not going to worry about like, Oh my gosh, if the Dow was down 15% and I need to buy a car next month, like, it doesn’t matter because your ally bank account is going to be 0.8% higher than it was the month before. And it’s also FBIC insured. That’s the federal depository insurance corporation. MDIC, you’ve probably heard that in like a little disclaimer at the end of a mortgage commercial on the radio. The FTC is an insurance company, essentially this, a subsidiary of the federal government that guarantees, deposits up to a quarter million dollars in any bank account. Meaning if God forbid cataclysm happens and you’ve got $200,000 in your ally bank account, and you’ve got $50,000 in your checking account, each of those accounts are going to be FDRC insured in each account will be up to a quarter million.
So if they were both at the same institution, hypothetically and your bank went bankrupt, or the CEO somehow managed to take all the money and wire it to his offshore account in the Caymans, and you lost that 250 K uncle, Sam’s going to write you a check for the difference, cause it’s covered by this insurance policy. So the bottom line is bucket. Number one, your checking account and bucket number two, your high yield savings and any other short term very high quality fixed income. That’s going to be accessible to you. That is going to be a safety net. It’s going to be a buffer against all of the ups and downs of the stock market. And obviously during all this time, you’re going to continue to earn money from your job we hope. And so you’re probably not even going to need to tap any of these monies, but if you do, they’re there for you.
So that’s one way that we can sort of unplug our brains from having to be riding this roller coaster. And the second thing, I want to point out the second tool that we can use to insulate ourselves from this bad news. And to be able to answer this question, should I be worried about the stock market before the election? Like let’s reframe the question and let’s also inform it with data. So, or any short period of time, you know, is the stock market going to be higher today than it was yesterday? It’s kind of a coin flip. I think like, you know, somewhere in the low fifties percentile, maybe like 53% of the time, it’ll be higher tomorrow, 47% of the time it’ll be lower tomorrow. We’re really not sure. But what happens is as time passes, as you look at longer and longer timeframes, the historically speaking, the likelihood that the stock market is going to be up over time increases significantly such that it really, it just eliminates your need to say, Oh my God, which is this one heads or tails now is this one heads or tails?
Like if you’re looking at a very, very short period of time, yeah, there’s a lot of uncertainty. If you look at a very long period of time, certainty gets much more reliable from a historical basis. Now, obviously the lawyers are going to tell me, I need to disclaim right now. Past performance is no indication of future results. It is possible that something that has never happened before could happen and the first time something happens, it always defacto fits that definition. But having historical context in this discussion can be helpful. And here’s what I want to talk about as we extend the amount of time that we’re looking at these stock investments, this bucket, number three, the money that you’ve got for retirement, you’re a 33 year old anesthesiologist. You’ve got a 401k with $75,000 in it. You’re wondering how do these fluctuations impact you?
First of all, if it’s a 401k and if you don’t need it for 30 years, it, so don’t read the newspaper when it comes to the financial section. But if you’re thinking, you know, what is the probability that this account is going to be higher or lower in one, three, five, 10 years? I’ve got a chart here. I’m going to link to it in the show notes over a one year period. You know, I said like in a daily basis, it’s a coin flip. It’s around 50% over a one year period. It’s 75%. It’s three out of four years. The stock market is higher on December 31st than it is on the, you know, the January 1st. Like it goes up three out of four times. Now that’s, if you’re talking about your life savings, like we don’t want to risk that, but it’s a nice trend to observe over time.
If we stretch that to five years, what is the likelihood that in five years, my investment in my 401k that’s very stock oriented is going to grow rather than shrink over a five year, time period, 88% of the time since I’m looking at a data set since 1926. So this goes all the way back to before the great depression, 88% of the time, over a five year period, you’re going to have more money five years from now than you do today. So 8.8 out of 10 times, that’s assuming you add $0. By the way, once we go from five to 10 times, sorry, five years to 10 years, this goes from 88% to 95%. So 19 out of 20 times, if you have a bunch of money in your 401k and you look at it again, 10 years later, and you totally ignore it in the interim 19 out of 20 times, you’re going to have more money than when you started now.
Obviously it’s not 20 out of 20, right? We can’t say Oh, every single time. Like there’s been world Wars and great depressions. And there’s been times over which a 10 year period, hasn’t been enough to get us to that a hundred percent threshold. But you know what? Somewhere between 10 and 20 years, the 20 year number is a hundred percent. Now that doesn’t mean a hundred percent certainty in the future. But what it does mean is since we started tracking this in 1926 through great depression, world war II, a stagflation in the seventies, crazy market cataclysm and like oil crises and the stock boom and bust of the, the late nineties and early two thousands. There has never been a 20 year period where if you buy a diversified basket of equities, you close your eyes. You look at it in 20 years, it’s been higher.
Every single return set every single time. Furthermore, the average return over that time is in excess of 10%. Now this is not a guarantee or even suppose that that’s reasonable to think you might earn 10% over the next 20 years, because we’ve seen a lot of growth over the last 10 years that, you know, it might be that growth is going to be slower. Who knows w we have no idea, but here’s the point. If we’re investing for a long time, if you’re talking about a retirement account that you don’t need for 10, 15, 20 years or more, then it doesn’t help you to know that there’s literally never been a 20 year period in which an account like this has lost money. So if you have a 401k that you don’t need for another 20 years, like headlines don’t matter, it should free you from the need to feel the anxiety around those questions.
Furthermore, I am to take an extreme example. If we look at rolling 35 year returns, I’m going to link to this from the show notes too. It actually gets even more stark. So not only are there no negative outcomes over a rolling 35 year return, it actually narrows the band. So the average annualized return is going to be between eight and 14%. There’s never been a 35 year return. So if you’re a 30 year old doctor and you’re going to retire when you’re 65, there’s never been a 35 year return. When you haven’t been able to earn at least 8% historically on the S and P 500. Now, again, this doesn’t mean anything for the future, other than it’s a data point to inform the way that we think about risk, the way we think about volatility, the way we think about that bucket.
Number three, that wealth building bucket that 401k four Oh three B Roth, IRA, traditional IRA, four 57. Any of those longterm retirement assets history is on your side. The longterm investments should be risky. If you want to grow, if you want to build wealth, if you want them to accumulate over time, and by the way, you should continue to add to them. And this gets to another idea that I want to close with is let’s control the controllables. There are major financial decisions in your life that are gonna make a big impact. What does it need to make a big impact is what did the stock market do on Tuesday then? What did I do on Thursday then? What did it do next Monday? That just, you can’t control it. And it doesn’t need to be a significant determinant of your outcomes. As long as you have bucket one and bucket two sufficiently filled, and then you’re taking your risk and your longterm bucket bucket, number three, where you can use these probabilities to your advantage, you can really proactively manage your stress and have much better financial outcomes.
So if we keep an eye on the data and we remember it, as we’re looking at these, you know, sensationalistic headlines, you’re going to be a lot better off, and you’re going to hopefully add years to your life. And you can think about spending time with your family, thinking about doing what you’re good at to make more money, think about doing things it’s gonna make you happy instead of stressing about things beyond your control and allow your cortisol to be monetized by Rupert Murdoch. Nobody wants that. And that’s all I’ve got for today as always. Thanks for tuning in to the anesthesia success podcast. Talk to you next week. If you liked what you heard this week, head on over to anesthesia success.com, where you can find more content and free resources to help you build a successful career in anesthesiology and pain management. If you want to leave a review in iTunes, I would also really appreciate it. Thanks for using some of your valuable time to join me today on the anesthesia success podcast.