OMA Insurance has partnered with Common Wealth, the administration and technology partner for the award-winning Advantages Retirement Plan™, to bring you The Financial Checkup, which features top financial questions and retirement stories from your fellow physicians.
Dr. Paul Healey: You don't care about what the stock market is going to do a week, a month, or even a year from now; you only care what it's going to be like 20 or 30 years from now, when you're getting ready to retire.
Speaker 2: Welcome to The Financial Checkup, a podcast series devoted to improving the financial health and retirement readiness of physicians and their spouses, or common law partners. This series is brought to you by the award-winning Advantages Retirement Plan from OMA Insurance.
Jonathan Weisstub: I'm Jonathan Weisstub.
Alex Mazer: And I'm Alex Mazer.
Jonathan Weisstub: We're the co-founders of Common Wealth, a mission-driven business that works with associations, unions, and employers to provide collective retirement plans, including the Advantages Retirement Plan for Ontario physicians.
Dr. Paul Healey: My name is Dr. Paul Healey and I'm an emergency physician, co-founder of the Physician Financial Independence online community with my wife, Dr. Jane Healey. I'm also a member of the investment committee for the Advantages Retirement Plan.
Alex Mazer: This series is for educational purposes, and should not be considered investment, tax, financial, or other professional advice.
Speaker 2: The views or opinions expressed by the presenters are solely their own, and do not necessarily represent the views or opinions of the OMA, OMA Insurance, or the Advantages Retirement Plan.
Alex Mazer: One thing we haven't talked about yet is investment mistakes that people make, and I think this is particularly topical during COVID and periods of market volatility like this. What would you say are the most common investment mistakes you've seen physicians make?
Dr. Paul Healey: Oh boy, we could do a whole hour on this. I think as far as investment mistakes, the first thing that physicians don't do, is they don't do buy-and-hold. This is the whole idea that you buy your investments, and then you don't touch them for two or three decades. Your investments don't constantly need to be sold and rebought. You shouldn't be chasing individual stocks: Tesla and marijuana stocks, and I've heard it all before. I don't think that those are things that really will benefit you in the long term. So I think that not buying-and-holding, doing active management, buying individual stocks, it's a very high-risk thing to do. And it's a hard thing, as you pointed out earlier, to do well when there are entire firms who are sitting in front of computers, who are essentially the party that you have to beat. So I see that as a big issue.
The other mistake that physicians make is just simply not being aware of the fees that they're paying. I've run into lots of physicians who are 20, 25 years into their career who had no idea what they were paying in fees, and that has cost them hundreds of thousands of dollars, so fees are a big one. Failure to buy-and-hold, failure to be aware of fees; those are, by far, the two biggest things.
The third problem that comes up a lot is the purchase of whole life insurance. And again, this is another big topic, so I'll just go through it briefly. It's a very involved topic, but what I see a lot of, unfortunately, are a lot of young physicians who end up going with a financial firm or financial advisor who very quickly turns the conversation from investing and financial planning, to the idea that they should be purchasing a whole life insurance policy. A whole life insurance policy is a life insurance policy that, as it says, covers you for your whole life. It pays out sort of when you die, as opposed to a term life insurance policy, where you buy it for a period of years, and if you die during that period, the insurance policy pays you money. If you don't die during that period, well, you've paid them their premiums and you go your separate ways.
Whole life is being touted by the financial industry as a great way to defer tax, that it's a great investment, and unfortunately, it's not a great investment, it's a very poor investment. If you want to invest, invest; if you want to buy insurance, buy insurance; but I don't necessarily think you need to combine the two. Whole life insurance policies are generally fairly expensive, they require you to put a significant amount into premiums, and you commit to doing that for a very long period of time. And the unfortunate part is that most people who buy these whole life insurance policies don't end up keeping them for their whole life, so they never get the benefit. In fact, 80% of people who buy them allow the policy to lapse, and when that happens, you lose tens of thousands of dollars.
So if a financial advisor is selling you a whole life insurance policy, I see that as a big red flag. Certainly if you're a younger person, you don't need a whole life insurance policy. Whole life does have some benefits if you are an older physician, you're high net worth and you are looking to do estate planning, but they are not an investment vehicle. So whole life insurance is probably the third-biggest mistake that I see them making.
Alex Mazer: And if you have a period of market volatility, like the one we've just been through and may go through over the next period of time, what's the problem with physicians trying to effectively time the market? Say, taking their money out when the market appears to be plummeting, and putting their money back in when the market appears to be going back up.
Dr. Paul Healey: Yeah, this is an example of active management: the whole idea of, "Well, I think that in two months the market will be down." Obviously, because of COVID, or obviously because of Brexit, or whatever the latest news event is, but the problem is that with the stock market, you really cannot predict it on the short term. And we have this sort of cognitive problem where we convince ourselves that we can, that somehow we know what's going to happen in the next few weeks or months, when really we don't.
When COVID happened, it was obviously a big hit to the market. And when that happened in our group, I was frequently reassuring people, saying, "Listen, this has all happened before, and it will happen again. Stock market crashes will happen." And the answer is not to go selling your holdings. If you start to sell as soon as the market goes down, then often you are locking in a loss, and you will lose money. What we know from the market is, in the long term, the market does well. When you hold for a long period of time, if you hold for a 10-year period, the chance of you losing money if you hold money in the market for a 10-year period is extremely small. In the last 100 years, you can count on one hand the number of times you would've lost money if you had held it for any 10-year period in that 100-year period.
So the answer is to do nothing when the stock market crashes: just hold your investments like you normally would, buy on your normal schedule, whether it's automated if you have it being withdrawn from your account; or if you do it yourself, just keep buying. You don't make any changes. That's the right answer, because the market will recover. It has happened every time previously: it's happened after the Great Depression, it's happened after the financial crisis in 2008, it happened after COVID in a record amount of time, at the amount the market has recovered. And with COVID, I would use that as a recent example of how you absolutely cannot predict the market. Everyone just said, "Oh my gosh, the market is going to crash, and it's going to be down for years." And the market has already recovered a significant amount. Who would've predicted that? Who knew that? No one did. And if you can't predict the future, then you can't actively manage your stocks that way.
And this is the hard thing that you have to get past: is that with the stock market, don't pay attention to the news, don't pay attention to short-term changes. You don't care about what the stock market is going to do a week, a month, or even a year from now; you only care what it's going to be like 20 or 30 years from now, when you're getting ready to retire. So just stop thinking about the short term, and just remember the long term. And that's why something that is automated is nice, because you don't have to think about it, you don't even have to look if you don't want to. So an automated process is quite an advantage in this scenario.
The other thing is, that if you're going to start doing that, if you're going to start trading based on news, that means that you're going to have to start sitting on a bunch of cash. And when you're sitting on cash for months, or years, or even decades, that money is not earning money for you. So it's very problematic, and something that everyone wants to do and wants to fall into for psychological reasons that we don't fully understand, but you have to get past that, and you have to see yourself as a long-term buy-and-hold investor; it's the only thing the evidence supports.
Alex Mazer: The other advantage of something automated is, it's very difficult. This can be very emotionally difficult when, especially if you're watching the markets all the time, to not panic and pull out at the last minute. So if you're not watching it, if you have something automated, that can be helpful. And the other thing is that, if you look back through history of periods of market crashes and then recoveries, often the recovery can happen very quickly. So there can be a day on which the market gains a significant amount, and if you've taken your money out you're going to miss that, and you saw that in spades in March and April of this year. A very large percentage of market gains over time happen in short periods of time during market recoveries, and you want to make sure, to your buy-and-hold point, that you're in the market during those times.
Dr. Paul Healey: And one other follow-up thing is that, people will often post to our group and say, "Oh, the markets are going to drop, I'm going to sell." And the thing I say to them is, "Sure, you're going to sell, but that's half a plan. What's the other half of your plan? Let's say you sell now, and then the market goes up. Are you going to buy back in? Are you going to wait for it to fall again? What if the market drops 10%? Are you buying when it's 10%? And then are you going to ride it down to 30%?" There's all of these variables that you have to work out. This whole idea that, "Well, I'm going to just sell." Which is people's initial reaction; it's not a plan, it's half a plan. So you're moving into a very complicated area that you are going to be unable to manage if you're going to start actively managing during every crisis. You are going to be outmatched, and you are going to lose; whereas if you can be patient, if you can look at the long term, you will do extremely well.
Jonathan Weisstub: Thanks for listening to The Financial Checkup.
Dr. Paul Healey: If you're a Canadian physician, join the Physician Financial Independence group on Facebook to learn more about saving and investing.
Alex Mazer: For physicians in Ontario, check out the Advantages Retirement Plan at omainsurance.com/retire.
Speaker 2: The Financial Checkup series is produced in collaboration with OMA Insurance and Common Wealth, the administration and technology partner for the Advantages Retirement Plan.