What to Do When the Market Goes Down

Show Trancript

Jimmy Turner MD

On this show, we’re going to talk about market downturns. And the reason for this is because there’s been a lot of turbulence in the market lately, as we record the show in the in the week or two before that.

Jimmy Turner MD

And so this is top of mind for a lot of people, you’re seeing your your stock portfolio, your investments, whatever they might be, go down. And this is something that happens, I think it’s important to understand the history of it.

Download a free copy!

 

Jimmy Turner MD

So this will be an important episode, not just for recent events, but also for you, if you’re listening in the future to this episode, this happens, it actually happens more regularly than you think, on average.

Jimmy Turner MD

And so we’re going to talk about how to deal with these downturns. Why is it such a big deal? Why is it something that people worry about? What can you do about it? And, and all that and more. So before we dive in, just want to mention, I’ve actually been giving some some free virtual talks lately, and have really enjoyed doing that for residency and fellowship program specifically.

Jimmy Turner MD

I’ve given some recently, like Northwestern, UC Irvine, Beth Israel, have really enjoyed doing that. And I’m all about financial literacy these days. And so that’s my main passion. My main goal is just to educate people is why we do the podcast.

Jimmy Turner MD

So I started the YouTube channel, and, and why the book’s free on the website. If you want me to speak for your program, obviously, I can’t I can’t do them all. But I’m happy to consider a request that gets sent my way, you can send me an email at Jimmy at money meets medicine .com.

Jimmy Turner MD

I’m happy to chat more specifically about how to give a free virtual talk for your program, what we normally talk about when I give those talks. But ultimately, my biggest passion is teaching. So if you want me to help out there, I’m happy to consider it.

Jimmy Turner MD

Shoot me an email, we can chat more offline. Justin, I, I love the psychology of money. I think I’ve shared this with you on more than one occasion. And this is one of the best examples of the psychology of money.

Jimmy Turner MD

When the market goes down, and people lose their mind. And I think before we can talk ever about what to do in this situation, we really have to talk about why is this such a big deal? And why does it bother us so much?

Jimmy Turner MD

And the study that I like talking about the most is the one by Thaler and Kahneman and Tversky, where they looked at people’s investments. And they said, Hey, if somebody looks at their investments more often and more closely, are they going to do better?

Jimmy Turner MD

Or are they going to do worse? And the premise that they had was because they’ve done this in other studies, where they had negotiations in classrooms, and people had to negotiate to keep money. And they’d hand one person $10, they hand one person $0, and they’d say, Hey, you have to negotiate.

Jimmy Turner MD

And if you can’t get to negotiation, you both get nothing. And people had a hard time. The person with $10 who didn’t have $10 before would have a hard time giving it up. The person with $0 would be like, Hey, we should split this in half five and five.

Jimmy Turner MD

And the person’s like, No, I have $10. You’re gonna get 250 I’m gonna keep 750 even though they had no money. So the thought process behind that is we hate losing money, right? We hate we hate loss in general, it’s called loss aversion.

Jimmy Turner MD

And so they’ve studied this in a lot of other realms. It turns out that people hate losing about twice as much as they like winning. And so they did this study, where they looked at it and said, Hey, people that pay more attention to their portfolio, do they do better?

Jimmy Turner MD

And the answer is no. And the reason why is because people hate losing money. And so they came up with this term called myopic loss aversion. And the idea there is that because we’re so averse to losing money, the more often we pay attention to our investments, the more likely we are to see them go down, and the more likely we are to do something really, really, really stupid with our money, like sell in a downturn.

Jimmy Turner MD

And so this myopic loss aversion, I’ve been obsessed with this idea ever since I learned about it, because I think it’s, it’s so true. And it really impacts so many things in just life in general. Yeah.

Justin Harvey CFP

This is, for the financial advisor, one of the very, very most important things you can do for your client is make sure that they remain in their seat with their seatbelt securely fastened during times of market unrest.

Justin Harvey CFP

And the last couple of weeks have been tumultuous and it’s funny because in the advisory community, we have these conversations like, oh, how’s it going? Are your clients blowing you up right now about the big sell -off and the market’s down 3% in one day?

Justin Harvey CFP

What are you telling people? And it’s actually an interesting touch point for advisors to, it creates a bit of a window into the framing that advisors create for their clients. And if you’re one of those advisors who is sort of like either consciously or unconsciously reinforce it, like, yeah, here’s what’s going on, I’m sending you updates, like the market’s down 2 .5%, but here’s what we’re thinking,

Justin Harvey CFP

here’s what we’re doing, you’re kind of telling your clients that there’s merit to doing that, to thinking and acting that way, and you’re going to train them to do the same thing. So that when the market’s down 2%, you’re going to get these panicked emails from people saying, advisor, what are you doing right now?

Justin Harvey CFP

I can tell you that I have conversations all the time with my clients about a couple things that are recurring themes. One is like, let’s talk about your goals and what is the purpose of this long -term money?

Justin Harvey CFP

And number two is what is the sort of investment chassis that we have built together and how does it work in good times and in rocky times? And so as long as neither of those things have changed, as long as this money is still going to be used 10 plus years from now, and as long as our investment strategy is being maintained ongoing, bumps in the road are just that and need not create a tizzy.

Justin Harvey CFP

you

Jimmy Turner MD

Yeah, this all for me comes down to framing. And, and I love giving this example. So so a lot of time when I spend my time doing teaching residents is a lot of the softer skills of patient care. And so I’m an acute pain physician.

Jimmy Turner MD

And so even though I do anesthesia, it might surprise people that I round on patients, I evaluate their pain, I do blocks and procedures, I have to consent patients for procedures to help with that pain.

Jimmy Turner MD

And as part of that, you have conversations. And so we like to think that we’re out of the there’s terms for this, right? We’re out of patriarchal medicine, we don’t tell patients what to do anymore, we give them the information, and then they make a decision about what it is that is best for them.

Jimmy Turner MD

And that is the dumbest thing that I’ve ever heard in my life. And the reason why is because it lacks knowledge about psychology of how human beings work, there is no conversation that you will ever have, where the way that you say things and the words that come out of your mouth will not impact the way that that person thinks.

Jimmy Turner MD

And so this is called framing. And so if you with your medical knowledge, for example, know that a procedure is probably the best thing for a patient, you’re going to shape your words in such a way that they are more likely to consent to the procedure, even if you are not consciously making that decision to do so, you can try to be as black and white and lay out the narrative as much as you can.

Jimmy Turner MD

And they’ve actually done studies on this. Same people. So this is a behavioral psychology, right? So Kahneman Tversky, and they looked at it and basically said, hey, when you frame something where a patient needs surgery, and you tell them they have a 90% chance of making it off the table, or you tell them there’s a 10% chance of death, which are, by the way, the same thing said differently, when you frame it 90% chance of making off the table,

Jimmy Turner MD

87% of people like some very large number of people proceed, when they tell them 10% chance of death, it’s 50. And so you can’t objectively give people information without framing it. And once you recognize that is just a truth of the way that human beings work, since the creation of time, you’ll start to understand, okay, well, since framing is unavoidable, how do I use framing beneficially in this situation when the market goes down?

Jimmy Turner MD

And for me, being young, because you mentioned the 10 year timeline, being young, when the market goes down, I’m like, this is amazing, and wonderful, because I get to buy a bunch of assets at a steep discount that are then going to get to grow for the next 1015 2030 years.

Jimmy Turner MD

If you frame this in such a way that you’re like, oh my god, my portfolio just went down by 10% in a single week, I’m losing my mind, I need to sell everything and put it under my mattress in order to keep it safe.

Jimmy Turner MD

If you frame it that way, you are more likely to have that myopic loss aversion to make a really bad financial decision. And, and honestly, to pay the cost and the consequence of making that decision, but you have to recognize myopic loss aversion thing.

Jimmy Turner MD

And the way that you frame the situation, and every situation in life is fundamentally important. Absolutely.

Justin Harvey CFP

And part of the framing discussion, I think necessarily includes a discussion of the environment in which you exist and a huge, huge part of that, and this is getting more and more true as, you know, the top eight out of the top 10 companies in the S &P right now are essentially what we would describe as big tech in various flavors.

Justin Harvey CFP

And they take your data and they figure out how to most usefully sell you stuff. And as a quick example here, I just flipped over to MarketWatch, which is my favorite sort of litmus test for how the media is trying to get in your brain.

Justin Harvey CFP

And it’s like lots of red and green and lots of big, bold, scary, you know, it’s just designed to make you freak out. And knowing that we exist in a world that monetizes fear, particularly as it relates to financial security, will give you a huge advantage, a huge head start to say like, your anxiety is going to go down more and more as you more and more insulate yourselves from these companies and these headlines and these resources that are not designed to help you preserve assets.

Justin Harvey CFP

They’re designed to get you agitated, get you hooked, and then sell ad space so that it can continue to access your brain.

Jimmy Turner MD

So for those not watching on the YouTube channel, can you can you read that headline?

Justin Harvey CFP

Yeah, it says the stock market route gave investors a scare and it’s a reminder that panic doesn’t pay. you

Jimmy Turner MD

Panic doesn’t pay. I actually liked the end of that, that headline.

Justin Harvey CFP

The thesis here works, but the presentation, and I can tell you, you know, I was checking in periodically this week as I kind of do as a hobby to just see what people are reading out there. And it has been, you know, it’s reinforced this idea.

Jimmy Turner MD

I think it’s fascinating because I think on an individual level, myopic loss aversion happens. When an individual investor pays more attention to their individual portfolio, they are more likely to sell, even though that’s a catastrophic financial mistake.

Jimmy Turner MD

When I talk about this publicly, in terms of educational opportunities, I’ll often say, and this is slightly inflammatory, but just to kind of put some perspective on this, it’s one of the few catastrophic financial mistakes that you can make.

Jimmy Turner MD

I mean, getting divorced and losing half is pretty catastrophic. Selling your portfolio when it’s gone down by 20% is not as catastrophic, but it’s up there. And so when you have that kind of framing about how bad this can be, myopic loss aversion on an individual level, we know is true.

Jimmy Turner MD

But then on an advisor level, because you’re a little detached from it, and that’s what allows you to think a little more rationally about it. I don’t imagine that checking things more often actually leads to the same result.

Jimmy Turner MD

In fact, it probably is protective so that you can have those conversations with people. And I will say, and I joke about this all the time on this topic, financial advisors, this is one of the situations where they are going to pay for their weight in gold.

Jimmy Turner MD

And the reason why is because they’re going to prevent you from making that catastrophic financial mistake that I just mentioned, help you keep that seatbelt on as you just described, Justin, if you don’t have a financial advisor, you either need to learn about your risk tolerance, there are assessments and tools out there.

Jimmy Turner MD

I think the University of Missouri has one that that I like, but risk tolerance and get a sense for who you are. And some of that’s going to be financial literacy, you should be taking risk. And if you’re completely risk averse at a young age, that’s just a financial knowledge thing, like you should want to take risk.

Jimmy Turner MD

But if I’m just a really risk averse person, but I know that I’m 35 or 40 years old, and I know I should be taking risk, I don’t have a financial advisor, you have two choices, you can either go get one, which is highly advisable if you’re in that kind of situation, if you know your personality, or you can have your best friend, log into your account, change the password and pay them $100 to never tell you what it is.

Jimmy Turner MD

And genuinely, you will do better in that situation. Then if you watched your portfolio closely, and sold in a down market, just if you just hold that investment, as crazy as that sounds, you will actually do better.

Jimmy Turner MD

And so you need to learn about your risk tolerance so that you can tolerate it yourself, have an advisor help you if you can’t, or have someone change your password. I mean, it really is that big of a mistake if you sell in a down market.

Justin Harvey CFP

And just to humanize this a bit, I would say as an advisor who is accountable to my clients for stewarding their assets in ways that are going to be in the best interest of these families, I’d be lying if I said there was, I have zero emotional interaction with these realities because when I watch this happen, as someone who’s empathetic, I understand that my clients, even if they don’t email me in a panicked way,

Justin Harvey CFP

I know that many of them are having some sort of reaction to this. I have a couple of clients that like to pick stocks, and I have a couple of clients for which the stock makes up a big part of their net worth.

Justin Harvey CFP

And whenever these corrections happen, I know what’s going through their minds. And I feel bad about that in many cases, even though we have conversations and as an advisor, you try to discuss these types of risks, but that makes me feel for them.

Justin Harvey CFP

Another thing that helps me process these circumstances is when I feel that way, when I feel like, oh man, I know what I tell people and I know what their data says, but I’m still a little nervous, I can just ask myself, well, what should we do?

Justin Harvey CFP

Like, should we go to cash? If so, how long do we go in cash? When do we get back in the market? The problem with volatility is it clusters around a certain point, meaning when times are really good or really bad, they tend to be the inverse, like the really good and the really bad tends to stick together, statistically speaking.

Justin Harvey CFP

So the problem is whenever you get out, whenever markets are doing very bad, it’s likely, statistically speaking, that you’re going to miss the rebound is if you’re not super lucky, basically is the bottom line.

Justin Harvey CFP

So you can’t just get into cash and stay in cash and wait for the quote unquote, right time until volatility has gone away because by then the market has rebounded and you’re going to have a permanent impairment of capital as the MBA speak for what we would describe this as.

Justin Harvey CFP

So it would behoove the investor and the advisor to remember this. Like we the alternative is we we have to get lucky. We have to play roulette and win. And that’s not a good way to help clients manage money.

Justin Harvey CFP

The good way is to stay in your seat with your seatbelt fastened, talk about the plan, talk about the goals. And if none of that has changed, then let’s just ride this thing out the way that I describe

Jimmy Turner MD

this to people in somewhat concrete terms is just referring to the studies that have looked at passively managed index fund strategies compared to active management and how over a long period of time the index fund wins over 90% of the time.

Jimmy Turner MD

The reason why is because even people that could pay millions of dollars a year to pick the stocks that win and get rid of the stocks that lose and to time the markets don’t do it well over 90% of the time.

Jimmy Turner MD

So what are the odds that you as an individual investor who is working as a physician or a medical professional listening to the show and you think that you can do it? For me, like when I wrap my head around, okay, this is the evidence, here’s the studies.

Jimmy Turner MD

In medicine, we don’t like to practice anecdotal medicine. We say that that is a bad thing to do. So practicing anecdotal money is equally problematic. I like this. I’m going to use this, Jimmy. Yeah.

Jimmy Turner MD

Yeah. So it just comes down to the studies, right? If you’re a logically inclined scientific person, then stop guessing when the market’s going to go up and when the market’s going to go down because you don’t know and people that get paid a lot more money than you do to do exactly that one thing, that’s their entire existence and job professionally, is to get that right and they don’t.

Jimmy Turner MD

And so once you have this understanding of the psychology and kind of history behind it, and it’s probably worth mentioning too, Justin, like I can’t remember off the exact number off the top of my head, but yeah, I want to say it’s a 10% correction that happens every one and a half years and the 20% is going to happen.

Jimmy Turner MD

So true bear market’s going to happen several times during your lifetime, not every one and a half years. That said, the reason I mentioned that historically, because again, if you look at these studies, the history of this, you’ll recognize that this is going to happen.

Jimmy Turner MD

It is going to happen. It’s happening almost right now. I mean, it was like 7%. So it’s almost 10. And that said, we know this happens. We know it bothers us. We know there’s psychology involved. So what do we do about it?

Jimmy Turner MD

And when this happens for me, the first thing that I think about is how am I sleeping at night? And that might sound like a funny question. But the reason that I asked that question is because if I’m sleeping really well, that means my asset allocation is probably appropriate, right?

Jimmy Turner MD

I saw the market go down by 10%. My portfolio went down by 10%. I slept like a baby. That means that I’m probably assuming that you’re taking enough risk. That is probably a good indicator that your asset allocation is appropriate.

Jimmy Turner MD

If you are looking at the market, seeing it go down by 10% and you are not sleeping at night because of the loss of money in your mind, by the way, you haven’t actually lost anything until you sell. Just for the record, that’s called actualizing.

Jimmy Turner MD

You’re making it a real loss. Before you do that, if you see stuff goes down, it hasn’t. Like if over a long period of time, it continues to go up, you haven’t lost anything. So if you see it go down and you’re losing your mind and you’re stressing out about it and you can’t sleep at night, you’re probably of too high of a risk in your portfolio.

Jimmy Turner MD

So let’s say you’re 90 -10, you’re losing tons of sleep. Well, maybe this is a good opportunity to recognize that as decisions are timed appropriately, maybe you need to be at 80 -20. Maybe you need to be at 75 -25.

Jimmy Turner MD

But either way, that loss of sleep is probably telling you that you’re taking more risk than your personality and your financial literacy at that time can probably tolerate.

Justin Harvey CFP

Yeah. And another thing to just be aware of is the trade -off between human and financial capital. And as a one -year -old child, you are all human capital and no financial capital. As a 100 -year -old person, you’re all financial and very little human just because of your ability to earn money.

Justin Harvey CFP

And then there’s a trade -off that happens over years. So as a 34 -year -old, you’re still, as a physician, you’re just getting started. You’re still all human capital. As a 67 -year -old, you have given significant trade -offs.

Justin Harvey CFP

You’ve worked, you’ve earned. Hopefully you’ve accumulated wealth. The wealth you’ve accumulated is then going to be exposed to the markets and earning its own return. And the human capital that you have left is significantly diminished compared to that 34 -year -old.

Justin Harvey CFP

So one of the ways you should be processing this is, oh, there’s a big market sell -off. Man, as a 34 -year -old, all of my human capital is my biggest asset right now. So I’m looking at my balance sheet, and it’s scary because I see what happened to my 401k, but still, I’m going to make X number of dollars per year for the next 30 however many years.

Justin Harvey CFP

Or I’m going to be well -insured in the event that I don’t. It’s going to be protected. And therefore, market sell -offs shouldn’t get me upset. Or conversely, if I am the 60 -something -year -old, then I have moved my asset allocation in a way that reflects I don’t have as much human capital as I used to.

Justin Harvey CFP

And therefore, I’m not going to be as impacted by these market moves because I’m more conservatively positioned. So one of the two of those things should be true for you. And if you’re in one of those camps and you’re experiencing this unsettledness, you should ask yourself, am I understanding the human and financial capital trade -off?

Justin Harvey CFP

And am I appropriately positioning my life and my brain to account for that reality?

Jimmy Turner MD

Yeah, so as things you wind down on that capital from making money, and it is more financial capital from your investments, you should also decrease your risk. And there’s that favorite famous quote that kind of exists in this space, which is, if you’ve won the game, stop playing, right?

Jimmy Turner MD

And so when that happens, it’s worth considering, do I need to keep taking this much risk? And so you’re going to gradually decrease your risky assets, like stocks, you’re going to gradually increase your fixed assets that might be safer for you to help kind of make this turbulence be less turbulent as you get closer to retirement age.

Jimmy Turner MD

And this is a interesting question that that when we were thinking about this show idea, Justin, I was like, I want to pick Justin’s brain on this, because I know the answer academically, right? So if and this isn’t a show about inheritance, but let’s say that you have $100 ,000 sitting on the sidelines, because I’ve had conversations with doctors that have had $100 ,000 sitting on sidelines, which for the record,

Jimmy Turner MD

is mind blowing. But from my perspective, I also know that studies have shown be inherited a bunch of money. And the question is like, wait, wait, should I dollar cost average this $100 ,000? Should I let’s make it $120 ,000?

Jimmy Turner MD

Just because I’m bad at public math? Should I take this $120 ,000? And should I put $10 ,000 per month into the market over 12 months until my $120 ,000 is invested? Or should I take that $120 ,000 inheritance?

Jimmy Turner MD

And should I just put it into the market lump sum all at once? And if you’re listening to this, think about that. What do you think the answer is, you might even hit pause on this and be like, I’m gonna think about this for a second.

Jimmy Turner MD

It turns out that the answer is that lump summing that money into the market wins the vast majority of the time, which is fascinating, right? There are reasons for this. Potentially, one of them is that that money is still sitting on the sideline every month until you get it fully invested, is not having the opportunity to grow.

Jimmy Turner MD

Now, psychologically, it’s probably less painful when you dollar cost average. And as with your normal investments coming out your paycheck, that’s what you’re going to naturally do anyway, that’s because you don’t have the money yet.

Jimmy Turner MD

But I’m just kind of curious from your perspective, you know, academically, I know the answer to this. When someone has cash sitting on the sideline, there’s there’s some physician listening to this show right now, one of the 1000s of people that listen to the show that has $100 ,000 sitting on the sideline, if you’re in residency or training, I’m sorry, I know this is a traumatic conversation at the moment,

Jimmy Turner MD

because you probably don’t. But for those that aren’t in training, what do you what do you tell that person market downturn, they got cash on the sidelines, what are they doing with it?

Justin Harvey CFP

this question, I would say similar to the example you gave earlier, I don’t like to be overly paternalistic to say, here’s what you should do and not even create alternatives because I believe that autonomy is important, but there are certain circumstances in which I know the forces working against individual investors are so pronounced and the answer is clear cut enough that presenting a one -sided argument is the best way to really help someone.

Justin Harvey CFP

This is my personal belief. If you give everybody an A and a B, sometimes people, and I actually had this, this is an epiphany for me. I’d say, you could do A or you could do B, and they’re like, Justin, I pay you to tell me what to do, just tell me what to do.

Justin Harvey CFP

The math is clear, markets are up most of the time, the right answer is to get all the money to work as soon as possible. If somebody said, Justin, I’ve got 100 grand, what should I do with it, as long as it’s a long -term pool of money, as long as it is in accordance with their goals, we would obviously filter this through the lenses of their financial plan, but I’d say, let’s just invest it today because statistically speaking,

Justin Harvey CFP

this is going to give you the best chance of turning this into the most wealth possible. Now there are some cases in which that is so uncomfortable for someone that the dollar cost average is sort of the, it’s the crutch that is needed to do something rather than have someone paralyzed.

Justin Harvey CFP

In that case, I would acquiesce and say, all right, well, let’s do what we can do, and if it’s 10 grand a month for the next year, I could live with that. The truth is, that’s not going to permanently harm their financial plan in a way that’s going to make a material difference.

Justin Harvey CFP

It’s not that big of a deal, and I wouldn’t push back that hard in that case.

Jimmy Turner MD

The reason I mention this is because the idea of keeping cash on the sidelines, just in general to invest it, is problematic. By all means, have an emergency fund. Have some funds available, sinking funds available for things that you’re saving for, for trips and travel and vacation, for emergencies that may come up.

Jimmy Turner MD

But after you accomplish those goals, having additional cash just sitting on the sideline because you’re waiting for the opportunity to invest is going to lose you money, not just in the market, but also to inflation, which my friends, I can remind you, recently has been as high as 5%, 6%, 7%, 8%.

Jimmy Turner MD

This is not a benign decision. It is something that will cost you. Now, if you are keeping cash on the sideline because you have some buyout coming up, you have an investment opportunity of some kind, again, that is money that is being saved for a specific goal, but if you just have cash sitting in an account, which it blows my mind how often I have this conversation, please don’t just leave it there.

Jimmy Turner MD

That is not, but God forbid you’re in that situation. This is a judgment -free space. If you’re in that situation, market downturn is a great time to put the money in, right? Just lump sum it. If you can’t do that and you need the psychology of being like, well, if I put it all in and then it keeps going down, fine.

Jimmy Turner MD

Dollar cost average, it’s a second great thing to do. It’s not as good as the first, but if you psychologically need that crutch, as you’re describing Justin, then I don’t think it’s a terrible idea.

Jimmy Turner MD

It’s not six, one way, half dozen, the other. It’s more like eight, one way, four, the other, but either way, it is not a terrible thing. Just don’t keep cash on the sideline for no reason.

Justin Harvey CFP

I have one specific story that has always stuck in my brain for this. I have a client that they actually had this exact situation. They get a big bonus from work and they’re like, what should we do? And we had this conversation and it ended up that we dollar cost averaged.

Justin Harvey CFP

And the first dollar cost average was actually, it was in March of 2020. So I don’t know if you remember what was going on at that time, but it was actually like the worst two weeks that the stock market had seen in a decade in a long, long time.

Justin Harvey CFP

Maybe I don’t, it could have been decades. I can’t remember how tightly clustered the bear market of oh eight was in terms of losses, but it was terrible. We threw all this money to work and it was awesome.

Justin Harvey CFP

Like that lot that we invested in March was, it was up, you know, 70% after a couple of years from the trough up to the peak, but there were a few different buys at that time. So it was, you know, that was the first tranche and there’s another and another and another.

Justin Harvey CFP

And later on they were charitable incline. We started using a donor devised fund. We’re gifting appreciated securities in the way that we’ve talked about on this show. And instead of having the whole, you know, quarter million dollars that we put to work in that one day in March, which was the first buy that amount was only like 80 grand that we had done in three tranches.

Justin Harvey CFP

And so the amount that they had to contribute was significantly diminished as a result. So this is obviously, I’m kind of contradicting myself in terms of practicing anecdotal medicine here, but this one does, it was a, an anecdotal expression of the statistical reality of the fact that because markets are up most of the time on a one year basis at something like 75 or 80% in any calendar year that a stock market is going to be up,

Justin Harvey CFP

it behooves you to just drop it all in. And had we done that in this case, the amount that this family would have had to gift appreciated securities would have been a lot more. And the wrangling that we did in this particular instance was ultimately detrimental.

Justin Harvey CFP

So for me, I’m always like, all right, if we’re going to DCA, we better have a darn good reason and I’m going to push back a little more aggressively if we don’t.

Jimmy Turner MD

Yes, I would say that that is anecdotal evidence of what the evidence shows. So in that case, this is the only reason to bring it up. Yeah, I mean, and I think those are the numbers. I think it’s 80% of the time, give or take that lump summing wins.

Jimmy Turner MD

And so I can’t say that it always wins. That’s, that’s definitely not the case. 80% of the time it will. So you mentioned appreciated shares. So some other opportunities, because I do recognize that when the market goes down, people want to act.

Jimmy Turner MD

That’s where the moppy colossal version comes from. You see it go down, you’re like, Oh, my goodness, I need to do something. And so it’s not like you can’t do anything. There are moves to make when the market goes down.

Jimmy Turner MD

It just isn’t to sell things and to hold it until the market starts going back up. That that’s not the move. That is a detrimental decision that the vast majority of the time, you’re gonna look back and be like, man, that was a really bad mistake.

Jimmy Turner MD

But examples, right? We’ve talked about some of this on the show before tax loss harvesting, right? This is a fantastic time to do that. And maybe we’ll just mention a second without getting too far into the weeds, Justin, because I know we’ve talked about tax loss harvesting a bit in the past.

Jimmy Turner MD

But when people are considering this method in the last couple of weeks, maybe maybe spend a second talk about the wash sale rules. And just there are some mistakes that can be made when your tax loss harvesting.

Jimmy Turner MD

So everyone’s like, Oh, this is great. I’m gonna lock in some losses. And they totally screw the pooch and mess this one up. So so what are some mistakes that people make when they tax loss harvest being aware of the wash sale?

Justin Harvey CFP

rule is an important facet. You can’t just sell something and buy it. If it is a, there are some, there’s exceptions to this and this is why it quickly gets technical. But if we’re talking like an S &P 500 stock, let’s talk about Nvidia, that’s, it’s been just stratospheric in its ascent the last few years.

Justin Harvey CFP

If you like, okay, Nvidia is now, I own a ton of it, I bought a little of it, and I want to lock in some losses because it’s, you know, down 17% in the last week or whatever and it’s just been bouncing all over the place.

Justin Harvey CFP

You can’t just sell it and then rebuy it. That creates what’s called a wash sale because if you make a sale and a repurchase within a 30 -day timeframe, then the tax loss that is realized is negated.

Justin Harvey CFP

And so in order to lock in a tax loss, you need to sell Nvidia and buy Microsoft or buy some other thing to replace it. The common methodology in this circumstance would be to buy a company of a similar profile and a similar highly correlated return stream so that if the underlying investment thesis remains the same, meaning like we still like Nvidia, we just want to take some gains off the table but remain exposed to the space,

Justin Harvey CFP

we would reinvest that cash in something that is AI forward, for example. But it’s easy to mess up if you’ve got a bunch of different accounts and particularly like if you’re doing some stuff in your little side account and you’re working with an advisor who’s also doing some stuff, the IRS doesn’t care who’s placing the trades, they look at your social security number and if you locked in some losses but your advisor is making some buys because you’re not talking to each other or you have multiple money managers running accounts in parallel and they’re not talking to each other,

Justin Harvey CFP

it’s pretty easy to sort of infringe on this rule and the losses that one party is going to a lot of trouble to try to lock in as being negated by the actions of another. So you definitely need to make sure that this is a coordinated effort, which is one of the reasons, it’s a little self -interested, but one of the reasons I like to manage all of my clients’ money is to make sure that I don’t have to talk to four different money managers to make sure that we’re all doing the same thing.

Justin Harvey CFP

It doesn’t work as well for the client.

Jimmy Turner MD

And just to be clear so that people understand, had $100 ,000 in Nvidia, you potentially have a $22 ,000 tax loss opportunity. But what I don’t want you to hear is that we’re saying, hey, you see Nvidia go down, you sell, you hold the cash to invest later.

Jimmy Turner MD

That’s not what we’re saying. We’re not saying hold the cash for 30 days so that you can then buy back Nvidia. What we’re saying is that you sell it, you lock in that loss from a tax loss harvesting standpoint, and that it is immediately reinvested into something similar, but not the same, so that you are never, quote unquote, out of the market.

Jimmy Turner MD

So we just had this conversation about staying in the market and how it’s really bad to sell. So when we’re talking about tax loss harvesting, we’re not saying, hey, lock in your loss, hang on to the money for 30 days and then put it back in.

Jimmy Turner MD

We’re saying, lock in your loss from a paper tax IRS standpoint and invest in something extremely similar, but not the same, so that you can stay in the market the entire time.

Justin Harvey CFP

Which also means for the listeners of this show, because they’re smart enough to not be wheeling and dealing on the roulette wheel of buying individual securities, they’re probably using index funds.

Justin Harvey CFP

And so you can’t buy the, you can’t sell SPY, the S &P 500 ETF and buy IVV, another S &P 500 ETF, or at least it is not, and the IRS is, this is a little bit gray, they don’t explicitly say this, but it is, it is commonly accepted that buying one index ETF and, and using it from the proceeds of another is not going to be kosher in terms of realizing a loss, you’re going to need to use a different index that is similar.

Justin Harvey CFP

So in this case, if it’s the S &P and you’re like, I want to lock in some S &P losses, you sell your S &P ETF, you buy a Russell 1000, which is a different, it’s a similar US large cap index that’s going to behave, it’s highly correlated, but it’s going to be a, it’s going to pass the test in terms of not being an offsetting purchase for watch sale purposes.

Justin Harvey CFP

So just be aware of that, that there are index options, index equivalents of what we’re describing, but you can’t use the same index.

Jimmy Turner MD

Yeah, so obviously not recommendations on any individual securities there, because it’s important to recognize that. But I will say in my past, I’ve just kind of gone back and forth to the S &P 500 and you know, the total stock market fund, it’s because they correlate so highly, but they are not the same.

Jimmy Turner MD

And so because of that, but just to give you an example of this, we talked about having individual securities with somebody who is direct indexing them or having a separately managed account. And so I just mentioned that 22% loss that Nvidia’s had an Nvidia has a pretty large market share.

Jimmy Turner MD

But for the S &P 500, for example, in last month, it’s only been down 5%. And so that that is an example of ways in which direct indexing may provide some more tax loss opportunity in terms of individualization.

Jimmy Turner MD

That said, you can sell tax loss harvest on index funds, like you’re mentioning, Justin. So I think that’s an important thing to call because a lot of the listeners of the show, myself included are going to be passively managed index fund strategy people, a big fan of it.

Jimmy Turner MD

And I think it’s simple and simplicity is good. And so and one of the reasons why is because what we’re talking about on the show. So if you’re going to be really fancy, I think you need to have an advisor.

Jimmy Turner MD

And one reason why is because you’re going to pay more attention, you’re going to have that loss aversion, you’re going to make mistakes. And so if you’re going to be a do it yourself investor, in my opinion, in my experience, and the conversations that I’ve had with other people, if you’re going to be in that boat, simplicity is your friend.

Jimmy Turner MD

So if you’re going to be a do it yourself, or you’re going to be passively managed index fund three fund portfolio Boglehead style, keep it simple, the simpler things are the more likely you are to not look at it, the more likely you are to not look at it.

Jimmy Turner MD

So I didn’t even know this was happening until somebody mentioned it to me just just for the record, like I, I live in the personal finance space, have conversations about money every single day of my life.

Jimmy Turner MD

And I didn’t know the market had gone down the way it had until somebody at work mentioned it to me, because I never not never, I rarely quarterly look at my portfolio just to do a net worth update. And it’s not to change anything.

Jimmy Turner MD

I rebalance once a year, because it’s simple. Now, mathematically, is that the best possible way to optimize my portfolio? No, it’s not. But I know simplicity keeps me from looking at it, which keeps me from making mistakes and wanting to make changes.

Jimmy Turner MD

And if I wanted to do all that fancy stuff, I would hire an advisor. That’s just my personal opinion. I don’t know if you like vehemently disagree with that, Justin.

Justin Harvey CFP

I think that all makes a lot of sense. And you know, there are things you could do it a little bit differently, but is what you’re doing going to get you where you need to go almost certain.

Jimmy Turner MD

Certainly. So hopefully the show in the middle of a market downturn or just immediately following that is helpful for you, whether you are currently thinking through what to do right now or you’re listening to the show in the future.

Jimmy Turner MD

And as we wind things down, don’t forget if you want to consider a free virtual talk for your residency or fellowship program, hit me up, give me at moneymeetsmedicine .com. Happy to talk about that more offline.

Jimmy Turner MD

You can also give a free copy of the book to your trainees at moneymeetsmedicine .com. It’s downloadable ebook and Kindle style. You can download your Kindle, read it on there if you’d like. And that’s all at moneymeetsmedicine .com or you can email me at jimmy at moneymeetsmedicine .com.

Jimmy Turner MD

All right, everybody. We will see you next week. Cheers. Justin Harvey is a certified financial planner at APM Wealth where he helps anesthesiologists in pain medicine positions. Dr. Jimmy Turner is a practicing academic anesthesiologist at Wake Forest in North Carolina.

Jimmy Turner MD

He’s also a licensed insurance agent. However, either Justin or Jimmy are your financial planner, investment advisor or insurance agent. The show is expressly for general education and entertainment purposes only.

Jimmy Turner MD

Nothing should be considered financial advice. All views expressed are solely the views of the guests on the show and do not represent the views or opinions of their employer.