Finance for Physicians

Burnout is tough, especially for physicians.

But you don't have to be a victim of it. There are ways to combat burnout.
It's not this unfixable or unmanageable thing. There are steps you can take.

This is why, for this episode, we're interviewing Dr. Sapna Shah-Haque!

Dr. Sapna Shah-Haque is a primary care physician who's had numerous battles with burnout, even losing a friend to it, which is part of the reason she started her own podcast and started talking more about it!

In this episode, we're going to cover:

- How Dr. Sapna Shah-Haque overcame her numerous fights with burnout

- Why she feels her lowest moments were a result of her extreme levels of stress as a physician.

- What actionable steps you can implement to manage and beat burnout.

We're so excited to present to you this conversation and can't wait to explore the important topic of burnout in the medical industry even further!

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Finance for Physicians

Physicians are often associated with burnout.

And there's a reason why.

There are arguably few professions that rival the stress a physician has to endure throughout their career.

But the stress isn't always at the hospital or the private practice. Financial matters can cause distress for physicians, but they can also be the solution.

On this episode of the Finance for Physicians podcast, we're going to talk about:

- The sneaky nature of burnout.
- How medical professionals are prone to burnout from college.
- Upward mobility in medical professions and how this addicts the physician to a more stressful lifestyle.
- How to not miss out on family experiences as an ambitious professional
- And so much more!

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Finance for Physicians

We went LIVE with our show, Finance for Physicians!

We're over 100 episodes into our podcast, Finance for Physicians, and we've got the chance to learn great lessons together with our audience.

But it's time to turn this audience into a community.

That's why we did our first LIVE show!

For this world premiere, Daniel Wrenne talked about:

- What are the key lessons have been from the first 100 episodes
- How Daniel realized that what is missing for physicians is a community of peers they can count on
- Why the show is expanding beyond financial advice in order to make you smarter with your money
- And much more!

This is an interactive conversation that will shape the future of a community we'll build together. 

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Finance for Physicians

As a doctor, you begin your professional career as a high-income earner. But many people don’t talk about the cost of this achievement.

As you know, medicine is a demanding field that requires a lengthy, expensive education and rigorous hours of training. When you spend that much time studying and working, you don’t have the time for side jobs to offset the cost, or the mental space to learn about anything else other than how to treat patients. This means most physicians, like you, end up having to take out huge loans to survive, without time to get a proper financial education. But by the time you start to earn income, you begin to feel trapped by “the system”.

You start to feel behind in life - forcing you to continue to sacrifice your quality of life and your patient quality of care starts to decrease. This leads to poor health, stressed relationships, and a propensity for burnout from a vocation you worked so hard to achieve.

We have a solution: we believe control of our finances leads to having control of our life. Welcome to “Finance for Physicians” a show where we teach and empower doctors, like you, to practice medicine the ways you always dreamed you would- free of financial worry to provide the best level of care for your patients, your family, and yourself.

Don’t believe that “burn-out is a necessary myth.” You don’t have to sacrifice your health, relationships, and your career to live the life you want. If you want to learn how to have better control of your finances and more control over your life, this show is for you!

“Finance for Physicians” is hosted by financial expert, Daniel Wrenne, of Wrenne Financial.

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Finance for Physicians

The pandemic in America is starting to look like a memory of hard days gone by, but the effects can still be felt throughout our country. That reason is, probably, why the Biden Administration has decided to extend their Covid 19 Forberances to the end of this year.

In this episode of the Finance For Physicians Podcast, Daniel Wrenne will go into detail with Jeff Wenger about the situation surrounding Covid Forbearances while also taking a look at the currently shifting loan-giving and forgiving policy of the Biden Administration.

Updates On 4 Big Changes To Federal Student Loans

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Finance for Physicians

Does it take you hours and hours to count and track every single expense, every single month? How can you monitor your spending without spending too much time that you do not have and cannot afford to waste? 

In this episode of the Finance for Physicians Podcast, Daniel Wrenne talks about how busy physicians can monitor spending without wasting hours by using a basic system that he developed to keep a pulse on cash flow and total household expenses.

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Finance for Physicians

What’s up, everyone? I am recently returning from a podcast conference. Basically, a bunch of people like myself got together, shared ideas, and talked about how to improve.

My goal up to this point has been just to basically produce episodes and share as much value as I can. Now that I’ve been at it for (I guess) a little over a year, maybe close to a year-and-a-half, the goal going forward is to start to proactively grow and really fine-tune the skill.

This conference was super helpful in getting some ideas. I want to fill you guys in on that before we jump into the episode today, and share a couple of other things I’m going to be working on.

Like I said, the big goal going forward is to really focus on growth and adding value, which has been my primary goal all along, is how do I get as many people listening as possible, and make sure it is valuable as possible.

I got a lot of ideas from the conference. I’ll share those over time and you’ll start to see those come out over time as we implement them, but there are a couple I’ll throw out today.

In terms of value add, a couple of ideas that I took away from that conference was along the lines of improving engagement. A couple of other things I’m thinking about is maybe doing some live format, where we allow the ability for guests to participate more in-shows, throw out questions, and just make it more interactive, with the goal being to make it more community-focused. Or maybe having a Facebook group where we’re doing form-type setup and having conversations.

I have a lot of different ideas along the lines of building community and improving the interaction among you guys, so if you have ideas along those lines please share those. Ultimately, this show is for you guys, so I want to hear if you guys have ideas for how to provide more value and be more engaged. Ultimately, I want to know what you guys are looking for and what’s what we’re after.

That’s the first big thing that I’m working on. The other big thing is growth. The goal there is to naturally grow through providing maximum value. Plus I think I’ll try to do a little bit more promotion, maybe on social media, although I’m not the most engaged. I’m not the social media type.

Another big thing is potentially getting on other people’s podcasts. If you know of people that either might be good guests for this or podcasts that might be good for me to attempt to get on, please throw those out as well because we’ll be looking to do that in the future.

More info to come. I just want to throw you guys in on that. Super exciting to see how many people are working in that space, and there are a lot of people with great ideas. The goal is to work through these things to continually improve on what this podcast is providing ultimately for you guys.

The goal today was to talk about expenses and monitoring expenses  without spending hours and hours. I know that is a common issue. You’re probably thinking of budgeting when we talk about budgeting. We kind of are, but when I think of budgeting, I’m like, gross. That sounds terrible. I don’t really want to budget. Budgeting sounds painful to me.

I think of counting every single expense every single month and hours and hours of time. That is commonly what it turns into, especially when you’re tracking every single expense. It’s also a common cause of arguments with couples when you get into the weeds. Not that budgeting is always bad, but I don’t think it’s a great starting point. So we’re going to talk about how to monitor your spending without getting into the weeds, and without spending hours and hours of time.

Through my work with physician families one-on-one, and also just with my own personal finances, I’ve developed a system. It’s very, very basic. It’s nothing. I’m sure tons of people have used this before, but it’s a system that really works well for just keeping a pulse on cash flow and total expenses.

For most people, that’s really all you need to do most months. I’ll talk about my experience with this as we go through this because I’ve seen the ups and downs in this. I think the goal is most people just want to make sure they’re not overspending or make sure their spending is in line with what they want it to be.

This system will (at minimum) show you if you’re on track. It’ll also give you awareness if you’re slipping, if your lifestyle is starting to creep up. I’m going to talk through this cash flow tracking system.

Basically, the system involves monitoring your total cash balances between your checking and savings account over time, and your income, and then using those values to back into what your expenses are.

First of all, this is not going to work if you have consumer debt that you’re not paying off every month. If that’s you, you have to take care of that first. This is just not going to work for that. But assuming you’re paying off all your credit card debts every single month, this system to monitor will work.

We’re looking at cash balances. Really the system is watching those cash balances over time and backing into what your spending is based on that. The way I do it is monthly. You could do it at any frequency, but I like monthly. It’s how I track everything else.

Let’s say we’re looking at May of 2022. What I’m going to do is—I use a spreadsheet, but you could use paper—I’m going to look at May. The first number I’m going to write down is my starting balance between all my cash accounts—checking account, savings account—total them up, that’s my starting cash balance at the start of the month. Let’s say it was a thousand, so I started May with $1000.

The next number I figure out is how much income came in. The reason we’re using this approach is because it’s simple. Hopefully, you have much less, much fewer transactions for income.

For example, between our accounts we only have three or four income-lined items each month. With our clients, we typically see anywhere from a couple of transactions to maybe 15 at most. All you’re doing is totalling up all the income that came into your accounts for the month. Let’s just (for example) say that number is $5000.

The third number you’re looking at is the ending all cash balance. So same thing as the first number, except we're just looking at the end of the month total between all the accounts cash balance. Let’s say that number is $1100. You started the month with $5000. Five thousand dollars came into the account and now you have $1100. That would mean that your expenses were $4900. In other words, your surplus was $100.

The reason I love this approach is because it allows you to back into this total number, in this example $4900. It allows you to back into what your total expenses are very easily. It takes me 10 minutes a month to update these numbers.

I know what that number needs to be for us. I can do a quick check and see if it’s in the range of what I want it to be, I just write down those four numbers and I move on. Usually it’s over for us and most people, but if it’s over or under, you can take action based on that, so I’ll talk about that in a second.

I have gotten in the habit of doing this every month, just once a month. I write down those three numbers, starting cash income, ending cash, then I back into the expenses so it ends up being four numbers, and I just document it for June, July, August, September.

The other thing is after you’ve been doing this for a while, you get a nice rolling tally of what your lifestyle is, and it’s just a much more accurate representation as opposed to just looking at one month.

That’s my simple system for tracking cash flow or total household expenses. Another common question—probably the most common question—that comes up as a result to this, is what if my expenses are not what I want them to be? Or maybe even before that, the question is what do my expenses need to be?

That’s a personal question and I think the best thing to do is have a financial plan. Part of the value of a financial plan is deciding how much your lifestyle should be versus how much you should be spending versus how much you should be giving away and tying that into your values and goals.

Ideally, you have a financial plan and can use that to drive what your expenses should be. If you don’t have that, that’s got to be step one, because otherwise, you’re just flying blind. Once you have a plan and you know what your expenses should be, then that’s what you’re going to be using as a benchmark or a line in the sand.

Going back to the example I just gave, say your number needs to be $4000 of expenses. We just saw it was $4900 or maybe the past 3 months it’s been averaging $5000 or $4900 or somewhere in that range. In other words, you’re over by close to a thousand dollars. What do you do then? What I would suggest at that point, that’s when you dig deeper.

Lately, I have had that happen with my own tracking. I think everybody, a lot of people that I’ve talked to lately had had this happen. It seems like people are spending money plus things are getting more expensive. There’s been all this COVID travel pent-up lack of spending.

I’m one of those people. Our lifestyle has creeped up the past six months to a year. And now it’s gotten outside the bounds that I would like it to be. What we do in this situation is that’s when we dig into the expenses. At that point, I would do what I call an expense audit. Basically, you’re just going to dig in a little bit more.

I just did it earlier today, so it’s fresh. What I basically did is—I’m recording this June 2022—I looked at April and May, and I’m auditing those two months. First thing is what period of time are you going to audit or dig into? I typically suggest two, maybe three months at the most. You don’t want to make it too intense. I took April and May.

First step is I’m going to go to all the accounts that I spend money on and log into them. For us, there are three different credit cards and one checking account where transactions happen. I logged into all four of those accounts and downloaded my transaction history in an Excel spreadsheet for April to the end of May, so for the two months. I just downloaded all those accounts into a spreadsheet and then I pull them all together into one spreadsheet.

That’s the data. You pull all that into a spreadsheet. Then you have to take out the income and transfers. Sometimes, they’re just irregular things that you need to take out. Really, I’m focusing on expenses. If it’s a credit card payment, I take that out because that’s already going to be accounted for. I want to know what was swiped on the credit card. A credit card payment is not an expense. That’s just money moving places.

I take the income out. I take the transfers from one account to the other out. I take the credit card payments out, that sort of thing. I got to take all that out first. Then for my account, I have to make sure some of the accounts show refunds as positive expenses. I had to add a negative to those because that’s a refund. We took something back and got a refund. I had to do some small corrections like that.

Basically, you’re just reviewing your list of transactions from a high-level standpoint and saying, is there anything I need to take out? Is there anything I need to adjust? Ultimately, I made some tweaks to make it so that it’s strictly our transactions for expenses from those accounts for April and May.

Then I’m going to go through and just categorize it. I would suggest using broad categories for categorization, like home or entertainment or travel or food. Food would be eating out, groceries. Or maybe you could use food/eating out and then food/groceries. Transportation is one I add. Basically, come up with the categories that you want to sort everything by.

There’s always going to be an other or an unknown category. But come up with a big category that you’re going to sort everything by. Then go through the spreadsheet, identify which category all the transactions are going to be. Then total up by category.

This is kind of painful, I’ll be honest. It takes an hour or two. The whole point of this is not doing this exercise every month. This would suck to do every single month. I’m sure you could come up with some automations or what not to make it faster. But either way, it’s painful to go through each individual transaction.

The whole idea of this system is to track cash flow and get into the weeds every so often. For us, we’re typically doing this deep dig every year on average probably, or nine months to a year. It does take some time, maybe one or two hours. Ideally, you’re coming away with a very accurate representation of what your expenses are by category.

Once you have it all categorized and you have summed up those transactions by category, then I would start to review the totals for each category, and maybe even review some of the individual transactions. This needs to be with your spouse or whomever you’re sharing your expenses with if you’re doing that.

As a couple, you’re going through and reviewing each of these. You can’t be judgemental. You can’t be finger-pointing if there are two of you. You are going to review them and say, let’s start to highlight—maybe even do it on paper so you can literally highlight it—some of these transactions that we might consider cutting.

Each of you go through and highlight as many transactions as you think might be transactions you cut, not that you will cut or change or something. As you do that, I think it’s important to remember what’s most important, your values, and your goals. You’re going to naturally go that direction, but I think it’s a good reminder to think about what’s most important.

For example, for me, and this is where it gets tricky. I don’t really have a high value on clothes, for example. I don’t really spend anything on clothes. So when I see transactions for shopping at clothing stores, I’m like ugh. So that’s a low value thing for me. My wife is not super into that, but she definitely values that more than I do. She’s going to rank it a little higher, I’m going to rank it low. On the other hand, I definitely value traveling, so I’m going to be considering that a very high value expense.

Ideally, you’re looking for things that you both don’t really value that high. Or even something that you completely don’t use. That’s low-hanging fruit. Almost always when we go through this, we’re going to see some just straight low-hanging fruit. Like a Netflix subscription that we never use, that’s low-hanging fruit. That’s an obvious one.

Or maybe we’re getting carry-out food or something more than normal. Both myself and my wife don’t value that really at all. If we’re going to eat or spend money on food, we want to go to a nice restaurant. Carry-out is not that valuable to us. Really, we do it a lot of times when we get busy or lazy or whatever. So that’s something we definitely will often identify as something to cut, just that carry-out type.

Or spending in a super convenient grocery store right across the street, but it’s way more expensive. Those are the types of things that typically get highlighted on my list, but everybody’s list is going to look different.

Once you’ve identified all of those or highlighted all of those, then you talk through those with your spouse and star the things you’re going to cut or work on reducing.

Once you star all the things you’re going to work on adjusting, you have to make a plan to do it, especially if it’s an entrenched habit, like dining out or carry-out can become a super entrenched habit. You have to focus on how you’re going to stop or change the habit. Habit change is not easy. You have to remember to make a plan.

Sometimes, it’s as easy as just going online and canceling the Netflix subscription. Other times, it’s like how are we going to not eat out as much? Well, I don’t know. You can come up with something creative, say maybe if we spend less than $100 dining out next month, we can buy ourselves a treat or something.

You can use some of those habit tricks to encourage or incentivize yourself to do it. Or you could just stop using your credit card because that makes it easy to swipe for certain things. The key is to make a concrete plan for changing it.

Going even further, as you free up money you want to make sure it does its thing. If you’re freeing up money, it’s going to have to go somewhere. Think about where you would like it to go. Maybe you’re spending in a different category. Maybe you’re giving it away. Maybe you’re saving or investing it. Whatever it is, ideally you’re making a plan for that to happen.

For example, if you need to save more for education for your children, the key is to cancel the Netflix subscription and at the exact same moment, like in an ideal world, you adjust the 529 contribution up by that exact amount. The dollars have basically just gone from one category to the other.

That’s how the expense audit works. It worked well for us. Myself and my wife have had good results doing that. It is painful, but it’s not something we do every month by any means. We’ve had a lot of clients that use a similar approach.

The key is it doesn’t need to be perfect. This temptation with budgeting is if you’re going to budget, you need no other expense. But I don’t think that’s the right way to look at it. Knowing what your total expenses are is very valuable and is much better than knowing nothing. A lot of people are like, I’m going to budget perfectly. Then they get into it and they’re like, this sucks. I’m never budgeting at all. Knowing your total expenses is much better than not budgeting at all.

Ideally, you’re keeping a pulse on total expenses. And that’s keeping you out of the weeds. But then you know when the alarm bells are sounding and you can jump into the weeds every once in a while, and make some adjustments so that you’re not having that lifestyle creep we talk about a lot.

That’s what happens pretty much for everybody. If you’re not looking at this, it’s happening for me right now. We’ve had lifestyle creep just over the past six months to a year. What’s important, though, is I’m aware of that. I see it happening, so that’s why I’m jumping into the weeds.

I hope this has been helpful, and as always, I enjoy chatting with you. We look forward to talking next time.

Have you maxed out your 401(k) or 403(b)? What should you do now? There are a lot of different options—what do those look like, what might be a good out, and what to pass on. 

In this episode of the Finance for Physicians Podcast, Daniel Wrenne talks about  401(k)s and what to do after you max those out.

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Finance for Physicians

Hey, guys. Hope you’re having a great day. I am planning to talk about 401(k)s and what to do after you max those out. That’s a pretty common question that comes up, and I think there are a lot of different options after that, so we’ll talk through what those might look like, what might be a good out and what might be options to maybe pass on.

Before we get into that, I want to give you guys a quick update on just the podcast in general and tell you a couple of things we’ve been working on. If you’ve listened awhile, you know my goal is really to help physicians (in general) use money to live better. I think what’s different about us is we’re focused on the ‘live better’ part and not necessarily the ‘more money’ part. That’s been great to focus on that in this avenue.

In my day job, I work with a lot of individuals. It’s more of a one-on-one basis. Our planning firm—Wrenne Financial Planning—have several financial planners, including myself, working one-on-one with physician families. This has been a really great way for me to work more in a one-to-many avenue. It seems like, so far, we started to gain some traction.

Surprisingly, it’s been almost two years. I think it was October of 2020 when I started this, maybe more like a year-and-a-half since I’ve been recording. At this point, we’re averaging about 5000 downloads a month, which I still really don’t know what to compare that to other than the past, and it’s going up consistently. To me that’s great news, but I have no frame of reference of what to compare that to.

Based on the past, it does look like we’re getting some traction, so that’s always good to see. More people are listening, which is awesome. Thanks to you guys that are listening; that’s great to see.

My plan going forward is to start promoting the podcast a little bit. Up to this point, we’ve not promoted it at all. My goal has been to just produce content, record shows, get in the routine, and give it a try. So going forward, my goal is to start promoting it a little bit more, start to get the word out and that sort of thing. A lot of it probably will be online and that sort of avenue.

I’m actually going to a podcast conference this weekend. I’m recording this in late May, but I’m going to a podcast conference this weekend. It’s like they’ve got conferences for everything. This is apparently a big conference and it is where you go to learn the art of podcasting. Hopefully, I can learn some things. I’m still an amateur. I really don’t exactly know what I’m doing. I’m just kind of rolling with the flow, so hopefully this conference will allow me to pick up some new strategies I can pass along to you guys.

In the future, the goal will be to get a little bit more tactical with trying to grow this thing. Always continue to provide great content and even better content in the future. At the end of the day, that’s what this is about, is we got to add value for you guys, and that will allow us to grow.

I also wanted to say again thank you for listening. You guys are the reason I’m doing this. And thanks for the feedback that some of you have given and for sharing. Also, keep the topic suggestions coming. That’s been helpful. Any of the questions you have are great, going to be great topics for us to cover in the future.

All right, so 401(k)s. We’ll say 401(k)/403(b). I’m sure many of you have those plans available, and if you’re in practice or you have a spouse with a higher income, odds are you’re getting close to or have already maxed that account out.  As of this recording in 2022, the max is $20,500 for an employee contribution. If you’re self-employed, that’s going to be quite a bit higher, but for the employed physician, you max that $20,500 out and you’ve filled the bucket up.

A lot of you guys in that situation might be asking what’s the best next step. I think the first question to ask yourself is whether that 401(k) is enough. I would never assume these things. Some people assume it is enough or maybe they assume it’s not enough. First takeaway is don’t assume either way that it’s enough or not enough.

You got to always go back to your financial plan. I’ve said this a bunch of times, but that’s part of the value of having a financial plan. It allows you to match up your goals with the dollars, and you could put those dollars to work to help you move towards those goals.

A financial plan should help you get an idea of how much you need to be saving for whatever long-term goal—retirement is a big one. It’s going to help you get an idea how much you need to save to reach the goal.

In some cases, it might be that your financial plan is indicating that maxing out the 401(k) is perfect, but that’s you’re on track. In that case, you don’t need to do anything. That’s all you need to do.

In other cases, you need to save a lot more. For the average physician in practice, the latter is going to be the case just because your income is higher than average, and typically you need to save more than just your 401(k) or 403(b). I’m wrapping the 401(k) and 403(b) together as one. They are two different types of plans, but they both have that combined total limit.

Anyway, first question is, is the 401(k) enough? If not, how much do you need to save? There’s a good chance most of you are going to need to save more than your 401(k), so we’re going to assume today that you do need to save more than your 401(k).

In that case, the question is what’s the next best option. The second thing to focus on is really about maximizing tax shelters. What I mean is putting it in vehicles that provide some added tax benefit.

The first tax shelter I’ll point out, which is actually the best tax shelter (really) of all of them that we’ll talk about, is the HSA. I’m going to link to some shows about the HSA because some of you that haven’t heard those are going to be like, what are you talking about HSA? The stooge is crazy. Check those out to get more on this.

Basically, you have to have access to an HSA with your health plan through work. That qualifies you to be able to fund an HSA. If you’re able to access the HSA, then you can fund this fantastic tax shelter.

Not everybody’s going to have access. But assuming you do have access or have that choice and you end up choosing it and funding the HSA, then the second part of the equation is you’re using it as a wealth-building vehicle as opposed to just a healthcare spending account. I guess you’re using it as a healthcare savings account instead of a healthcare spending account.

By using it as a wealth-building account (or in other words, investing it)—most HSAs allow that—you’re able to leverage that fantastic tax shelter. I would consider it the best tax shelter (like I said) of all these that we’ll talk about. Like I said, I’ll link to the other shows where we talked more about what that tax shelter is and why this is a beneficial strategy. I would rank the HSA, using it as a wealth-building vehicle, as probably the number one alternative tax shelter beyond just maximizing your 401(k). So that’s the first one.

Second one to potentially consider tax shelter–wise, would be the backdoor Roth IRA. Backdoor Roth IRA is actually just a made-up term. Technically, that doesn’t actually mean anything. What’s technically happening is you’re funding a traditional IRA and then converting it into a Roth. It’s a way to fund Roth IRAs no matter what your income is.

This is kind of a multi-step strategy. The key is you have to understand the rules. There are some hurdles or problems that can crop up in funding a backdoor Roth IRA that you have to be aware of. But as long as you’re following the steps correctly and taking into consideration all these potential issues, it’s a fantastic tax shelter that allows you to save in addition to your 401(k), and save those dollars very tax-efficiently.

I’ve covered backdoor Roth IRAs a few times in prior episodes, so I’ll link to those as well in case you want to dig into how the backdoor Roth IRA works.

Going back to point number one, if the answer to that question is yes, you do need to save more than just your 401(k) to reach your long-term goals, then you should be considering backdoor Roth IRA as a really good alternative to start filling those buckets up to get you on track for that long-term goal.

Beyond that, other options that work would be worth considering. Oftentimes, the question is raised to us, like what do I do? I’ve already maxed out all my work retirement plans, but I know I need to save more. Where do I save? What people sometimes don’t realize is there are actually other work retirement plan options available through their employer.

Some examples that come to mine are 457(b) plans, cash balance plans, deferred compensation, after-tax 401(k). Those are just some of the more common options. But a lot of you will have additional options where you can save on top of that max from the 401(k) or 403(b).

The 457, let’s look at that example. The 457 has a completely separate limit. The dollar is the same for employees. You can put in the $20,500 this year (2022) in the 457, but it’s a completely separate limit beyond the 401(k). In other words, you can max out both at the same job.

The thing to watch out for 457 is there are two main categories of them—governmental or non-governmental. Governmental 457s are fantastic. They’re basically like the 403(b)/401(k) but a little bit better, typically.

Non-governmental 457 is the second category. They’re not nearly as awesome. Especially if you have a non-governmental 457, you want to be a little cautious with that. Understand how it works and dig into it before you start funding that kind of a plan. But it’s definitely an alternative tax shelter to consider.

Cash balance plans, I mentioned that. That’s an additional bucket to fill up beyond the limit of the 401(k). That type of plan, similarly to the 457, you really need to understand how it works because they’re a little more complicated and there are a lot of variances that you’ll see.

The most common negative with a cash balance plan is no flexibility on how it’s invested, and you’re limited to a conservative investment option. If you’re really young and getting started, that’s not great because you can take risk and it’s going to lower your expected return and ultimate efficiency by being super safe with the money. But it’s definitely still worth considering, especially the more you need to save in the higher tax bracket.

The other one I’ll mention just for today would be the after-tax 401(k). That’s a provision that your company’s 401(k) would sometimes offer and allows you to fund more than just the $20,500 employee limit. It’s a separate bucket that they allow you to fund as an employee, and it’s more like the employer part of the equation. It’s not Roth. It’s after-tax 401(k) funding.

This is another one you have to look into and understand how it works, and see what your specific company allows or offers. If that is an option, that can be an additional bucket to save into.

I think the big consideration I would start to throw out on these other options through work you got to look out for is first of all, some of the complexities I’ve already thrown out. You got to understand these. There are a lot of different types of structures. You have to understand the pros and cons.

The second thing is expenses. Sometimes, the expenses are extremely high on these add-on plans, to the point where it even eats into the tax benefits. Sometimes, it completely eats into it to where it’s not even worthwhile.

They can also get really complicated. As you start to consider these options, you want to be aware of the expenses, the complexity, what type of plan, pros and cons of that specific plan that you’re offered. Other options through work can be fantastic, but you really need to look at the specific plan that is available.

There’s also another category of options I would consider for those of you that have second jobs or even side hustles where you’re self-employed. This gets even more complicated in terms of the rules that you have to be aware of, especially for the self-employed setup. But it’s definitely something we advise often with our one-on-one clients, and it’s something I know many of you would potentially benefit from.

If you have two jobs (for example), you can often fund both company 401(k)s. But you have to be aware of how that coordinates. I’ll give you just an example of one that might come up. Let’s say you’re a partner in a practice and you’re maxing out the 401(k) there. But let’s just assume that it’s all coming from your employer, which often happens.

Let’s say you’re in a small practice and the “employer” (the practice) is funding all that 401(k) 100%. When the practice is funding, it is a much higher number than that $20,500. But let’s just say the practice is funding all of it. Let’s also assume on the side, you’re self-employed in an unrelated business. And let’s just say you’re making $20,500.

In that example, you’re actually able to fund, through that side hustle, 100% of it to a solo or individual 401(k) as an employee contribution and max out that $20,500 bucket. The reason is because your practice was 100% funded by the employer. In other words, you’ve not yet filled up your employee 401(k) max bucket.

That number actually can be even higher than the $20,500 if you’re making higher through the side hustle. That can allow you to fund a lot, but it gets complicated quickly. For example, if you have a 403(b) through your primary job, that messes with the rules here a little bit. It adds some additional limits that can often restrict us.

Another thing when you’re looking at this situation is you want to focus on making sure you’re maxing out the matching dollars. Oftentimes, you’ll have a match with both employers. You have to coordinate the two together and make sure you’re leveraging that.

The key when you start to get into this realm of stuff is hiring or leveraging advisers or consultants or those sorts of things, especially if you get into self-employed retirement plans. You’re going to be able to save quite a bit—tax sheltered when you have that setup—but you have to be really careful that you’re following all these extra rules between the two plans.

The further we go down this list, you have to look out for expensive products. Salespeople start to come out the further we get down this list. You have to look out for expensive products that are overly complicated and potentially so expensive that they would eat into that tax benefit. Sometimes, there are products that are not even in these categories I’ve thrown out that are often brought up as these tax shelter alternatives.

Some examples are annuities or permanent life insurance. They’re typically sold as the answer to this question. This podcast we’re talking about is like, I’ve maxed out my 401(k). What should I do next? Oftentimes, these financial services companies or salespeople will sell these vehicles, like annuities or permanent life insurance, as solutions in themselves to this issue of where to save next.

The problem with them is they’re typically extremely expensive. Often, it’s very difficult or impossible to figure out the expenses. That’s always a warning sign. If you can’t figure out what’s going on, don’t do it. They’re typically sold as the Swiss army knife style, like this is going to provide this additional tax shelter. I’ll link to a podcast where we talk about some of these a little bit more. You’ll have to look out for those vehicles.

I would encourage you to focus on the traditional vehicles first and not the products themselves. What I’m talking about is focus on the 401(k), 403(b), 457, like the IRS-blessed tax sheltered retirement plans, HSAs or those sorts of things. Those are vehicles that the IRS has signed-off on and created code around.

On the flip side, I would be cautious with some of these insurance company–created products that are in themselves designed to be tax shelters. That doesn’t mean that they’re always bad. You just want to be cautious with those.

In some cases, your work plans can be really, really expensive. Maybe you have access to a 457(b) plan as an alternative through your work. But it’s just really expensive funds in the plan. That can be a restricting factor, maybe even to the point where it’s not worthwhile.

The further down we get on this list, you just want to be aware of the expense aspect and the complexity aspect. I think a good rule of thumb is you need to be able to explain it to somebody else, at least the general pros and cons, understand the expenses, and understand the basics before doing it yourself. If you don’t understand it, you don’t want to put your money into it.

That’s a big, broad bucket. The second big point is maximizing the tax shelters. As I said, as you get further down the list, you want to exercise some caution. Once you max out that 401(k) or 403(b), typically the next thing you go to is what other tax shelters are available.

In a lot of cases, many of you will max everything out. Let’s say you have a 401(k) through work. You max it out $20,500. Let’s say you have a 457 as well, but you’ve maxed it out $20,500. Let’s say you’re also maxing out backdoor Roth IRAs. And let’s assume again your plan says you still need to be saving more on top of that. Then, what next after that?

If you maxed all of these tax shelters that are available, which often happens, then you go to things like non-qualified investments. Stuff like a non-retirement plan. I call them non-qualified investments. Sometimes, people call them a brokerage account. Basically, that’s just like investing in your name instead of investing in a tax-qualified vehicle that has some special tax treatment like a 401(k), IRA or whatever.

Non-qualified investing is basically just investing outside of all these vehicles we were just talking about. A plain Jane brokerage account investing in your name. Technically, a savings account is a non-qualified investment. That’s typically the third thing to look at, is if you need to save more on top of the tax shelters, typically you’re going to start looking at some of these non-qualified or less tax-efficient investments.

The vehicle itself is actually pretty simple. It’s just like invest in your name. What you have to keep an eye on when you get into this realm is when you invest in these types of accounts, you can trigger taxes and they will cause harm sooner. There’s less or no tax protection, whereas with a Roth IRA or something, or even a 401(k).

Let’s say you buy an investment in a 401(k) or Roth IRA. It’s just growing crazy, pays all kinds of dividends, generates all kinds of income, it just explodes in value and pays out income, interest, dividends, and all sorts of income. That doesn’t affect your taxes. Let’s say you sell that investment that’s grown a ton in a Roth IRA, 401(k), those sorts of things. It doesn’t affect your taxes.

With non-qualified investing, that’s a completely different story. Same investment is growing crazy, generating interest, dividends, and spitting out income. Everything is theoretically going well. But each of those different avenues of growth will (in some cases) generate tax for you in the current year. You have to be much more aware of the tax impact of the investments you placed in the vehicle, and ideally it’s tax-efficient stuff.

For example, real estate funds, when you just buy real estate in an investment fund. Generally, that’s not very tax-efficient. Just the income it kicks out is typically not as tax-efficient. So that’s not the best vehicle to own in your taxable investments.

It’s not the worst thing, but you probably have a lien towards owning that, like a Roth IRA or a tax-sheltered investment, and would probably be a little less appealing to own it than just a non-qualified investment because it’s going to fully realize that tax hit.

Even more of an extreme example, let’s say you have an investment account that you’re trading on E*TRADE or Robinhood or something like that, and you’re trading a lot. Let’s say you’re buying stocks here and there, and selling stocks here and there. You’re investing your money, so that part of it is good. But the problem with it is oftentimes, you’re kicking out short-term capital gains.

If you buy an investment and sell it in a short period of time—let’s say a few months—if you only owned it a few months, that’s going to cause short-term capital gains, and they’re the least tax-efficient. If anything, you keep it for over a year and get long-term capital gains, those are much more tax-efficient. Ideally, maybe you don’t even trigger long-term capital gains. You just hold it for a really long time.

Typically with taxable investments like non-qualified investments like this, you want to defer taxes as much as possible and avoid triggering tax now. That’s the general strategy. The more you trade or the more the funds that you even own trade, the more it generates taxation.

Trading a lot is typically an issue with these kinds of accounts. Or even have them a broker. A lot of brokers have high turnover. Even the funds that they put you in are high turnover. High turnover means the stocks get traded a lot. That’s typically terrible for tax sheltering purposes.

The key to non-qualified investing is you have to watch taxes. Taxes become an added expense. On top of normally paying attention to the expense of the vehicle itself, the tax it generates is an added expense on top of it all. If it’s managed well, you can be pretty tax-efficient with your non-qualified investing. You can pay attention to those investments that you own.

Ideally, your tax laws harvesting, that’s another term I’ll throw out. I’ll link to a show where we cover that a little more. There are basically a list of things you can do to minimize the taxation on this type of an investment vehicle, knowing that it’s more sensitive to tax.

The nice thing about a non-qualified investment vehicle is there’s no limit. You can put a ton of money into it. You don’t have to worry about the funding limits that you would typically see in all the other tax shelters.

Also, it’s ultra flexible. There’s not really any limitation when you take it out. It might trigger a tax, but it’s not going to be penalized. It’s not like retirement accounts you have to hold it in there for a certain time, in a lot of cases to avoid any adverse tax penalties or whatever. With this type of investment it’s super flexible.

That can be a solid alternative, particularly when you’ve already checked off those first two boxes, like you know you need to save more, and you know you’ve maxed out all the good tax shelters. That’s when this comes into play. So that’s non-qualified investing.

The other thing I’ll throw out is a side note. I meant to mention this. If your goal long-term is saving for education, sometimes that can be an additional tax shelter that you might consider saving in an education savings account. If the goal is for education, you might explore that tax shelter as well. That can be a really fantastic vehicle to save into.

First thing, figure out are you saving enough? Should you be saving more on top of your 401(k)? That’s when you consult your plan to see what that should look like and how much you should save. Second thing, look at all the tax shelters. Make sure you’re maximizing those. Third thing, if you still need to save more, look at non-qualified investing.

The last thing I’ll throw out before we jump off, this often comes up, like what about getting into real estate, or I got this investment deal and my buddy’s doing, or syndications or whatever. I would lump those altogether in more active businesses. Even if they sometimes call them passive investing, when I say active I mean it’s going to require some effort on your part to screen or manage them.

Let’s say buying/investing real estate. You’re going to have to be the one that decides which type of real estate you want to invest in. Especially if you’re directly owning property, you’re going to have to manage it and make sure you get tenants. That can be a pretty intensive business.

It often comes up like, I heard that it’s worthwhile to invest in real estate as an alternative. That can be fantastic, actually, but I would look at that as more of a business. It’s an investment, but it’s more like a business you’ll have to be active in, depending on what business it is at varying levels.

I don’t think that’s for everyone. I would definitely not do that or go that route just because of the tax benefits or because people said it’s a good thing. You need to have good reasons to do that outside of all of those things.

Maybe for example, you have a passion for doing real estate or you really are interested in it, and you enjoy building something. Ideally, you have some solid reason for doing it that’s independent of all this stuff. In that case, it can be a fantastic thing, but you have to look at it differently. It’s not for everyone.

That’s the last thing I wanted to throw out. I hope this has been helpful. As always, I enjoyed chatting with you today, and I will look forward to catching up with you next time.

What are some of the behavioral tendencies we all can run into that affect our decision-making, and ultimately cause some big mistakes? What do big areas or behavioral tendencies look like?

In this episode of the Finance for Physicians Podcast, Daniel Wrenne talks about investing behaviors that will wreck your financial plan. Knowledge and awareness are needed to avoid behavioral finance mistakes.

Confirming Fund Managers Overconfidence - SSRN

Behavioral Finance - Charles Schwab Asset Management

What To Do When Your Investments Start Tanking

How Market Downturns Look and Feel

The Power Of Diversification

Investing During Wild Markets with David Blanchett

Free DIY Financial Planning Guide for Physicians

Predictably Irrational: The Hidden Forces That Shape Our Decisions

Thinking, Fast and Slow

The Psychology of Money: Timeless lessons on wealth, greed, and happiness

The Big Short

GameStop on CNBC

Contact Finance for Physicians

Finance for Physicians

Hey, guys. Hope you’re having a great day. I am excited to talk about investing, and this is the third in our series of three shows, talking investing. In the first, we talked a little bit more about how to navigate scary downturns in the market. The second, we talked more about how those looked historically, some of the numbers, returns and that kind of thing.

Today, we’re going to be talking about some of the behavioral tendencies we all can run into that can really affect our decision-making, and ultimately can cause some big mistakes. We’re going to get into that today.

This is a big topic, behavioral finance is what they call it. Behavioral finance is a monster topic. It’s one of my favorites to get into. Today, we’re just going to hit some of the high points of some of these behavioral tendencies that are out there, and hopefully give you some baseline knowledge and awareness so you can start to see them and other people and yourself, and ideally avoid some of the mistakes that can come into play as a result of them. So we’ll jump into that now.

We’re talking behavioral finance. This is a fun topic. It’s one of those things. It’s a little easier (probably) to identify it in other people. We had to see it. It’s one of the fun parts about my day job. We work with people one-on-one all day long, so it’s really one of those things that we can typically see before sometimes people see it in themselves. Often, by pointing it out, we can really help people a lot, so that’s the fun part about it.

Now, on occasion we can’t help, so that’s unfortunate. But it is one of those things. Like anything, behaviorally, it’s sometimes harder to self-identify these things, but it’s not something that you cannot self-identify, especially as you gain some awareness around it.

We’ll be talking through some of the big areas or behavioral tendencies that I have seen come out, what they look like, and how you can potentially avoid mistakes around them.

Behavioral finance is this whole study of people and how they’re not quite as rational or self-controlled. They’re ultimately prone to errors, mistakes, and biases. We’re going to talk about (like I said) some of the big areas that behavioral finance has identified.

The first one that I want to talk through is called overconfidence. You might already be thinking the right direction on this. It is what it sounds like. Overconfidence is this idea that I know really more than I actually do. It’s really common. There’s been a lot of studies on this and they seem to say the same thing.

There was one I was looking at recently, looking at investment fund managers. Seventy-four percent of them said they’re above-average and 26% said they’re average, and then basically 0% of them said they’re below-average. Everybody thinks they’re at least average or above—which is not possible—so this is reinforcing the whole overconfidence thing.

Not everybody is subject to this and it can depend on the topic or how much you know about it. Sometimes, it’s most common when you know enough to be dangerous. You’ve heard people talk about that. What people say when they’re overconfident—because usually, you can acknowledge that people tend to do this—say something like, I know everyone says they’re above-average but I really am above-average.

It’s one of those things you’re like, no, I’m not overconfident, but then, I’m sure there were times when you were. At least I can think of times where I was overconfident. Maybe not in all areas of my life. Definitely not in all areas but in certain times. Like I said, it’s usually when you know enough to be dangerous.

The problem with overconfidence is confidence gives you this feeling of being in control. You’re less likely to exercise caution. It makes you way more prone to mistakes, all along the way considering yourself maybe an expert or more knowledgeable than you really are.

This shows up with investing. Say you’re buying investments, particularly individual investments. Say you bought cryptocurrency in GameStop or whatever individual stocks. You started doing that (say) 2015 or something like that.

From 2015 to 2020, everything’s going up. Your stuff, your trading, your investment choices have done exceptional. You’ve started to see the balances go up, have built up some confidence, and maybe it’s gotten a little in overconfidence level. What happens is you start to feel like you’ve got it figured out.

With investing (at least), inevitably it always goes the other direction. This is where the mistakes often happen. The mistakes can happen when everything is going up, but usually, when everything’s going up, everything is going up, so it’s hard to not make money with general investing.

But when things go down, that’s often when the big mistakes happen. When you have this overconfidence, you don’t really recognize that and you’re prone to those mistakes. They can happen really fast, especially when things go down.

The problem with a lot of these is they’re difficult to self-identify. Ideally, this is where it’s helpful to get another person’s view. This is going to be true with a lot of these. Whether it’s a knowledgeable friend or if you work with a financial planner, this should be something you’re asking them about, especially if you’re pulling the trigger on certain things with your investing.

It’s good to get others’ input on this and then listen to it because they might say something that you don’t agree with. It’s important to remember especially if they have expertise, like they probably know what they’re talking about and it’s probably easier for them to see some of my flaws, and maybe they have a point. So at least be open to other people’s input on this kind of thing. Even your spouse.

If you know enough to be dangerous in that territory, that’s oftentimes where it happens. Sometimes, it happens when you say you know more than enough and you’re an expert—but you’re really not—so that’s probably even more dangerous at the time.

Oftentimes, say the spouse that doesn’t really know much at all, can be bringing up really good points. We ought to get someone else’s opinion because this is not what you do. You don’t spend that much time on it. You’re so busy doing this other thing that you have going on or job or whatever. Sometimes, they can be the voice of reason. Sometimes, it just takes listening to them.

That’s overconfidence. That’s a big one that can come into play. I think it’s most common probably in younger people that have had some experience investing but not a ton of experience. It seems like these big, huge market downturns will teach people some of these lessons through that mistake. So that’s overconfidence. That’s a big one.

Self-serving bias is the next one that I wanted to talk about. Self-serving bias is where you tend to attribute good things or good outcomes to your skill, and bad outcomes to luck. If it’s a bad situation or outcome, you’re going to be like, oh that’s not me. That’s not my fault. Now if it’s good, you’re going to be like, pat on the back.

For self-serving bias, I like the example of school because everybody can relate to this. If you get an A+ on a test, you’re going to be like, wow, I must’ve done so well with my studying. I’m a naturally smart person and I’ve got lots of skills. So, nice job self.

Versus imagine getting the same test score back and you’re like, oh, I got a D-. Then you’re like, well, the teacher didn’t teach what they needed to teach and the books are lacking. There’s no direction. You’re just coming up with excuses. It’s not my fault. It’s external factors.

That’s self-serving bias, and everybody has a little bit of it in them. It can become a major problem with investing especially if you’re involved in pulling the trigger and making decisions.

It’s the same as the test score. You’re going to pat yourself on the back when things are good, and when things go bad, you’re going to look for excuses and blame other people, when in reality it’s probably not quite that way.

With investing, when things go really well, most of the time it’s not you. It might be a little fraction of you, but most of the time it’s not you. Even when they go poorly, it’s often not you. I think with investing, people often attribute success with their investment too much to their own intelligence.

A good way to counter that is to—same thing with overconfidence—getting others’ input; that’s going to be common in these. Also, maybe comparing to more objective comparisons, like how the overall market was doing. That’s always a good wake-up or benchmark check-up on this sort of thing. So that’s self-serving bias.

Hindsight bias is the next one. I’m sure you’ll recognize this. It’s where you think you know more or knew more than you really did in the past. I hear this all the time with people talking about big events.

In 2008, we had the housing bubble crash, and everybody that was around then probably remembers that. Everything tanked. What happens is you start to get people reflecting back on that. A lot of people—not everybody—would talk, like maybe they saw it coming, the writing was on the wall, it was inevitable and everybody knew it’s going to eventually crash.

You create this belief in your head that at that moment in time you did see it coming, but in reality you look back to actual what was going on in the moment before that crash. Nobody knew that that was coming. That’s just not reality. In fact, if you actively knew it was coming, people would make fun of you. That was the least likely thing for people to be bringing on up. One in a million people knew that thing was coming.

There was a movie made about the one dude that knew 2008 was coming. The Big Short. If you haven’t seen that, that’s a good movie. That’s the movie about the only dude that knew 2008 was actually coming, maybe a few more guys and gals. 2008, a lot of people looking back think they knew it was coming but really didn’t.

What happens with this hindsight bias is you start to give yourself more credit than is due, and it goes along with these first three. It leads to more overconfidence, pat yourself on the back—I’m pretty awesome. A lot of these are related.

Confirmation bias is a little different. It’s paying close attention to information that’s confirming your belief and ignoring information that contradicts your beliefs.

My favorite example of confirmation bias is social media. Social media has completely figured out how real of a bias this is. Social media is programmed to put in front of you that’s in line with your values and beliefs, and not put stuff in front of you that’s against those. This totally makes people feel good about this. This is in line with confirmation bias. The same thing with social media.

When you’re investing, if you only take in information in the area of the thing that you believe. Let’s say, you have just gravitated towards this idea. I’m going to go with the one that actually happened lately. GameStop stock was super popular. A lot of people talked about it. It was in the news for a while. They’re buying the one stock and it got crazy.

Say around that time, you really just bought into that idea. The people you hung out with or the [...] were online in this group that all talked about it. That was what you were hearing all day long, and all the news stories you got were that. Even your social media started to pop up stuff just on that story. That’s just really pushing you down the same path you’re already going and confirming these beliefs you already have, which causes you to do more of it.

What’s happened with GameStop, for example, it skyrocketed. Then it went way down and went back up. But since that huge skyrocket when it was big on the news, it’s been on a steady trend down. That’s often what happens with these. Even if it does pretty well, the problem with this is it leads you to be less open to other ideas.

This can be any idea, but with investing there are all kinds of good ideas that are out there. Just because you’ve already committed to whatever given ideas you already have being great, that doesn’t mean they’re always going to be great. Or maybe even you’re wrong, and it’s good to consider the other side of the coin. This is one that it’s good to just force yourself to open up to other ideas or alternatives and have that open mind.

Recency bias, the next one, is the one that’s actually similar to hindsight that I was thinking about as I was talking about it. Hindsight bias and recency bias are both looking at the past. But recency bias is honing in on short-term and really overemphasizing the importance of that.

The short-term—which we talked about in the past couple of episodes—in the investing world should not be the focus. It’s a long game. There’s this tendency, though, for people to really just hone in on that.

Let’s say the market tanked. The news says the worst loss in eight million years, everything’s going down, everything’s blowing up, and it’s based on this one-day drop. You’re going to have the tendency to be like, argh. This is a problem because it’s fresh. But if you go back and look at history, there’s actually been a whole bunch of days like this before. Many, many days like this before, if you look at it objectively. In reality, this day is not important.

This is a good one where it helps to refer back to your financial plan and remind yourself of the goals, and the dollars are tied to those goals which should be long-term. You have to have a long view. Recency bias is about having a short view and having a pull towards that. Everybody has a pull that looks at what they recently had happened, but with investing it needs to be a long view. You have to pull yourself away from that, even though there’s that natural tendency.

Anchoring bias is the next one. Anchoring bias is relying too much on pre-existing info or the first info that you come across. It’s latching on.

For example, I’ve seen this with people we worked with one-on-one in the past with their planning. Maybe it’s like my parents lost lots of money in the market. Therefore, I’m going to lose lots of money in the market if I do it, so I’m not going to do it. They’ve latched on to this information that their parents have passed on to them, and they’re adopting that themselves. Or maybe it’s like, my buddy that I hang out with has done really well with real estate investments, so I’m going to do really well.

The problem with it is it’s not adequate information. You’re latching on to a limited, tiny slice of the information, and potentially making huge decisions on that small, tiny information.

With the parents example, maybe they had no idea what they were doing. Or maybe they didn’t lose as much money as they thought they did. Or who knows what happened. Maybe the timing was bad, which is a mistake in itself. There are a lot of things that could’ve happened. It’s impossible to draw a conclusion from it without knowing the entire story of not only the parents, but also, you should probably look at it like what the alternatives could have been for them. The problem with this is not doing a full, adequate analysis.

Loss aversion is the next one I want to talk through. This is where you are just going to be overly fearful of losses. It’s just the pull to avoid losses, kind of like all cost or at greater cost. The research says if you’ve experienced prior losses, you’re going to have an increased chance of having this issue come up in the future, which makes sense. Or maybe other people around you, like the parents example overlaps with this. Maybe you’re pulling in that loss they’ve had and attaching to it.

In down markets when investments go down, it just naturally brings more fear into the equation for everyone. Everyone has that little bit of this. You just see it when you hear people talk about investments a lot more when they go down. This is in play for all of us to a different extent. Some people are painfully fearful to the point where they can’t take any action on anything with any risk.

Insurance companies actually leverage this. They have annuities with floors. They have a cap and floor. They limit the downward exposure. It’s basically capping the losses that you can have. But they come at a huge cost, typically. They basically sell these overpriced products a lot of times in order to help people address this behavioral tendency.

I think a much better approach is to work through that and have some understanding of where the fear is coming from, a little bit of understanding of how markets work—that can help—and understanding how these downturns typically play out, and reminding yourself about the purpose of the dollars and consulting your plan. What’s the money for? Is it a long-term thing? It should be. If so, then this short-term loss is really not a problem because I’m not going to need it short term.

The last one I want to talk about is herd mentality. This is the common one that comes up. It’s like the FOMO—fear of missing out—ties in with that. The tendency for people to follow the masses as opposed to doing their own independent analysis.

Examples of this lately are cryptocurrency, GameStop, I bonds especially lately. This is probably one of the most often ones we see, just snippets of it from people we work with one-on-one. Typically, how it comes up is like, I’ve heard from several of my buddies that XYZ is a good place to put money right now, or something along those lines.

I think it’s different if you work with a financial planner versus if you’re doing it yourself on a lot of these, especially this one. These people that are bringing up to us are doing the right thing. What I would tell you to do is bring it up to another person. Or if you’re doing it yourself, you could bring it up to another person, but they need to know what they’re talking about. Or you need to be doing your own independent analysis.

If you’re putting your entire net worth into cryptocurrency, you really need to understand it backwards, forwards, understand all the risks, and how to fix your planning. It’s important to avoid that pull to go with what the people around you and the masses are doing. That’s where bubbles get created and then they blow up.

Not to say any of these are necessarily bubbles, but you don’t want the herd to drive your decisions. It will pull you behaviorally, like this is what all this research is about. Behavioral finance is the fact that we all have these pulls either way. You don’t want it to pull you so much that it’s affecting your decision-making and causing you to make big errors.

With herd mentality, think about the decisions, where it’s coming from. Are you running it by someone else? If you’re not running it by someone else, are you doing an independent analysis? Or are you just going with what the herd is doing? Thinking through those points (I think) will be helpful.

All right, so that’s behavioral finance in a quick nutshell. This is one of those things, like I said, there’s been huge books written on it. You can dig in a lot on this. I’m happy to get into some of these areas more. Like I said, I enjoy this subject. However, I know it can get pretty intense.

Let us know anytime if you have areas within this or other areas that you want us to dig into in the future, and we’ll definitely plan to do that as we hear from you. Hope you have a great rest of your day and good catching up as always.

What do market downturns look like? Understanding what they look like or what they have looked like historically is helpful. We can't predict the future, but we do know what happened in the past in order to navigate better if and when history is repeated.

In this episode of the Finance for Physicians Podcast, Daniel Wrenne talks about how market downturns look and feel based on market history and market factors.

Playing the Probabilities - Wealth of Common Sense Blog

What If You Only Invested at Market Peaks? Bob - The Terrible Market Timer

Learning from the Lessons of Time - Franklin Templeton Brochure

What To Do When Your Investments Start Tanking

The Power Of Diversification

Investing During Wild Markets with David Blanchett

Free DIY Financial Planning Guide for Physicians

Dow Jones Industrial Average

Contact Finance for Physicians

Finance for Physicians

What's up, guys? Continuing on with the theme of last time, we're going to be talking about downturns in the market. We talked about (last time) how to navigate a scary investment market, and I gave you some tips on actions you can take.

I think the big takeaway from that conversation was making sure you have a solid financial plan that includes an investment plan. If you don't have one of those, that's important to create first. It's always good to consult your financial plan, especially when things get dicey and emotional like they are in scary markets. Try to avoid making changes or taking actions based on things that are out of your control and emotions that come into play. Definitely check that out if you haven't listened to that as a precursor to this.

Today, we're going to be digging in a little bit more into what those market downturns have looked like historically. I think this is part of the education component. Understanding what this looks like or what this has looked like in the past is really helpful. It has been for me. Of course, we can't predict the future, but we do know what history has looked like, so we'll talk about what that has looked like historically so that you can have a little bit more of that education and be better armed to navigate it as this type of thing happens again in the future.

Okay, we're going to be referring to a few sources today to give you guys some hard data. I'll link to the stuff that we mentioned today in the show notes. They have pulled together some of these numbers and concepts, so definitely check those out. We'll link to any of those sources, as I mentioned.

The first concept I wanted to talk about was making sure to have a long view. We talked about it last time in the last episode about having a financial plan and making sure you tie your goals to your actions. With investing, if you have a long-term goal, that's where investment can work really well because investing is a long-term thing. You should not be investing for short-term goals. Using that approach, it's not about the short term. If you're looking at the short term, that's not really the right view for something that's not going to be needed until the long term.

Also, looking at the investment data, the short term has been relatively unpredictable. The first source that I wanted to look at was the probabilities of how the market is done based on different time frames. The source that I have here is A Wealth of Common Sense blog. This is a blog from Ben Carlson and he's very much into investing and gets into some of the weeds of investing. If you're interested in that, this is a good blog to check out. He's a smart dude and writes a lot about this type of stuff.

Anyway, he wrote a blog a while back where he shared the probability of positive versus negative returns based on different slices of time. He looked at the entire period from 1926–2015 of the S&P 500, which is the 500 largest stocks in the US. He looked at it for varying slices of time, was it positive or negative?

First, he looked at daily slices of time. For every day, over that entire 1926–2015 time period, how many days were positive versus how many were negative. Positive was 54% and negative was 46%. Basically, a day in owning the S&P 500, it's almost a coin flip, slightly better than a coin flip. It's better than going to the casino, better than a lottery ticket, but not great, especially for your life savings. That's part of the problem. When you're looking at it daily, close to half the time, it's down. It's just unpredictable.

When you go quarterly, it's 68% positive and 32% negative. One year slices of time over that entire 1926–2015 time frame, it was 74% positive and 26 negative. And the five-year period was 86% positive and 14% negative.

Basically, the further out you go, it increases that positive percentage to the point where at 20 years, it's 100% positive. I think probably he has ten years as well at 94% positive, but it's got to be somewhere in between 10 and 20 years, which he did not calculate. Somewhere in between there, I would guess it's hitting 100% before 20 years.

The takeaway is the longer you go out, the higher your odds of getting a 100% outcome positive returns, no matter which slice of time you look at up. The key is to take that long view and tie it to long goals. Really, you shouldn't worry about the short term because it is more like a coin flip. What you need to focus on is the long term.

The next concept I wanted to hit on was timing. I think a common concern is what if it's not the right time? Maybe you're investing at the worst possible time and you just don't realize it or maybe you're worried that it's the worst possible time. The video that I will link talks about—it's a hypothetical example based on the actual returns of the market—they call him Bob, the Story of Bob, The Worst Market Timer.

Anyway, they share Bob's journey as an investor who basically times his investments at the worst possible time. He buys at the peak of the market right before it tanks and it shows you how things turn out for him over a long period of time. Where Bob messes up, as he worries about it, and ends up investing when everything feels great, and typically that sometimes happens at the peak.

Basically, he has bad luck and times it at the worst possible time possible every single time. He does that bad, but the good thing is he keeps his money in the market and does not change it.

You'll see from the video that things still work out pretty well for him because he holds his money in there long term. That's the important thing. As I mentioned in the first point, you have to take a long view. It has to be a buy-and-hold sort of approach.

Ideally, you're not trying to time it. That's the mistake he made. A much better approach is to remove that decision from the equation. You should not be trying to predict when the best time is to put it in the short-term period of time.

Going back to the first point, we don't really know what it's going to do in a short period of time. You just have to invest based on your own circumstances, and it's generally best to put it in systematically over time. Maybe you're investing monthly at the same time every month.

Ideally, you remove the emotion and the decision-making from the equation and systematize it and it just happens. You don't have to worry about this whole timing thing because most people that start to try and worry about the timing thing tend to get it wrong. They tend to gravitate towards this example of Bob timing it terribly. So that's Bob.

The next example I wanted to look at was the reverse scenario. What if you're investing at the worst possible time when the market feels terrible? The Bob scenario was like he was investing only when it felt great and when the news was great, but what turned out to be the worst possible time.

This example is looking at what if you invested when we looked back and we knew it was terrible? At the bottom of the market. What if you're investing at the worst possible time in reality? Maybe you don't know it at the time, but it's the bottom of the big market downturn.

You can look at all the examples. This piece that I'll share is from Franklin Templeton. There are four examples in it. I'll just talk about the most recent one, which is 2007–2009. They all have the same sort of takeaway, but that was the big housing crash crisis in 2008.

In that particular downturn, from the peak down to the trough, the S&P 500 index went down just over 50%. It was 50.95%. Check out the PDF link for all the details on that and the disclaimers are in there, too, so definitely read those.

That was the 2008 crash from peak to trough. Then they look at what if you invested at that bottom point? The thing is, looking back, you're like oh yeah, duh, that's a great time to invest. If you were looking at it objectively and investing in that period of time, it felt like a terrible economy. Everything was negative. It just didn't feel like a good time.

The world was telling you not to invest, but if you had invested at the bottom of the market, one year after your cumulative return was 53.60%, then five years after it was 137.49%, and then ten years after it was 367.39%.

The takeaway is these downturns, it goes down fast and feels super scary. A lot of times people don't realize how fast it recovers and how quickly we can get back to where we started. Oftentimes, the scariest point in time is actually when it's a fantastic point in time to invest.

Same sort of thing as I mentioned in the first point. I think the takeaway is you don't want to try to time it now, but if you do happen to have extra money, if you're going to be timing it lower when it's gone down, it's actually a better time to invest. At the end of the day, you want to have your dollars working for you and make sure you're investing that based on your financial plan and not based on where you're predicting the market might go.

We don't really know what the short term is going to do, and these sorts of things happen. It's very difficult to predict at the moment. I think the temptation, though in that bad market is to maybe stop investing. You definitely don't want to do that. Or I guess a different temptation. Sometimes people that have even more fear might even be tempted to bail out.

I think that’s probably the most important thing to try to avoid. Basically, if you had bailed out at that bottom in 2008, you're missing out on all that upside in recovery. You're basically cashing all your chips in at the worst possible time. If anything, do not go down that path, and really you should be continuing to invest based on your plan.

There is a temptation to move away from the pain. It does feel painful when things are down, but you want to avoid that temptation and look at something like this piece I'll share with you and remind yourself how quickly things return to normal. Typically, when it feels like it's the worst period of time, oftentimes it's the best period of time to invest.

The next concept, which is in the same PDF that I was just referring to, is oftentimes, when it's really bad or when you just feel unsure about things, I'll sit out for a few days. I'm just going to give it a few months. I'm going to stop investing for a few months or go to cash for a few months and let the dust settle, or something along those lines.

This visual, this chart looks at the S&P 500 again, and it looks at 20-year periods ending December of 2021. If you're fully invested for that period of time, the return you would have had for that period of time is 9.46%. If you had excluded the ten best days, or 20, or 30, or 40, or 50, or 100 best days, it's basically looking at if you had excluded X number of days from 10–100, what would that have done to your returns?

Just missing out on the 10 days out of a 20-year period of time, if you've missed out on 10 of the best days, it knocks your return down by down to 5.27%. If you miss the 40 best days, it knocks your return down to -1.57%. If you missed the hundred best days, it knocks your return down to -10.06%.

Basically, you don't want to miss out on those good days. The problem is the days are really difficult, or really impossible (actually) to predict. You have to be invested fully for that entire period of time to get the maximum return. I think that's a very important takeaway.

Sitting out for a few days doesn't work out well in the end. It's much harder to know when to get back in and oftentimes you start missing out on these good days. Now all of a sudden, it's too high to get in, at least that's what you tell yourself. You don't want to start going down that path.

I think the other big temptation with any big story like this is to start tracking with the news. A lot of times, it's where people go for their information. Maybe it's not the news on TV, but maybe you're on social media, or wherever you're getting your information. Let's just call this financial information, to go to your sources of financial information and get the word from them.

The problem with the general financial information out there is it's a terrible predictor of the future. This visual is kind of cool. It's the same piece from Franklin Templeton. It's a really good piece because it hits on all these concepts, but this goes through a really long period of time.

This is going all the way back to 1972 and it goes through some of the big news stories and how the market behaved over those periods of time. It's looking at the Dow Jones Industrial Index, which is a pretty good measure of the market. It's not my favorite, but it's still an okay measure of the market.

Anyway, what tends to happen is the worse the news gets, the better time it is to invest. In 2020—that's the recent one everybody remembers—unemployment and the pandemic. Unemployment is at the highest rate since the Great Depression. I think that was the big financial news story. There was a lot of talk of recession and all that stuff. It's like who in their right mind would want to invest?

Those news stories get more amplified the further it goes down. Actually, if you go back in history and you look back, that's actually the better time to invest versus just a year before, there wasn't really much of any news. There weren't big-time headlines about the markets like there were in March of 2020. It's almost like the bigger the headlines get, the better it is to invest.

It's the reverse of what you would think it would be. When the news says don't invest, at minimum, continue investing. That's the important thing because you don't want to get into this whole timing cycle, as I've already mentioned a million times and I'll continue to mention because it's important. You don't want to get into this trying to time the market mentality. It's super easy to get into, but we don't know what the future is going to hold, especially for a short period of time, so you just have to systematize it.

The news is especially terrible, but it is a big temptation that can pull you away from systematizing this and trying to time the market. The temptation is going to be like things start to get negative, and the news starts to tell you it's negative. Right now it's getting negative. The news is saying that negative inflation is high. Everybody's going through a recession, the market, the war, all this stuff. You're going to be feeling a little tempted to say, maybe I should stop investing my monthly investment because it's going down.

Definitely, you don't want to stop that systematized approach based on your plan. That would be a bad move, especially based on the news. They're terrible at this stuff. You can see from history, that it's very much shown through history over and over and over again that they're terrible predictors of the market and it's best to not make decisions based on what you're seeing in the news.

You can also see this in, my favorite example is cryptocurrency, because it seems like cryptocurrency, everybody starts talking about how good it is. As the price goes up, people talk about how good it is, and as the price goes down, they question it. But it's the reverse of how it should be.

Not that I'm endorsing cryptocurrency, but people talking in the news are a good representation of human nature, but a bad representation of what actually happens. The important takeaway, as I said, is not trying to time this stuff because it's incredibly impossible. It's just not possible.

I think another common thought that creeps into the equation when markets get dicey, that I'll talk through before we wrap up today, would be this alternative that's creeping into the equation.

Oftentimes—we hear this from clients and I felt this temptation with my own finances—clients will ask us on occasion what about the XYZ alternative? Like cryptocurrency, I bonds, real estate, or GameStop stock is an example that was popular a few years ago, or maybe investing in gold.

Oftentimes those will come up. I think the question is to ask where is that coming from? Normally it's presented as an alternative, or diversification, or some sort of reasonable approach as a good investment. It's a little different than what we've talked about so far. It's not necessarily getting out of investments. It's not really necessarily timing investments. It's more of changing what you're invested in.

Typically, if you peel back the layers, it's based on some underlying fear of whatever your primary investment is. Sometimes it's FOMO (fear missing out), everybody else is doing it kind of a thing. A lot of times it’s just fears of investments going down or not being as productive as the alternative.

Lately, the most common thing that's been coming up is I bonds. Investments have been going down as of this recording, and inflation has been going up. An I bond is really the only thing that mimics or is pinned at inflation. It's a government bond that pays exactly what the inflation rate is. I bonds are the best possible investment that keeps up exactly with inflation. When inflation is high and investments are terrible, it starts to look more appealing.

As I said, typically what happens is people are having greater fear with their investments as they go down because they're worried maybe they're not going to do as well, especially the further down they go. Then the further up inflation goes, they're thinking that's a better alternative. The temptation is to switch from investments to I bonds in just this example, you can use any example.

The problem is it's based on short-term view and fear. If you peel back the layers, it's this fear that the market is not going to do as well and it's looking at this slice of time or really just not thinking about the long term. If you're investing, it should be for long-term goals.

You have to remind yourself. That's why it's important to remind yourself what is the purpose of the money and what's the goal and the purpose? It should be some sort of long-term goal. Otherwise, it should not be invested. If it is long-term, you have to keep that long view in mind that I've been referring to.

All this alternative stuff I've been talking about, at least so far, is kind of based on the short-term view and short-term fears. If I look historically at inflation and historically at investments, I think that's the best reminder of how these things work. Long-term inflation and long-term investments are good reminders.

If you look at the short term, it's very emotionally prone to driving you to be fearful because right now inflation is high, investments are doing bad, but long-term investments will recoup. Long-term investments have considerably outperformed inflation over all periods of time if you look at it a long-enough period of time.

Inflation or I bonds, for example, are not a great long-term investment. I think the key is to consult your financial plan. What are the goals? Focus on your situation and avoid this temptation to make changes to different things that are not in line with your goals and your purpose.

That's the issue usually with these alternatives and really all these different concerns or fears around the market. The issue is that you're moving away potentially from what the best route is for your goals, so you want to really keep that focus on that.

At the end of the day, short-term markets are very unpredictable, and you have to be careful not to tie that to a short-term need. You shouldn't be using investments for short-term goals and so don't let those short-term markets knock you off track. Remind yourself those investments are tied to long-term goals, and you got to take that long view because long-term markets are far less volatile and will really do well for you.

History is such a great reminder of that. If you look back and you spread it out over a long enough period of time, those numbers start to look really solid. Even if, like we talked about today, you're timing it at the worst point in time possible, things will tend to work out and flatten out if we can extend that slice of time over a long enough period of time. I think that the key is really taking that long view and as I said several times, focusing on your plan and your goals, and not on these external factors and fears that inevitably crop up in our world from day-to-day, week-to-week, or month-to-month.

All right, guys. That's it for today on market history and market factors. Next time we'll be talking a little bit about some of these behavioral tendencies and biases we have as humans. We'll go through some of these. I think these are super interesting. We're all prone to them and they can really cause some problems in our world, particularly in investing and personal finance. We'll look forward to talking about that next time.

If you have been watching the markets lately, like I have, it's gotten a little dicey. It's been a while since we've had volatile downmarkets. What should you do when your investments get shaky?

In this episode of the Finance for Physicians Podcast, Daniel Wrenne talks about what to do when your investments start tanking. Markets do go up and down. If you've been investing long enough, you realize that’s just the way it goes.

The Power Of Diversification

Digging Into Tax-Loss Harvesting

Investing During Wild Markets with David Blanchett

Free DIY Financial Planning Guide for Physicians

Vanguard Total Stock Market (VTI)

Contact Finance for Physicians

Finance for Physicians

Hello, everyone. I hope you're having a great day. I have been watching the markets lately. It's gotten a little dicey. As of this recording, we're in about the middle of May, and things have gotten a little dicey lately.

It's been a while since we've had volatile downmarkets. I guess the last time was in 2020 when COVID started happening. Before then, it's been a really long time. Even with 2020, that was really fast, and then it just shot right back up.

Markets do go up and down. If you've been investing long enough, you realize that that's kind of the way it goes, but either way, even if you've done this a million times, it can get scary. There's a lot of fear, temptation, and stuff to think about potential changes to make.

We're going to talk about that today—what to do when investments get shaky like they are now—go through some of the things you should be thinking about, and give you some tools to arm you as we go through shaky markets like we're dealing with now and inevitably in the future.

Like I mentioned in the introduction, if you've been investing long enough or you've researched investments, you know the vehicles when you invest. Things go up and down, but it's different when you actually see your balance go down. It can get emotional when markets get shaky like this and fear is high.

The problem with shaky markets like we're having now is this is when people are prone to mistakes. A lot of times, people think that when the markets are good, that's when they're excelling because it feels like they're doing good, but when the market is really good, the majority of people are doing really good. What separates people typically is in these big downturns. It's mainly when people make big, huge mistakes and where they lose a lot of ground.

The question that arises is what should you do about it? The market's shaky. I know you're feeling like I need to do something about it. There are some things you should do and there are some things you should avoid doing. We're going to talk through that today. We're going to talk about what it looks like.

When I say shaky market, I'm going to talk through a little bit of what I mean by that. We're going to talk about some of the natural reactions people have, and then we'll talk about some action items you can take to avoid some of these big mistakes I'm referring to.

Just a quick story, my first experience investing was one of those big mistakes I talked about. I was 16 and had saved up a bunch of money working over the summer. I've always been interested in investing and thought it would be a good idea to invest the money that I had earned.

I took my entire life savings, which was, I think, $4000 at that time. It still feels like a lot of money to me now, but then, it was all the money I had when I was 16. The year was about late 1999. I invested my life savings. I really didn't have any plan at all other than I just wanted to make my money return something. There was really no purpose and no plan beyond just that.

I picked some stocks. Tech stocks happened to be really popular at that time. I started researching and that was what was out there. It was everywhere. Everybody was talking about tech stocks, so that's where my research led me and that's naturally what I settled on.

I did research on what the best ones were, and I picked some of those. I'm like, okay, great, we'll have a few of these, I'll invest in them, and then things will be great. I'm going to buy them and hold them for a long time because that's what you do with investing.

If anybody was around investing then, you'll know what I'm talking about. If you've researched it, that was the tech bubble. A lot of these tech stocks and dot-com companies got overinflated, and then they crashed around that time. Right around the time I was investing, I guess I caught a little bit of the upturn enough to be like, man, I'm awesome.

That's how it felt at the time, but it quickly started to crash. Like any first-time investor, I felt the temptation to do something about it, so what my action was is as I started to trade, I'm like, I got to get rid of these losers. I'm going to find some winners.

I started trading and looking for the winners. Unfortunately, I never found the winner and basically, after a few years of trading, had lost pretty much everything that I had started with. That was my first big investing mistake. I really didn't have the knowledge and experience at that time and basically made all the mistakes you could possibly make. Fortunately, it was an early phase in my life and I was able to learn when the stakes were lower.

That is a good example of some of the mistakes that happen. Hopefully, you're not making all of them at once like I did, but people make mistakes. We're all prone to those. I think it's helpful to recognize those mistakes and ideally, you're learning from the mistakes of others. Hopefully, you can learn from some of these mistakes we'll talk about and some of the mistakes I made in my past.

When I talk about shaky markets and downmarkets, what does that look like? If you look at the short term, right now, the market has been starting to get volatile. If you go to Google and you google VTI, what you're looking up there is the Vanguard Total Stock Market. That's one of the good metrics of the market.

When I say the market, basically, it's an ETF that owns basically every stock in the US. I look at it as a pretty good metric of the entire market. It's a good way to look at the historical market. I guess the fund is not super old. It goes back to the early 2000s, but you can look at how the market is doing by just looking up this fund.

As of this recording, I'm looking at it. If I go to the year-to-date view of how it's doing, the ups and downs are starting to get a little bigger, and as of this second, it's down 16.31%.

That's going to change every second because I'm looking at Google as of literally the second, but call it a little over 16% down year-to-date for this fund. I would define shaky market territory as in that 15% or greater territory. Twenty percent loss or greater is when people start to get alarm bells going on. Then, when you get into 30% territory, I think that's when it really starts to get bad and people start to feel it.

By my unofficial definition—there are much more official definitions—I gauge it just by how our one-on-one clients feel, the feelings I'm seeing them having, and the number of them that are raising issues. I think at this point in time, it's starting to get into the shaky market territory with this downturn. Not quite like it was in 2020 or in 2008, but it's starting to get into that territory. The market is starting to get more volatile and starting to have more ups and downs, and people are starting to get a little emotional. That's what I mean by shaky market territory.

In 2008, that's a good example of an extended bad market. Once things settled out at the bottom like I was talking about the Vanguard Total Stock Market—like I said, that's a good example of the overall stock market—from the top of the market in mid-2007 until when it got to the bottom in early 2009, it had dropped over 50%. That's a pretty big hit. If you're 100% in that fund with all your money, say you have $1 million, it's now $500,000. You're going to see that statement. Basically, it's going to feel like you just lost $500,000. That's shaky market territory.

I wanted to talk about the reaction that happens there because I think that's important to observe. When people see the statement as things come up or they start to see the news go out, the feeling that either the news tells or we naturally tell ourselves is this is different. This time is different. I know it's down and I know markets go down, but this time is different. And maybe even like, this is something we're never going to recover from maybe because it's different.

The interesting thing about that storyline is it usually is different. That's why it happened typically in the first place, because we often as a society learn from our mistakes but not always.

These big downturns typically are caused because some new big issue came up or something flew under the radar and caused it. Oftentimes, the downturn is caused by something completely new and different, but also, historically, we're able to work through it, come through, and recover nicely, so those feelings are normal.

Also, when we get in that shaky market territory, things just get completely backward sometimes. Right now, for example, inflation is high, cash is paying nothing, and for a while, mortgage rates were really low.

There was this time in March of 2022 when inflation had already crept up, but mortgage interest rates were super low and cash was paying basically nothing. Fast forward to today, cash is still paying nothing and inflation is really high, but mortgage rates have gone up quite a bit.

That's not exactly normally how it is. Typically, as inflation goes up, your cash should pay a little more normally and interest rates on mortgages would typically go up. They've started to do that on mortgage interest rates, but things can get backward, especially when you look at the really, really short-term periods of time.

Sometimes, if you've ever heard people talking about their reverse yield curve, that's an abnormal thing that happens, but typically, these backward sorts of scenarios happen in a really, really short-term timeframe. Also, in these scary markets, salespeople really leverage people's fear, and so does the news. You have to realize that there are a lot of people incentivized by that fear and they can capitalize on it. That's just another consideration.

The focus or the temptation is to really hone in on the day-to-day. People get this pull to start watching the market, especially the worse it gets. You can find yourself checking the daily market report or maybe even checking hourly, or watching it. There's this pull to watch that short-term market movement. Not to say that the news is bad or whatever. I'm just saying this is just a tendency that happens.

Feelings will come out. That's just a thing that happens. When things get bad, people will get nervous, scared, or fearful. I think it's important to emphasize that that's completely normal. That's how this works. You're going to want to search for solutions that are out there.

It's natural to avoid the pain and try to stop the pain. What happens with all this is you're prone to actually making changes. For example, selling low and buying high. You're prone to making changes that are not exactly logical and very emotion-driven.

When it comes to investing, this is oftentimes the worst time to make the changes we are pushed towards in this situation, maybe get rid of my investments, or change the investments to a different type of investments. They're just at the point where they're at their lowest. That's the reverse of what we know we should be doing.

I think it's good to recognize that those things are happening. It's normal. Ask yourself what is the underlying concern? Maybe think about what is the money that I'm concerned about for? What's its purpose? Think about when am I ultimately going to use it? What's it going to be for? You just think through those questions.

The last thing I wanted to talk about in relation to these shaky markets is what can you do about it? What can you do to avoid some of the mistakes that I'm talking about? You got to remember your financial plan and investment plan. They're kind of integrated, your financial plan and investment plan. If you haven't made one by now, this is the prime time as soon as possible to have one because this is going to be the timeframe when you're going to really lean on it.

Your financial plan allows you to connect your investments with your goals. It helps you to put a good purpose or tie in a purpose for your dollars and helps you to match up long-term goals with long-term dollars and avoid matching up long-term dollars with short-term dollars.

For example, if you're investing money that really should be for emergencies, that's going to cause a lot more added fear and concern when you see them start to drop. You're going to be like, uh-oh, what if something happens and I need that money? That's my only reserve.

A good financial plan is going to say, well, no, you should have an emergency account which should not be invested because you need to pair up short-term needs with short-term dollars. If you need it in the short term, you can't invest it because who knows what's going to happen in the short term? You're pairing up those dollars with those goals and putting a good purpose behind that money.

On the flip side, for example, maybe you have a long-term goal of retirement. It's the most common one, retiring by age 50 or something. It helps you to think of dollars in terms of that goal and purpose and put it in a bucket.

If you're 20 right now and all those dollars are tied to that purpose, that's a long time from now. You got 30 years. It helps you to not focus so much on the day-to-day. It doesn't really matter what's happening this week, day, or hour. You're not going to use those dollars for 30 years, so you shouldn't really be focused on that short period of time if you're not going to be using them.

The big thing is having that investment and financial plan and consulting it in times when it gets shaky or you start to feel those emotions. If you work with a financial planner—especially if you start to feel nervous about it—talk to them about it. That's what we do or where we can help sometimes.

As you feel those feelings and emotions, I think it's good to try to give yourself a little space between the emotion and the decisions or actions. The risk is you feel the fear, and then you make a move immediately or as fast as possible. It's better, especially with investing, to give yourself a minute to take some time to wrap your head around it and get some logic. Give yourself a little space between the feeling and the action.

It's also great to always educate yourself on this type of stuff. For investing specifically, I would suggest educating yourself on human investing behaviors and behavioral finance. There's a ton of stuff out there on how people behave with investing, some of the falls or the biases we have, and that sort of thing.

We've actually recorded an episode on that. I'll link to that in the show notes. It hasn't come out yet, but we'll have that linked up. You can check that out if you want to dig into that subject.

It's helpful to understand how you're going to tend to behave and some of the behavioral risks you would have and educate yourself on that so you can gain awareness of it and avoid being as prone to those.

Then, educating yourself just on how markets work too is a great step to take always as well. Same sort of thing, the more awareness you have of how these things work, the better you're going to be able to navigate this experience, especially when you're feeling the emotions.

We're also going to do a podcast episode on that as well. I will have that linked in the show notes for you guys that want to dig in on that.

I think the key though is just sticking to the basics of what your plan is and what the resulting investment strategy is to allow you to reach your goals. With investing, ideally, you're doing it as unemotionally as possible and sticking to pretty specific logical rules.

In summary, the first step is if you don't have a financial plan or investment plan, I would suggest creating one as soon as possible. We've created a do-it-yourself guide. For those of you that lean toward that direction or are not sure which direction you want to take, I'll link to a do-it-yourself guide that we've created to help you work through that process. If you want one-on-one help, our planning firm does initial consultations at no cost. We're happy to do one of those.

Step number one is having that financial plan you can lean on. That's going to be huge, especially the more emotional and scary it gets. Once you have the plan, you want to consult it, review it, lean on it when you start to feel that uncertainty and those emotions, and make sure that you're following it. It's going to be a reminder and a voice of reason for you, so you want to consult it.

If you're working with a financial planner, you can consult the financial planner. The service they provide is going to be that voice of reason. But if you're doing it yourself, you want to consult your financial plan so that you can remind yourself of what that needs to look like.

You don't want to make changes based on things you can't control like external market factors or emotions. Recognizing that the market is out of your control, for the most part, is really important. Separating some space between those emotions and the actions is helpful.

Some last items I'll throw out if you're still looking for some actions are some (what I would consider) productive actions to think about when the market is shaky. These are not always applicable, but there are some potential considerations for you to at least think about.

If you haven't funded all your tax-sheltered saving vehicles, when the market is down, it can be a fantastic time to do it. Ideally, you would have done that already or you already have a plan to do that. That's the ideal world because most of the time, the markets are good.

But if it happens to be that today, you didn't really have a plan for dollars and it happens to be that you haven't maxed out those tax shelters, well, that's a good time to do that. Like I said, ideally, you have that plan, you can lean on it, you're already facilitating that process, and you're already on track to fund all those tax shelters. If you don't have that, you now are seeing yourself with lots of extra cash, and you haven't funded those tax shelters when the market is really, really down, it can be a great time to get caught up on all that.

The second thing would be to tax-loss harvest. Tax-loss harvesting is when you're taking losses on investments intentionally to produce tax losses. It's a tax benefit that will come through on your tax return.

We did an episode several shows back on tax-loss harvesting that I will link to if you want to dig into that.

Then, just rebalance your investments. That's basically following your investment plan. Oftentimes, when the markets get shaky, it will pull you away from the target that you've established with your investment plan. What rebalancing is is rebalancing the categories of investments to stick with the plan you originally established. You're not actually changing the plan. You're just adjusting your investments because they've changed so much and they've gotten off track with your plan.

Rebalancing and tax-loss harvesting can be really good. The more it changes, the more these can be beneficial.

Another one that can sometimes be helpful is a Roth conversion. Roth conversion is when you're changing your pre-tax IRA or 401(k). You're changing your pre-tax account into a Roth account. You can always do this on your IRA, and then some 401(k)s allow you to convert from pre-tax to Roth.

This is basically saying that on pre-tax money like a traditional 401(k) or IRA, you're not going to pay tax until you take it out. It's like, tax me later. On a Roth, you get taxed now, but then you never pay tax again. It's like, tax me now. With a Roth conversion, you're basically saying, I'd rather take the tax hit now. You're just like, let's just go ahead, pay the tax now, and get it over with. You usually do that because you think the tax hit is going to be lower now than later. That's usually why you do Roth.

The Roth conversion can work well when the market is really low mainly because the values are down. You can use history as an example. It's not always easy to pinpoint this in real-time. It's actually very difficult to, but in some cases, say we're in 2008 at the bottom of a 50% drop, you are already considering this strategy of Roth conversion, and you just hadn't pulled the trigger yet. That can be an excellent time to do it because say you had $100,000 in an account. If you converted it to Roth, it would be $100,000 that was taxed. That triggers a tax on, say, 30%, which is $30,000, but you hadn't done it yet, so now, that account is dropped to $50,000. The same thing, you convert the $50,000 and it's taxed at 30%, but that's only $15,000 of tax. It's basically converting it at a discounted price which triggers less tax.

Roth conversion looks slightly more appealing the more the market goes down. It's not a reason in itself to do Roth conversions, but it can add to the argument for Roth conversion.

Then, the last thing is if you happen to have unaccounted-for dollars—this goes back to the financial plan—the most important thing is having the financial plan. But if you happen to have not had one, you have these unaccounted-for extra dollars that are just not being put to use good use, and let's say that they should be or could be used for long-term monies, it can be an excellent time to start investing those the further down the mark the market goes.

Like I said, it's best if you're already putting those to good use, if it just happens to work out that you have, if you get a big bonus, or you have a good influx of cash, I'm going to lean slightly more towards getting that invested quickly, especially if I know we're in the middle of a huge downturn.

As I mentioned, I think the biggest thing is having that plan and leaning on this as the market gets shaky. It's really pretty much always going to get emotional and scary for people as we go through this especially the worse it gets. It's hard to tell exactly how it's going to affect you until you're really in it, so I think it's good to recognize that that is something that's going to happen. It's okay to have some fear and concern around this, but just make sure that you're taking a minute, consulting your plan, and trying to put on that logical hat. I think it will save you some pain and regret later in life.

Hopefully, you don't have to learn from your mistakes and hopefully, you can learn from this and some of my mistakes I made in the past.

As always, it's been a pleasure. We'll look forward to catching up again next time where we dig into a couple of these issues I mentioned. We're going to dig into some of the behavioral tendencies we have when we invest. Then, in the next show after that, we're going to talk about some of the examples of how markets have worked in the past.

We'll look forward to catching up on those topics next time.