Financial lessons learned from COVID-19 pandemic
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With summer 2021 here, more than 150 million Americans vaccinated for COVID-19, sports played in full arenas and many activities nearly back to normal, a column on financial lessons that can be learn from the pandemic is needed.
Although we hope to not endure such an event again in our lifetimes, there are a few salient lessons from the pandemic that can guide us in times of relative normalcy.
As you consider these lessons, take a minute to remember the uncertainty, stress and panic that set in during spring 2020, when U.S. COVID deaths were skyrocketing and financial markets were collapsing.
Lesson 1: Contact financial advisor
This lesson can also be stated another way: Do not go it alone. Making important financial decisions in times of great uncertainty and even panic is difficult. It is even more so when one does not have a professional advisor to partner with in the decision-making process. Many orthopedists have a financial professional on their advisory team and those who did in 2020 have likely to have benefitted significantly.
First, the professional advisor should have provided a sounding board — someone to run your ideas by who can put a pause on some of the more emotional elements of investing and wealth planning that overwhelmed many investors in March and April 2020. Ideally, a physician’s selected advisor is also someone who is attentive, disciplined, data-driven and guided by longer-term planning.
For many investors who make decisions on their own, spring 2020 was a time for selling assets and moving to cash, out of fear. This strategy often proved to be a double whammy against them: (1) they incurred capital gains taxes on the sales, as, even during the March market lows, many securities were still up relative to their basis if they had been held for a year or more, and (2) many never felt right about “getting back in.” Thus, those investors missed the snap back to new highs later in 2020. Unfortunately for orthopedists who recognize this as their story, it may take years to make up for the losses and lost gains incurred in 2020.
On the other hand, we are beginning to see data that show a significant number of investors who worked with a professional advisor (and certainly many who did not) did not panic in spring 2020. In fact, they either held still and did not sell or they bought into the downturn and came out with even larger gains in 2020.
Lesson 2: Step back, review your plan
In lesson 1, we discussed macroeconomics — what happened with the financial markets. Here, in lesson 2, we look to microeconomics, which involves an orthopedist’s specific financial plan. This is a good time to step back and review your long-term financial plan.
One of the most powerful ways orthopedists can avoid poor short-term financial decisions during stressful times is to keep their long-term planning goals top of mind. Importantly, this should involve a review of a long-term financial/retirement model, including annual saving goals, assumed rates of return, and personal spending and retirement benchmarks.
By reviewing and understanding what goes into their financial plan, physicians can truly buy into a long-term time horizon. Furthermore, they can look at short-term financial downturns with perspective and not let these downturns create stress or lead to poor decisions, even during a chaotic and scary time, as the beginning of the pandemic surely was.
Lesson 3: Be proactive about taxes
Because everyone wants to reduce taxes to the extent they can, it is not surprising that most orthopedists consider this lesson 3 to always be important, not just in times of crisis. Moreover, this lesson may be especially important in the next few years if proposed tax increases become law.
A detailed dive into all types of tax reduction tactics is beyond the scope of this article. However, one tactic that stood out in 2020 as timely was capital gains and loss harvesting. Many advisors, including David’s firm, helped clients benefit from the sharp market downturn in March 2020 and enjoy the run-up the rest of the year. This was achieved by selling pre-identified holdings into the market downturn to realize significant tax losses and reinvesting proceeds in pre-identified similar investments to fit the client’s overall allocation.
Before the pandemic, many orthopedists, especially those who manage their own investments, may have thought that loss and gain harvesting should be executed in the fourth quarter, when one understands which elements of the portfolio are up or down for the year and the physician’s overall tax picture for the calendar year is clear. This is a mistake. One of the lessons made clear in 2020 was that an investor who waits until the fourth quarter to harvest gains and losses will miss a tremendous opportunity to enjoy large tax losses while investments increase significantly. The opportunity to relish this “win-win” came and went in March 2020.
Lesson 4: Find a fiduciary advisor
Along with extreme market volatility in spring 2020, most orthopedists had more time on their hands due to mandated cessation of non-emergency procedures. Some used that time to examine their investment portfolios, re-evaluate their existing advisor relationships or perhaps look for a new financial advisor. In these endeavors, physicians had a significant opportunity to understand the different ways financial advisors make money and to realize the value of a fiduciary financial advisor.
In short, there are two regulatory models for investment advisors — the fiduciary standard and the suitability standard, which we discussed in this column in September 2019. Fiduciary advisors must put their clients’ interests before their own, while an advisor operating under a suitability standard needs only to provide clients with suitable investment options. The fiduciary advisor owes a duty of loyalty to their client and the suitability advisor owes a duty of loyalty to their broker-dealer.
Fiduciary model
For many orthopedists evaluating options for financial advice, the fiduciary model business model made the most sense. This is not surprising, as physicians also operate under a professional duty to put their patients’ best interests first. As orthopedists have returned to their busy pre-pandemic schedules, the importance of working with a fiduciary should remain top-of-mind when evaluating current or prospective advisors.
Conclusion
Along with health worries, many orthopedists had substantial financial concerns during the COVID-19 pandemic. From our viewpoint in 2021, we examined four time-tested financial lessons that gained new significance during the pandemic and will continue to impact physician wealth planning in the future.
- For more information:
- Sanjeev Bhatia, MD, is an orthopedic sports medicine surgeon at Northwestern Medicine in Warrenville, Illinois. He can be reached at email: sanjeevbhatia1@gmail.com.
- David B. Mandell, JD, MBA, is an attorney and founder of the wealth management firm OJM Group www.ojmgroup.com. You should seek professional tax and legal advice before implementing any strategy discussed herein. He can be reached at mandell@ojmgroup.com or 877-656-4362.
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