COVID-19's impact on physicians saving for retirement
What you need to know
- While market downturns can be very stressful, the bigger danger is that market events cause us to make poor decisions that have longer-term impacts on our financial health
- Everyone saving for retirement is likely to encounter several downturns over the course of their lifetime; the question is not whether we can avoid downturns, but how we respond to them
- While one cannot predict how long this downturn will last, downturns in recent history have not lasted longer than a few years
- In market downturns it is tempting to try to “time the market”, for example, by moving from stocks to cash when the market is falling and getting back into stocks when the market is rising. However, evidence shows that, on average, investors who attempt this kind of strategy fare worse than those who remain invested through market ups and downs
- Sticking to your plan through market ups and downs can avoid these mistakes and typically leads to better long-term outcomes
- The Advantages Retirement Plan™ was designed to help members achieve retirement success through periods of market volatility. This is achieved through features such as:
- Regular, automatic monthly contributions
- Highly diversified target-date funds that automatically become more conservative as you age
- Automatic portfolio rebalancing that takes some of the emotion out of investing
- Guaranteed lifetime income options to help members protect themselves from market risk and the risk of outliving their money (coming soon)
The impact of COVID-19 is being felt around the world, and nowhere more so than in the medical community. In addition to the very real human cost of the pandemic, many OMA members and their spouses may be seeing what’s happening in financial markets and wondering what it means for them.
As part of our commitment to keeping members informed about their plan, we wanted to offer some perspective on recent events and provide you with useful information as you navigate the coming months.
We and our service partners are working to ensure you have the support and service you need while adjusting our own workplaces to help blunt the public health impact of the COVID-19 crisis and ensure the safety of employees. We feel we are well prepared to deal with COVID-19’s impact on the Advantages Retirement Plan and will continue to keep you informed as the situation unfolds.
Financial market turmoil and our reaction to it
In the past two weeks, market volatility caused by COVID-19 was compounded by a steep drop in oil prices. Economists are predicting a recession in the coming months. Equity markets have experienced a steep drop in value.
This is understandably unnerving and painful for many people. However, as behavioural finance expert Joe Wiggins points out, more than the market volatility itself, “the poor decisions that we will make as a result of the torrid environment will likely prove more damaging to our long-term outcomes.”
Market volatility in context
Everyone saving for retirement is likely to encounter several downturns over the course of their lifetime. According to analysis by the chief economist of Vanguard (the Advantages Retirement Plan’s investment partner), between 1980-2020 investors experienced eight “bear markets” (defined as a decline of 20% or more lasting at least two months). In that time, markets have seen 13 “corrections” (a decline of 10% or more). Over that same 40-year period, the value of global equities increased by a magnitude of 17 times.
Time horizon plays a big role in understanding the impact of these downturns. The table below (again borrowing data from Vanguard), shows the four most significant bear markets and corrections in the last 40 years, as well as the length of time markets took to reattain their pre-downturn levels.
|Loss||Time to recover|
|1987: Black Monday||31%||2 years|
|2000: Dot-com bubble||33%||4 years|
|2008: Financial crisis||50%||4 years|
|2018: Market correction||12%||7 months|
Let’s look specifically at the 2008 financial crisis. In the depth of the downturn, stock markets had fallen roughly 50% from their pre-crisis peak, making for very challenging times for many investors. However, investors who “stuck it out” through this period of volatility were well rewarded: by 2012, markets had regained all losses and returned a total of 60% in the following five years.
The risks of timing the market
In periods of high volatility like what we are currently experiencing, many people are tempted to “seek safety” and avoid further losses by pulling out of the market (for example, by selling investments), telling themselves that they will buy back in when things return to normal and the market starts to recover.
As Rob Carrick put it recently in the Globe and Mail, “getting out of the market is a lot easier than getting back in”. Strong psychological factors work against us. In Carrick’s words, “If you were stressed enough to bail on the markets, it’s unlikely you’ll have the fortitude to jump back in at the market nadir.” Secondly, getting market timing wrong is costly. Extensive research has found that, over the long run, the stock market’s outperformance over cash boils down to just a few critical months, which occur mainly during periods of recovery from drawdowns and periods of climbing to new peaks. Missing these critical months means missing out on all the risk premium to be earned from holding a more volatile asset such as stocks. Analysis from investment firm JP Morgan has quantified the effect of market gains occurring in a relatively short window of time, finding that an investor who missed the just the 10 best days in the stock market over a 20-year period would have seen their returns cut in half. Empirical data suggests that many investors suffer from the effects of bad market timing. Poorly timed withdrawals have been estimated to cost average mutual fund investors roughly 0.15% per month.
You might be wondering: Where does this leave me? In a previous message, we emphasized the importance of staying the course in periods of volatility. However, there are specific tools that are available to you as an Advantages Retirement Plan member to help you create a retirement plan that effectively manages (and even benefits from) volatility.
Regular, automatic monthly contributions: As highlighted above, attempting to time the market is hazardous. To help members avoid these risks, we have built the Advantages Retirement Plan to help members make regular, automatic monthly contributions.
Highly diversified target-date funds that automatically become more conservative as you age: For individuals with long financial time horizons (for example, younger people who do not plan to retire for many years), this means that the long-term outperformance of riskier assets, such as stocks, outweighs shorter-term downturns. However, individuals with shorter-term financial time horizons (for example, people who plan to retire in the near future) can be more impacted by market shocks. Advantages Retirement Plan members have access to Vanguard target-date funds that are designed to help members mitigate these risks. In a target-date fund, more money is invested in equities in the early part of your career. Then this balance shifts towards lower-risk fixed income products as your retirement date approaches. The net result: your investments grow during your working years and are protected as you get closer to needing your nest egg.
Portfolio rebalancing that takes some of the emotion out of investing: The Vanguard target-date funds available to Advantages Retirement Plan members predetermine an asset allocation which is then adjusted on a fixed schedule as the fund approaches the target date. At regular intervals, these funds will rebalance (e.g., sell equities, and buy more fixed income investments) to ensure that they achieve the predetermined asset allocation for a particular point in the fund’s trajectory or “glide path.”
Guaranteed lifetime income options to mitigate the risk of outliving your savings: To help protect physicians against the risk of outliving their money, the Advantages Retirement Plan will include a life annuity option. What an annuity delivers is certainty. In exchange for the premium paid to a life insurance company, a guaranteed amount of income is paid by the insurance company for the insured person’s life, regardless of economic and market conditions over time. This program will be coming soon, and you can learn more about guaranteed lifetime income here.
If you would like to hear more about the Advantages Retirement Plan’s perspective on current developments, we invite you to register for our special webinar on April 7. If you would like to discuss your plan, we invite you to contact an OMA Insurance advisor, or get in touch with OMA Insurance at 1-800-758-1641 (select option 1) or firstname.lastname@example.org.
These are challenging times for physicians. As you focus on serving patients at this critical time, we hope to do our part to help keep you informed and reduce the stress of managing your long-term retirement security.
CFO, OMA and OMA Insurance
and the Advantages Retirement Plan