10 Years Later: When The Bear Stearnly Strikes Again, What Will You Do?

Can you remember what you were doing exactly 10 years ago???

I definitely can.

It was a glorious time for me. Match Day had just happened at the end of March. Fortunately, I matched to one my top picks for residency. On top of that, I was about to graduate medical school in three months! I was enrolled in ridiculously easy courses for the remainder of school. This was purposely planned by design because after Match Day, nothing else really matters.

Remember that feeling of “senioritis” back in high school? It was kind of like that, but a thousand times better. Finally after 8+ years after high school, no more schooling! It was a great feeling.

So we celebrated.

And to that end, my medical school friends and I went to all sorts of swanky L.A. clubs and fancy Hollywood bars, participating in shenanigans and douchebaggery that my current self (now married, a new father, and much more health-conscious) would not be proud of. But I don’t regret any of it!

Amid my post-Match Day euphoria, the stock market was highly volatile and Bear Stearns (one of Wall Street’s largest investment banks at the time), was on the brink of collapse and in the process of being bought out by JP Morgan.

While I was partying and raging like a bull, the stock market was behaving more like a bear that was slowly sobering up from hibernation– and ready to wreak havoc in one of the worst bear markets and financial crises since the Great Depression.

 

What is a bear market anyway?

Here’s an excerpt straight outta Investopedia: “A bear market is a condition in which securities prices fall and widespread pessimism causes the stock market’s downward spiral to be self-sustaining. Investors anticipate losses as pessimism and selling increases. Although figures vary, a downturn of 20 percent or more from a peak in multiple broad market indices… over a two-month period is considered an entry into a bear market.”

The term “bear market” is named for the way in which a bear attacks its prey– swiping its paws downward (hence downward stock prices). By contrast, a bull attacks by thrusting its horns up in the air (hence upward stock prices signify a “bull market”).

 

So what happened 10 years ago?

The causes of the financial crisis and subsequent bear market of 2008 are complex and lengthy, so I am not going to summarize it here.  Ten years ago, my financial literacy was very minimal. What I did know at that time was that many people were borrowing a lot of money for homes they really couldn’t afford. I also knew that the housing bubble bursted. And I heard that investment banks like Bear Stearns and Lehman Brothers collapsed. Oh yeah, and the stock market began to crash.

Not going to lie. I pretty much knew nothing about the financial crisis until I watched the documentary Inside Job, which depicts a pretty good summary of what happened.

In 2011, the U.S. Financial Crisis Inquiry Commission summed it up and came to the conclusion that “the crisis was avoidable and was caused by:

• Widespread failures in financial regulation, including the Federal Reserve’s failure to stem the tide of toxic mortgages;
• Dramatic breakdowns in corporate governance including too many financial firms acting recklessly and taking on too much risk;
• An explosive mix of excessive borrowing and risk by households and Wall Street that put the financial system on a collision course with crisis;
• Key policy makers ill prepared for the crisis, lacking a full understanding of the financial system they oversaw; and systemic breaches in accountability and ethics at all levels.”

The recession had unfortunate consequences for many people. Some lost their job (unemployment went up to almost 10%). Others lost their home to foreclosure. And many people lost a lot of money selling their investments in the bear market.

 

What did I do?

Actually, I really didn’t do much of anything. I certainly didn’t panic. In fact, I was unintentionally able to mute all of the noise. I simply carried on with my life, saved a high percentage of my income, and invested it.

By September 29, 2008 (when the Dow Jones Industrial Average had a record-breaking drop of 777.68), I was in the middle of my first year of residency. Being so busy and sleep deprived, I had little time to keep up with the news. Between the 30 hour shifts working in the surgical ICU and working 80+ hour weeks in the medicine ward, I was barely surviving the rigors of residency. Because of this, I had little mental energy to even panic let alone pay any attention to the financial markets. Since I had been going to school for so long (8 years counting college and medical school), I didn’t have any money in investments to lose.

I saved and contributed to the max

Here’s a fun fact. I earned my first real paycheck in residency.  And starting with that first paycheck, I made regular contributions to my employer-provided 403b account. My goal was to max out my contributions every year. I totally wanted to “pay myself first” and capitalize on the magic of compound interest. (I was influenced by the book “The Automatic Millionaire” by David Bach, which I read a few years prior back in 2006.)

My annual salary as a resident was not very high. At about $54,000, it was somewhere around the median income at that time. With the exception of my first year, I was able to max out my contributions to my 403b account. From 2008 through 2012 (the duration of my residency), I had contributed a total of almost $75,000. And this is in addition to maxing out a Roth IRA at the same time.

After 2012, I didn’t touch my 403b account at all. Having left the institution where I did my residency, I couldn’t make any more contributions to it. I didn’t roll it over to an individual IRA because I planned to contribute “back door” Roth conversions to my existing Roth IRA as an attending making serious money. I also didn’t see a point to rolling it over to my current employer 401k. At any rate, I left my 403b account alone. Currently, this account is sitting pretty at a value of $120,000. Not too shabby for someone who had little clue about what he was doing.

While the recession was devastating for many people, it worked out well for me. I had a stable job and an average salary as a resident. And by automatically making contributions to my residency retirement account, I unknowingly capitalized on the sale on stocks and allowed my portfolio to grow during the economic recovery.

 

Will it happen again?

Of course it will happen again. The stock market is always going up and down. And once in awhile, a bear market happens. The problem is that nobody really knows when the bear market is coming. Nobody can accurately time the market.

But fear not. As Jim Collins always says: “The market always goes up!”

See? Even though there have been many dips, market corrections, and bear markets… the trajectory of the market is always up. It’s like a reverse gravity roller coaster.

 

What to do when it happens

The simple answer is to not panic and let it ride.

If you’re in the accumulation phase like me, and have no immediate plans to retire, then you should relish these bear markets and see them as buying opportunites to purchase stocks on sale. I’m not necessarily hoping for a bear market. But you better believe that if it does happen, I will continue to dump more money into my Vanguard taxable account.

Folks who are retired and have enough money to FIRE should rest assured. A safe withdrawal rate (SWR) of 3-4% is very safe even taking bear markets into consideration. How safe? You can read more about it here and here.

 

Final thoughts and considerations

I often talk to my friends outside of medicine. And a lot of them are quite a bit more fearful of bear markets than I am. Admittedly, it is easy for me to be optimistic because I have a stable job in a profession that pays well. No matter what happens, I’ll likely be okay. That is a blessing I cannot take for granted.

But I can’t say that the same is true for a lot of my friends. Many people have jobs that are more dependent on the overall economy. If a recession occurs, unemployment will increase and people will be laid off. It can be devastating.

Making matters worse, with technology advancing at a rapid pace, it is likely that many jobs will be lost to artificial intelligence, robotics, and self-driving vehicles. If people are laid off during a recession, corporations may choose to hire non-human labor if it is better for their bottom line. My best friend works in a big bank and sees this happening all the time. He is trying to brace himself by furthering his education and learning new skills. While I am sure his job and financial situation is secure, I think it’s a great idea to learn and adapt. You just never know.

What I do know is… When the bear comes, stay calm. Just let it pass. We will survive and be just fine.