3 Ways Diversification Saved Us During the CoronaBear – The White Coat Investor – Investing & Personal Finance for Doctors

Over Easter weekend I was struck with gratitude for many things. One of those things that readers of this blog may find interesting occurred when I exchanged some emails with a physician entrepreneur whose business is nearly 100% dependent on live speaking events. As I reflected longer, I realized diversification has really protected us from risks that we could not foresee. At the risk of being that guy who points out “you should have bought flood insurance” after the flood, I’m going to talk about three ways that diversification has benefitted us recently.

# 1 A Side Gig

Perhaps the most unexpected aspect of the CoronaBear for readers of this blog was that many doctors were laid off, furloughed, or at least had their income dramatically reduced. This included doctors that you would have expected to be “on the front line” such as emergency physicians. Volumes in emergency departments are down dramatically all across the country. As hospitals, physicians, the media, and the population turned their focus almost completely to coronavirus, elective procedures were shelved and even much of what you would not think was elective was either delayed or not done.

Like most of you, my clinical income has already dropped significantly and I expect it to get worse in coming months. It may not snap right back either. A business that we have spent decades building has been maimed essentially overnight.

Another of my partners also has a side job that he spends about half of his time on. The first time he saw me after this all began he asked, “Aren’t you glad this ER job isn’t your only source of income?” I sure am.

In addition, I’m also really glad that my ER job and my side gig at The White Coat Investor aren’t my only sources of income.

Being financially independent, we have other sources of income besides our earned income. I have minority ownership in several other successful businesses you may have heard of (The Physician on FIRE, Passive Income MD, and The Physician Philosopher.) Now while I’m sure their revenue will be affected just like nearly every other business in the country, it is unlikely to dry up completely. Katie and I have had lots of practice living frugally and could probably live just off of that income. In addition to that, we have a sizeable portfolio of stocks, bonds, and real estate. That portfolio isn’t doing so great, but it does produce a fair amount of income and would cover a big chunk of our mandatorily reduced spending (at least once the home renovation is complete). Plus we could always sell shares and declare our own dividend.

I for one never really expected medicine to not be a super stable source of income. But diversifying our income protected us against a risk that I could not see.

# 2 Multiple Business Streams of Income

Over the last 9 years here at The White Coat Investor, we have consistently worked at developing different sources of income and “product lines”. Online entrepreneurs basically make money in four different ways:

1. Display ads/sponsorships
2. Affiliate marketing (selling other people’s products)
3. Selling their own products
4. Selling their time (speaking, writing, consulting)

Each of these four methods has been responsible for the majority of the income of the business at one time or another over the years as the business has evolved. But even when one of them seemed to be doing really well, we continued to work on all of the others.

Several of these methods of earning were smacked down in the CoronaBear. For example, all of my speaking gigs in April through June were cancelled, many of the companies we were partnering with to do affiliate marketing are either in dire straits themselves or are temporarily cutting back on their marketing efforts, and we’re certainly not currently working on WCICON21 like we expected we would be at this time. However, our readership/listenership (eyeballs on ads) are up and many docs (including us) are coming out with great new online courses.

We also have many different “product lines” among our advertisers, such as disability insurance, mortgages, student loan refinancing, financial advisors, and real estate investing companies. We have built business relationships with several to dozens of these companies in each product line. Altogether, we have hundreds of these partnerships. So even if some of them are not doing well or choose not to advertise with us for a while, or even if entire product lines are decimated (who wants to refinance their federal student loans when there are no payments or interest until September 30th?), we still have something coming in.

I’m now grateful that we maintained as many of these relationships as we could over the years, even when some of them were not very profitable by themselves. That diversification protected us from risks that we could not see.

# 3 A Diversified Portfolio

We also appreciate our diversified portfolio. We invest in stocks, bonds, and real estate. We do so primarily using low-cost, broadly diversified index funds. We pretty much own every publicly traded company in the world. So while we own Royal Caribbean, Norwegian Cruise Line, and Delta Airlines, we also own Amazon, Zoom, and Netflix. There’s no need for us to have a clear crystal ball to decide who the winners and losers are going to be in advance. Some of our real estate is connected to the stock market (publicly-traded REITs) and some are not (private funds and syndications.) Some of our fixed-income holdings are nominal and some are inflation-indexed and some have stable principal. We are also diversified by factors (small and value). This diversification has limited our losses and ensured that we have assets that perform differently in different economic scenarios.

Many of you know about my elderly parents’ portfolio. It is 50% stocks and 50% bonds. The last I looked at it the market was down 18% from peak and their portfolio was down 9% from peak. Diversification works. Not only do bonds reduce losses in a nasty bear market, they increase your ability to tolerate losses. My parents can be reassured that they can take RMDs for well over a decade without needing to actually sell stocks low. Even at their age, they can ride this out.

Our diversified portfolio has once more protected us from risks that we could not necessarily foresee. Although of the three topics in this post this one was the one that was the easiest to foresee (bear markets happen on average once every three years), it still works just like it did in the past.

What do you think? How has diversification of your income sources and investments helped you in this bear market? Comment below!

 

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