Financial Wellbeing in times of Crisis

John Francis Lee Hok, MD, MBA

PART 1: BEFORE A CRISIS

PREPARING FOR A CRISIS

History being our teacher, we can expect a major crisis at least once every 10 years. It may be in the
form of a severe weather event, a geopolitical unrest, a severe economic meltdown, or in this case, a
pandemic. Even in the time of pharaoh, he asked Joseph to interpret his dream of 7 fat cows and 7 thin
cows pertaining to 7 years of abundance, followed by 7 years of famine. Knowing this trend, the
prudent thing to do is to always prepare for it. Use the years of bountiful harvest to prepare for the lean
years.

Pharaoh’s dream of 7 years of abundance followed by 7 years of famine

Figure 1: The first level of the financial pyramid is all about protection, building an emergency fund,
purchasing life and health insurance, and managing debt. Only after protecting yourself and your family
can you start investing.

EMERGENCY FUND

Every one of us should have an emergency fund. This is a non-negotiable. Your emergency fund should
contain at least 6 months worth of your living expenses. Personal finance analyst already identified on
average, a severe crisis leading to unemployment can last up to 6 months. That is why they are
advocating a 6 month buffer.

Start by computing your actual non-negotiable monthly living expenses such as food, utilities,
transport etc. then multiply it by 6 months. So if your household is spending 100,000 a month, then your
emergency fund should have at least 600,000 on it. This fund is placed in a separate savings account or
money market instrument that you will not touch unless it is an emergency. Also, before you start
investing any of your money, you have to secure first your emergency fund. Assume all investments are
for a long term and in times of crisis; you may not have access to them.

HAVE MULTIPLE INCOME STREAMS

1. Professional income
2. Business income
3. Interest income
4. Dividend income
5. Rental income
6. Capital gains
7. Royalties
Your income from practicing medicine is just one income stream and falls under professional income.
There may be a period of time you won’t be able to practice because of some unforeseen circumstances
like illness, accidents, or calamities and pandemics. Having multiple income streams help ameliorate
this problem. Of the seven main income streams (aside from your professional income), the hardest and
most time consuming is business income. Sometime, the return on investment is so long and laborious.
But for those with great entrepreneurial spirit, this may be the most rewarding. The simplest and easiest
form of income comes from interest, dividend, and rental income.

Interest Income

Interest income comes from lending out your money. The caveat here is that you only lend out your
money to corporations you trust to have the capacity to pay you back your principal and interest. This
may be in the form of bank deposits or corporate bonds. As a general rule, I only purchase triple A rated
corporate bonds from companies like Ayala, Ayala Land, San Miguel etc. Before you purchase a bond,
check the bond rating from Philratings. Never purchase a junk bond. In the Philippines, the average yield
of a good triple A rated bond is between 4-6% per annum.

Dividend Income

Dividend income is income you derive by being part owner or a shareholder of a company. Shares fall
under two categories, preferred shares and common shares. Preferred shares have a pseudo-bond like
quality in which it pays a fixed dividend yearly, around 5-7% annually. Common shares on the other
hand have variable dividend rates depending on how much profit the company made during the last
business year. There are a few Philippine companies consistently giving a dividend yield of 8-10% per
year.

Rental Income

This income is a doctor favorite and comes from purchasing properties such as condos, apartments, and
clinics and collecting rent from them. Problem with properties is that it is capital intensive initially. For
the millennial doctor who wants to get rental income without the hassle of physically owning and
managing properties, please look at REITs or Real Estate Investment Trust.

You can learn more about REITs from https://www.investopedia.com/terms/r/reit.asp

There are many sectors in REITs such as office, industrial, retail, residential, health care, data centers,
storage, infrastructure etc. My favorite spaces are office, industrial, health care and data centers. You
know why.

Capital Gains
This comes from the price appreciation in the value of your investments, may it be in shares of companies, artworks, land, hospital shares, and gold.

Royalty income
Doctors earn this by selling a patent to an idea of their may it be in medical devices. It can also come from authoring books.
Life Insurance and Health Insurance

There are only two things certain in life, death and taxes. We will all die; it is just a matter of when and
how. Getting a life insurance is a no brainer paying a 200k premium for a 4M life benefit with 1M in
critical illness coverage and disability coverage bundled in. The only caveat here is that you have to
choose your insurance company wisely. Your insurance provider should be in sound financial health and
should outlive you. Just like you wouldn’t risk driving a car that is not insured, you don’t want to go
around your daily life uninsured. Get the best coverage you can afford. It is for you and your family’s
peace of mind.

When it comes to health insurance, even doctors should get one. Families often are just one major
illness away from financial ruin. Doctors, by age 45 and above should already get health insurance
before major illnesses strike you making you no longer uninsurable. Get health insurance you are
comfortable with paying, you can always upgrade the plan next time should you feel the need to
upgrade coverage. The important thing is to get early before you get denied because of serious health
issues or co-morbidities.

DIVERSIFICATION

I won’t be discussing the nitty gritty details of personal finance and investing. But if you investing, there
is only one way to minimize risk, its diversification. Do not put all your eggs in one basket. King Solomon,
considered the wisest king and the richest man, gives us the best investment advice:

“Invest in seven ventures, yes, in eight; you do not know what disaster may come upon the land”

Ecclesiastes 11

He wants you to diversify and invest in seven or eight different asset classes, two of which should be
abroad for we do not know what calamity may befall the land.
 Figure 2. The Investment Pyramid showing the different asset classes and the increasing risk you
undertake as you climb up the levels of the investment pyramid. Stay away from the speculative part of
the pyramid unless you are a seasoned investor already.

Figure 3.

This study by JP Morgan shows the 20 year annualized returns of different asset classes. This is very
important data because during the 20 year time frame of the study, the US underwent 3 recessions. So
this data is representative of both the good years as well as the bad years.

In summary, stay invested, stay diversified, and use the best available data to guide you in your
investing journey. Use the appropriate investing strategy based on your risk tolerance.
GOLD

Robert Kiyosaki, author of Rich Dad Poor Dad said that gold is God’s money. I agree. Gold has been
money since 5000 BC. In times of uncertainties, gold is considered a safe haven asset. Our modern
currencies like peso, dollar, etc may devalue after massive Central bank money printing. During the
Asian financial crisis, the peso devalued against the dollar by 50%. Going from 23 pesos to a dollar, to 50
pesos to a dollar. You need to have a hedge against such devaluation, and gold offers that by being a
store of value. Aside from being a great store of value, gold has an annualized return of 7.7% based on
the JP Morgan 20 year data.

PART 2: DURING A CRISIS

DO NOT PANIC!

Having mentally rehearsed and physically prepared yourself for a crisis, you need to approach
everything systematically and logically. Set your priorities and address each concern based on urgency
and priority.

SECURE YOURSELF AND YOUR FAMILY

First of all, safety first. Protect yourself and your family with what is causing the crisis. In this case, it’s
the corona virus. You already know what you need to know on how to combat this, it is just a matter of
putting it in practice: hand hygiene, social distancing, and wearing mask if you are sick.

Second, secure your family’s basic necessities, food, water, medicine, and shelter. There is nothing
wrong with storing a month or two worth of supplies. What is wrong is hoarding to the point you are
depriving others of these basic necessities.

SECURE YOUR PRACTICE

Would you be holding clinics? Would you be operating elective cases? Use best available local
practice guidelines in helping you with the decision.

SECURE YOUR CASH FLOW

Foresee how your cash flow will be affected should this crisis be protracted. There will be a significant
drop in consults and in elective procedures, unless you are in the frontline specialities where you will be
swamped with patients. There is even a chance you might get sick yourself, quarantined, or much worse.

1. Have a meaningful amount of cash stored in your secure house vault. In times of crisis, there
might be some banking restrictions, withdrawal caps, or mobility restrictions in place.
2. Review all your income streams and see how the crisis will affect them. Check which income
streams you will continue to flow in and can help you weather the storm.
EMERGENCY FUND

Make sure you have an emergency fund equivalent 6 months of your living expenses. Compute
your monthly expenses, multiply it by 6. This money you are not allowed to touch unless it is
really an emergency. Tap into this account only after depleting your living expenses account.

ONLINE BANKING

If you haven’t enabled online banking in your bank account, this would be a good time to do so. You can
use online banking for your payrolls, pay utilities, transfer of funds etc. Some reminders in using this
medium:

1. Use a very strong password

2. Beware of phishing attacks
3. Use a reliable antivirus software
4. Never access your account using public wifi or internet

For additional tips on online banking security, refer to this link:

https://www.firststatebnk.bank/fraud-center/best-practices-for-online-banking-security

https://www.bdo.com.ph/support-topics/viii-internet-banking-all-about-security/what-type-internet-
security-do-you-provide

SECURE YOUR CASH AND INVESTMENTS

1. List down all your banking and investment accounts with current value.
2. List down current usernames and passwords for investing accounts
3. List down liquidation instructions in case of incapacitation or demise.
4. List down all life insurance policies and whom to contact. It would be better to have the
physical policy kept together.
5. List down safety deposit box locations and instructions
6. Secure all these information on your personal fireproof safe with clear instructions for next
of kin.
7. Update these information once a year at the start of the year. This is good financial
housekeeping.

MANAGING EXPENSES

Cut down on your expenses by half, this way, the limited income would last twice as long. The
easiest places to cut down are the non-essentials, such as eating out, shopping, and basic luxuries like
expensive coffee. While most utilities, credit card companies, insurance companies offer payment
deferment without interest or penalty, if cash flow is not a problem, you may opt to pay everything on
time and online to avoid bill shock from accumulated bills at the end of the crisis. If cash flow and cash
on hand is a problem, then consider their offer of deferred payment.
LOANS

Taking in a personal loan during a crisis is a slippery slope and should only be as last resort. You
do not want to take in a loan during a bad time. Rates will be very high. Do not take in a credit card loan
as much as possible with interest and finance charges as high as 3.5% per month reaching an effective
annual interest rate of 35% and up. Emergency personal loans from banks have an effective annual rate
of around 25%. SSS loan is at 10% per annum, GSIS is at 8% per annum. Take advantage of
compassionate emergency loans from your societies which have a very low and reasonable interest rate
of less than 1% per annum.

Effective Annual Interest

Credit Card cash loan 35% up
Bank personal loan 25%
SSS Loan 10%
GSIS 8%

DEATH AND HOSPITALIZATION BENEFITS

Philhealth currently is covering the full cost of COVID hospitalization until April 14, 2020. Beyond
the said day, they will be shifting to a case rate depending on severity.

Link to Philhealth COVID coverage: https://www.philhealth.gov.ph/news/2020/assure_stmnt.php

This is a good time to check on your coverage. Check with your life insurance and health
insurance provider if they will cover illness due to this pandemic. I got emails from my providers they are
covering COVID, then one will not cover since it is a pandemic. So it all depends on your provider.

The Philippine Medical Association has a 50,000 pesos death benefit for members of good
standing. Different societies have different hospitalization and death benefit.

Link to PMA member’s benefit: https://www.philippinemedicalassociation.org/membership/

ASSESSING YOUR PORTFOLIO

After securing the first priorities above, it is now time to assess your portfolio. Assess which part of your
portfolio would most likely be hit. The main reason you are diversified into seven or eight different asset
classes is exactly to protect yourself and your portfolio from being wiped out by a crisis. Not every part
of your portfolio will be hit, some safe haven assets may even go up. If you are in the very early stages of
a crisis, you may want to consider selling the riskier and more volatile portion of your portfolio,
especially if you are at a profit or near breakeven. In times of uncertainties, cash is king, and cash is a
valid position. If you decide to sell, sell hard, sell fast. More conservative assets such as high quality
bonds and gold usually shine in a crisis because people shift their riskier instruments into these safer
bets.
 1. Do not panic
2. Stick to your plan- Before taking an investment position, it should be very clear to you what your
time horizon is, your entry plan, and more importantly, your exit plan. Stick to your plan and
stick to your strategy. Are you doing cost averaging? Are you following the Warren Buffett way?
Then stick to your strategy. Those strategies have been validated to weather our crisis over a
long period of time. During a long enough time frame, the law of averaging, and the law of
compounding are your friends. Remain optimistic in the long term and believe in the Philippine
growth story.
3. Personally, I have a predetermined 10% cut loss in my investments. When I get into a bad
situation or my investment is not going my direction, I amputate my losses at 10% and live to
fight another day.

Cut loss table. In order to recover a 10% loss, I only need to do 11% in my next investment which is
very much doable. However, should I let my losses run, suffering a 50% loss, I would need a 100%
gain to breakeven.

4. Consult with your financial adviser/coach – In times of great need or emergency, you need an
objective ally that would help you plot a good course of action. Consult your financial advisers or
coaches to help give light and hope in these troubled times.

The ultimate question of should I sell or hold is an individual decision based on your risk tolerance,
strategy, and time horizon.

Good resource on bear markets and market crashes:

https://www.youtube.com/watch?v=Jh9Gn58r9Fw

https://www.youtube.com/watch?v=9PYsVkPtcXk

https://www.youtube.com/watch?v=a1XztHyREqk
PART 3: AFTER THE CRISIS

Thank the Lord for guiding and protecting you and your family through the crisis. Now it is time to
rebuild.

EMERGENCY FUND

If you tapped into your emergency fund, it is now the time to replenish it. If you still don’t have
a separate untouchable emergency fund, seriously consider having one, in preparation for the next crisis
or emergency.

YOUR PRACTICE

Inform your patients that you are resuming regular clinic schedules and ask if they have
immediate medical concerns that need to be addressed.

INSURANCE

Reassess and update your insurance needs and make sure they are active. Make sure your
coverage matches your needs. Top up if you have excess cash.

INCOME STREAMS

1. Professional income
2. Business income
3. Interest income
4. Dividend income
5. Rental income
6. Capital gains
7. Royalties
Secure your additional cash flow streams. It pays to have multiple income streams. Do not rely on a
single one should that stream be cut off due to unforeseen circumstances.

INVESTING

Reassess your investment portfolio, your financial objectives, your investing strategies, and your
allocation. There is no better time to invest that after a crisis or a recession. Diversify your investment
into seven or eight different asset classes. Again, save up in the years of bounty, so you are taken care of
during the lean years.