Steve Perrone
Oct 30, 20222 min
“The future’s uncertain and the end is always near”
Expectations of a recession have increased lately. And with good reason. Inflation. Higher interest rates. Stock market pull back. Supply chain woes. It’s enough to scare some people onto the sidelines. At the same time, it’s important to remember the increases that followed the past couple recessions. Being on the sideline is a good way to be left behind.
Here is a short list of mistakes to avoid during a downturn.
Moving investments to cash.
Even typically bullish investors can feel that moment of panic about having enough cash reserves. But those who stay invested are rewarded when the market bounces back. The challenge is to hang on and stay put. Moving investments to cash stops the decline but without reinvesting, people also miss out on the rebound. And that can cost a lot. Some of the biggest market gains come during a correction or in a bull market. Before moving to cash, consider rebalancing your investments to a more conservative approach.
Ramsey Solutions explains that when investors try to time the market this way, they generally end up losing more money than if they’d left their investments alone as they ride out the roller coaster.
https://seekingalpha.com/article/4535147-time-in-the-market-beats-timing-the-market
Pausing contributions to retirement plans.
When markets experience a downturn, some people pause their regular ongoing investing, like recurring contributions to retirement plans. Before making changes like this, consider
your goal and investment strategy. How long until you need to access the money? You may have plenty of time for the market to recover. And investing in good companies when stocks are down may mean buying them at a reduced price.
Focusing too much on short-term returns.
Looking at quarterly account statements can add a lot of agita during a recession when balances pull back. Don’t forget to evaluate overall performance. The portfolio may have benefitted a great deal during the past few years. And it should again during a future recovery.
Forgetting about history.
While no two recessions are alike, it is critical to remember that market downturns are part of the normal cycle of economic growth. The Great Recession was followed by the longest bull market run in history that bore witness to new all-time highs for the Dow Jones Industrial Average.
Timing a Recession vs. Time in the Stock Market
A look at every recession since WWII along with S&P 500 returns in the 6 months leading up to the recession, during the actual recession itself and then one, three, five years and ten years from the end of the recession:
https://awealthofcommonsense.com/2022/06/timing-a-recession-vs-timing-the-stock-market/
Even investors with a great deal of experience can feel that bit of panic during a recession, but it’s critical to make financial moves from a place of knowledge and strategy, not emotion.