Borrow to invest in the stock market. In an effort to assuage the public’s fears, money media personalities and personal finance experts alike will push the mantra of a recession being a “fire sale” on stocks or a chance to snag cheap real estate. There is of course some truth to this sentiment, but it’s not a reason to over-leverage yourself.
It’s often a mistake to take out a home equity loan, high-interest personal loans or use cash advances from credit cards to try and capitalize on the down market, advises Nikki Dunn, CFP and founder of She Talks Finance. Dunn tells clients that if we’re in a recession, then asset prices, including a home, can decline, plus the security of your job could be in question.
“Leveraged investing can make sense for those in a strong financial position (e.g., maintains liquidity, does not carry high-interest debt and has reliable income), but borrowing money at 10 to 15-plus percent because you think you can double your money is highly inadvisable,” says Anatasio.
The focus on ramping up risk instead of de-risking investments is also a move that may be unique to this recession, says Maureen Wright, a financial advisor with Savant Capital Management, because there is access to investment tools and technology (e.g., micro-investing apps and fractional shares) that wasn’t available during the 2008-2009 recession.
Focus on aggressive debt repayment. Planners also advise against using up or reducing your cash resources in order to pay debt faster than required. In a recession, it’s best to stick to the minimum payment due.
“Once you have made those debt payments, that money is gone. Hold onto savings in case they are needed in the event that you lose income,” says Samantha Gorelick, a CFP at Brunch & Budget. If the debts accumulate and get to an overwhelming place, however, then it’s important to seek help.
Not seeking assistance. “One of the biggest mistakes is not consulting a bankruptcy attorney if you're struggling with debt,” says Liz Weston, a planner and columnist for NerdWallet. “People continue to try to pay their bills long past the point where they should have thrown in the towel, or they try to settle their debts when those debts could be legally erased.”
Weston points out that right now people have unprecedented access to forbearance programs from lenders, which can buy you more time to pay back debt. But if you’re making a bankruptcy decision, speaking to an attorney can help you emerge from in the best shape possible.
Make panicked choices instead of proceeding slowly. One of the most painful parts of the pandemic and quarantine is this pervasive feeling of the unknown. We want so desperately to revert back to “normal” and feel some semblance of control.
“The biggest advice I give people in uncertain times is to take all of the things going on in your head and write them down,” says Jude Boudreaux, a senior financial planner with The Planning Center.
Writing all of my concerns down did help me assess them more objectively. These included earning a variable and volatile income, living in an expensive area and having an enormous medical bill if my husband or I needed to be hospitalized due to Covid or any another health issue. Even though we have decent health-care coverage, it often feels we’re one medical issue away from major debt—and the same is true for many American families. Getting these worries out of my head allowed me to model budgets for various situations. I also reduced the salary I pay myself in order to ensure my business reserves could last longer if it took a while to rebuild my income streams.
Forget about history. While no two recessions are alike, it is critical to remember that market downturns are a normal part 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.
Even the most experienced investors are likely to feel a twinge of panic during a recession, but it’s critical we make financial moves from a place of knowledge, not emotion.
This article was provided by Bloomberg News.