After relishing one the longest bull markets in history, millions of millennials and young investors, myself included, are getting our first real taste of a severe recession—a scenario that often leads to costly, knee-jerk financial decisions.
A global pandemic has made it unclear when routine socializing and in-person events can continue, dealing a devastating blow to many industries. Even a $2 trillion relief package in the U.S. hasn’t provided an adequate safety net. Not to even mention the double-digit unemployment numbers we’re seeing.
It’s a safe bet to say the aftershock of the Coronavirus Recession will rival, if not outpace, that of the Great Recession. And for those of us fairly fresh to managing such a downturn, it's critical to know which mistakes to avoid. For this insight, I turned to the expertise of eight certified financial planners. Here are the worst money moves they’ve witnessed clients make in a recession.
Stop contributing to retirement plans. A common misstep among investors of all ages is to panic about the market downturn and press pause on investing, including on recurring contributions to retirement plans.
Before you make any changes to your asset allocation, or even consider withdrawing funds, it’s important to consider what your goal and investment strategy is, advises Inga Timmerman, an associate professor of finance at California State University Northridge and owner of Attainable Wealth.
“If you are 35 years old, there is no need to change your investment allocation in a retirement account you cannot touch until 60,” says Timmerman. “If you decide to make the portfolio more conservative, make sure you have a plan—an exact plan—on when to come back, rather than a general idea of when the market starts to recover, as it is impossible to know that.”
Move investments to cash. As a self-employed person, my income got rocked in March and April due to the pandemic. Speaking engagements were cancelled and media companies began to freeze freelance budgets. A typically bullish investor, I admittedly had a moment of panic about not having strong enough cash reserves. Thankfully, I left well enough alone and was rewarded when the market bounced back. But many people don’t stay put.
Lauren Anastasio, a certified financial planner at the company SoFi, told me about a man who was advised by a broker to sell out of his portfolio. The investor was in his early 60s and sold at the bottom of the market in March. He didn’t reinvest the money, so he missed out on the rebound and has about 25% less than if he had simply stayed invested.
Most planners have some version of this tale. Instead of moving money from your brokerage to your paltry-interest-rate bank account, first consider rebalancing your investments to a more conservative portfolio.
Focus on short-term returns. According to Helen Ngo, the CEO of Capital Benchmark Partners, clients tend to exacerbate their panic by focusing on their account’s quarterly or monthly statements, instead of evaluating the overall performance.
“This was very evident in March and April when they received their quarterly statements and saw a 20% drop in their accounts,” she says. “Had they looked at their performance since inception, it's not so bad.”
She advises clients to keep in mind what type of account they have and the accompanying time horizon. “If it’s a five-plus year time horizon, a recessionary period is an opportunity to capitalize on cheaper investments and lower interest rates if you are looking to borrow money,” says Ngo.
That being said, it’s important not to be overly bullish on borrowing.