- Financial planner Pamela Capalade says people tend to make rash money decisions during recessions.
- Instead of rushing to change your investment strategy, reassess your risk tolerance.
- A recession may be a good time to hire a financial planner or therapist for ongoing support.
Americans are terrified of a potential recession.
While many of us are rushing to change the way we spend, save and invest, financial planner Pamela Capalade of Brunch & Budget recommends pausing before making dramatic changes to your investment portfolio.
People tend to make emotional money decisions during recessions
“Recessions lead to a lot of potential despair,” Capalade says. “I think it’s a matter of understanding what you’ve invested in, what your goals are, and taking the time to review and revisit that before
hits. When that happens and you start to feel emotionally attached to it, you can just stick to your plan, because during a recession your instinct or your emotional state can panic and say, “Oh my God, I have to got away!’
Capalade says she’s seen very wealthy people sell their stocks at the lowest points of the 2008 recession. “They were like, ‘I can’t do this!’ My gut tells me to get out!” and then they missed the next few years
I’m running. So it’s not necessarily about trusting your intuition, it’s about trusting your plan.”
Instead of making hasty decisions about changing your investment strategy, Kapalad recommends asking yourself the following questions:
- Are my investments still in line with my goals?
- Am I comfortable with the level of risk my investments are at?
- Am I comfortable with how volatile the stock market is right now and how volatile it is likely to be?
“If your answer to these questions is no, then it’s probably time to reconsider the allocation your investments are in,” she says. “During the 2008 recession, stocks and the S&P 500 fell 40% — that’s half of people’s money — but the bond market as a whole only fell 10%. If you can’t bear the risk, then maybe it makes sense to go back to your investments and reduce the risk by putting more money in bonds and less in stocks.”
A recession is a bad time to invest in things you don’t necessarily understand
“Avoid investing in anything you didn’t understand before the recession,” Capalade says.
In the cryptocurrency market, for example, a new investor might think it’s a good time to buy now that prices have collapsed 23% in five days at the time of writing.
“Do you understand why you invest in cryptocurrency? Do you understand how cryptocurrency works? It’s really easy to ride a wave and a trend, especially when it’s going up, because right now cryptocurrency is all speculation,” she says. “Unless you’ve had long-term investment experience” — cryptocurrency only started in 2009, so it’s rare for people to be long-term investors — “your gut really doesn’t know which way to go sometimes.”
It may be a good time to hire a financial professional for ongoing support
If the thought of a potential recession sends your emotions on a roller-coaster ride, Kapalad says it might be time to find ongoing support from a financial therapist or financial planner.
She says: “The tricky thing about financial planners and financial therapists is that we can’t necessarily give you one-off advice on the spot when you’re in an emotional state. If you’re going to get excited about it, now is probably the time to start looking at whether it makes sense to have ongoing support and ongoing financial advice.”