- Financial planner Pamela Capalad says people tend to make rash money decisions during recessions.
- Instead of rushing to change your investment strategy, reassess your risk tolerance.
- A recession might 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 Capalad of Brunch & Budget recommends taking a mindful pause before making dramatic changes to your investment portfolio.
People tend to make emotional money decisions during recessions
“Recessions lead to a lot of potential desperation,” says Capalad. “I think it’s a matter of understanding what you’re invested in, what your goals are, and finding time to review and revisit that before the hits. When it happens and you start to feel emotional abut it, you can just stick to your plan because, during a recession, your gut or emotional state might panic and say, ‘Oh my God, I have to get out!'”
Capalad says she witnessed very wealthy people sell their stocks at the lowest points of the 2008 recession. “They were like, ‘I can’t do this! My gut’s telling me to get out!’ and then they missed out on the next few years’ run. So it’s not necessarily about trusting your gut, but about trusting your plan.”
Instead of making rash decisions about changing your investment strategy, Capalad recommends asking yourself these questions:
- Are my investments still aligned with my goals?
- Am I comfortable with the level of risk my investments are in?
- Am I comfortable with how volatile the stock market currently is, and how volatile it’s most likely going to be?
“If your answer to those questions is no, then it’s probably time to revisit the allocation your investments are in,” she says. “During the 2008 recession, stocks and the S&P 500 dropped by 40% — that’s half of people’s money — but the bond market overall only dropped by 10%. If you can’t stomach the risk, then it might make sense to go back to your investments and dial down 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 that you didn’t understand before the recession,” says Capalad.
In the cryptocurrency market, for example, a new investor might think it’s a good time to buy now that prices have plummeted by 23% in five days, at the time of this writing.
“Do you understand why you’re investing in crypto? Do you understand how crypto works? It’s really easy to ride a wave and ride a trend, especially when it’s going up, because crypto currently is all speculation,” she says. “Unless you’ve had long-term experience in investments” — cryptocurrency only started in 2009, so it’s rare for people to be long-term investors — “your gut doesn’t really know which direction to feel sometimes.”
It might be a good time to hire a financial professional for ongoing support
She says, “The tricky thing about financial planners and financial therapists is that we can’t necessarily give you one-time advice on the spot when you’re in an emotional state. If you are going to get emotional about it, now is probably the time to start seeing if it makes sense to have ongoing support and ongoing financial advice.”