A market downturn during a global pandemic is more than enough to have people questioning where they go from here with their investments and financial situations. Read our 7 money moves to avoid during a recession to ensure you avoid any critical or costly errors.
1 – Panic selling
Seeing your investment portfolio value decreasing can be upsetting- but remember, you do not lose money during a recession until you have sold your investments at a loss.
The stock market will likely go up and down during a recession. Making decisions out of fear or panic can be a big mistake and you should try to remain calm instead of quickly selling off your investments. It is important to focus on the long-term and stay the course, and more importantly resist the temptation of following the herd.
It is also equally problematic to try and time the “bottom of the market” to get back in. Timing the markets is a gambling game and an extremely risky investment move.
It is valuable to chat to a financial advisor before making major changes to your portfolio.
2 – Stop investing
It is a good idea right now to make an investment plan. Choose an appropriate investment strategy and stick with the plan unless something changes in your life. Despite being a very unpleasant part of investing, market losses don’t count as a change in your life.
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 savings and retirement plans. While you might hesitate in parting with your hard-earned cash as the market falls, hoarding your money instead of investing might be a move you end up regretting.
Many choose to re-direct any savings to their home loan. Often during a recession, interest rates fall to stimulate the economy and reducing you home loan with an interest rate (at present) of say 3% is not a good long-term use of funds, when long term share market returns are historically 8-9%.
3 – Not having an emergency fund
We recommend having at least 6 months of living expenses stashed away in case of emergency situations, and 2 years for retirees.
Don’t have this in a savings account as they are paying almost no interest at the moment. Alternatively, put the money against your home loan (with redraw facility) or in your home loan’s offset account. This has the effect of saving you anywhere between 2.5 – 3.5% interest on your loan (you can’t even get that on a Term Deposit at the moment). Also check out the interest you are paying on your loan – if you are paying more than 3% you need to shop around. A quick and easy way to check out what is available is by using TAG Finance and Loans Compare N Save website.
4 – Eliminating your insurances
Often when things get financially tight, people start reviewing their expenses. One such expense is personal insurance – life, total and permanent disability, trauma or critical illness and income protection (this cost can be a little hidden in the annual superannuation statement).
Although insurance is an easy expense to cut back on, you need to beware that it can cost you dearly in the long run and that it does provide a parachute when things go wrong.
Read our recent blog – Should you cancel your insurance cover?
5 – Raiding your nest egg
Taking out money out of superannuation before retirement means losing the benefit of compound interest over several years. Depending on how old you are, withdrawing money now could see you miss out on more than double that amount by the time you retire.
When your circumstances change, emptying your retirement accounts is often the first option when you don’t have an emergency fund. This should be a last resort. Weigh up all your options like financial assistance options and cutting discretionary spending before dipping into your retirement saving.
6 – Forget to learn from history
It is important to remember that market downturns are a normal part of investing. The chart below shows the rebound of markets (US share market) 150 days after the initial on-set of a significant negative market event.
It is normal to feel a twinge of panic during a recession, but it is essential that you make financial moves based on knowledge, not emotion.
7 – Not seeking assistance
Most people that are financially content and successful don’t do it on their own, they get professional advice. If you have the right adviser that takes an interest in you and your family’s needs and provides you quality advice, then your chances of achieving financial security increases dramatically. TAG is here to support you and your family.
Should you have any questions, please contact us on 03 9886 0800 or via email.
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Disclaimer: The information contained is general in nature. Professional advice should be sought before acting on any aspect on this page. Financial planning services provided by TAG Financial Advisors Pty Ltd (ABN 77 154 205 017 AFSL 415632), a wholly owned subsidiary of TAG Financial Services Pty Ltd (ABN 67 075 374 686).