- Financial planners say investors typically make rash decisions out of fear during recessions.
- Avoid investing in something trendy, like crypto, if you didn’t understand it before the recession.
- Don’t sell everything out of fear without looking at your long-term goals.
An estimated 20 million Americans started investing in the stock market during the pandemic. That’s a lot of new investors experiencing a
— and potentially a
— for the first time.
It’s not an easy thing to grapple with, says financial planner Pamela Capalad of Brunch & Budget.”Recessions lead to a lot of potential desperation,” she says, which often means mistakes are made.
Nicole Morong, a financial planner at Peterkin Financial, agrees and adds, “There’s a lot of fear and people asking, ‘Is this the right time to invest? Should I be waiting for the market to go down more before I put more money in ?'”
If you’re a new investor wondering how best to protect yourself from what may be a recession, Capalad and Morong have some advice.
1. Avoid investing in something you don’t understand
Capalad says she’s seen investors get into new, trendy investments during recessions, but that’s a mistake. “Avoid anything that you didn’t understand before the recession,” she says.
For example, if you didn’t know how cryptocurrency worked before, now might be a bad time to invest in crypto out of desperation. Capalad says, “Ultimately, it goes back to: Do you understand what you’re investing in? Do you understand why you’re investing in crypto? Do you understand how crypto works?”
“Crypto was one of the first things to take a dive when there was any hint of recession because crypto is currently all speculation,” she adds. “It’s really easy to ride a trend, especially when it’s going up.”
2. It’s not the right time to try day trading
Morong says, “Any investments that claim you’re going to get your money back fast, like day trading, I would avoid that. That’s a bad idea any time.”
Day trading is when you buy and sell the same securities multiple times during the day, with the hopes of capitalizing on any increases in the market throughout the day. While anyone can technically start day trading on their own, Markets Insider reported that 97% of day traders lost money over a period of 300 days.
Morong adds that the promise of making money quickly in a short amount of time makes day trading alluring, but that it ultimately isn’t worth it.
3. Don’t sell everything when the market is down
During a recession, many investors feel a sense of panic, especially if you’re doing it alone without any accountability from a financial planner or financial advisor. Selling everything when the market is down is typically a fear-based decision, says Morong, which can hurt investors in the long run when the market corrects itself.
Morong adds, “It’s easy to get really, really scared, and when you don’t have someone to bounce ideas off of, you look at your portfolio and think, ‘Oh my God, this is a slow bleed! my money! This is down 40%!’ You might sell out or make rash decisions without understanding the macro perspective.”
Instead, try a dollar-cost averaging strategy where you invest the same amount of money on a regular basis. You’ll buy stocks at their highs, sure, but you’ll also buy them at their lows while they’re “on sale,” which evens out your costs over time.