When times get tough and headlines scream “recession!” it’s only natural to want to scale back and lay low. But according to financial experts, many Americans are making one major misstep that could actually hurt them and their money more in the long run.
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GOBankingRates spoke with Emily Irwin, head of the Advice Center at Wells Fargo, to discuss the No. 1 mistake people make during a recession — and what you can do instead to stay smart and steady when the economy gets shaky. Here’s what she had to say.
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Mistake: Letting Emotions Fuel Your Action or Inaction
According to Irwin, the biggest mistake investors make during a recession is letting emotions fuel their action or inaction. In fact, CNN reports that recession fears are being blown out of proportion and it’s more urgent to worry about inflation instead.
“As your portfolio is decreasing in value, it’s human nature to want to sell assets to stop the pain,” Irwin said.
She added this may not yield the desired results, however, because you’re selling when the market is depressed, and many investors find it paralyzing to determine when to reenter the market.
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This means that you’re hit with a double whammy of exiting the market when it’s down plus potentially missing out on the upside when there’s a recovery.
Irwin also noted this behavior can accelerate other investment decisions that can magnify the problem, such as overweighting in certain stocks or industries with the intention that this will speed up the process of recouping any losses.
“If you cannot resist the urge to exit the market, put a methodical plan in place to reenter it using a dollar cost averaging approach,” she said. “A certain amount or percent on a recurring basis.”
Solution: Have a Financial Plan in Place
One of the best ways to prepare for a potential recession, according to Irwin, is having a financial plan in place.
“A financial plan can neutralize an investor’s inclination to act on pure emotion during periods of marketing volatility or recession because the financial plan should incorporate the investor’s goals, time horizon, and risk tolerance,” she noted.
It may also highlight any potential portfolio risks that can be magnified during a recession, such as a concentrated position, as well as showcase potential opportunities, such as building up cash reserves that can be used for emergencies or investment opportunities.
She said being proactive to understand your full balance sheet: Income, expenses, tax liabilities, and running at least one scenario illustrating decreased incoming cashflow and increased (or static) cash outflow. This can provide advance comfort to investors as to how much bandwidth exists to absorb a recession.
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This article originally appeared on GOBankingRates.com: This Is the No. 1 Mistake Americans Make During a Recession, Says Financial Expert
