Spooked by the bear market and worried about what’s next, investors are looking for ways to shield their portfolios from more pain. Yet money moves made in fear can be bad ones, advisers and behavioral economists warn. On Monday, the S&P 500 closed more than 20% down from recent highs, officially entering a bear market. On Wednesday, the Federal Reserve approved the largest rate increase since 1994 in a bid to hit the brakes on rampant inflation.
For investors, this sense of doom and gloom can prompt questionable financial decisions with investments, debts, and household budgets, said Michael Liersch, head of Wells Fargo’s advice and planning centre. “People go back to what feels good and familiar from a financial perspective, rather than what actually will help them,” Mr. Liersch said.
Here are three common mistakes advisers say to avoid when choosing how to defend your money in a possible downturn.
1. Panic selling
Individual investors tend to sell after an economic downturn is already priced into equity markets, said Katie Nixon, chief investment officer at Northern Trust Wealth Management. By selling at this time, investors are locking in their losses. “This perfect bad timing can have negative consequences for building wealth,” she said.
In addition to checking your balances, it is important to check your state of mind, said Betty Wang, a financial planner in Denver. How do I feel about this market? Can I stomach this in the future? Down markets and recessions are a fact of investing, she said. Do you need to make any changes to how and what you invest in? If you still can’t sleep at night, it is likely time to reconsider your asset allocation, said Ms. Wang.
2. Using up emergency savings to pay down debts
Paying off credit card debt is among the best things you can do when interest rates are rising and uncertain market conditions are ahead, but some people take paying down debt too far, says Thomas Blower, a financial planner in Grand Rapids, Mich. If you use up too much of your savings by aggressively paying off debts with low interest rates, such as a 3% fixed-rate mortgage, you could find yourself short on cash during a downturn, said Mr. Blower.
Ted Halpern, a financial planner in Ashburn, Va., said one month of core expenses such as rent or a mortgage payment should be your zero balance in your checking account heading into a recession. Keep about three months’ additional expense reserves held in your savings account, he said.
Review the liquidity of your emergency fund, said Kyle McBrien, a financial planner at Betterment. I Bonds, inflation adjusted government-savings bonds, and certificates of deposit are popular because of rising interest rates, but many CDs have early withdrawal penalties and I Bonds must be held for at least 12 months.
People often lack lines of credit when downturns happen, said Shaun Melby, a financial planner in Nashville, Tenn. It is much easier to get a home-equity line of credit or personal line of credit when economic conditions are favorable, so consider securing those lines now if you’re worried about the possibility of a recession, he said. It is also usually cheaper than borrowing on a credit card.
3. Spending as if nothing has changed
Failure to reassess your budget and make frequent changes can leave you unprepared to adjust your spending during a downturn, said Curtis Crossland, a financial planner in Scottsdale, Ariz. Avoid spending more on nonessential items or signing up for new subscriptions and services, and look for ways to reduce optional expenses, he said. Don’t add new fixed expenses, such as another car loan, if you can avoid it, he said. The idea is to keep your regular expenses as trim as possible.
And waiting can pay off. During the dot-com boom in the late 1990s, Tara Unverzagt wanted to remodel her house. She started the prep work, finding an architect and putting away money for the project, but she waited until after the bust in 2000 to start the work that helped her get a better price, she said.
“If I can’t get the prices I want because the other side isn’t willing to negotiate, that’s usually a sign that I should wait until they are a little more hungry,” said Ms. Unverzagt, a financial planner in Torrance, Calif.