Top 5 things to not do in a Recession/Downturn!


Also how to set yourself up for success!

Going through market cycles is an invariable part of one’s investing life cycle. And the ability to smartly deal with downturns in a prudent way is a fundamental step required for building long term wealth.

#1- Don’t try to predict the bottom!

Recessions are an inevitable part of market cycles and one may be tempted to try and time the market (getting in and out) based on what one may think will happen. This is an extremely risky activity. There are simply too many factors and unpredictable future events that can drive the market haywire in short to medium term. If your goal is to invest for the long term, then trying to time the market based on what you/others predict is going to happen is a sure way to end up with an unbalanced portfolio and sleepless nights. Relax and watch the events unfold and continue to adhere to your pre-recession investment plan.

Recession and downturns are Normal!

#2 - Don’t sell your stocks and hold 100% bonds/fixed income!

I see some friends doing this time and again. They think if I just sell the falling stocks and hold cash/fixed income for a while until bad times blow over, I will do better. Well, absolutely wrong! If your investment horizon is longer than 10 years, the only prudent thing to do is to remain invested in your diversified portfolio. Nobody including the experts are able to time the market well except by chance, and if you miss just a few of the best market move days, most of your gains can be potentially wiped out.

#3 - Don’t check your holdings everyday!

I know it can be hard not trying to assess one’s portfolio when markets swing heavily day-over-day. But for your own sanity and for the sanity of your investment portfolio, one needs to stick to reviewing one’s portfolio at only a predefined schedule and not ad/hoc. Usually a well balanced portfolio does not ever need to be looked at more frequently than every month (even once a quarter is fine). The more frequently you check your holdings, the more likelihood of you making rash reallocations and ill-timed sells.

Go do the things that are primary for your career/growth. Build new things, write new code, learn new technologies, and of course travel! There is nothing to be gained by checking your holdings daily except hypertension!

#4 - Don’t forget to continue investing!

Falling markets tend to make us unwilling to keep setting aside money in our retirement and other investment accounts. If you think about it though, this is very illogical. Falling markets are a great opportunity to invest at lower cost basis, so we should still continue to invest! Automated dollar cost averaging works in your favor and keeps your investment plan on track without you having to do this manually with every paycheck.

#5 - Don’t pay any attention to the talking heads trying to explain recession!

We are creatures that love stories and a cause-effect narrative to everything that goes on around us. Real world and especially the future is far more complex to assign instant explanations to what is going on and what is going to happen. The talking heads on TV and media/social platforms attempting to explain recession gain from engaging with the target audience. They are never held accountable for what they are saying and whether it is accurate. They just move on the next thing and forget, as it is in their interest to do so. Enjoy the pointless banter if you like to, but treat it for what it actually is — entertainment — and do not confuse it with investment advice to be taken seriously.

Happy investing through the market downturn! This one and ones you will — I’m sure — come across in the future.