The Biggest Money Mistakes People Make in a Recession

Many people are facing a situation they haven't had to deal with in a long time: an economic downturn.

Many people are facing a situation they haven't had to deal with in a long time: an economic downturn. And they need help navigating it. The Wall Street Journal reached out to financial advisers and asked a simple question: What are some of the biggest mistakes people make in hard times, and how can they avoid them? After all, facing a downturn is hard enough without making it even worse by falling into common traps in the way you spend, invest, and save. My initial instinct was to mention how investors tend to want to make changes to their portfolio in response to current news and market movements. More often than not, the best action to take is no action at all. If you are nervous about the market, you are better off reviewing the underlying assumptions in your financial plan than making changes to your portfolio. A thoughtfully-crafted financial plan takes periods of bad performance into account through Monte Carlo analysis, and does so without emotion. That way you spend less time predicting and more time planning around things you can control. But it occurred to me people fall into this trap in both good times and bad, so I geared my response to something ultra-specific to good savers during recessions: refusing to tap an emergency fund. An emergency fund helps make tough times a little better, but two groups of people fail to fully leverage their savings. The first group are those experiencing economic hardship and who choose to live uncomfortably rather than access their savings. This happens when their saver's mentality—the same one that helped in building an emergency fund—makes the emergency fund seem sacred and unavailable for use. A better framework for thinking about the use of such funds is viewing it as a reward for disciplined saving in good times. Isn't this why you had the emergency fund in the first place? A second group of people are those with well-funded emergency savings but who aren't experiencing economic hardship. These individuals should consider investing a portion of their emergency savings during a recession at lower stock-market prices to further strengthen their long-term financial position. This also applies to retirees with at least two years of living expenses in cash. If you have a Wall Street Journal subscription, you can view the other responses to the biggest money mistakes people make in a recession (unfortunately it is behind a paywall). Here are resources I've created that you might find helpful: What to Do If You Were Getting Ready to Retire Before the Pandemic Hit How to Set Up Your Emergency Fund Cash is King: 3 Ways to Manage It the Right Way Market Prediction is Harder Than You Think What I Am Reading Most Stocks Suck (The Irrelevant Investor) Election Matter, but Not So Much to Investments (Vanguard) The Fault is Not in Your Investments, But in You (Safal Niveshak) The Billionaire Who Wanted to Die Broke...Is Now Broke (Forbes) 29 Psychological Tricks to Make You Buy More (Visual Capitalist) To making money simple, Peter Lazaroff P.S. Are you a diligent saver wanting to ensure you allocate your savings to places that optimize your chances of achieving financial success? Here's how I can help people like you.

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Peter Lazaroff, P.O. Box 440113, Saint Louis, MO 63144, United States