It’s usually more enjoyable to return to the fall routine when the economy is doing well and optimism is at its peak. While not all is doom and gloom right now, many of you are probably focused on recession risks and economic uncertainty, topics that are receiving a variety of media coverage.
Furthermore, our thoughts (and therefore potentially our decisions) are formed under the influence of many cognitive biases. The negativity bias, for example, explains the natural tendency to be more influenced by negative information and events when it comes to making choices. It can therefore play nasty tricks on personal finances when economic news reports market upheavals — as was the case at the beginning of August — or economic risks.
Let’s see why I suggest you direct your thoughts elsewhere.
Chase away this naturalness that comes back at a gallop!
Every time the “R-word” circulates in the media—that is, almost constantly since 2018—many make the mistake of taking refuge in guaranteed investments or believing that the end of the economic world as we have known it until now is upon us.
Recessions are part of every economic cycle. They are therefore “normal” and last on average a few months. It is true that as an investor, you must mentally prepare yourself to see your investments fluctuate downward during this stage of the cycle, especially for certain asset classes, such as small and mid-cap stocks or high-yield bonds. Facing a period of high volatility does not mean that you will not obtain returns in the long term.
Resist the temptation to over-protect your portfolio or sell when the news is negative. It’s easy to forget that stock markets aren’t exactly in sync with macroeconomic indicators. By the time a recession is official, market adjustments have already taken place. While it’s impossible to predict the future with any degree of accuracy, it’s been shown that missing just a few of the best days in the stock market will hurt returns. So if your portfolio is well-diversified, you’ll get more out of riding out the storm than you would from taking losses and missing the rally.
Seeing the glass half full
Many households are experiencing the impacts of high interest rates and the inflation that has set in after the pandemic. Central banks, in their fight against inflation, will lower these interest rates when they see that the tightening effects have been achieved. Whether or not current economic indicators, particularly in terms of employment, allow us to conclude that there is a recession, the weakness of many indicators in general would indicate that this stage is probably underway. It is therefore more possible than ever to anticipate a return to more regular key rates and a less painful financial burden in the coming years for borrowers. Your financial goals will also be easier to achieve with controlled inflation.
If you’ve been managing your finances well, you might even see the next few months as an opportunity to invest. That’s because many investors shouldn’t listen to their gut instincts. In times of recession and turbulence, it’s time to buy, not sell! And since during recessions some asset classes and sectors (healthcare, consumer) are more resilient than others, you’ll probably sleep better if your wealth is well diversified.
Don’t bury your head in the sand just yet…
Wearing rose-colored glasses all the time is also not the best option for managing your investment portfolio and assets. The main idea is to remain optimistic, with a touch of realism. For example, if you are in the process of withdrawing your assets, it is absolutely necessary to take this into account in your investment objectives and review the allocation of your investments. If you are highly risk intolerant, it is also not a bad idea to consider purchasing an annuity for a portion of your assets.
Additionally, most investors can’t afford to miss out on long-term growth in their investment portfolio, and avoiding risk reduces it. That doesn’t mean there’s nothing you can do to better weather a recession. Spending within your real means is obviously the foundation of any form of wealth, and that’s especially true if your income is unstable or influenced by the strength of the economy. This will allow you to avoid debt or reduce your mortgage, build an emergency fund if needed, or invest regularly.
Negativity bias is universal, and fortunately, it may well diminish with age. Whether you’re a young investor or nearing retirement, it’s still wise to seek professional advice, who can help you make rational decisions during emotionally charged times.