3 Common Investing Mistakes People Make During Recessions
- Financial planners say investors typically make rash decisions out of fear during recessions.
- Avoid investing in something trending, like crypto, if you didn’t understand it before the recession.
- Don’t sell everything out of fear without looking at your long-term goals.
An estimated 20 million Americans started investing in the stock market during the pandemic. That’s a lot of new investors who are going through a
— and possibly a
– for the first time.
It’s not an easy thing to manage, says financial planner Pamela Capalad of Brunch & Budget. “Recessions lead to a lot of potential desperation,” she says, which often means mistakes are made.
Nicole Morong, financial planner at Peterkin Financial, agrees and adds: “There is a lot of fear and people are asking, ‘Is this a good time to invest? Should I wait for the market to go down further before invest more money in?'”
If you’re a new investor wondering how to best protect yourself from what could be a recession, Capalad and Morong have some advice.
1. Avoid investing in something you don’t understand
Capalad says she’s seen investors jump into new, trendy investments during recessions, but that’s a mistake. “Avoid anything you didn’t understand before the recession,” she says.
For example, if you didn’t know how cryptocurrency worked before, now might not be the time to invest in crypto out of desperation. Capalad says, “Ultimately it comes down to: do you understand what you’re investing in? Do you understand Why you invest in crypto? Do you understand how crypto works?”
“Crypto was one of the first things to take a dip when there was a hint of a recession because crypto is currently just speculation,” she adds. “It’s really easy to follow a trend, especially when it’s going up.”
2. Now is not a good time to try day trading
Morong says, “Any investments that claim you’ll get your money back quickly, like day trading, I would avoid that. It’s a bad idea at any time.”
Day trading involves buying and selling the same securities multiple times throughout the day, hoping to capitalize on any upside in the market throughout the day. Although anyone can technically start day trading on their own, Markets Insider reported that 97% of day traders lost money over a 300-day period.
Morong adds that the promise of making quick money in a short time makes day trading alluring, but ultimately it’s not worth it.
3. Don’t sell everything when the market is down
During a recession, many investors feel a sense of panic, especially if you do it alone without any accountability from a financial planner or financial advisor. Selling everything when the market is down is usually a fear-based decision, Morong says, which can hurt long-term investors when the market corrects.
Morong adds, “It’s easy to get really, really scared, and when you don’t have anyone to brainstorm with, you look at your portfolio and think, ‘Oh my God, that’s a slow bleed! my money ! That’s down 40%!” You could be selling or making rash decisions without understanding the macro perspective.”
Instead, try a dollar-cost averaging strategy where you regularly invest the same amount of money. You’ll buy stocks at their highs, of course, but you’ll also buy them at their lows while they’re “on sale”, which evens out your costs over time.