Common Mistakes Made During Times of Economic Crisis

January 26, 2021
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During times of economic crisis, investors can make some simple mistakes that may cost their financial futures dearly.

The most common mistake is losing investment diversification discipline. An example of this is selling stocks that aren’t performing well in the portfolio and buying more of the stocks that are performing well. This will increase risk to fewer stocks thus increasing the risk to the overall portfolio. Even though it may be tempting to sell all your losers and chase the shiny objects, abandoning your diversification could lead to a disastrous outcome.

The second common mistake involves losing spending discipline and making emotional purchases or simply spending more money on a monthly basis during a time when the portfolio may not be able to keep up with that spending. It’s very important during times of market volatility and economic uncertainty to at a minimum maintain your spending discipline and ideally you may even want to reduce your spending during these times to increase your reserves and build a cushion in case the economic conditions worsen. A general financial planning rule is to limit withdrawals to 3-4% of the portfolio total annually We recommend withdrawing less if possible during times of economic stress.

So in conclusion, we recommend maintaining your investment diversification discipline even when it’s tempting to chase the shiny object of the moment. Also, keep necessary portfolio withdrawals to 3-4% of your portfolio value annually, even less if possible during times of economic stress. And always consult with your advisor before making any large purchases to make sure it doesn’t throw your long term goals off track.