Common Mistakes Made During a Recession

If the current state of the economy and market volatility has taught any lessons, it’s that emotion plays a big part in the numbers.

Poor financial decisions are often driven by emotions such as fear or anxiety over market movements, and now that we’re officially in a recession after almost 30 years without one, we can expect many to make common mistakes.

Read on to find out the most common mistakes made during a recession.

1. No longer contributing to retirement plans. Part of the Government’s stimulus measures included allowing those experiencing financial difficulty to access up to $10,000 of their super, and a second application to withdraw up to $10,000. Many may have received unsolicited advice from friends or family suggesting that withdrawing one’s superannuation was a safer bet than having it remain, ‘just in case’. When approaching a long term investment strategy such as superannuation, it’s important to consider what the overall strategy and goal is*. Some may have chosen for their super to invest more conservatively. Some may not have considered the tax-effective environment which super is invested in, and how long it will take to earn those retirement savings back. The impact of withdrawing from superannuation may be the difference between living a comfortable and adequate retirement. When numbers begin to return to normal, do you have a return strategy?
2. Changing investments to cash. When markets first began showing signs of volatility as a direct result of COVID-19, a sense of panic resulted; with many selling out of their shares. By choosing to sell at a low, it’s possible to miss out on the reward when the market bounces back. If concerned, a discussion with a financial planner may provide clarity on what decisions will result in a better outcome such as holding tight, re-evaluating the investment strategy or investing more conservatively**.
3. Focusing on short-term returns and performance. It’s easy to get stuck in the trap of focusing on quarterly or monthly statements and not on overall performance. Many may have seen hefty drops in March and April however when looking at overall performance since the time of investing, it may not have been so bad.
4. Borrowing to invest and aggressive debt repayment. Borrowing to invest in shares is a well-known strategy. However just because it’s well known, it may not be the best strategy for everyone. This is where professional advice can assist in plotting out the best strategy for the individual. Repaying debt quickly may be a goal outside of a recession, but it may not be the correct choice when finances are uncertain. Once a loan repayment has been made, that cash can no longer be used in other areas.  It is best to seek advice before taking action, or no action for that matter.
5. Making financial decisions quickly without consideration. Market downturns can be a worrying time, especially for those who haven’t experienced one before. Many people may make rash decisions without consideration on how they may affect them long term. The key here is to make sure to remember there have been many economic downturns throughout history where the market has returned to normal if not better. Read our article here on historical downturns in the last 90 years. And although past performance is not an indication of future financial market performance, taking strategic action (with advice from a financial professional) during uncertain times, may create opportunities for future wealth growth.

7 Steps to Financial Recovery Post-COVID

With the possibility of eased restrictions on the horizon, now is the best time to prepare for financial resilience post COVID.

Don’t wait for restrictions to ease to take action, that will be too late!

Watch this interactive question and answer webinar where we will hear Modoras Melbourne Directors Ian Fox and Alf Couceiro, share the 7 critical steps to success coming out of lockdown.

WATCH RECORDING

Modoras is committed to assisting in making conscious, well thought out financial decisions. Contact us on 1300 888 803 or click here to book a catch up with a Modoras Professional.

Below are some articles that may interest you:

• Is the Economy Stuffed? Live Webinar Recording
• Accessing Super Early: What Your Future Self Would Tell You
• What Does the Recession Mean for Me?
• How to Apply for Early Super Access
• Are You Investing for Income or Capital Growth?
• You Can Be Young Without Money, But You Can’t Be Old Without It

* https://www.smh.com.au/money/super-and-retirement/don-t-panic-super-is-a-long-term-game-experts-say-20200313-p549qm.html

** https://www.finder.com.au/prepare-your-finances-recession

IMPORTANT INFORMATION: This blog has been prepared by Modoras Pty. Ltd. ABN 86 068 034 908 an Australian Financial Services and Credit Licences (Number 233209). The information and opinions contained in this presentation is general information only and is not intended to represent specific personal advice (Accounting, taxation, financial, insurance or credit). No individuals’ personal circumstances have been taken into consideration for the preparation of this material. Any individual making any investment or borrowing decisions should make their own assessment taking into account their own particular circumstances. The information and opinions herein do not constitute any recommendation to borrow funds or purchase, sell or hold any particular investment. Modoras Pty Ltd recommends that no financial product or financial service be acquired or disposed of, credit contract entered into or financial strategy adopted without you first obtaining professional personal financial advice suitable and appropriate to your own personal needs, objectives, goals and circumstances. Information, forecasts and opinions contained in this blog may change without notice. Modoras Pty. Ltd. does not guarantee the accuracy of the information at any particular time. Although care has been exercised in compiling the information contained within, Modoras Pty. Ltd. does not warrant that the articles within are free from errors, inaccuracies or omissions. To the extent permissible by law, neither Modoras Pty. Ltd. nor its employees, representatives or agents (including associated and affiliated companies) accept liability for loss or damages incurred as a result of a person acting in reliance of this publication.