Everyone I know is worried about the recession coming. Are you?
The stock market has been on the rise since around 2010. And here we are, even after a pandemic, still worried.
If you’re wondering, is a recession coming up and should I be worried? Learn my four psychological hacks to win during a recession. I’ll show you how to build wealth in bad times.
- What Happens in a Recession?
- Is a Recession Coming?
- Why Do People Screw Up During a Recession? Fear
- Psychological Hack #1: Redefine the Recession Definition
- Psychological Hack #2: Escape the Herd Mentality
- Psychological Hack #3: Invest for Decades at a Time
- Psychological Hack #4: Turn Fear into Greed
- How to Conquer the Recession: Four Psychological Hacks to Win
- What’s Next?
What Happens in a Recession?
When you’re in the middle of a recession, it feels like the world had ended and there is no bottom to how bad things could get.
In 2008, I bought a few thousand dollar shares of Lehman Brothers, the premier investment bank at the time. And within a few weeks, Lehman Brothers collapsed and my money went to $0: *poof* gone!
Then, half of the senior executives at my company got laid off, and six months later, I was laid off too. I was 25 years old, totally clueless and scared out of my mind.
Of course, everything turned out alright in the end. And it always does.
But nothing felt fine back in 2008, and today, I am scared that I’ll feel that way again. And this time, I have more to lose.
Is a Recession Coming?
Oh, it’s coming. The question is when. Regardless of when, just know that you or I will very unlikely guess it right.
People get paid millions of dollars to predict the recession and most of them get it wrong. If you try to time the market, you’ll lose.
While you can’t predict when a recession is coming, you can still plan for it by anticipating how you will behave and behaving to win.
If you want to learn more about what a recession is, check out my complete analysis of why the stock market crashes.
Why Do People Screw Up During a Recession? Fear
A recession itself will not destroy your money. Your panic is the reason why you will lose big during a recession.
Your reaction toward the recession due to the fear can end up derailing your wealth significantly.
It’s not the recession but the actions you take under stress and fear.
It’s not just you, it’s our DNA. We are hardcoded with the fight or flight response when we’re under attack.
When a recession hits, people realize they can’t fight the market, so they flee instead, taking all of their money out of the market and never investing again.
We can’t control what happens in a recession or when it can happen.
But we can control our evolutionary, fight or flight response.
And that is the #1 wealth preservation plan you need to learn right now. Let’s go into details about how you can behave to win.
Psychological Hack #1: Redefine the Recession Definition
Do you know people who tend to use the word “always” and “never” a lot? “The world is always bad, and I never get what I want.”
Using extreme words like “always” and “never” not only exaggerates a situation, making it worse than it really is, these extreme words completely distort reality.
How does this apply recessions? We often use words to make recessions sound a lot worse and in fact, inaccurate from what recessions are.
What is a recession? It’s a period of temporary economic decline during which things measured by the GDP go down for at least 6 months.
Note that the official definition of a recession has the word “temporary” in it. Recessions are always temporary because when prices go down, they always go up eventually.
But people think of recessions as stock market crashes.
Is It Really a Stock Market Crash?
What does the word “crash” mean to you? A crash means a total collapse, a complete loss. Crash implies total damage.
A crash is irreversibly bad, and it should hurt a lot. A crash might even kill you, like how a plane crash would.
If we define a crash that way, then, of course, we’re going to panic during recessions. It sounds terrible!
Except that’s totally not reality. In fact, by this definition, we’ve never had a stock market crash in the history of the United States because the stock market has always bounced back since its inception in the 1920s.
If people had just kept their money in the stock market and kept investing, they would’ve not only survived but thrived big time through every recession that ever happened to us.
Let’s adjust our words to match reality and recalibrate our perception of what a recession really is: a recession is not a crash, it is just a temporary decrease that’s always bounced back.
A Recession is a Stock Market Correction
If you don’t call it a crash, what do you call it? I recommend that you call it a correction. That’s right, a stock market correction.
Repeat after me,
“I’m worried about a stock correction.”
Doesn’t that sound less scary already?
By changing this one word, you reduce panic, align with reality, and set yourself up for behaving rationally.
A correction is also rebirth, which is an opportunity. A correction turns recession from panic to optimism: recession is a great time to invest!
Again, we’re not changing facts, we are simply changing perception. By simply calling it a correction instead of a crash, we stop exaggerating and start seeing opportunities, which is truly what a recession is according to Warren Buffett.
One more thing: the truth is women and people of color are particularly vulnerable to fear. We have more to lose and we don’t get second chances.
And because of this, I think women and minorities are more stuck in the mindset of “stock market crash” than wealthy white men.
So I want to encourage everyone, especially the most vulnerable, to stop using the word crash and start seeing opportunities during a correction!
Psychological Hack #2: Escape the Herd Mentality
Humans have a natural bias toward overconfidence.
It means when things are going well and we are literally incapable of imagining how we might feel when things are bad.
To fix the bias of overconfidence, set up an emergency fund.
If you have 1 to 2 years’ worth of cash on hand, you can afford to do what I am about to recommend without worrying about not having a roof over your head.
Do the Opposite of the Herd
When the stock market corrects itself, your families, best friends, and people you respect are going to panic.
They’ll talk about this crash as if it’s never happened before and as if it’ll never be the same again.
Smart people you look up to on the TV, in newspapers, and all over will behave like the herd: they’ll sell their stocks in fear. And you’ll hear anecdotal, unproven stories of people boasting about how they’ve already sold all of their stocks and that’s why they didn’t get hurt.
Don’t give in to the peer pressure. Don’t sell.
The herd mentality thrives during a panic and selling is the #1 reason why people never recover from recessions.
The market did not lose them money, they screwed themselves over by buying high and selling low.
It might seem silly now why anyone would behave that way.
But recessions are scary, and people do crazy things when the world no longer makes any sense to them.
Psychological Hack #3: Invest for Decades at a Time
What should you do when a recession hits?
Let’s talk about what you shouldn’t do first. You shouldn’t be obsessively tracking the stock market on a day-to-day basis.
In fact, don’t look at your money for a full year because when the market is going down, a drop on a day can feel like an eternity of agony.
You should look at your portfolio in increments of 10 years and balance your risks in increments of 10 years. And then just go live your life.
You can afford to do this because you already have an emergency fund, so you’re not short on cash. And as long as you balance your portfolio according to your age and risk, you can handle a market correction.
Keep doing what you’re doing. If you’re putting money into the stock market, keep putting money into the stock market even as the world is crashing around you.
In fact, you can even increase your investment when the recession is at its worst. A recession presents unprecedented opportunities for you to buy stocks at a bargain.
You can invest with Vanguard. I love Vanguard so much I wrote a whole piece on it: Best Vanguard Funds For Every Stage of Your Life.
One of my favorite mutual funds for those who are risk-averse is the Vanguard Wellington.
My parents have a lot of this in their 401K and IRA. It’s perfect for someone who doesn’t want to see their money drop too much during a recession but still want growth: Vanguard Wellington Fund (VWELX): Retirees’ Favorite. Check it out.
Psychological Hack #4: Turn Fear into Greed
Fear is one of the most powerful and motivating emotions, and it’s not a bad emotion. If you’re not scared, you won’t be as successful or as strong.
So accept fear. And know that fear is a primal response you’ve acquired from your ancestors when an animal is chasing you and about to eat you. alive.
The fear you experience about recessions is not an actual life or death threat.
So when you see everybody around you scared senseless during a recession and you’re thinking about panicking, know that this is all in your head.
So what should you do instead? Instead of feeling scared, get greedy. Warren Buffett has famously said “the more the market goes down the more I like to buy”
Buffett is so successful because he doesn’t act based on fear. He acts based on opportunity. Instead of thinking “Oh God I’m losing everything”, you should think “the stocks are so attractively priced right now, this is a great opportunity for me to put more of my money into it.”
It takes a mental shift and a lot of emotional control to master the pressure to act small and instead, to seize the opportunity and win big.
Doing this will make you a very rich woman or man by retirement.
How to Conquer the Recession: Four Psychological Hacks to Win
Psychological Hack #1: Redefine the Recession
- Recession is temporary
- Stop thinking in extreme terms. It’s never a stock market crash.
- Call it a stock market correction.
Psychological Hack #2: Escape the Herd Mentality
- Save 1 to 2 years worth of cash upfront.
- Do not follow what everyone else is doing during a recession. Resist the urge to sell your stocks during a recession.
Psychological Hack #3: Think Recessions in Ten Year Increments
- Don’t look at your stock portfolio during a recession, it’ll only make matters worse.
- Instead, balance your risk before a recession happens, and balance it such that you can stomach the risk!
- Think in ten-year increments – you won’t need to withdraw for another ten years, so let it be and don’t touch it.
Psychological Hack #4: Turn the Fear of Recession into Greed
- Instead of retrieving and feeling scared, think of recessions as unprecedented opportunities.
- When the entire market is tanking, consider buying.
- When everyone else is selling off, consider increasing your investments.
Winning isn’t for everyone. But if you cultivate the right habits and reconsider how you should approach and plan for recessions, you will come out with way more money than you can ever imagine.
Looking for index funds to invest your money? Read Best Vanguard Funds for Every Stage of Your Life.
Scared for your stock investments and wondering when you should pull out? Read Will the Stock Market Crash? Complete Analysis
Retiring soon? Learn about the go-to fund I recommend to my parents: Vanguard Wellington Fund (VWELX)