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The Short Answer

Worried About a Recession Coming? You’re Not Alone.

Three tips for coping with the recession threat.

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It’s nearly impossible to turn on the news without seeing someone declare a recession is nigh, but investors don’t even need to listen to prognosticators to see the signs for themselves.

Last year, the markets exhibited volatility that had many reeling. In the past few months, there have been numerous high-profile layoffs in the technology sector—something that previously seemed unfathomable in the rapidly growing industry. And just this month, markets and investors were rocked by both the emergence of a banking scare and the Fed announcing that it expected to raise interest rates higher and for longer than expected to get inflation in check.

Unfortunately, discussing money tends to be taboo, which is problematic under ordinary circumstances, as it can prevent honest and productive conversations about money at work and at home. However, when there is the threat of a recession, this taboo can leave anxious investors feeling isolated and asking the question, “Am I alone?”

Recent research from Morningstar Behavioral Insights helps us peek behind the curtain to understand how other everyday investors are coping with the threat of recession. We find that it is common for investors to feel both worried about a recession and compelled to prepare for one, which allows us to shift the focus from wondering whether we are alone to how we can make the best decisions in the face of recession threat.

If You’re Bracing for Impact, You’re Not Alone

We surveyed 949 preretirement U.S. investors and found it’s not just experts who are predicting a recession. Our study found that 68% of investors think a recession happening in 2023 is likely to nearly certain. In fact, less than 1% of respondents felt there was almost no chance that a recession would happen, compared with 11.9% who felt it is almost certain.

We also asked investors several questions to gauge how worried they were regarding a recession’s impact on their financial situation. We found a near-even split between those who were worried (48.3%) and those who were not (43.4%), with a small number who could not be classified as either (8.3%).

Additionally, we asked people what they expected to happen to them if a recession occurred. Investors most commonly expected to see news about it (91%), to lose value in their investment portfolios (74%), and to have to put off big-ticket purchases (62%). This suggests that most people expect a recession to affect their investments and household finances on some level.

Altogether, most investors expect a recession, are worried about its impact on their financial situation, and expect some financial pain associated with a recession.

If You Feel the Need to Act, You’re Not Alone

Our study showed most investors are not just sitting on their hands in the face of recession threat: 87% of investors took some action between June and December 2022 to prepare for a recession.

For example, about half of investors reported having reduced their monthly spending to prepare for a recession. Investors also reported seeking an additional income stream (40%), increasing their emergency savings (38%), and paying down debt (34%).

If you read a lot about personal finance, you may be aware that a common recommendation is to stay the course with your investments during market downturns to avoid costly timing errors. However, about half of investors have taken some investment-related action to prepare for a recession such as updating their financial plan (22%), investing money in stocks (19%), and divesting in stocks (13%).

Overall, we see that most investors feel compelled to prepare for a recession, but the actions people are taking are varied, from building in wiggle room to adjusting their investments.

You’re Not Alone, But Act in Your Best Interest

Our survey shows that if you’re worried about a recession, you likely know someone else who is as well. You’re not alone. In fact, it makes sense to be uncomfortable when faced with a recession, even when we expect markets to recover in the long run; no one wants to see the balance of their portfolio go down or to put off that big purchase they’ve been working toward.

We’ve also shown that it’s completely normal to want to act—many already have. But we think it is important to act within reason. As always, you should act in your best interest and not be drawn to following the herd, which can lead to undesirable outcomes. Here are a few tips:

  • Seek out trusted sources of advice. These days, there is no shortage of good advice, but there is also no shortage of bad advice. When seeking advice on the internet, turn to sources that provide well-researched information and puts investor outcomes first. You might also consider breaking that money taboo and talking to friends and family members whose financial habits you admire (but be wary of the urge to compete). Finally, you may consider talking to a financial advisor. Find a fiduciary who is legally required to act in your best interests.
  • Make it easy to follow through. Avoid feeling overwhelmed by making it simple to execute your plan. For example, if you want to beef up your emergency savings, you might consider setting up automatic bank deposits to your savings account every time you get paid. That way, instead of having to make the decision to save some money each pay period, you make the decision once and let the savings accrue without further action. If you want to invest more but find the prospect of deciding how to invest your money daunting, consider outsourcing those decisions to a financial advisor or a robo-advisor.
  • Stay the course. If things go sideways, it can be hard to stick to a ready-made plan. Making it difficult to deviate from the plan can save you from yourself. One way to create friction is to set up a cooling-off period. To do so, you might decide that if you suddenly want to cash out some investments that are not doing well, you won’t let yourself act on this decision for three days. You may find that getting distance from the heat of a bad day changes your mind. Another way to create friction is to make yourself reckon with the high costs associated with making trades before taking any action.

We collected responses from 949 pre-retirement investors who live in the United States. The survey was distributed in December 2022 using the Prolific online research platform.

Investors were defined as individuals who reported they owned at least one of the following items: employee-provided retirement account, individual retirement account, mutual funds, stocks, exchange-traded funds, money market funds, brokerage account, HSA, annuities, or cryptocurrency. On average, investors were 39 years old and reported having $212,346 (median: $50,00) in assets and an annual salary of $112,402 (median: $90,000).