How to Avoid Financial Panic When a Recession Threatens

More Americans are worried about a recession with record inflation and a downturn in the stock market. If you’re among them, here are a few steps you can take that could help you sleep better at night.

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(Image credit: Getty Images)

It’s OK to worry about a potential recession. The unknown is scary. But, don’t let those emotions lead you into financial panic.

You are not the only one feeling anxious – more Americans are worried about a looming recession than in years. Two-thirds of Americans (66%) say they are expecting a major recession right around the corner, according to the 2022 Q2 Quarterly Market Perceptions Study (opens in new tab)* from Allianz Life Insurance Company of North America. At this time last year, fewer than half (48%) expressed concern about a recession.

The anxiety about a potential economic downturn makes sense. Recessions are times of significant decline in general economic activity that are part of the regular economic cycle. What’s tough is that we often don’t realize we’re in one until it’s in full swing. And, we never know how long the decline will last or how low our investments will fall.

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Every recession is different. The 2008 housing crisis was completely different from the 2020 COVID-19 recession. If we are in or falling into a recession now, it will be unique too, with the stock market dropping into bear market territory and inflation at historic levels, but unemployment, so far, still historically low. (opens in new tab)

Many people are looking for guidance on how to prepare for or navigate another recession, especially during this time of record inflation. Changing your spending habits could help in the short term. The cost of goods has increased, so trimming expenses where you can would help your bottom line right now. But, fewer meals out and more at home, or purchasing generic rather than brand name products isn’t going to set you up for long-term financial security

While our focus often shifts to short-term needs during times of economic decline, it’s important to keep a long-term view of your finances, particularly when it comes to things like retirement planning. Take measured steps now to help create a secure financial strategy for your retirement, even when – or perhaps especially when – your retirement may be years away.

Here are a few ways to keep your worry about a recession from leading to panic.

Review your financial strategy

When financial factors outside of your control start to play with your emotions, it is time to revisit your written financial plan – and stick to it. Ideally, you should have a written, detailed financial plan to consult that was created with the support of a financial professional that provides for contingencies during stressful times like these. If you do not, the best time to create one is now.

A good financial plan will have addressed potential risks to a retirement strategy like inflation, a market downturn or a recession. Reminding yourself of the work you did to create that plan will help you maintain reassurance in uncertain times.

You may review your financial plan and realize that it might not work for you anymore. Maybe your financial situation has shifted with a promotion at work or the kids have graduated from college. Or your tolerance for risk has changed. As people get closer to retirement, they typically move to financial strategies with less risk. If that is the case, consult with a financial professional on how to rework your strategies for your current financial situation and goals. Most importantly talk to them before making any investment changes.

Stay the course

If you intended to or are currently participating in your employer-sponsored 401(k) account, keep doing that. Don’t bail on the market. While the market may feel risky, simply not investing and keeping cash on the sidelines is risky too and almost a guaranteed way to lose purchasing power due to rising cost of living with today’s record inflation.

Money left out of the market, even in times of volatility, isn’t working for you. While money kept in cash isn’t subject to potential market drops, it will also miss out on opportunities for gains when the market recovers. Trying to time exactly when the market will rebound is a method destined to fail.

Yet, people are increasingly saying they are keeping cash on the sidelines. In the latest Allianz study, 65% of respondents said they are keeping more money than they should out of the market because of worries about loss. This is up from 57% in 2021 and 54% in Q4 of 2020. I’ve often heard it said that the market is the only place where no one wants to buy when prices are low – only when they are high – and that mentality can hinder your chances for a comfortable financial future.

At the same time, it’s important to remember to set aside some cash for an emergency or rainy-day fund. A substantial emergency fund will provide a crucial cushion for unanticipated expenses, job loss or other costs. A good goal is to have six months’ worth of expenses saved in cash.

Protecting assets from market risks

Mitigating risk is part of a strong financial strategy. If you’re like most people, you’re looking to hedge your bets and protect yourself from market risks. The majority of study respondents (60%) said they think it is important to have some retirement savings protected from loss.

There is no sure thing, but there are ways to lessen your exposure to risk. This is especially important as you prepare for and enter into retirement. This could be a good time to add a guaranteed source of lifetime income like an annuity to your portfolio. If you are more concerned about helping to reduce risks there are investments like buffered exchanged traded funds (ETF), fixed index annuities (FIA), and registered index linked annuities (RIA) that provide some mitigation against loss while also some potential growth.

Your retirement strategy is about the long term

Keep the big picture and long-term view in mind. It’s not about timing the market, it is about time in the market. Balances in your retirement investment accounts may be lower than they were earlier this year. But, you haven’t actually lost any money. You only recognize the loss if you sell and cash out.

Historically, the market has always rebounded, and while past performance is no guarantee of future performance, it can provide some context for future actions. If you keep investing now, you may be investing in the market at a lower initial investment and possibly take advantage of the gains when the market improves.

Talk with a financial professional

I cannot stress this enough – so I will repeat myself. If you are thinking about changing your financial strategy, consult a financial professional first. The guidance of a financial professional can help you avoid making rash, uninformed adjustments to your portfolio that could sacrifice your retirement security.

*Allianz Life conducted an online survey, the 2022 Q2 Quarterly Market Perceptions Study in June 2022 with a nationally representative sample of 1,004 Respondents age 18+.

Allianz Life Insurance Company of North America does not provide financial planning services.

Guarantees are backed by the financial strength and claims-paying ability of Allianz Life Insurance Company of North America (Allianz). Variable annuity guarantees do not apply to the performance of the variable subaccounts, which will fluctuate with market conditions.

Products are issued by Allianz Life Insurance Company of North America (Allianz) and distributed by its affiliate, Allianz Life Financial Services, LLC, member FINRA, 5701 Golden Hills Drive, Minneapolis, MN 55416-1297. 800.542.5427

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Kelly LaVigne, J.D.
Vice President, Advanced Markets, Allianz Life

Kelly LaVigne is vice president of advanced markets for Allianz Life Insurance Co. (opens in new tab), where he is responsible for the development of programs that assist financial professionals in serving clients with retirement, estate planning and tax-related strategies.