Global markets are crashing, the price of oil is plummeting and even entire countries are in lockdown. The odds of a recession due to the new coronavirus outbreak are rising every day.

A question I’m often asked as a finance professor and a CFA charterholder is what should people do with their money when the economy is slowing or in a recession, which typically causes riskier assets like stocks to decline. Fear causes many people to run for the hills.

But the short answer, for most investors, is the exact opposite: Stick to your long-term plan and ignore day-to-day market fluctuations, however frightening they may be. Don’t take my word for it. The tried and true approach of passive investing is backed up by a lot of evidence.

AP Photo/Andrew Medichini

Most of us have money at risk

While we usually associate investing with hotshot Wall Street investors and hedge funds, the truth is most of us have a stake in financial markets and their ups and downs. About half of American families own stocks either directly or through institutional investment vehicles like mutual funds.

Most of the invested wealth average Americans hold is managed by professional investors who look after it for us. But the continued growth of defined contribution plans like 401(k)s – which require people to make choices about where to put their money – means their financial security increasingly depends on their own investment decisions.

Unfortunately, most people are not good investors. Individual investors who trade stocks underperform the market – and passive investors – by a wide margin. The more they trade, the worse they do.

One reason is that the pain of losses is about twice as strong as the pleasure of gains, which leads people to act in counterproductive ways. When faced with a threatening situation, our instinctive response is often to run or fight. But, like trying to outrun a bear, exiting the market after suffering losses is not a good idea. It often results in selling at low prices and buying higher later, once the market stress eases.

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The good news is you don’t need a Ph.D. in finance to achieve your investment goals. All you need to do is follow some simple guidelines, backed by evidence and hard-earned market wisdom.

Investing checklist

First of all, don’t make any rash moves because of the growing chatter about recession or any wild gyrations on Wall Street.

If you have a solid investment plan in place, stick to it and ignore the noise. For everyone else, it’s worth going through the following checklist to help ensure you’re ready for any storm on the horizon.

Always keep in mind your overall investment plan and focus on the long-term goals of your portfolio. Many market declines that were scary in real time look like small blips on a long-term chart.

Turbulence ahead

In the long run, this approach is likely to produce better results than trying to beat the market – which even pros tend to have a hard time doing.

Billionaire investor Warren Buffett demonstrated this by easily winning a bet that a simple S&P 500 index fund could beat a portfolio of hedge funds – supposedly the savviest investors out there, at least judging by the high fees they charge.

In the words of legendary investor Benjamin Graham: “The investor’s chief problem and even his worst enemy is likely to be himself.” Graham, who mentored Buffett, meant that instead of making rational decisions, many investors let their emotions run wild. They buy and sell when their gut – rather than their head – tells them to.

Trying to outsmart the market is akin to gambling and it doesn’t work any better than playing a lottery. Passive investing is admittedly boring but is a much better bet long-term.

But if you follow these guidelines and fasten your seat belt, you’ll be able to ride out the current turbulence.

This is an update of an article originally published on Aug. 21, 2019.

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Alexander Kurov does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.





