Ramit Sethi, known for hosting Netflix’s “How To Get Rich” podcast and authoring the bestselling book “I Will Teach You To Be Rich,” has extensive experience guiding individuals through economic downturns. In a recent video, he detailed his perspective on how to navigate a severe recession, emphasizing critical actions to avoid during such times.
Investors often react instinctively to economic downturns, particularly when they observe a sharp decline in the stock market. This reaction generally involves withdrawing funds from the market and placing them in perceived “safe” options, like bank accounts. Sethi warns against this knee-jerk response, recalling the panic that erupted during previous recessions, such as in 2008 and 2020. He highlighted how individuals frequently believe that the current situation is unprecedented and that recovery is unlikely.
Reflecting on forums like the Bogleheads Forum during the financial crisis of 2008, Sethi noted that even those who typically practice sensible, long-term investing fell victim to fear at that time. Many chose to sell their investments during the downturn, locking in significant losses that impacted their financial futures.
Statistical data shows that the stock market has historically rebounded from crashes, often surpassing previous highs. However, in the face of immediate losses, this historical trend can be overlooked. Sethi emphasized that investors who succumbed to panic selling often missed the most substantial phases of recovery. He provided an illustrative example of an investor with $500,000 in the market during the 2008 crisis. Had they held their position, their investment would have nearly doubled by 2014. In contrast, those who reacted out of fear faced long-term financial hardships.
Sethi’s strategy during a recession is the opposite of selling: he would advocate for ongoing investment, utilizing dollar-cost averaging to buy more shares at lower prices. He critiqued the common behavior of fearful investors who often buy high when the market is flourishing and sell low during downturns, resulting in poor returns compared to stable index funds.
Recessions are an unavoidable aspect of the economic landscape, and while they cannot be prevented, individuals can take proactive steps to prepare. Sethi advocates for establishing a robust financial foundation—a ‘war chest’—beginning with an emergency fund. He analogized this to the mundane yet essential act of flossing: while it might not be exciting, it is crucial for financial health.
To create this emergency fund, Sethi recommends automating savings directly from paychecks, aiming for savings equivalent to six to twelve months of fixed expenses in a high-yield account. He also advises eliminating high-interest debt and diversifying investments to minimize risks during economic downturns.
Sethi further suggests diversifying income streams to counteract potential layoffs that frequently accompany recessions. He encourages viewing income as a skill that can be enhanced through negotiation for better pay and establishing additional revenue channels through side hustles or small businesses.
In conclusion, preparation is key to not only surviving the inevitable recessions but also thriving within them. By taking strategic actions now, individuals can position themselves to capitalize on market downturns, leveraging opportunities that arise while others remain fearful.
