Heading into 2023, the belief that a recession was imminent was a popular one, and according to a new report by Morningstar, many investors took steps that they hoped might mitigate the impact. Some of those actions, the research firm said, were “imprudent” and were often made without the help of a financial advisor.
Morningstar’s online survey, which was taken in December 2022, polled 948 pre-retirees. On average, the respondents were 39 years old and had $212,346 in assets and an annual salary of $112,402.
According to Morningstar, 68 percent of investors polled said they thought a recession was likely. Additionally, 48 percent of respondents were worried about how a recession would affect their finances. Thirty-four percent of those respondents thought the equity in their homes would decline; 26.5 percent said they would be unable to afford an emergency; and 10.9 percent said they would be unable to pay monthly expenses.
The survey found that 87 percent of investors had taken at least one action to prepare for the recession, with roughly half of those (48 percent) choosing to reduce monthly spending. Forty percent said they had sought additional income, 38 percent had increased their emergency savings, and 34 percent had paid down debt. About half of those surveyed had taken at least one investment-related action, including updating their financial plan (22 percent), putting more money in stocks (19 percent), and taking money out of stocks (12 percent).
According to Morningstar, about 38 percent of investors surveyed had taken what it called an “imprudent” action, which included pulling money out of bonds before maturity, withdrawing money from a retirement account, taking out a personal loan, or acquiring an additional credit card. Morningstar found that those who had made these decisions also believed that a recession was more likely, were more worried, and predicted a greater impact than those who hadn’t made these decisions.
Understanding why and how investors prepare for a recession is important, because it can provide insight into how those investors may behave during future bouts of market uncertainty. Advisors then can help investors make better decisions. “Investors may need help finding a balance between action and inaction as they look toward a recession,” Morningstar wrote.
However, advisors may face a challenge when it comes to getting investors to turn to them for advice. While most investors sought advice before they prepared for a recession, 39 percent said they most often relied on their own knowledge to make decisions.
And although financial advisors were the highest selected source of advice for investors who used them, even those investors only consulted their advisors about 30 percent of the time when preparing for a recession. For investment-related actions, investors who use advisors consulted them 62 percent of the time before touching their investments. However, they only consulted those advisors a quarter of the time before taking an “imprudent” action. Overall, financial advisors ranked low as a source of advice among all investors preparing for a recession, with only 8 percent of those surveyed turning to them for advice.
Morningstar wrote that while it may be concerning to hear that investors were preparing for a recession, and that half of them were touching their investments in the process, the fact remains that they were looking for advice, and the right sources could have helped them make better decisions.
“Financial advisors can position themselves as a trusted source for recession advice. Tapping into investor expectations can help gauge what guidance they may need, and creating tangible action plans can help clients follow through in making good decisions while satisfying their desire to act.”