Sort common reactions to a downturn into ones that help and ones that do harm.
In the first months of the pandemic, Kumar's group chat filled with conflicting advice. One friend sold all his shares "before it gets worse." Another stopped paying his life insurance premiums to save cash. A third emptied his savings to pay down his mortgage early, because debt felt dangerous. Kumar's wife, Shalini, a teacher, asked him which of them was right. He did not know, and he was trying to decide while frightened.
A downturn produces a predictable set of reactions. Some protect a household. Others feel safe in the moment but cost you for years. Because the reactions are predictable, you can sort them now and make your choices while you are calm, instead of in the middle of the next downturn.
The first helpful move is to build a larger cash buffer. In a downturn, the chance of losing income goes up, as Lesson 4.3, "What actually changes for households in a recession", sets out. A cash buffer is cash you can reach within days. It carries your household through an income gap without selling assets or borrowing on bad terms. If your buffer is sized for ordinary emergencies, top it up for a downturn. Ideally, start before the downturn arrives. Module 5 shows how to size a buffer for losing your job.
The second is to delay optional big commitments, such as a new car, a renovation, an upgrade to a bigger flat or a large wedding budget. Waiting a few months to see how your income holds up costs very little. Once you sign, the commitment is fixed, even if your income is not.
The third is to keep your insurance in force. That includes hospitalisation, term life, critical illness and disability income cover. These protect you against the events that would turn a hard year into a disaster. Protection is the base of the whole financial plan, and it matters more when money is tight. Lesson 1.2 of the course The Singapore personal finance system, "Protection comes before investing", explains why.
The most common harmful move is the one Kumar's first friend made. Say he held S$40,000 of diversified shares (these are example figures). During the downturn they fell 30%, to S$28,000. He sold to "stop the bleeding." Until he sold, the drop was a fall on paper. Selling turned it into a realised loss of S$12,000. If the market recovers to its earlier level, someone who held on is back at S$40,000. Meanwhile he sits in cash, waiting for a "safe" time to re-enter, and for many sellers that time never seems to arrive. No one knows how long a recovery will take, but selling at the low guarantees the loss.
There is one exception, which is money you need soon. If the shares were meant to pay for a flat next year, that money should not have been in shares at all. A downturn exposes the mismatch. The mistake was made at the planning stage, and the best time to fix it is before a fall.
The second harmful move is the one Kumar's second friend made: he stopped paying his life insurance premiums to save cash. When premiums stop, the policy can lapse, which means the cover ends. If he wants cover again later, it may cost much more because he is older. Any health condition he develops in the meantime may be excluded, or may make him uninsurable. A few hundred dollars saved in one year can cost a family its safety net.
The third friend's choice is harder to judge, because the right move on debt depends on your job risk. If your job is at risk, the size of your monthly commitments matters a lot. Some households lock a fixed rate when they can, so the instalment stays predictable for the fixed period. Others pay down part of a floating rate loan to shrink the instalment. Both can make a smaller income easier to live on.
Neither should drain your cash buffer. Money you put into a mortgage is very hard to get back out. A bank is least likely to lend it back to you just after you have lost your job. Kumar's friend ended up with a smaller debt and almost no cash, which is the worst position to be in if income stops. The rule is that the buffer comes first. Only money beyond the buffer is a candidate for paying down debt.
If you are thinking of fixing a rate, remember that rates often fall in a recession, which Lesson 4.3 also covers. A fixed rate locked at the start of a downturn may end up higher than the floating rate a year later. When you lock a rate, you are paying for certainty, and you should know that is what you are buying.
The common thread is timing. Every helpful move above is easier to make before a downturn starts. Every harmful move looks sensible during a fall, because fear makes selling feel like safety and makes cutting premiums feel like prudence. In practice, the moves are:
top up your cash buffer, ideally before a downturn starts delay optional big commitments until your income proves stable keep all your protection policies in force hold long-term investments through a fall, and separately make sure money you need soon is not in shares if your job risk is high, consider making monthly debt commitments smaller or more predictable, using only money beyond your buffer make these decisions while you are calm
The next lesson asks you to write your downturn plan down while things are calm. To prepare, think back to the last downturn you lived through, and the money decisions you made or watched people around you make.
Write down three things you did, or saw others do, in the last downturn. Mark each one helpful or harmful and give a reason.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).