You will be able to sort common downturn reactions into helpful and harmful ones.
In the first months of the pandemic, Kumar's group chat was full of advice. One friend had sold all his shares "before it gets worse". Another had stopped paying his life insurance premiums to save cash. A third was emptying his savings to pay down his mortgage early, because debt felt dangerous. Kumar's wife, Shalini, a teacher, asked him the obvious question: which of these was right? Kumar did not know, and that was the problem. 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 and cost you for years. This lesson sorts them, so you can make the choice now rather than in the middle of the next one.
The first helpful move is 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, showed. Cash you can reach within days is what carries you through a gap in income without selling anything or borrowing at bad terms. If your buffer was sized for ordinary emergencies, a downturn is when you top it up, ideally starting before one arrives. Module 5 shows how to size a buffer for losing your job.
The second is delaying optional big commitments. A new car, a renovation, an upgrade to a bigger flat, a large wedding budget: any of these can wait a few months while you see how your income holds up, and waiting costs you very little. Once you have signed, the commitment is fixed even if your income is not.
The third is keeping your insurance in force. Hospitalisation, term life, critical illness and disability income cover protect you against the events that would turn a hard year into a disaster. Lesson 1.2 of The Singapore personal finance system, Protection comes before investing, explains why protection is the base of the whole plan. That base matters more, not less, when money is tight.
Selling long-term investments after they have fallen is the most common harmful move. Here is an example with made-up figures. Kumar's friend held S$40,000 of diversified shares. In the downturn they fell 30%, to S$28,000. He sold to "stop the bleeding", turning a paper fall into a realised loss of S$12,000. If the market later recovered to its earlier level, a holder would be back at S$40,000 while he sat in cash, often waiting for a "safe" time to get back in that never seems to arrive. No one knows how long a recovery will take, but selling at the low guarantees the loss.
The exception is money you will need soon. If those shares were meant to pay for a flat next year, they should not have been in shares in the first place, and a downturn exposes that mismatch. That is a planning error to fix, ideally before a fall.
Stopping protection premiums to save cash is the second harmful move. If a policy lapses, the cover ends. Buying new cover later may cost much more, because you are older, and any health conditions you developed in the meantime may be excluded or make you uninsurable. A few hundred dollars saved this year can cost a family its safety net.
Debt deserves care, because the right move 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.
But neither should drain your cash buffer. Once money goes into the mortgage it is very hard to get back out, and a bank is least likely to lend it back to you when you have just lost your job. Kumar's third friend, who emptied his savings to prepay his loan, had a smaller debt and almost no cash, which is the worst position to be in if the income stops. The buffer comes first, and only money beyond it is a candidate for paying down debt.
Remember also from lesson 4.3 that rates often fall in a recession. A fixed rate locked at the start of a downturn may turn out higher than the floating rate a year later. You are paying for certainty, and it is worth knowing that is what you are buying.
The common thread is timing. Every helpful move above is easier to make before a downturn. Every harmful one looks sensible during a fall, because fear makes selling feel like safety and cutting premiums feel like prudence.
That is why the next lesson asks you to write your 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 and mark each as helpful or harmful, with a reason.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).