7 Reasons Not to Withdraw Investments During a Recession

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Recessions suck. But you probably knew that already. Because if you’re reading this post, your investment account is probably getting hammered and the economy may not look so hot.

So let me be the first to tell you that it will all get better. We do have to get through the recession, though. That recession is going to hit hard and your investment account value is going to go down. But it’s okay.

If you’re on the fence about whether or not to take your investment money out of the market, you’ve found the right post.

A lot of people are SCREAMING right now to “get out now” and “take your money out so you don’t lose any more.” That’s a bunch of crap and you should run as far as you can away from those people.

In this post I’m gonna’ go over a few things to help you learn about recessions and try to help you relax. We’re going to talk about:

What a recession actually is.
Whether or not we are in a recession.
Whether or not we are headed for one.
7 reasons not to withdraw investments during a recession.
Investment account loans (and how much they suck).
And how to survive a recession.

Alright…let’s get to it.!

What is a recession?

According to my other post I wrote on recessions, “A recession is a temporary period of economic decline in which industrial activity and trade decrease, and which is normally identified by a fall in the Gross Domestic Product of a country over a period of two successive quarters, or 3-month periods of financial activity.”

To put it simply: the economy sucks, people lose jobs, investments accounts are down, and a lot of people suffer. But we always get through it.

Are we in a recession today?

(This post will be updated accordingly)

As of 06/03/2022, the United States is NOT currently in a recession. However, a 2022 recession has been projected starting around July of 2022.

Are we headed for a recession?

(This post will be updated accordingly)

As of 06/03/2022, it has been projected that the United States is heading toward a recession around July of 2022. This is due to slowed economic growth and some of worst inflation numbers since the 1980s. The United States Gross Domestic Product was negative in the first quarter of 2022 and is projected to be down again in the second quarter of 2022. If this happens, we will officially be in a recession.

So with that being said, your investment account value might be down, but it’s important that you don’t take that money out of the market! Here’s why:

7 Reasons NOT to withdraw investments during a recession

1. You haven’t lost your money…YET

The first HUGE reason to NOT withdraw your money during a recession is because you haven’t actually lost any money yet. Yes, your investment account value has dropped, because the stock value has gone down somewhat, but it’s going to go back up at some point.

Example: let’s say you had $10,000 dollars in the market. If it goes down 20% percent, it will be worth $8,000 dollars. It might feel like you’ve lost money but you haven’t. The value has just gone down. If you withdraw that money, that’s when you lose the 20% percent. If you stay in, once the market gains 20% percent, you’ll be back to $10,000 dollars and hopefully more soon after.

Once you withdraw your money, that’s when you actually lose money. When your value is down and you cash out, you get whatever the value of your account is in cash. If you stay invested, you’ll eventually see your money get back to where it was and continue growing.

So don’t get tricked into cashing out because you’ve “lost money in the market.” You haven’t so chill out.

2. The market IS going back up

The real reason you shouldn’t pull all your money out of the market is…it’s inevitably going to go back up. I mean, this has been historical fact for over 100 years. This article here on Titan.com shows that the average stock market return over the last century, adjusted for inflation, is 7%.

That’s pretty crazy considering how many recessions we’ve had in the last 100 years and how insane the market can be sometimes. Since 1922, there have been 13 recessions including the Great Depression. And yet the stock market has still had a return of 7% percent. That alone should speak volumes.

So even though times might be tough, there’s nothing to indicate that things are going to get significantly worse. Recessions will happen, but keeping your money invested will see growth over the long term.

3. You’re NOT going to lose EVERYTHING

So even though a market drop during a recession might be scary, you already know that it’s going to eventually go back up. But if you’re invested in a diverse array of mutual funds, even if your investment account value went down 20-30% percent, you aren’t going to lose everything. The only way that would happen is if ALL of the hundreds of companies in your mutual funds all went bankrupt. And that’s not going to happen. But if you stay in, your account will eventually go back up.

Some people who have listened to the craziness and cashed out will often say, “I lost HALF of everything I had!” or “I lost EVERYTHING!” Not true. They stupidly cashed out at the bottom and lost a lot. What happened next probably crushed them even more.

4. The HUGE penalty

That dude that “lost everything” or “half of everything” in the market is exaggerating. But I wouldn’t be surprised if he lost close to half or more after the penalties and taxes. Because after cashing out of huge losses, you’ll have to pay early withdrawal penalties of around 10% on top of that. Plus, don’t forget about the taxes on your “income” that you just pulled out. That’s at you tax rate and probably constitutes another 15-20%.

So after it’s all said and done, this dude lost 20% in the market plus 10% in penalties and 20% in taxes. That very well cuts your money in half if you take it out during a recession or any huge market drop. DON’T be that guy. Just stay in and ride it out.

5. Millionaires continue investing

If you really want to build wealth in your life or have at least a decently-sized nest egg, you have to weather the storm. A recession and a down market can be a really tough, demotivating situation. But people who build wealth over time continue through and keep investing, no matter what happens.

This is what millionaires do. I’m not talking about ultra rich people. I’m talking about Joe Smith, your next door neighbor who works in construction and his wife Sally who’s a teacher. They’ve worked for 30 years and invested into their 401(k)s for decades now. Because of frugal life choices and consistent investing, they have a net worth of 1.1 million in their investments and their paid for home. They’ve just steadily invested, through recessions and other tough times. Be like them.

My wife and I are on this journey now and plan to be where Joe and Sally are by no later than 45 years old. And you can do this, too. But withdrawing that money during a recession can set you back from that goal of being a millionaire.

Remember, the millionaire mindset says keep investing, no matter what. For a great article on the millionaire mindset, check out this one here on money.usnews.com.

6. it can ruin your retirement

Let’s look at the overall picture of your possible withdrawal from your investment account. If you do this, you’ll face:

All of that lost money.
Not earning back your money when the market goes up.
A huge penalty.
And all of that momentum that you’ve gained from steadily investing up to this point.

All of those points are BIG. So you really need to look at the big picture and think about your financial plan. What’s your plan and your goal for retirement? Do you want a large nest egg? Are you trying to become a millionaire? Do you just want to retire with dignity and have a little bit of money always coming in to live on?

Well, if you take all your money out, you’re going to ruin that plan. If you cash out, you could possibly ruin your retirement and your entire financial future. Now I know that sounds extreme, but I want you to retire and have some money some day. I don’t want you to mess that up so I’m going extreme with this post and this message. PLEASE don’t withdraw your money. Keep it and continue investing. Plus, there’s one final reason why you should!

7. Stocks are on sale!

I know it may seem counterintuitive, but when the market is down during a recession, stocks are on sale! Whenever you put money into your investment account, you’re buying a small portion, or a few shares, of whatever is in that fund or whatever stock it is. So if you put a few hundred dollars in, depending on how much each share costs, you’re buying more and more of the stock over time. So when that stock is down, it’s on sale. You want to buy as much of it as possible. When the share price is down during a recession, each deposit every month is buying you more and more shares.

So don’t cash out, cash in!

No loans either!

One last thing: DON’T EVER take out any loans on your investment account. Even if there’s a recession and you’re struggling. Why? Because it has to be paid back (obviously you’re borrowing money from your future retirement account which is just dumb) and if you leave or get fired from your job during the recession, you have 60 days to repay it in full. If you don’t pay it back in time, you’ll owe that 10% penalty and income taxes on the funds you still owe. That sucks. Don’t EVER borrow on your retirement account.

How to survive a recession: 5 ways to bulletproof your finances

Get on a budget

So in order to bulletproof your finances in a recession, you have to do a couple of things. The first is to get on a written budget where every dollar you make has a clear mission.

With that being said, I highly recommend that you use the zero-based budget and put every single dollar down on paper. You want to have every dollar going toward something, whether it’s debt, savings, emergency fund, or something you’re spending money on. ALL of your expenses need to be in the budget or you don’t spend money on it.

If you’d like to learn more about the zero-dollar budget, check out this post: “7 Ways a Zero-Based Budget is the Best Budget for Your Money”

For tips on how to improve in your budget, check out this post: “37 Ways to Give Yourself a Raise in Your Budget (#27 is Crazy!)”

Get your debt paid off

Getting your debt paid off is one of the most important things you will ever do. Why? Because it sets you up to have a great life through good times and bad times.

It doesn’t matter if you’re in a recession or not, you need to get your debt paid off so that you can get your 3-6 month emergency fund fully funded and start investing more money. Then, when a recession hits, you won’t even hardly notice.

If you’re currently investing, I want you to TEMPORARILY pause your investments to get your debt paid off as fast as possible. Once you do that, you’ll move on to the emergency fund.

For more on how to pay off your debt, check out this post: “47 Creative Ways to Pay Off Debt This Year”

Build up an emergency fund

Next up, you need to build up your fully funded 3-6 month emergency fund. This is highly important and a crucial part of weathering a recession. After your debt gets paid, get this emergency fund completed as quick as you possibly can. After you get this done, get back to investing and building wealth.

If you have debt, you want to have a $1,000 dollar starter emergency fund ready. Check out the post below for more on that:

“How to Create a $1,000 Dollar Starter Emergency Fund in 1 month!”

If you’re out of debt, get your fully funded 3-6 month emergency fund built asap. For more info on the fully funded 3-6 month emergency fund, check out the post below:

“How to Create an Epic Emergency Fund With Any Income: 2022 Edition!”

Get a pro in your corner

After you get on a budget, get out of debt, and build your fully funded 3-6 month emergency fund, you need to continue with your investing strategy. You also need someone who can help with that and keeping you calm through the storm that you may currently be in.

That’s means you need to find yourself a professional financial advisor that can guide you into the right investments AND keep you on track with your financial goals/financial plan. My wife and I decided to go through the Dave Ramsey SmartVestor advisor tool to find someone. And we got a great financial advisor. You can find pros in your area here on the Smartvestor page at Ramseysolutions.com.

Read this post

Finally, I want you to check out my other post I wrote on this topic called: “How to Survive a Recession: 17 Tips to Bulletproof Your Finances.” This post is epic and it has a bunch of great tips on how to survive a recession if you’re currently going through one!

Keep your money!

So that’s it. I pray that you haven’t taken your money out of the market yet, because that a HUGE mistake. PLEASE don’t do this. Because you haven’t lost your money yet and the market is going to go back up. Just give it a little bit of time. Be patient. Your money will shoot back up and your retirement will be fine. Just relax and keep investing!