Psychology of Investing through a recession

Psychology plays a big role into how investors see through a bear market. Even the most staunch buy and hold investors can get wiped out during the harshest recessions. These are investors who have help regular 10-20% market downs and bought the dip into a bull market.

Asset allocation and the ability to stick to it is off course very important. Often times investors coin asset allocations during bull markets and heavily "overestimate" the amount of real risk they can tolerate. Overestimation is a harsh word here. Bull markets are characterized by good times, growing earnings, growing incomes, new cars, new houses, etc. Hence, recency bias can trick an investors brain and the investor tend to forget what bad times look like. The probability of bad things happening tend to be low. Also generally investors see peak asset prices towards the end of a bull market, fuelling higher confidence, retirement dreams, etc.  Once a recession emerges, several risk factors become more probable. Often times they are correlated and become more likely to happen. An investor generally keeps 6 months expenditure as emergency funds. Let me underline some risk factors that can blow up the emergency funds during a recession

• job loss
• health insurance loss
• stock market decline and scare of contagion into bond/real estate prices
• mental and physical health issues
• immigration uncertainties
• lack of diversification of assets
• emergency fund being too small
• regret of not having sold and FIREd
• house price underwater
• over-investment in company stock
• high amount of leverage in rentals
• head-fake or bull-trap

All these things piled together leads to "flight to safety" mentality which leads investors to sell at lower prices. When all these dark clouds appear together, even the biggest "buy and hold" investors can fold. Also this has played out time and again from 1942, 1972, 2008, 2020

I have compile a list of real life readings for investors from previous recessions/bear markets

1. Devil take the hindmost : a history of financial speculation
2. A tale of health crisis, layoffs, 2 recessions and how a couple FIREd in their 40s
3. FATFire Facebook thread on recession stories
4. Have courage : we have been here before - describes the bleak outlook of capital markets in the midst of world war II 
5. Making sense of a stock market that doesn't make sense

Guggenheim

1. Market whiplash perspective during 2020 recession
2. Note published after the S&P500 experienced worst weekly loss after 2008

Sabre Capital

1. Bear Market Notes

Boggleheads threads from past recessions

1. [Oct 9, 2008] Sheepdog's "To sell or not to sell" is a must read for all new investors or new retirees. It talks about how Sheepdog made the decision at the depths of the financial crisis. This is the point in 2008 when the market was 40% off the peak. Point to note was that the market fell 20% from here further to reach the bottom. Also the market rose 10% from the day after he sold
2. [Dec 29, 2008] Maximum tolerable loss thread on boggleheads
3. [Sep 7, 2008] Plan B - achieve your required minimum wealth in loss. This thread is important because the recession comes after a prolonged bull market. Hence, investors often feel that they are close to their retirement goals, life goals, etc. The should tie their portfolio and asset allocation to those goals. If an investors current asset allocation, guarantees them to not need to work full time, they may consider taking some chips off the table by the time the market still allows them to. Otherwise, the bear market may wipe out that dream leading to regret and despair. 
4. [Sep 16, 2007] Mortgage your retirement - long 3x ETFs threads that surface at the peak of the bull market
5. [Mar 3, 2009] REIT disappearance thread on boggleheads
6. [28 Jan, 2009] Real estate expert stay away from malls