What to do in an economic crisis: a phase-by-phase guide

General financial education ideas according to how much stress there is in the market. They are not investment recommendations or personalized advice.

Three ideas to get started

In a crisis, what does the most damage is usually deciding out of fear. These ideas help you be prepared and avoid acting on impulse.

Do not invest with borrowed money

If the market falls, anyone who borrowed to invest may be forced to sell at the worst moment.

Keep savings available

A cushion in a safe place gives you peace of mind and avoids selling investments when they are cheap.

Come back gradually

When the worst has passed, get in in several parts over months, not all at once.

1Phase 1

First signs

Usually occurs months before a recession

When does it apply? Index between 35 and 60 Short-term rates above long-term rates Quick alarms: 1 or 2

There is no panic yet. It is a good time to put your finances in order calmly.

Step 1.1

Review your debts

Write down how much you owe and at what interest rate. If any debt has a variable rate, consider switching it to a fixed rate or paying off the most expensive ones first.

Action: know how much you owe and what it costs you

Step 1.2

Avoid investing with borrowed money

If you invest with borrowed money (on “margin”), reduce that debt. When the market falls, you can be forced to sell at exactly the worst moment.

Action: invest only with your own money

Step 1.3

Build a savings cushion

Try to keep 6 to 12 months of expenses saved in a safe place from which you can withdraw the money easily.

Action: safe, available savings

Step 1.4

Check that you do not have everything in the same thing

Spreading your money across different kinds of investments (and not just one company or sector) reduces the scares.

Action: diversify

2Phase 2

High stress

Usually occurs when the crisis is starting or very close

When does it apply? Index of 60 or more Quick alarms: 3 or 4 Unemployment starts rising quickly

There is a lot of stress at once. It is time to protect what matters and avoid risks you do not need.

Step 2.1

Review how much risk you are carrying

Check whether your money depends on very fragile assets, such as bonds of troubled companies or highly speculative bets, and whether that risk fits your situation.

Action: know the risk you are carrying

Step 2.2

Increase your available cash

Increase the portion of your money that you can use quickly. How much depends on your situation: the more you need that money, the more margin is advisable.

Action: more liquidity, depending on your case

Step 2.3

Do not exceed your bank’s guarantee

Bank deposits are insured up to a limit per person and per bank (for example $250,000 in the US, £85,000 in the UK and €100,000 in the EU). If you hold more than that, spread it across several banks.

Action: spread money across several banks

Step 2.4

If you have a business, look after cash

Cut spending that is not essential and try to collect from your customers as soon as possible.

Action: prioritize cash on hand

3Phase 3

Panic

Usually occurs at the worst of the fall (1 to 3 months)

When does it apply? Index of 80 or more Stock market fear (VIX) above 30 Quick alarms: 5

The news is frightening and everything is falling. The most important thing now is not to make impulsive decisions.

Step 3.1

Do not sell in fear or try to call the bottom

Selling in the middle of a panic usually turns a temporary loss into a permanent one. Buying too early does not work out either: big falls last months.

Action: patience and no impulsive decisions

Step 3.2

Watch who you depend on

If you have a business, check that your key customers and suppliers can keep paying.

Action: avoid defaults

Step 3.3

Prepare your shopping list

Calmly write down what you would buy if prices fell and how much you would pay. That way, if the moment comes, you decide with a cool head.

Action: a written plan

Step 3.4

Reduce the noise

Consult a few reliable sources and this dashboard. Stay away from alarmist headlines and social media.

Action: stay informed without getting overwhelmed

4Phase 4

Recovery

Usually occurs when the fall has already hit bottom

When does it apply? The index drops below 60 and keeps falling Stock market fear (VIX) calms below 30 Central banks support the market

The worst has passed. Those who arrive with savings and no debts have room to take advantage of the recovery.

Step 4.1

Avoid deciding everything at once

A common practice among prudent investors is to spread decisions over time instead of making them all on the same day.

Action: decisions spread over time

Step 4.2

Watch whether fear is easing

Historically, panic phases have coincided with a VIX above 30 and worsening credit. If those signals calm down, it indicates that stress is easing, not that it is time to buy.

Action: look at the data, not the headlines

Step 4.3

Remember the value of diversifying

Spreading money across many companies, sectors and asset types reduces the damage if one thing goes wrong.

Action: diversify

Step 4.4

Restore your balance

When everything normalizes, bring your portfolio back to the percentages you had planned for the long term.

Action: back to the usual plan

How does a prudent investor’s allocation usually change?

Educational example of a conservative approach, not a recommendation: what is appropriate depends on your age, your goals and your risk tolerance.

Asset type	In calm times	1. First signs	2. High stress	3. Panic	4. Recovery
Stock investments	According to their plan	Review their weight	Usually holds less	Avoids selling out of fear	Returns to their plan gradually
Risky-company bonds	Little	Less	Avoids them	Avoids them	Little, at the end
Safe, available savings	A cushion	More	Quite a bit more	Quite a bit more	Is being used
Gold	Some or none	Same	Same	Same	Same

Checklist

Tick what you have already done. It is saved in this browser.

0 / 10

1. No borrowed money for investing I do not invest with debt, so nobody can force me to sell.

2. Debts reviewed I know how much I owe and at what interest rate; the most expensive ones are under control.

3. Savings cushion I have 6 to 12 months of expenses in a safe, available place.

4. Little in very risky investments I do not hold much in bonds of troubled companies or in speculative bets.

5. Money spread across banks No bank holds more than the deposit guarantee covers.

6. Diversified portfolio I do not depend on a single company, sector or asset.

7. Shopping list prepared I know what I would buy if prices fell and at what level.

8. Panic rule I do not buy or sell at the moment of the fall: I wait 24 hours.

9. Staged entry plan If I invest, I will do it in parts and not all at once.

10. Reliable sources I keep informed with a few reliable sources and with this dashboard.

If you have a business

Use your credit line in time: banks may reduce or cancel it when the crisis begins.
Collect sooner: shorten your customers’ payment terms; money today is worth more than a promise in 90 days.
Cut what is not essential: subscriptions, travel and spending that can wait.

If you are an individual

Emergency savings: try to keep 6 to 12 months of expenses saved, separate from your income.
Variable-rate mortgage: consider switching to a fixed rate when the first signs appear.
Do not sell out of fear: if your investments are long term, selling at the worst moment usually makes the losses permanent.

Six rules for staying calm

What does the most damage in a fall is deciding out of fear.

Price is not the same as value

In a panic people sell out of fear or obligation, not because companies are suddenly worth less.

Do not decide in a hurry

Wait 24 hours before making important decisions with your money.

Beware of headlines

The alarming gets shared more. Consult a few reliable sources.

Buying is hard

The best purchases often feel uncomfortable. That is why it is wise to have the plan written down in advance.

Having cash gives you freedom

Available money lets you hold on without selling out of obligation and take advantage of opportunities.

Crises end

Every past crisis ended in recovery, even though it sometimes took months or years.