Should You Sell Investments in Your Brokerage Account During a Recession? Here's What Ramit Sethi Says

You don't want to make the wrong move.

Is the U.S. headed towards a recession? At this point, many experts seem to think so.

The Federal Reserve has been raising interest rates in an effort to slow the pace of inflation. In doing so, it's driving up the cost of borrowing so everything from auto loans to credit card interest rates are impacted. 

The Fed wants consumers to stress about the high cost of borrowing to the point where they cut back on spending. That's really the only way to narrow the gap between supply and demand that's been causing inflation to surge.

But the Fed could end up overdoing it. If it keeps raising interest rates aggressively, consumer spending could decline quickly, and to a more extreme degree than anticipated. That, in turn, could fuel a recession and lead to widespread unemployment. 

If a recession does hit, it can be a stressful thing to experience as an investor. But should you start selling off investments during a recession? Financial guru Ramit Sethi says that's a definite no.

Stay focused on the big picture

It's easy to see why you may want to sell off investments when economic conditions sour. If the economy takes a turn for the worse, the stock market could follow suit. A $25,000 brokerage account balance could easily get whittled down to $15,000 during a period of economic decline.

But one thing you must remember is that in a situation like that, you're only looking at a hypothetical loss -- not an official one. And if you leave your brokerage account alone, you'll give it a chance to recoup its value once the stock market recovers.

In fact, Sethi specifically says in his blog that if a recession hits, the best response is: "Don't sell investments and stay the course." The market, he explains, has the potential to fluctuate, but over time, it tends to go up roughly 7% to 8% per year. 

Now that average 7% to 8% return accounts for years when the market underperforms. And in the past, the stock market has definitely ended up in the red. 

But in the long run, the stock market tends to reward investors who stick with it. And so if you don't sell off investments during a recession, you'll give yourself a chance to benefit once the market stages its recovery. 

In fact, some of the stock market's strongest periods of returns have followed extended periods of declines. Keep that in mind before you sell.

Also, if you're investing for a far-off milestone like retirement, then there's really no reason to rush to cash out investments. After all, if you don't need that money right away, why not sit tight and let things play out?

Try not to panic

If a recession hits, your brokerage account value could decline. That's a reality you'll need to face. But if you do your best not to panic when that happens, you'll put yourself in a better position to ride out the storm and come away unharmed.