The Covid-19 pandemic has had a huge blow on investments all across the globe. Due to lock down in major cities around the world, trading of goods has greatly been affected. This in turn has affected stocks and businesses. This article will shed some light on how to contain the damage caused to your investments. The market has been in a bearish trend and is experiencing lots of volatility due to the panicked state of traders. However, it is important to remember that this is not the first, and won’t be the last market dip. It can be a good opportunity to get your investment strategy in check.
When looking for money-making opportunities in uncertain times, it is vital to remember the core investing strategies: go gradual and diversify. Although the market crashes sometimes, the basic tenets of surviving these events remain the same. It is wise to diversify across major asset classes (equities, bonds, cash and gold) and major regions/sectors. If you follow the principles outlined below, you should be able to safely maneuver your finances through this challenging phase.
Create a financial cushion
As has been witnessed from time immemorial, severe bear markets are usually accompanied by crippling economic downturns. These can wreak havoc on your finances if no smart actions are taken. Retrenchments, salary cuts or delays in payout are inevitable outcomes of a sputtering economy. You should critically analyze the market situation before thinking of making moves in your portfolio which includes arming yourself with adequate buffer.
Tarun Birani, Founder and Director, TBNG Capital Advisors says, “A prolonged bear market not only drags down returns but can hurt incomes too. It is prudent to have sufficient buffer for such an eventuality. Build a contingency fund to cover at least 6 months’ expenses. This way you won’t be forced to dip into your savings in a cash crunch.
Reassess risk tolerance
It is vital to understand your risk taking ability not only during sunnier days but more importantly during stormy seasons. This is because, during good times, we tend to be complacent and have misplaced notions about how much downside we can withstand. Finding yourself in the waves of a stormy bearish market will make you rethink your risk tolerance. It is during this time that you must revisit your risk profile which will give you a more accurate reading. More importantly, remember to adhere to this version of your risk profile when the next bull market sweeps you off your feet.
A study done by Schwab Center for Financial Research and Morningstar found that the longer you wait for market recovery, the further behind you will fall. This is because stocks generate their biggest gains in the first 12 months of a recovery, and that missing even the first month of gains after the market hits bottom leads to substantially lower returns over time.
Keep your war chest ready
During a full blown bear market, investors fear deploying money. Even when the market recovers, they hesitate to get back on the saddle. It is unfortunate that they realize that they missed the bus when the market recovers fully. This therefore supports the fact that the longer you remain on the sidelines, the further behind you find yourself when the market recovers. At some point, you should start making a staggered entry.
However, for this you need to have surplus cash in hand. Identify the part of your portfolio that can be liquidated to give you the necessary arsenal then make the most of it by investing in tranches.
Stick to fundamentals
In bad times, typically fundamentally strong businesses sail through and weak businesses sink. It therefore makes sense to stick with proven businesses during such times. Do not be over adventurous and bet on relatively unknown businesses. Stick with quality names and avoid aggressive bets at this stage. Intermittent rebounds in a bear market can fool you into believing the worst is over. Instead of trying to time the market, investors should look at staggering their market entry over 6-12 months.
Have a financial plan
Investing should never be guided by specific moments; it should be a part of a process over time. In the absence of a plan, there is a greater risk that you will make rash decisions about your portfolio during a market upheaval. If you don’t have a long-term financial plan, creating one and sticking to it is the best action you could take at this time. Consider engaging the services of a professional adviser for this purpose.
Don’t try to catch market bottom
Market tops and bottoms are only clear in hindsight. If you try bottom fishing, deploying money at a perceived market low, chances are you will burn your fingers badly. Do not commit your cash in one shot. A staggered entry spread over several months is ideal. It’s crucial to stick to asset allocation and re-balance one’s portfolio instead of calling a market bottom.
Don’t change investing strategy
Don’t switch strategies amidst a bear market. Overwhelmed by panic, investors are prone to abandon years of investing principles. This fickle nature undermines long term strategy which may come in the way of achieving longer term goals.
Don’t get overly defensive
Avoid rush decisions and exiting an investment mid-way. Doing so turns the whole exercise of investing futile, ending in a bad investing experience. Opportunities abound when there is panic, but you can’t benefit from them if you are storing money under the mattress. Do not withdraw from equity thinking that when the market starts to recover you will put it back. It is very difficult for anyone to predict when the markets will recover and when it does, human psychology will prevent us from getting back in.
An oft-repeated advice during times of market turmoil is to do nothing by letting your investments run and failing to realign your portfolio. However, this advice is not suitable for all investors depending on whether the investments are long term or short term. One must assess risk and decide whether they can bear the storm by remaining calm throughout this Corona Virus pandemic.