The pandemic has affected more a million lives around the world and has destabilized the global economy. Every major economy is under full or partial lock down and is looking to contain the damage caused by the virus. The lock down has resulted in businesses coming to a standstill with even the basic supplies facing severe strain. Most business are experiencing challenges like never before and are now facing survival issues. They are drawing up plans to curtail expenses, delay expansion and are revising business strategies. Some businesses have started to lay-off employees in non-critical roles.
The COVID 19 pandemic has sent shock waves to investors and has caused great damage to their portfolios. Most investors are under shock due to the intensity and speed of market correction and are unable to take the right investment decisions. Let us look at a few important aspects to help you take the right investment decisions during such a crisis;
Design your portfolios for market correction
Investors should note that market corrections are very common and it is in their nature to remain volatile. A portfolio constructed after taking into account the risk profile and aspirations of the investor would ensure that the asset allocation is ideal. Regular monitoring ensures that any changes in the fundamental attributes of the instruments or changes in the investor’s circumstances are noted and course correction is undertaken. Adequate cash or debt allocation helps the investors to increase exposure to equities when the markets have corrected due to the pandemic. Remember that there is no, what is more important is that you start early.
Portfolio re-balancing is an important exercise which ensures that the portfolio asset allocation arrived at the time of designing the investor’s portfolio is maintained over the investment time horizon. It is very common for equities to outperform debt investments during market booms and as a result increase their weightage in the portfolio.
Periodic re-balancing ensures that the equity investments are liquidated and the funds are invested debt. This reduces the risk exposure of the portfolio and ensures timely profit booking. The opposite is true during market corrections; when the stock markets correct, the equity weightage reduces and the asset allocation is distorted. When portfolios are re-balanced during such times, more funds are allocated to equities which result in superior gains after a few years.
Take stock of your liabilities
Economic recessions are often accompanied with job losses causing severe strain to individual finances. Many individual are unable to pay their EMIs and are forced to liquidate their assets or raise fresh loans at insane interest rates. Few are caught in the web of credit card debt without realizing that the interest rates are as high as 36% to 60% per year.
Smart investors create an emergency corpus that can take care of their mandatory expenses for at least 9 to 12 months. They also ensure that their EMIs do not cross the 25% threshold of their net income. They are not affected by the pandemic, allowing them to continue investing towards their financial goals and benefit from the lower prices during market turmoil.
Deploy your cash reserves
Market corrections are usually preceded by stock market booms, usually lasting a few years. When the valuations are stretched and the markets have gone up way too much in comparison to reality it is important that you start building cash/debt holdings. And when the markets correct due to pandemic or otherwise, it is important to deploy those reserves to take advantage of the mouth-watering valuations.
Warren Buffet said, “Cash combined with courage in a time of crises is priceless”. So when there is fear in the markets, it is important to carefully evaluate the investment opportunities and deploy your cash reserves. Off course having an emergency corpus is essential and not having one can cause tremendous financial and emotional strain. So invest your cash surplus after having an adequate emergency corpus.
Get a FREE consultation call with a fee only financial planner to understand the importance of financial planning and have your investment queries answered.