Palpitations, is what Dhiren Maheshwari, a senior executive with a multinational in Mumbai, gets when he sees his portfolio every morning. It has more than halved in just ten months. Maheshwari and his wife, who is an independent businesswoman, had diligently built a savvy portfolio over the past five years. All the hard work now seems to have vanished, and along with them many of his dreams and aspirations. ?It’s frustrating?and I simply don’t know what to do, just feel like dumping all the stocks and putting the money into fixed deposits,? he says.
Falling stock prices is not the only concern for Maheshwari. He now had to face the prospect of losing out on his lucrative annual bonus, and his wife’s corporate gifting business too will witness the effects of cost cutting by companies. In just over a year, the scene has changed for Maheshwari, who was known to change cars every year and get the latest models. And he is not the only one. Order cuts, bonus slashes and even layoffs are now commonplace.
The wealth explosion party is over. It’s now time to clean up and recuperate and brace for the steady growth wealth session. However, the immediate times ahead of the stress is only likely to increase. Here are some ways to battle the slowdown blues.
Ostrich head
?A lot many people I meet are in utter denial of the fact there is a slowdown and that they are going to be impacted by it. And this is extremely dangerous, because when reality hits hard, then it gets tough to manage,? says K Hegde, an independent financial advisor. This indeed is true for a lot of people who continue to spend and live with the same expenses as before.
Yes, it is not wrong to look to sustain your lifestyle and to continue with the momentum, it’s a matter of choice, he adds. ?It is not about shrinking and going into a cubby-hole, detaching oneself from all spending activity totally. It is just recognising that there is a slowdown and there could be implications and providing for them,? says Hegde.
This is more applicable for the newly wealthy people who have grown their wealth in the past five years and have not seen a downturn. A lot of young businessmen and executives, especially those in the financial services, IT and ITES sector fall in this category.
By recognising the seriousness of the situation, it would allow you to regroup and take stock of your financial position and rework your strategy for the times ahead. And if you don’t have a strategy in the first place, this could actually be the best time to formulate one.
You might not have to go overboard, but once you relook at your world around you and your financial obligations and aspirations, you would surely be able to cut some corners in many places and even postpone a few purchases, says Hegde.
Inaction vs over-action
Now, there are another category of people who are aware of the slowdown and have diverse reactions. On the one hand there are some who reckon ‘this too shall pass’ and hold on to their plans as before. On the other there are some who get stressed and go all out to take action, just because there is something happening.
?One of my clients insisted on selling all his equity and converting them into fixed deposits, just because the market had tanked and a slowdown was setting in,? says Shlok Malhotra, a relationship manager with an overseas bank.
Yes, the stock market has tanked, but it is not likely to go down to zero. And, moreover these are the times to make purchases. This is the time for rational action as it always is, but no action or over-action could lead to a loss of opportunity or further losses, say experts. This is actually the time to be in the stock market and make some solid purchases. ?Invest at the point of maximum pessimism?, said John Templeton.
And he has earned the right to say that because in 1939, with Hitler’s Germany was plundering Europe and all looked bleak and certainly gorier than the present times, John Templeton bought $100 of every stock trading below $1 on the New York and American stock exchanges. He ended up with a huge pile of paper of some 104 companies for a total investment of $10,400. Now, 34 of these companies went bankrupt. But four years later, he sold the rest of the stocks for more than $40,000.
It is not uncanny to notice that some of the great investment gurus in the US have cut their teeth in recession or times of the great depression. Thomas Rowe Price, founder of T Rowe Price, a global fund house, learnt it the hard way during the Great Depression and one of the lessons he learnt was not to stay out of stocks but to embrace them.
So, if you have cash, it could be a good time to build a new portfolio that will be forward looking and set in the real dynamics of today, given the future possibilities. ?If past history was all there was to the game, the richest people would be librarians,? says Warren Buffet.
No solitaire
But before you embark on the journey to make the most of the slowdown or avoid damage, it is necessary to consult an expert. ?Your mind is a dangerous place,? said a witty coach once, ?don’t visit it alone.? The point here is that it works to have sound advise from experts, who are now available.
Earlier, there were only chartered accountants who would, based on their knowledge, tell you how to manage your taxes. Or there would be the neighbourhood broker or sub-broker who would give you investment tips. But now there are qualified wealth managers who offer top-class services. It works well to consult with them.
Here as well, one of the mistakes that most people do is have multiple financial advisors or wealth managers. Again, nothing wrong with this strategy, it always works to have a second opinion, reckon experts. But having six to seven wealth managers will get you into a tizzy and you will then need another manager to manage the wealth management relationships, jokes a relationship manager who has actually faced such situations with some clients. One needs to build a relationship with the wealth manager and then work on a holistic goal-based plan rather than a return-based plan. This way, the wealth manager will be able to understand your situation well and accordingly develop a plan, he adds.
Another thing that most high net worth individuals don’t seem to be doing is coming clean on their debt front, reckons Satish Majethia, an independent wealth manager. The entire wealth management effort comes to a naught because of this. Majethia cites the example of a couple of cases where he and the clients worked on a long-term plan and all was well until the client had to repay some personal and business loans and the plan had to be diluted.
?Speaking about debt and defaults on them seems to be a taboo for many clients,? says Majethia. In this, many lose out on the opportunity to rework debt obligations. Banks and financial institutions are willing to work on debt reconstruction and some of them even stretch themselves to support you.
Many times, huge credit card loans have been negotiated and settled at competitive amounts. This means that your huge interest cost is cut and even the outstanding amount is settled. For the bank, it means a quick recovery and less non-performing assets on their books. So it works well for both. But simply not being in communication does not help. Additionally, there are firms that are now offering debt counselling and these can be tapped into.
However, the slowdown this time will teach a lot of people to start using insurance as an insurance product and not an investment product. All wealth managers FE Investor has spoken to mention that not providing for family and assets adequately is one of the biggest mistakes many of their clients do. The key operative word here is ?adequate?, as most of the Indians are under insured, even if they have a policy. This time, would be like any other time, to sit with your relationship manager and work out the details on your insurance policies as well. Better, if you could call your relationship manager or financial planner and schedule a meeting. This time around, don’t just quiz them on the returns that they would give you but actually work with them to maximise your wealth, protect it and distribute it.
As ace investor John Bogle would put it, ?Investment success, it turns out, lies in simplicity, as basic as the virtues of thrift, independence of thought, financial discipline, realistic expectations, and common sense.?
?Believe you me, when I did this exercise of sitting with my financial planner and cleaning up all the cobwebs, I experienced a renewed energy,? says Pankaj Nikam, a Mumbai-based senior media executive.
For many, the slowdown would mean stress, and for some, it would be an excellent opportunity to relook at their finances and rework them with a renewed vigour. It’s just the beginning of a new cyclical wave that would start in a few months. And you could get ready to ride it again if you already had or join the ride if you?d missed it previously.
Beating the blues – a reckoner
Here are some dos and don?ts for you to battle the slowdown
Awareness exercise: Carry out a small awareness exercise, which will allow you to see where and how the slowdown could impact you, your business and family. Involve your business partner and also your spouse in this exercise. The objective is to come out with some definite and some likely pressure points. It is important to be objective in this exercise. Here, look at income streams, financial obligations, life goals and expenses ? all of them can be hit. When thinking of life goals, don?t just think in terms of ?returns?. Work on real objectives like your daughter?s wedding, child?s schooling.
Prioritise: Then in another exercise prioritise your spending plans. Here you could have categories like important and urgent, but not important but not urgent, not important but urgent and not important and not urgent. You can take up each activity and categorise them. Again, involve your partner and or spouse in this activity. Obviously, the first category will have to be dealt with immediately and the items in the third category can be postponed and the fourth category can be dumped. Come up with a spending plan and work out cash outflows on a specific time line.
Get advice: Do call up a financial planner/wealth manager if you don?t have one or your existing service provider. Block your time, this meeting could get lengthy. Prepare all the documents and have your calculations done before hand so that the meeting is fruitful. Do include your debt obligations in the meeting and work towards a plan for that as well. Also, include insurance and protection related-matters as well.
Rework debt: Contact your banks and initiate discussions on debt restructuring and settlement in case you have heavy debt. Be prepared to negotiate hard, you could actually get good deals. You could also contact debt counselling agencies that could help you in this endeavour.