The markets are reacting to the spread of the novel coronavirus. China sneezed, and the global economy went into a tizzy. Globally, stock markets are in a spin. Investors are worried. What should they do with their investments in a tough economy?
Eyes on your goals
First and foremost, always remember why you started an investment. Any investment must be tied to a specific goal. When you have invested in the markets, you must also have risk appetite which will help you prevail through all kinds of market scenarios. Therefore, remind yourself what the goals are and then decide whether you want to continue investing or redeem. For example, you may be near your goal, in which case it would become profoundly risky to remain invested in the current scenario.
Conversely, you may have just started investing and are a long way away from your goal, so you should continue investing as per your plan and look to reduce your average costs on the market dips. If you’re in doubt, you may simply pause fresh contributions to your investment plan and resume once you have clarity. The key, as always, is to avoid panic and to take decisions in a calm, informed manner.
In any market scenario there are always investment options that are riskier than others, or more profitable than others. The intrepid investor always looks for interesting new opportunities to profit from any situation. In the current situation, you must evaluate your high-risk investments – for example, investment directly linked to the Chinese market. You may look at sectors that will perform better now and help shore up your returns. Often, investors make the mistake of not evaluating their risk appetite before starting any investment.
This leads to panic selling and losses during crisis. So give your investment portfolio a hard look and ask yourself if your investments are built for all seasons or if they will crack each time there’s a crisis in the markets. If there are weaknesses in the portfolio, work on strengthening it with the removal of low-quality investments and the addition of high-quality investments. For example, from the point of view of stability and steady returns, it’s good to have a mutual fund portfolio made up largely of large-caps and bluechips, while restricting the presence of the more volatile and unpredictable small-cap funds to a minority share.
Shore up liquidity
This is also a good time to shore up liquidity. Maintain cash reserves—in your bank accounts, in fixed deposits, and at home. This is to help you tackle problems such as loss of income, health problems, urgent travel, etc. As things stand, we’re in the middle of a highly contagious global outbreak. As per researchers, a large number of people in the world are likely to be eventually infected though the fatality rates are expected to be low. To prepare for such a health crisis, ensure you’re armed with an ample-sized health insurance policy. It may not be enough to simply use your employer-provided coverage, because group coverage is often small and inadequate for treatment of critical illnesses. Ensure that all your family members have adequate coverage – preferably `10 lakh each if you live in urban areas with high healthcare costs. To tackle with the threat of dangerous diseases, you can boost your existing coverage by buying a super top-up cover, which are very cheap.
Diversify your portfolio
Lastly, always diversify your investments and as the saying goes, never put all your eggs in one basket. Trusting just one form of investment is a bad idea and could lead to poor returns and liquidity problems.
In recent months, we have seen a tremendous rally by gold due to uncertainty in the global economy. So while gold has provided excellent growth, the equity markets, real estate investments, and even fixed-income instruments such as deposits and bonds have been disappointing.
Therefore, aim to create a mix of investments that is ideal for your age, risk appetite and life goals. By systematically investing in various options, you’ll create a well-hedged, well-rounded portfolio which will keep performing in any market scenario.
At some point when the stock markets stabilise, your returns from gold will slow down, but your equity returns will start improving again.
To summarise, invest as per a long-term plan, avoid panic, save for a rainy day, make informed decisions, and always diversify. And never be without health insurance—global pandemic or not.
The writer is CEO, BankBazaar.com