When the situation is not looking favourable in times of coronavirus, what should be your strategy to manage your wealth to not just secure capital protection but also fetch desired returns?
The COVID-19 pandemic has left investors majorly worried across the globe. Many of the investment products are currently giving negative returns while a recession looks inevitable.
It is still unclear how long the pandemic will last and how adversely it is going to impact our wealth in the future. That being said, when the situation is not looking favourable, what should be your strategy to manage your wealth to not just secure capital protection but also fetch desired returns? I’ve mentioned a few tips in this regard which you are likely to find useful.
1. Reassess your risk tolerance
The COVID-19 pandemic has significantly eroded the investment portfolio of countless investors. Many of their income has also been hit, so wealth-creation is a difficult feat to accomplish in the prevailing situation. Equally importantly, investors’ risk tolerance, i.e. their actual ability to take investment risk as opposed to risk appetite which is their willingness to take investment risk, could not be the same as before. For example, suppose, you, as an investor, had a risk tolerance to face losses up to 30% of your investment portfolio before the outbreak, but now you may not be in a position to take any losses. So, it’s time to reassess your risk tolerance and avoid making a decision believing that you still are capable of taking a high risk as it was before the coronavirus pandemic. An accurate reassessment of your risk tolerance can help you to restart the creation of wealth gradually while protecting your money at the same time.
2. Prioritise your financial goals
Why do you want to create wealth? The answer could be to ensure you maintain and improve the quality of your living, to meet your financial goals in time and to lead a comfortable post-retirement life. As of now, most of the investments are down and the income streams are getting choked. Now, these can impact your chances of achieving all your financial goals on time. So, don’t hesitate to plan your financial goals again. It’ll help you to figure out which financial goals are still relevant to you and which are not. You may want to forgo some of your low-priority financial goals to ensure you achieve the important ones. Redrawing your financial goals will help you to use your wealth in the right direction.
3. Rebalance your investment portfolio
The investment scenario is not the same as it was before the pandemic had started. Depending on your age, risk appetite, goals, and return expectations, you would have invested money in different asset classes. However, due to the economic slowdown and the turmoil in the investment markets, your portfolio might have seen an imbalance; for example, the percentage of equity investments may have come down in comparison to debt investments. So, you may now have to rebalance your portfolio to increase or decrease the proportion of investments in certain asset classes. Do a portfolio-rebalancing to harmonise it with your current risk appetite, goals, and returns capacity of the various asset classes. You may want to consult with your investment advisor if you need any help regarding this.
4. Recast your budget
As opined by many experts, we may soon witness a fall in the value of the Indian Rupee against the US Dollar and other major currencies in the world. With income already choked and immediate growth projections appearing bleak, the loss in your purchasing power may force you to shell out more money to meet the same expenses that you were doing before the pandemic. So, you should recast your budget in such a way that you cut down on low-priority or non-essential expenses to protect your wealth from erosion. You’ll also be well-advised to keep your money invested so that you can beat the inflation in the long term and focus on earning a higher real rate of return on your investments. You may also want to take the necessary steps to build or increase the size of your emergency fund to be in line with your requirements.
5. Focus on having multiple sources of income
Having multiple sources of income have perhaps become more significant in the current situation than ever before. Many have either lost their jobs, are on the verge of losing or have seen pay-cuts owing to the COVID-19 crisis. Then there are people with businesses whose income has majorly declined during the lockdown and are not sure of a bounce-back even after the lockdown ends. So, focussing on creating new income channels in the key. Assuming the lockdown also entails more free time, you can monetise your hobbies, take up online tutoring or freelance projects based on your expertise to make some money on the side. Having multiple income streams would provide some liquidity and lower your dependence on your contingency fund or prevent the liquidation of essential investments when your primary income source is under turmoil. More importantly, it would help you avoid falling into a debt trap.
In conclusion, a difficult situation like the one we currently find ourselves in requires calm nerves and not panic-stricken decisions. It also requires reassessing of your financial health and making pragmatic readjustments to better tackle the economic fallout of the COVID-19 crisis.
(The author is CEO, BankBazaar.com)